Fed hikes rates by 0.25 point despite recent turmoil in the banking sector
cnbc.com
cnbc.com
I’ve come to associate it with an attempt to will the Fed into doing what they want.
Not that I know anything, but I’m wondering if the Fed is just going to keep doing it until everyone is resigned to continued increases. The Fed won’t stop until rich people stop asking them to stop. (Yes I know I’m probably dead wrong)
They kind of got what they wanted. IIRC, before SVB collapsed, it was widely believed the Fed was planning to hike rates by far more than they just did (IIRC, 0.75%).
Because that's what it is. Powell tried to raise rates early in the pandmeic and wall st. meltdown successfully got him to lower them back down. It worked before so they're trying again.
It used to be that money - capital - was used for value creation like a better product or service or some public good in the commons. Now the most crucial use of capital is to generate (further) wealth for those already wealthy. And since "conventional wisdom" of the economics kind blames higher wages as an impetus for inflation, "hurting" those wage earners is the key via higher rates to reign in said inflation. But real wages are and have been falling. Thus, because the economy is biased towards enabling and sustaining the making of money with money, in other words continuing to generate and increase wealth for the wealthy at the expense of others, the system will continue to reward the needs and wants of the wealthy.
Just my take on things. I'm learning as we go.
Sure but investing a modest sum in the S&P 500 as a wage earner, salary earner, or otherwise also requires you to work for someone else your whole life and never get wealthy. That incentive kesp people starting new companies and doing other things - i.e. taking risks.
But we’re in a situation where there was, until quite recently, both too much consumer demand (inflation) and too much investment (lots of wasted investment on silly things).
Higher interest rates are an incentive to slow investment and consumption and park money in government funds, where it‘s presumably more inert.
I think the answer to “what if everyone does it” is that everyone doesn’t do the same thing. If you have a good idea then you can spend your own money on it, and sometimes you have to, but if it’s expensive then it’s probably better to try to raise money from other people.
https://www.portfoliovisualizer.com/backtest-asset-class-all...
These periods highlight that the returns don't meet any common sense definition of "predictable". Maybe if everyone was more precise on the definition of predictable it would resolve the discussion, but it doesn't appear that the common sense definition of predictable is met here.
Doesn't matter how many shares in bread companies you buy and sell. If nobody is baking the bread, people will starve.
A society cannot exist without makers, and neither can an investment Market in the long run
Broadly, no [1]. There was some weirdness around the pandemic, but real wages today are flat with 2019 which, apart from the interceding era, was and is an all-time high.
https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
When you start adding in other considerations, the picture is worse.
No, it's not. Productivity adds a dimension to the question: it tells us the pie got bigger without more ingredients. But that isn't relevant to the absolute size of one's slice. Real wages are meaningful without preference to productivity.
> wages have comparatively been flat since the 1970s
Flat isn't falling. Taking into account benefits, per your Pew article [1], they're up. (Barely.)
The real economy grew in that time, and the rich got richer with it. That's a problem. But it's not a problem of falling real wages.
[1] https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us...
I think those are much more important to highlight and less pedantic.
Yes. The fraction of GDP paid out to labour has fallen. This is a problem. But it's a problem of dividing gains, not of anyone being materially worse off than they were before.
> what’s the story with purchasing power which seems to be way down
It's not. It's flat to slightly up over the last half century. That's what real wage measures: the real purchasing power of the median earner's wage.
Educating and training people, giving them general and specific skills, makes them much more productive.
The markets appear to indicate the worker value hasn't improved much lately, but capital has.
>Educating and training people, giving them general and specific skills, makes them much more productive.
And yet if you talk to almost any American, they will explain that the educational system has gone downhill. If the product produced through education is of lower quality, I would not expect the wage demanded to be higher.
Education isn't the only source of skills, of course. There is training, and also people are far better informed now, for example, due the the Internet (or disinformed).
Even if the quality of education is reduced, it's not nearly zero. Partly because of education (and health, freedom, political stability, etc.) we are far more productive than illiterate neolithic peasants farmers.
Also, the quality could go down, but may more people could be educated, resulting in a large net gain.
That's an aggregate gain, why are you comparing this to per capita gains.
>Even if the quality of education is reduced, it's not nearly zero. Partly because of education (and health, freedom, political stability, etc.) we are far more productive than illiterate neolithic peasants farmers.
