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Comment by markus_zhang | Hacker News Reader

I'm wondering if they are going to bite the bullet and raise like Volcker.

But again I realized that I actually do not understand the source of inflation and how much contribution each source has. We all know that the war, Covid and monetary policy are three sources but are there other structural sources? What about the trade quarrel between US and China? How much does it hurt for each industry?

I should read some papers and talk to people in different industries to get some ideas.

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>I actually do not understand the source of inflation

I think this is the source of the problem:

https://www.bls.gov/charts/employment-situation/civilian-lab...

Demand is coming from 100% of the population, but supply comes only from those who are working. Thanks to Covid, the supply of workers is less, but also there is a long term trend (maybe compensated for by productivity gains..)

It's interesting to compare it with this one:

https://www.bls.gov/charts/employment-situation/employment-p...

This one shows the percent of people working of employment age. This doesn't look so bad, but the people not of employment age also create demand.

IMHO, the only price that really matters is the cost of labor (no matter what they say). IMHO, because the value of money is defined by average annual salary (the real value is work, not money).

https://fred.stlouisfed.org/series/CES0500000003

The main source is definitely monetary policy, this was supremely obvious from the enormous asset bubble that ballooned out of the pandemic with risk-on assets like tech stocks and crypto exploding in valuation. The reason this happened is when interest rates are held at near zero then future profits are valued significantly higher (normally they are discounted by the interest rate, or more correctly the "risk free return" of US 10Y government bonds).

It also manifested in higher savings balances etc.

The main reason this happened was the Fed didn't trust the administration to deploy appropriate fiscal stimulus as in the past trying to rely on US politicians has been a poor choice. Unfortunately we ended up with both monetary policy and fiscal policy deployed at full ball. If we had seen a weaker or more targeted monetary policy that aimed to just unfreeze credit markets and have fiscal policies step up to handle depressed employment/industry shutdowns the fallout would have been significantly decreased.

For instance China did cut rates and reduce the reserve requirement ratio (US also did this, it was essentially zero until start of 2022) they didn't get anywhere near that "essentially zero" rate that the US did. This means their domestic inflation remained manageable, most of their inflation is attributable to imported sources like energy and commodities. They instead pursued more targeted policies aimed at addressing specific industries and socioeconomic groups affected.

So yeah, it still is a combination of things but monetary policy in the US had an outsized impact on inflation globally compared to circumstantial factors IMO.

Retiring boomers and an aging population along with disability due to long COVID are leading to not enough workers. That is leading to wage inflation along with unionization since the workers currently are holding more of the cards.

That is the bridge too far for the Fed so they're cracking down like Volker. They didn't care about housing prices, rents, college tuition, the commodities inflation in 2010-2014, etc. Normal jobs like working in a restaurant are seeing wage inflation now and that can't be tolerated.

My understanding is that the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach.

Harm to who? Aren’t rate hikes beneficial to entities that have a lot of debt?

I’m no expert here, so someone by all means correct me, but my understanding is that the fed rate correlates to the rate of interest the government has to pay on its debts. The higher the rate, the larger the chance that the government defaults which for the US would be catastrophic.

@mrgalaxy So long as the US onshore Dollar and offshore 'petrodollar' remain as the reserve currency of the planet default is unlikely as they essentially control all our planets money and can print more and more, or reduce money supply. It is good to be king.

The US can't be forced to default. They can literally print money.

https://www.crfb.org/blogs/just-how-big-are-federal-interest...

> According to the Congressional Budget Office's (CBO) latest baseline, the federal government will spend $400 billion on interest payments on the national debt this fiscal year (FY). That's equivalent to just over 8 percent of all federal revenue collections and roughly $3,055 per household ... Interest costs and the national debt could be even higher if interest rates continue their upward trajectory and outperform CBO's latest economic forecast. Each one percentage point increase in interest rates would increase FY 2022 interest spending by $38 billion at today's debt levels.

