Even a global recession may not crush inflation
economist.com
economist.com
The fact that wage growth has stagnated for like 30 years (at least in the US) and markets became used to outsized profits doesn't help either.
This inflation issue is entirely a making of our own shortsightedness.
Yes, central banks printing money relentlessly for more than a decade has nothing to with it. We the people are to blame!
Baby steps towards raising rates (during massive boom years) were decried by the markets, by politicians (an particular an ex-President) and by the populace generally who are not well informed on what central banks do. The central banks should have raised rates anyways - but let’s not pretend like everyone wouldn’t have hated them for causing a recession or even just a slow down in growth by doing so.
The whole point of the nominal independence of the Fed from the political process is that they would be able to take unpopular decisions that may hurt in the short term but will further their dual mandate (maximum employment and price stability) in the medium and long term.
Seeing as they cannot do that, and these days are venturing further away from their mandate by assuming the mantle of fighting climate change as well as racial inequity, we might as well do away with it entirely. It's not like the financial history of this country hasn't been replete with one crisis after another even after the advent of the Fed, and one dollar at the time of the creation of the Fed is worth about $30 now, so prices have only been stable for a strange definition of price stability. (For comparison, the Swiss franc inflated about 10x in a similar time period.)
Exactly! We saw what cheap money did to rebound the economy after the 2008 crash - it created the largest bull run we've ever seen.
Politicians, hoping to keep their jobs (and make sure their trading accounts grew), said "yeah, we'll keep things right as they are" because they didn't want to be the ones that caused a cool down which would in turn cost them their jobs (and insider information).
Is this central banks diverting attention or is the parent comment overly simplifying this?
Plus, keeping interest rates unrealistically low for over a decade just to please the highest echelons of financial power (under the bullshit guise that lower interest rates == more jobs) does nothing more than pause the natural economic cycle and, honestly, it just makes the bust that much more inevitable and dangerous.
It’s not totally wrong mind you, but as we all know, prices are set by supply and demand.
An obvious example that I think a lot of people can easily connect with is the fact that globalization has been deflationary (it’s driven prices down), and that isn’t a monetary phenomenon.
As someone sympathetic to MMT, the solution in my opinion has less to do with the fed, Congress needs to tighten fiscal policy.
The problem is - how do you improve this system while taking into consideration the real-world effects of Fed policy?
I guess I can imagine how such a editorial process could create a monoculture (although I don't think it has to), but that's where multiple newspapers become useful. While one newspaper may have some editorial angle, different newspapers have different editorial staff.
Journalists also seem to me to be rather principled people. If their editors were systematically suppressing certain stories and angles, I'd expect them to start a new newspaper, especially considering how easy it is to get started nowadays, and report on that.
With all these considerations I don't see what system would keep these stories back. Editorial staff can maybe control a single newspaper, but they can't control the other media. Even if they could, they wouldn't be able to control journalists that may become disillusioned by such a system.
I don't believe that a conspiracy is required per se, but i don't see what other argument you could be trying to make. I can tell from your rhetorical questions that you're implying some power dynamic and allegiance between politicians and CEOs, but I don't see how that explains the peoples own propensity for voting for those same politicians.
If democracy does nothing else, it at the very least implicates the people in their own apparent suffering. You can't really decry the "elites" if you vote for them.
It's a bit like an unhealthy person dying from a heart attack. What's the cause of death: the heart attack or decades of unhealthy habits? And if the later, which habits and how should the person have changed? Even then, something is missing if the explanation omits the heart attack itself.
I have never seen central banks trying to divert attention. That something that politicians do, and central banks communications tend to be done by technical people (not by their heads).
I have seen plenty of head of governments trying to divert attention from some economical fact, but the lack of understanding of fundamental things, like cause and effect, monetary identities, and the difference between monetary and real indicators are always there and don't seem to be planted by any PR team.
Does Wall St include people directly invested in equity and debt markets via 401k/IRA/defined benefit (DB) pensions/etc and indirectly via being taxpayers of jurisdictions that have taken on those DB pension liabilities?
People get what they want, and it's still not good. In this case, triumph of labor, high wage growth, low employment, and rentiers scurrying to eek out any kind of gain.