Worker earns more real value than neolithic farmer, but I don't think anyone was saying they weren't.
>Education isn't the only source of skills, of course. There is training, and also people are far better informed now, for example, due the the Internet (or disinformed).
There was also training in the 1960s and 1970s. The median worker likely has more optionality to become an above median worker now, although whether the median worker themselves has better training today than in the past decades is debatable.
>Lots of people saying something doesn't at all make it true; in fact, it should make you skeptical that they are following a mis/disinformation herd and don't know what they are saying.
This is true, but if everyone is saying US high schools produce dogshit, the world is not going to be inclined to pay a reputational premium to US workers graduating from high school. Perception is part of value, and in markets indeed the buyers believing something has value creates real positive demand. This can be seen elsewhere i.e. felons get depressed wages, even if their conviction was bogus or not something that effects their work. The very fact our education is seen as going downhill creates lower value/quality for our workers -- so as you can see what I said was highly relevant.
Inflation is good for debtors, however, reducing the value of the principal, and similarly bad for creditors.
High inflation is bad for almost everyone.
If inflation was running hot persistently at like 6% then long term interest rates would be higher and housing prices would fall in nominal terms compared to wages.
The low-inflation, low-interest rate environment has produced high asset valuations due to the cheapness of borrowing money.
There is an important distinction on the spectrum between consumable things bought with wages and investments bought with borrowed money, and the rise in prices in those categories are different.
If you want to play the semantic game that all rises in any prices are inflation there is a real distinction that you're missing -- in which case we should talk about asset inflation vs. price inflation vs. wage inflation as being different inflations and stop talking about it like its the same thing (which economists would tell you it isn't by arguing that you're talking about assets and not inflation, but now we've just gone in a circle talking past each other because of definitions).
We’re insulating an aging gerontocracy at the expense of the next generation.
That’s ageism.
We’re on the hook for their contracts, their businesses agreements. I never signed anything.
They’ve successfully leveraged their propaganda spewing media companies to convince us to coddle them and fuck the next generation; no one else matters!
That’s the only real thing going on here. Everything else is semantic games.
A bunch of elders raised in a more religious era built “flocks” of employees whose agency they exploit to avoid real work.
Inflation causes asset prices to rise.
> If inflation was running hot persistently at like 6% then long term interest rates would be higher
This is not true.
> housing prices would fall in nominal terms compared to wages
I suggest you reconsider your assertion that 6% inflation would result in lower housing prices.
> The low-inflation, low-interest rate environment has produced high asset valuations due to the cheapness of borrowing money.
The high asset valuations as a result of low interest rates is textbook monetary inflation.
> There is an important distinction on the spectrum between consumable things bought with wages and investments bought with borrowed money, and the rise in prices in those categories are different.
The prices in both those categories are affected by dilution of value as a consequence of monetary expansion and that increase in prices has a name, 'inflation'.
> If you want to play the semantic game that all rises in any prices are inflation there is a real distinction that you're missing -- in which case we should talk about asset inflation vs. price inflation vs. wage inflation as being different inflations and stop talking about it like its the same thing (which economists would tell you it isn't by arguing that you're talking about assets and not inflation, but now we've just gone in a circle talking past each other because of definitions).
The point of semantics is to enable us to communicate by having mutually understood meanings for the words we use. If you want to talk about price increases that are not a result of monetary factors, then you can just talk about the price of things going up without misappropriating the word 'inflation' and making it seem like you don't understand what the word even means.
The distinction you speak of was cleverly crafted by the rich to provide cover for them because they own most of those assets and wage earning people can no longer afford them.
In the end who gives a shit if you dissect inflation into categories or not if my standard of living keeps dropping, which is what inflation does. Robs purchasing power from the people.
Was told last year the payment will be abt 500. I reckon after rate jumps it’ll be closer to 800.
Sigh.
Everyone has a mix of: Debts, money they've loaned to others, amount of assets owned, and amount of dollars owned and wages (recurring income in dollars).
So, inflation is most harmful to wage earners with few assets - and most helpful to non-wage earners with many assets.
Increasing wealth disparity between workers (most people) and those who own the most assets. Those who own large amounts of assets largely don't own dollars - they own real estate, securities, etc..
The bank issue is a strawman - simply a matter of SVB (and others) making bad interest rate bets and losing.