As the interest rate increases, those payments increase also - this is money that is spent and doesn't "get us anything more" - it's just maintaining the current debt load. The site linked is obviously arguing for "spend less money" but the math checks out, and if the debt never goes down interest rates can have a major effect. (Now sure, some/most of this debt is paid to the government itself.)

Wow thanks putting a number on it. I knew it was high but holy cow is that a lot of money for as you say, nothing more.

To be fair, there's an argument that it's effectively the same as the government printing 400 billion a year, or something (this is MMT). I don't fully follow the argument and honestly it's not something really actionable by me. Personally it's all too complicated for me to think about and any analogies are going to fall short in horrible and painful ways.

Not if it's variable debt, like credit card interest.

The US rolls over debt by paying off debt with new debt. So interest rate hikes would eventually lead to a hike in interest payments on bonds.

A sharp increase in bond interest payments set off the Greek crisis.

Not if they can't pay it off, and need to roll over said debt, which is the case with the national debt.

Inflation is beneficial to entities with a lot of debt. Lowers what they have to pay back in real dollars.

Harm to the politicians that like to spend borrowed money. [Edit: Remember that the US debt is constantly being refinanced at new (now higher) rates] Also remember that debt reflects money ALREADY spent and which therefore provides no additional value, while the ongoing cost of servicing that debt will climb and capture an increasing proportion of the national budget. If all goes well, this will result in reduced spending - but that's not likely. More likely is that this leads to EVEN MORE borrowing, which in turn causes MORE inflation. If we don't get a grip, this is what ultimately ends in a hyper-inflation death spiral as we've seen in other countries over the last 100 years. As the pie shrinks, the govt tries to preserve the absolute size of it's slice by spending more, which causes the pie to shrink still further.

To US government. It holds a lot of short term debt that it continuously rolls over into new short term debt. If the rate go up, new short term debt will become much more expensive to service.

Here is a simple example with made up (but not completely off base) figures. Assume US government has debt amounting to 100% GDP. Assume also that it collects taxes amounting to 20% of GDP. If rates are 2%, then interest payments are 2% of GDP, which is 10% of the budget. Now, if bond rates go to, say, 6% (current mortgage rates), then interest payments are 6% of GDP, which is now actually 30% of the budget.

Basically, at high debt-to-GDP ratio, small changes in the interest rates cause huge swings in how much budget is spent on interest payments. This money has to come from somewhere, and more debt is only a short term answer.

Too much harm for the Federal government to stomach when interest payments surpass tax revenue. Either tax hikes or spending cuts would have to occur, or go further into debt to pay interest on debt (???)

> the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach

The Treasury pays interest on government debt. The Fed does not. Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise. (The same way the Fed's accounting gains as it lowered rates are a useful fiction.)

When the Fed raises rates, it increases the rate the U.S. pays on new debt. Over time the U.S. government's interest outlay would thus rise. But we're nowhere near that being an issue. To the degree it would be an issue, it would manifest as inflation. The specter rates are being raised to fight.

> Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise

There is C: politics. It is believed that the Fed is directly responsible for Carter losing to Reagan. (though it isn't clear how the election would have gone otherwise, it wouldn't have been the landslide it was) The Fed also reports to congressional hearings.

The fed pays interest on reserves and reverse repo. But it can just create deferred assets to pay for them… https://fedguy.com/fed-balance-sheet-faqs/

Inflation was high for quite a number of years before volker, they kept raising rates but then backed off from the economic pain and never succeeded in killing it completely. Volker came in and raised rates to the point where inflation was done.

The point being, they can try to kill it first time, or maybe they have to raise even higher later on which would be even worse for the problem you're talking about.

Also, they're on record as being fully aware of this.

After the election...

Powell is Trump's pick (1st term) AND Biden's pick (2nd term) with like 89 votes from the Senate.

For better or worse, the man and his circumstances has proven himself to be apolitical.

He's done fairly well at navigating the political landscape I would say that he's smart enough to know that if he does anything strongly before the election it will be scrutinized heavily as political thus he will wait until after the election if he deems it necessary to make more drastic measures.

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