Do you mean low unemployment?
What I’m curious about is what component of inflation is the fact even with shipping rates dropped a ton they’re still twice what they were pre pandemic and fuel costs, which drives a marginal cost of any physical good, being so high? Maybe it’s a war disrupting energy prices and food?
Inflation is caused when demand is higher than supply can meet. Given the worlds ability to produce JIT it feels implausible that supply can’t meet demand if inflation were just left alone. I don’t know that making everyone poorer to reduce demand is the right answer. Maybe just let inflation happen for a while and keep capital cheap so we can invest rapidly in expanding supply?
Just as you can not deliver a baby in one month with 9 pregnant women, you can not grow food faster than it takes.
Also, there is no "leaving alone". As a central bank, you have to choose an interest rate, and this affects bond yields, stock prices, and financing costs (such as to produce said food).
Leaving alone in what I said means “don’t mess with the cost of capital and let people borrow to expand supply as fast as we can.” Eventually as we grow capacity to produce and people compete for higher prices we will overshoot supply, a consolidation will occur, and prices will drop. Trying to decrease supply expansion by making it more expensive to borrow to fund expansion will not improve supply. It will indirectly reduce demand by inducing savings and inducing a decrease in economic activity and a recession and unemployment, and therefore suffering.
I mostly agree. We see a clear supply problem right now. China's covid lockdowns mean any new iPhone Pro ordered today will not be here until next year.
There is no "just a while". Once it starts it's hard to stop. They're trying to save the dollar (and everything with a dependency on it).
There is just a while by the way. Increasing interest rates is a very indirect way to manage inflation. You essentially stimulate savings and increase the cost of growth by making capital more expensive and makes services that depend on warehouse credit more expensive to operate. Stimulating savings decreases spending which decreases economic activity which decreases demand and makes supply exceed demand and prices drop. But it also means less economic activity, which translates into unemployment, lack of wage growth, and other factors. But this process takes time, just like supply expansion through cheap capital (low interest rates). It’s also really hard to reverse a recession while it’s easy to stop a boom.
I’d rather stuff become more expensive for a while and keep my job and get raises to account for it while the economy expands to meet demand than lose my job and have absolutely nothing and struggle to make ends meet while we stumble through a recession, especially since inflation will keep going for some time despite the recession.
I know recession definitely do, and they’re a heck of a lot easier to stop than periods of growth.
I think frenetically switching monetary policy based on a relatively short trend is probably bad no matter what.
Your statement about making everyone poorer to reduce demand is confusing. Do you mean raising interest rates makes everyone poorer and we shouldn't do it? If so, that's not true. It makes people that have borrowed poorer and it makes people who have lent richer. There are second order effects where borrowers can no longer borrow and spend so demand is reduced but that's not really making people poorer, it's limiting their ability to spend money they don't have. If you meant inflation was making everyone poorer, that's true, but your statement doesn't come off that way. Raising prices broadly makes everyone poorer, which is why the central bank should be fighting inflation with whatever tools they have.
Back to the limitless JIT production. if that was true (and we had limitless delivery to where goods were needed) then yah, we wouldn't have inflation, I agree. What we have instead is high production capabilities that took a hit from the war and a much larger hit from Covid policies messing up factory production and all this being fed into a severely overloaded transport system with chokepoints at most ports causing backlogs. if you want the high JIT production and delivery to be true then you need to address the causes of it not being true and that is often (but not always) government. Government is standing in the way of breaking the unions and automating the ports, for example. Government is also standing in the way of new fossil fuel infrastructure that is desperately needed via extreme uncertainty in regulatory approval processes.
If the issue is supply can’t meet demand, you can either reduce spending or demand and increase savings or you can make capital expansion cheaper and encourage supply meeting demand. The former makes everyone poorer because the economy shrinks. The latter grows the economy, and makes everyone richer.
Now I agree inflation is bad for everyone. But inducing a global recession is an ass backwards way to solve it. Expanding supply capacity and ability to deliver while reducing frictional cost of transportation solves it in a positive way.