I'm not sure what type of assets you're referring to, but I haven't exactly noticed stocks skyrocketing along with inflation. If anything they seem to have dropped in value.
That's not "good", it's just less bad, because as soon as they want to turn those assets liquid they run into the same problem. Their assets are not gaining value, they're just not losing it.
However, high enough inflation does benefit people who borrowed tons of money to hoard more physical assets than they can afford.
If their salary keeps up with inflation yes. The trouble with relying on RSUs for comp is that when the fed raises rates to fight inflation, it ensures your total comp doesn't keep up with inflation.
As I mentioned in that thread, this is an extremely disingenuous take. The Federal Reserve has no interest in "hurting wage earners." Before the rate hikes, wage earners had already been hurt because inflation was outpacing wage growth. A wage-price spiral would only exacerbate this pain for those who aren't in a good position to switch jobs or negotiate with their employer.
Also, "the wealthy" isn't a monolithic group that all have the same interests. People who got rich off of cheap money, like Elon Musk, are asking for the Fed to lower interest rates as well.
And I was thinking... "I'm not sure 'destroying the banks' is a metric the fed tracks. Unemployment and inflation are."
But the earnestness with which the comment was offered. It was, as you say, like the commenter was willing the fed to do what they wanted. I guess magical realism isn't just a literary genre.
https://en.wikipedia.org/wiki/Lender_of_last_resort
It's often stated that their two goals are to maximize unemployment and minimize inflation, but those are ultimately secondary to maintaining the overall health of the banking system and financial sector (although it's generally thought that aiming for those two goals help achieve that stability).
It's interesting you say that. Putting on my tinfoil hat for a second.
People who have been making their fortunes on easy access to capital, VCs and the tech sector, are now mad that the rates are going up and it is starting to kill their golden gooses. Since the fed isn't listening to them they are going to force the Fed to listen to them by laying people off to increase unemployement and will continue to do so until the Fed relents to their demands.
That would be threatening the Fed with a good time! The Fed has lower consumer demand as a target metric, and laying people of is one way to achieve that goal (roughly speaking).
I think the most negatively affected by these rises is going to be the US middle-class, i.e. the people who have to pay mortgages (the same goes for the middle-classes based in Western countries more generally speaking). Higher interest rates means higher mortgage rates, and taking into consideration that those mortgages were signed when the effective rate was close to zero we're talking about a devastating effect on those people's finances.
Of course, VCs and capitalists somehow also negatively affected by these rises will have the louder voices, they're the ones controlling the discourse.
Most mortgages rates are locked in when you buy the house (unless you get an adjustable-rate mortgage, which is only about 9% of applications in the US as of September 2022)[1]. Like my mortgage payment hasn't changed hardly at all since I got it 5 years ago (it went up $100 because I have a PMI, but that's it, and that predated any rate increases).
What it's actually caused is it's kind of locked millions of people into their existing mortgages, because they got in while rates were so low, they don't want to buy a new home at the much higher rates (especially considering home prices are still super inflated over the past couple of years), so they're kind of stuck.
We kind of wanted to move but didn't buy a new home fast enough during the pandemic (we were looking late 2021, but didn't pull the trigger), so now it just doesn't make sense, the new rates would almost double our current mortgage payments, especially considering we'd have to buy a house at about +50% of our original purchasing cost. Selling our also inflated home will help towards that a bit, but not enough.
So now we can't really afford to move, even though we'd like to.
[1]: https://www.rocketmortgage.com/learn/40-percent-of-americans...
If you could not buy into an expensive market then, you likely never will barring some huge windfall like doubling your salary or inheritance. Guessing most of Gen Y will be renting condo's or living with their parents until the homes are passed on to them. A dumpy 3/2 1400-1600 sq ft. in the south bay area is like $8000+/mo with taxes and $360,000 down payment. Good luck.
>Consumer spending appears to have picked up this quarter, although some of that strength may reflect the effects of swings in the weather across the turn of the year.
I'm not proficient enough in monetary and fiscal policy to comment on the accuracy of drawing that conclusion, but I found it hysterical nonetheless.
https://www.federalreserve.gov/mediacenter/files/FOMCprescon...
It has, at least in my part of the country, been the most mild winter in my memory. We hit the 70s the majority of the days in February, with overnight lows in the 50s. I'm in North Carolina, not Florida! We're supposed to have mild winters, but this year, other than that one weekend where much of the south saw negative temperatures... it's like we skipped right from fall to spring. I've barely even worn long pants.
Nice weather leads to more travel, outdoor activity, more shopping, more going to restaurants. If it's cold and rainy, you stay home more.
In a way, that's the idea. Inflation is a psychological phenomenon. People raise prices, etc. because they expect inflation. The Fed needs to keep raising rates until people expect that the Fed will continue to raise rates until prices stabilize (if that sentence makes sense).
And yes, it is by and large "rich people" the fed needs to convince, specifically business and capital owners.
The work on demographics is done by Pradhan and Goodhart and of course Peter Zeihan likes to discuss the latter as well. I don’t know where Zeihan gets his sources but he consults for the military and other government agencies.
In any case, I’d like to see asset markets deflate courtesy of the Fed raising rates, so I would agree with your take on the Fed holding more responsibility.
Keynes said that. In theory, fiscal policy alone can keep an economy balanced. In practice, you need an independent central bank.
MMT's novel assertion is that government debt is a monetary, not fiscal, exertion. (It also asserts raising rates is stimulative, et cetera.) It's broadly criticized and empirically unsubstantiated.
Can you cite that? That's very odd, and contradictory to the MMT works I've read.
1. When central banks raise interest rates, this means governments spend more on their interest payments. This translates into increased income for bondholders. Higher incomes lead to more consumer demand, pushing up prices. Similarly, banks benefit from higher interest payments from the Federal Reserve. In other words, the interest from the higher interest rates goes to someone in the economy, and their demand increases rather than decreasing.
2. Interest rates are a cost for businesses. When central banks raise interest rates, businesses pass this new cost on to consumers in the form of higher prices, which is inflation by definition.
3. Higher interest rates make it harder to start a business and harder to hold inventory. This reduces supply, leading to higher prices aka inflation.
4. Finally, MMT economists point to the fact that there is no empirical research at all showing that higher interest rates decrease inflation. In fact, the correlation runs in the opposite direction.
The above points are taken from Additionally, the following points are taken made here https://www.reddit.com/r/mmt_economics/comments/wchq55/raisi...
A few coastal politicians saw MMT supports deficits, ignored the intellectual bankruptcy within, and turned it into a polarising topic when it’s just an interesting but impractical way of reframing common topics.
Like any field, there are different sides to it. Krugman and Cowell are both mainstream economists, but they disagree on a lot.
Rate rises are being justified to "loosen the labour market" aka drive unemployment higher, and to suppress wages. Except labour costs are NOT the main driver of recent inflation:
https://www.epi.org/blog/corporate-profits-have-contributed-...
So if employment and high wages aren't driving inflation, then suppressing them will only eventually, indirectly drive down demand to the point where corporations can no longer justify their profiteering.
Wages drive spending and aggregate demand.
We know that tax cuts for the rich don't do it, if you want to juice aggregate demand give everyone a $500 tax rebate.
If everyone is employed and their wages are climbing they go out and buy things.
> indirectly drive down demand to the point where corporations can no longer justify their profiteering.
If you cut those wages that means that means that less is getting bought which means that corporations start to look at warehouses full of flat panel TVs or whatever that aren't moving fast enough, and they start to price them lower in order to move them. The corporation that sticks to their pricing model becomes the one left holding the bag with all the inventory that isn't moving.
Dunno why you'd describe that as only "indirectly" affecting prices since that is directly addressing the supply and demand curve that sets the prices of the goods. The company will always try to take any profits it can.
It's an interesting double standard that you seem perfectly willing to tolerate this greedy behaviour from corporations, but not when it's individual people getting better wages and being employed. Here's a thought: instead of capping employment and driving down wages, why not cap profits and so drive down incentives to take any profits they can?
https://www.epi.org/blog/corporate-profits-have-contributed-...
Maybe claw back the money supply from corporations instead of the labour market. If instead of having only one tool, they also had this complementary tool, maybe we'd see better policies.
Inflation is never going to be done without some kind of structural change to how we govern ourselves. It’s the only politically acceptable out to deal with massive over spending by the federal government. There’s no political will to raise taxes to cover desired spending, and no political will to lower spending to match taxes. So the only answer is for the debt itself to be devalued.
I think the reference was to “above target” inflation, not “above 0 inflation”.