But either way won’t see results over night. It takes time for any of this to happen. But I’ll argue here that inducing a recession and economic downturn by rewarding saving and not spending leaves us at a worse place in 10 years than we would have been had we grown into the demand and rewarded capital expansion in the face of increasing demand.
Note, I know there’s a morality in our culture around spending and saving as a concept, but I think these are entirely specious. You should save regardless of the reward structure to provide stability and a buffer against turbulence, and being parsimonious is IMO the actual moral imperative. Saving and spending in the above isn’t necessarily at an individual level but at a societal level. Saving is necessarily contracting economic activity by making capital expensive and removing currency from exchange for goods and services, and creating artificial incentives to save will lead to misery - layoffs, shrinking economic activity, declines in equity markets and the value of real goods relative to savings, etc, all of which is not beneficial to anyone in the long run.
Inflation, unless followed on with expansion of currency to try to battle inflation, will resolve itself naturally either way. But letting supply and demand work out the price in the market and making capital cheap means more people and businesses will try to capture more of that extra demand. That’s good isn’t it? Usually markets overshoot so you would ultimately see a period of deflation, especially if a recession pops out, undoing the experienced inflation.
But creating a recession to make people spend less and therefore decrease expansion and opportunity for growth is a truly awful strategy.
2. You confuse money with stuff. Generally, more stuff makes people richer, not more money. More money when there isn't enough stuff makes inflation.
3. More spending is currently how we measure growth but it's dangerous and incorrect to label growth coming from spending. Savings drives capital accumulation and capital drives efficiency gains/production gains, which means more ability to produce more stuff. It is easy to make this error because there are tons of things we can do that destroys the capital stock but drives spending in the near term to great medium/long term detriment.
second paragraph: 4. This whole thing is basically wrong. Making credit cheaper only "solves" the problem if the credit expansion can grow the output of whatever the constraint(s) is(are) faster than it is growing demand for the constraint itself. This is both not gauranteed and not likely in this case given we were already basically at the zero bound interest rate and funding all sorts of insane startup ideas/company largess at the large companies. Higher interest rates reign in malinvestment, which is definitely happening right now and destroying demand from malinvestment is a very good thing.
Third paragraph: 5. Do you think the economy wasn't trying to self correct in the way you describe and failing prior to interest rates being tightened? We had very extended and worsening inflation from the exact strategy you describe before the central bank finally flipped to tightening. If this actually worked we wouldn't be here.
Fourth paragraph: 6. This is impossible to agree on because I would say the places that have taken this path to its logical conclusion ended in hyperinflation and economic death spiral and you will say those places weren't really trying what you propose.
Fifth paragraph onward: 7. I obviously strongly disagree with you for non moral reasons so I don't see a lot of value addressing your morality arguments.
In my perspective, the bailout has been happening for decades, every time the federal government steps in to prevent broad market prices from substantially declining.
Not only have politicians been keeping labor costs low by using high ROI assumptions, they have been underfunding DB pension plans even with those rosy assumptions providing low costs for budgeting purposes.
For this reason, I think it is safe to assume the government will backstop equity prices over the long term (5+ years). It would not be politically popular amongst the voting population to let them fall.
https://www.pewtrusts.org/en/research-and-analysis/articles/...
What are you referring to here?
I understand the Fed can only raise rates and stop buying things. Rates are going up and they're reducing their balance sheets. I'd like them to stop backing mortgages completely but I don't think that's what they want to do anyway.
Somehow, people have been conditioned to believe that low interest rates == economic growth and that high, or reasonable interest rates (say, 5-10%) means a recession.....which is absurd if you think about it.
The cost of a bank loan or mortgage isn't, nor shouldn't be, the bellwether for effectively measuring the state or health of a given country's economy.
If a business has a need for an employee, that business will still have that need regardless if rates are 0.1%, 5%, 10% or 50%. Businesses of all sizes will just need to front more of their own money to grow, rather than using the bank's money to grow.
Just reducing demand with a recession doesn't reduce the price of goods automatically. For CPI to go down, someone on the supply side has to accept lower prices. Who is going to accept it? Only the most desperate of producers, and only if the owners of businesses want to continue that business. Paradoxically, if owners don't want a low margin business, they'll just shut them down causing even more shortage.