Yes, as long as we have policy based on the experience that slight deflation is worse than slight inflation, we will have a structural bias toward slight inflation.
To the extent that debt (or debt-service cost) to GDP matters, balancing the budget is way outside of what is needed to address it. The concerns are, in the short-term, ability to pay debt service out of current revenue, and, in the longer term, assuring the GDP grows faster than debt. Neither of those requires balancing the budget.
I agree. I don’t mean balancing the budget in an accounting sense. I mean getting spending down to sustainable levels. It just isn’t sustainable right now, and the only two possibilities I see is to either get that under control or to buy government debt with “printed” money, causing inflation which will decrease the real value of the debt.
Seeing the flagrant incompetency and immaturity in Congress, I’m betting on the latter.
The next biggest item is the defense budget, and I suppose a "competent and mature Congress" would be able to cut that dramatically, but it's a challenging task. People genuinely believe that our enormous defense budget is required.
The rest of the budget is a lot of little things, each one barely more than a rounding error. You could zero out whole departments without moving the needle. People talk about them because of culture warfare, with "teh deficit" as a fig leaf.
In the end, the US budget is so big because we want it to be so big. And that's not inherently a bad thing. It is part of an economy doing well enough that people believe the government will repay loans. Eventually we'll outstrip that, but it's not today.
The fact that Congress is immature and incompetent... that's kind of a different problem. And one much more important than the deficit. But I don't have any idea how to fix that, because the voters know what they want and deserve to get it, good and hard.
We're going into a period of elevated military risk and spending. In the 1990s, we were exiting one.
That was certainly a common-though-mistaken impression early in the year 1990; it wouldn't last through the year, and it definitely doesn't describe the late 1990s (when the US was a direct participant in the most significant European conflict between WW2 and the present, which was also where the renewed Cold War at which the later Clinton “Reset Button” was directed began, simultaneously with escalating threats & conflict in and beyond the Middle East involving Iraq, Hezbollah, and al-Qaeda.)
American military spending as a fraction of GDP plummeted in the 90s [1].
[1] https://en.wikipedia.org/wiki/Military_budget_of_the_United_...
The rising part of a bubble always has massive economic growth. It used to be better for everyone when there wasn’t a permanent housing shortage
* Political stability: As we are re-learning, that is necessary for everything.
* Economic stability
* Large productivity improvements due to the IT revolution
The bubble was only one small part of it for one sector of the economy, afaik. When it popped, we didn't reset to 1992; most or even all of the gains remained (was there even a quarter of negative GDP?).
* Globalization/off-shoring
* The west had growing share of higher-paying service jobs
* New markets in Eastern europe and China
* Increasing disposable income at home. The rust-belt wasn't rusty yet.
> Increasing disposable income at home. The rust-belt wasn't rusty yet.
This one I don't know about. The term 'rust belt' goes back to the 1980s.
Adjusted to 2023 dollars and assuming interest rates of 5.5% in 1998 and 4.5% now (source: https://fred.stlouisfed.org/series/FEDFUNDS), home owners on average are spending about 43% more money on their mortgage payment per month.
Real wages have been stagnant for a long time. The average person is not likely to be borrowing more than they were able to in 1985 adjusted for inflation and assuming the same loan terms. While real wages have stayed stagnant, all homes sold today will cost their new owners ~43% more of their individual purchasing power than the same homes would in 1985.
EDIT: can someone explain why this is being downvoted? I made this comment when there were zero other comments on HN, so I meant no offense to this community. It was just crickets on the HN thread, so I wondered where else there might be active/informed discussion.
Just read the Fed directly. Its not too difficult. The Press Release (started at 2:30pm) will also be relatively straight forward IMO.
:D We're a bit too myopic and self-congratulatory if we even try to compare.
Smart talk on this topic is valuable. Monetary forums are in person, to preserve privacy, and when distributed by newsletter, expensive.
Reading the Fed's thoughts directly, and maybe following some well-regarded economists, is the best one can do as a nonprofessional. (I'd argue it's at par with most professionals, too.)
Definitely not a perfect source, but I find it helpful at least.
Good breakdown of facts. Only slightly biased towards pro-raising-rates but relatively balanced IMO
https://twitter.com/concodanomics
https://twitter.com/UrbanKaoboy
https://twitter.com/PeterZeihan
https://twitter.com/EPBResearch
https://twitter.com/JavierBlas
https://twitter.com/LastBearStandng
among others. You'll at least be exposed to a lot of terminology that you can then dive into with sites like Investopedia. I'll caution you not to rush out and start trading based on what you see. If you want to trade, that's a skillset that needs to be honed over time(learning to be unemotional, set limits, choose position sizes, etc).
Here's my custom list: https://twitter.com/i/lists/1590358177513709568
This is more or less in line with expectations.
> The U.S. banking system is sound and resilient.
That is something like saying "the house is not falling down" - you don't need to say it if the house isn't at risk of falling down. I think the statement is true right now, but they are hoping to stem the bleeding on bank balances.
From later:
> Russia's war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty.
While true, it's hard to think that they aren't planning to set up a scapegoat here.
If somebody asks "is the house falling down" and you ignore the question then that's worse than responding "no."
OTOH, to the extent the banking turmoil and recession risk is a problem, the hike directly makes it worse. That may not be a better choice than something that merely signals that you think it is worse.
If we are timid now, it will only require larger course corrections later if we want to get inflation under control. The longer we wait, the more inflation gets baked into expectations and pricing.
SVB was supposed to be an isolated event. While they were large, they were not "too large to fail". If their failure was enough to rattle the entire system, things are in serious trouble.
He has many options. How long one takes to get to the inflation target is the simplest lever.
> given the market had priced in Powell making rate cuts
Which market? Rates markets certainly weren't.
He's just the chairman of the board/does the press conferences. It isn't all exclusively up to him, is it?
https://www.federalreserve.gov/aboutthefed/bios/board/defaul...
They do a vote, right?
Things may hurt in the short term, but in the long term "normal" interest rates will benefit Americans + strengthen the US economy globally.
Markets are still digesting the news that there will be no rate cuts this year barring a catastrophe.
Stocks remain highly overvalued. Equity risk premium is in the gutter(https://www.morganstanley.com/ideas/equity-risk-premium-low-...). There is little upside to stocks vs bonds right now. Stock valuations still aren't reflecting earnings revisions likely later this year as the economy cools. We've been riding on the savings built up during covid but that's starting to run dry. Personally, I'm almost 100% in T-bills with some long dated puts on the major indexes to hedge my unvested stock based compensation.
Sad to think if only the PS5 had never been launched, none of this would have ever happened.
--Trevor Noah, re: 2016.
Could you explain this joke (?) to me ?
But since you ask - supply chain shocks limited GPU availability and further squeezed PS5 availability. That led to people paying absurd prices for PlayStations. The joke is that was the root of rampant inflation.
I’ll go back to my hole now. Have a great day!
I don't think that really holds when talking to a broad enough audience.
This was layered on top of near 0% free money and QE.
It feels like we're replaying 1979 all over again.
This hasn't been the priced in expectation https://www.cmegroup.com/markets/interest-rates/cme-fedwatch... here since the SVB failure.
Did you see what J Powell said today on the press conference? No rate cuts for 2023? Do you believe him? Fed Futures Contracts pricing don't seem to.
√ Stocks are Down
√ Crypto is Down
√ Gold is Up
This says a lot about how investors see where the economy is headed.
People often forget.... so is gold. And it's much harder to print. Plenty of the people with guns want gold. In fact in the lawless parts of Brazil/Guyana/Bolivia even unschooled forest dwellers pay their "tax", trade, create debts, hire security, and buy food with it all with minimal friction in handling it. Plenty of people hate on gold, but it is the tongue that everyone understands.
Then why is it up 1.8% right now?
It does not matter if it is rational or not, it is signaling how investor see the economy. Gold is safe. Always.
If you thought the fed was gonna drop rates, there's a good chance you live in an echo chamber of wealthy private investors.
And now many states are planning to "fight inflation" by literally sending people "inflation relief checks." :/
I mean, inflation wouldn't double as a result of giving the bottom 25% additional money, but unless there was a matching increase in the supply of goods and services, the additional money would make prices rise.
I dont like the recent inflation, but as someone one the upper end of the income distribution (likely true of many HN readers), my life isn't fucked up by it. Merely my discretionary income.
What makes you say inflation wouldn't double? It's not clear to me that there's a linear relation between money supply/money velocity and inflation. In addition, I think there's a large psychological component to inflation: people spending money sooner than they would otherwise, i.e., quick buy it now before prices go up more; and, demanding increases in wages to match the expected increases in prices.