One solution appears to be a deep recession that wipes everyone out and then another low interest rate cycle to start the business cycle again. But this will be very very painful and unpopular.
Another solution appears to be for governments to incentivize increase in production. But this can't be a monetary incentive since that will cause even more inflation.
A third solution is to export inflation to developing countries. Just import a lot more from other countries at lower prices so that CPI remains low. But without Chinese manufacturing, where is this going to go?
We are in for a wild ride. One issue with economics is that it is based on a flawed model ( rationality is assumed ) and humans are way more emotional than the model allows for. I would like to hope that some marketing company has a real and closer model for predictions, but that is likely a closely guarded corporate secret.
You've nailed why the fed is in a pickle. Their only tool is a hammer, when they need a screwdriver. People moaning about energy companies not investing in more supply are missing that the fed is on the other side telling those same companies they are going to reduce demand and drive prices down. It doesn't make sense to invest in more supply when the fed is actively working against you.
The larger problem is the lack of a common definition of the word "inflation". This article is an example. There are 27 instances of the word and no definition.
The definitions used by most experts seem to fall into one of two categories:
1. a general increase in prices, as measured by the US Consumer Price Index or similar metric
2. a monetary phenomenon
But these are not by themselves definitions, either. The CPI is split into core, non-core, and a dizzying variety of other metrics. When people talk about "monetary" inflation, the landscape is equally fragmented. The various money metrics have been discredited by some, flat out rejected by others, and revered with near religious fervor by others.
If there's this much lack of consensus about what inflation is exactly, there can be little hope of predicting its future course, let alone controlling it.
[0] https://www.federalreservehistory.org/essays/great-inflation
The false premise here is that central bank action (Ie interest rates) is the only way to tackle inflation. This is false. Interest rates are indiscriminate. Whether you own a mortgage or are a failing business or a successful business, you are impacted to varying degrees.
Increasing interest rates is a form of wealth redistribution to banks.
The alternative to interest rates is taxation. Just enact an 80% corporate income tax rate and redistribute that wealth to the taxpayers most adversely affected by that.
A lot of people like to demonize, for example, oil companies for "price gouging" when the price of oil is set by a global commodities market. If an oil company charged less, someone else would simply profit the difference between the charged price and the market price as a form of arbitrage. The history of price controls as effective long term strategy is not good. Others will also argue oil companies are engaging in price manipulation. That's a longer conversation with some (but honestly not a lot) of merit. But it actually doesn't matter.
Why? Because the solution is to both of these problems is simply taxation.
Opponents might argue that corporations will simply pass that cost on. Won't that simply generate more profits which generate more taxation?
There is a fundamentally adversarial relationship between capital and labor here, which is why neoliberal publications like the Economist talk about depressing wages being a necessity. This is what's lead to almost no aggregate real wage growth in 40 years.
Wealth redistribution to taxpayers essentially hedges the inflation problem but that borders on socialism, which is why it's not part of any serious conversation about inflation.
In the 90s Turkey had 100% YoY inflation despite a growing economy. After the fall of the Soviet Union many of the former Soviet republics had soaring inflation amidst crippling economic depression.
The title of the article we're commenting on is literally "even global recession won't crush inflation"
Please don't gaslight. The entire premise of this Economist writing is that inducing recession by jacking up interest rates isn't the inflation cure-all The Great And The Good are group-thinking it is.
And "gaslight"? What?
Inflation is usually associated with too much demand (people attempting to buy more), and when that happens the economy is usually pretty good. A recession can happen when the central bank tries hard to fight it.
In other cases it's caused by a collapse in supply, which can happen when things are going badly.
Money is worth less because the cost to make and move things is more.
It's not the case that workers have too much cash, which would make goods less valuable relative to currency.
(In the US the fed has stated that they don't think the interest rate changes will make things less expensive)
Inflation today is independent of employment.
If it were the case that employees are paid too much, a recession would depress wages and stop inflation.
But it's not.
So us normal folks get it on both ends.
Things cost more and we foot the bill by getting paid less