I believe Michigan has north of $5B 'extra' money sitting around, which is anticipated to grow close to $10B by end of year. Maybe there will be a one-time refund check to citizens/taxpayers there, but is that marketed as 'inflation relief'? I wouldn't think so.
You're out of touch with reality if you think people who need inflation relief are the ones driving inflation.
Long term, the IRA will reduce energy prices. Energy is a huge component of inflation.
1: https://www.slowboring.com/p/tax-increases-are-the-best-cure...
Fiscal policy's monetary effects are not a fringe theory. Increasing taxes reduces the money supply, and a smaller money supply decreases price levels ceteris paribus. This is conventional economics.
Modern monetary theory goes a step further, arguing deficits and debts don't matter, all that matters is inflation. Which is sort of true, in a way, but also useless since it provides us with no system for predicting when inflation might become problematic beyond deficits and debts.
I don't doubt it, but I'm curious about how it works:
If I buy a car from GM, who then uses the money to buy things from suppliers, who use the money to pay some people and build a new factory, etc. - that all increases the velocity of money which increases inflation.
If I pay the same amount to the government, who then uses the money to buy things from suppliers ... how does that have a different inflationary effect?
I'd guess that the government, with less revenue than expenses, doesn't save the tax revenue. It's not stuffed in a giant mattress at the Treasury. I would guess that it's spent, pretty soon. In fact, there might be more velocity if I give the money to the government than to a company sitting on fat cash reserves.
EDIT: I just realized: Higher taxes reduce return on investment and thus reduce investment. Is that the only mechanism in play?
The first part is tax. The second spend. There is no obligation for the government to tax everything it spends, or spend everything it taxes.
In practice, governments will spend what they tax which is why we need an independent central bank.
True, but I don't see how that impacts inflation. They do spend it, as you say, which returns us to my original question.
1: https://www.federalreserve.gov/econres/notes/feds-notes/fisc...
Also remember the time impact. Taxes went up immediately, whereas the bulk of the IRA rebates will happen in a few years.
It is easier certainly to call out the IRA (even though it is doing a lot to drive a transition to a cleaner economy) because it happened, as opposed to “what ifs,” but not touching taxes as far as slowing the economy should be called out imho.
The CBO called out the IRA for being ineffective because the IRA only reduced the deficit by a few hundred billion dollars, when trillions in relief were needed.
Sure, trillions of dollars in increased taxes would have killed the economy, but interest rate rises are also killing the economy.
Can you justify the "very effective" part of that statement?
As an aside, the BTC USD rate has also jumped during this turmoil, and in many ways, it appears to mirror safe haven commodities quite closely. I find it interesting that an asset with such a "bad" reputation in the media is attracting investors during these unstable times.
100%. Crypto, broadly, behaved like a safe asset in the last weeks.
Safe asset is in part a statistical designation: it holds value or goes up in times of financial stress [1][2]. Crypto did that in the last weeks.
There is a second component of money-like stability that crypto does not meet. But it's interesting to see crypto rise while bank stability falters when, previously, Bitcoin was correlated with the S&P 500.
[1] https://www.stlouisfed.org/on-the-economy/2018/december/safe...
[2] https://www.jstor.org/stable/2328809?seq=1#metadata_info_tab...
I tend to agree. But external stabilization hasn't been a disqualifier for historical safe assets.
I agree. To be clear, I'm not declaring Bitcoin a safe asset. Just pointing out that it behaved like one in the preceding weeks. That's genuinely interesting.
> its spectacular failure to achieve one of its stated goals of being an inflation hedge
Correct. Though I'd be amiss not pointing out that equities, too, failed their traditional role as an inflation hedge in that time.
Are people actually rationally using Bitcoin as a safe-haven, or are the Bitcoin maximalists irrationally fantasizing that this time they'll get some crisis that will fulfill their wildest dreams, so are piling more money into it?
If money moves into it and the price tends to increase during inflationary times, then you would be rational to use it as a safe-haven, regardless of what other people are doing.
It's not surprising prices are up.
If you believe Tether's are real - then you believe the increase is real.
If you believe Tether's are fake - then you believe the increase is fake.
Same crypto story, different day.
That's a lot of buying pressure.