tag:blogger.com,1999:blog-582368152716771238.post521390911355310445..comments2024-03-28T02:34:12.891-05:00Comments on The Grumpy Economist: Inflation outlook at NRO. 1970s all over again? John H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger20125tag:blogger.com,1999:blog-582368152716771238.post-73268740066927688822021-04-19T11:44:32.100-05:002021-04-19T11:44:32.100-05:00Your views more or less echo two of my Barron'...Your views more or less echo two of my Barron's articles. One from May 21 last year “This Is No Textbook Recession” (the essential questions about the sequencing of the recovery) https://www.barrons.com/articles/this-is-no-textbook-recession-51590065124 which envisaged a supply-constrained inflationary scenario and anticipated the change in FED rules to accommodate this; and the other from a couple of weeks ago “With $1.9 Trillion in New Spending, America is Headed for Financial Fragility” https://www.barrons.com/articles/WP-BAR-0000032225. A modest inflation could help on debt. But a shift in inflation expectations--which could happen more rapidly than actual inflation--would raise real interest rates and could prove dire for government debt dynamics. Leslie Lipschitzhttps://www.blogger.com/profile/06234138498125373907noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60808113450390840522021-03-14T18:33:40.859-05:002021-03-14T18:33:40.859-05:00Brainard: "I would not hesitate to act and be... Brainard: "I would not hesitate to act and believe we have the tools to carefully guide inflation down to target.”<br /><br />Don't you find that alarming? I mean, the words "carefully guide". That's not how it works. In 1980-1982 the Fed beat inflation, but only with a ruthless battle, an intentional recession. Whether the Fed has the guts to do it again, it would help expectations to say <br /> <br /> "I would not hesitate to act and believe we have the tools to ruthlessly force inflation down to target, whatever the cost in jobs.”<br /><br /> That Brainard would make such a weak statement is almost as bothersome as choosing such a feeble response to inflation. <br /><br />Eric Rasmusenhttps://www.blogger.com/profile/01609599580545475695noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83342705470020243992021-03-12T09:21:13.662-06:002021-03-12T09:21:13.662-06:00"If you add it up, it is hard not to see here..."If you add it up, it is hard not to see here the policy package of the late 1960s and early 1970s: deliberately running the economy hot in a vain attempt to raise employment permanently;"<br /><br />With all due respect, I think you've badly estimated one of the very important goals of the Fed's policy change at Jackson Hole in August 2020. Social/ESG goals aside (a different topic for a different post...), the primary motivation behind literally redefining their 2 mandates was and is NOT to raise employment permanently.<br /><br />The primary motivation is to retain policy tools which have the chance to be effective.<br /><br />The most dangerous characteristic a Central Bank can have is lack of credibility. In the case of the past 20 years, it is more precisely: the lack of INFLATION-CREATING credibility. If I don't believe your policies have the ability to create inflation - when that is a prominently stated goal - I will stop listening to you. You become irrelevant. Your policy tools do not move the needle. Simply, it is what happens when deflationary mindsets take not only root, but take hold.<br /><br />The BOJ has gone down this path. Nobody cares what they do. It doesn't matter to markets, it doesn't matter to their economy. The ECB is very close to that point, as well. It is a black hole for monetary policy, and the Fed is hell-bent on making sure it does not cross that event horizon (for to do so would render it irrelevant, the scariest thing in the world for a bureaucrat).<br /><br />Importantly, the Fed believes it has the tools to deal with inflation - should it arise. Whether they do or not is fully irrelevant. I don't care if you don't think they do or I don't think they do - THEY think they do. They would and do welcome inflation because - as the scarcest macroeconomic thing in the world for the past 12 years - it is insanely valuable. And it would cement in the mind of the market and economy that, dammit, the Fed can create inflation if it wants to. Its tools still work. <br /><br />The other side of that coin is too gruesome for them to consider.<br /><br />ScottScott Ladnerhttps://www.blogger.com/profile/01170448582201764274noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65934703639233169682021-03-11T21:16:03.079-06:002021-03-11T21:16:03.079-06:00to repeat myself but in a different way.
how will ...to repeat myself but in a different way.<br />how will inflation rise to dangerous levels.<br />I am very interested in how wages will jump or have you and others not thought that through.<br />Perhaps go back to the 70s and discover why inflation rose would be a good thing to do.Not Trampishttps://www.blogger.com/profile/12738633092867411422noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9559734763265818862021-03-11T13:08:06.565-06:002021-03-11T13:08:06.565-06:00An article appearing in today's The Wall Stree...An article appearing in today's The Wall Street Journal titled "Wave of New<br />Debt to Test Treasury Market", by reporter Sam Goldfarb, describes the onset of jitters in the bond market to the on-set of a steep ramp-up of bill, note, and bond issuance by the Treasury department to fund the latest expansion in spending by the government. <br /><br />The response: rising interest rates demanded by buyers of new Treasury issues amid expectations of increasing inflation rates going forward.<br /><br />Also in today's issue of The Wall Street Journal, a book review written by Edward Chancellor (in the 'Bookshelf' column) of "Empire of Silver" by Jin Xu, editor at the Financial Times, Shanghai, PRC (Yale, 374 pages, $30). The book will find an audience amongst those who take an active interest in monetary policy and its effects on inflation, economic development, and national competitiveness.<br /><br />From the introduction of the book review: <br />"China may have been the first country to experiment with paper money, but modern finance took off in Europe rather than the Far East. In the West, banks and credit markets seeded the growth of capitalism. By contrast, China gave up on paper money long before Columbus set sail for the New World. From the 15th century through the 1930s, the Chinese were stuck with silver<br />money. Without access to credit, the Middle Kingdom yielded economic primacy to England and later the United States."<br /><br />The book, as noted by Mr. Chancellor, provides interesting insights into the inter-play between commercial interests, political decisions both internal and external to the country, and the consequences of excessive supply of paper money not backed by sufficient commodity reserves held by the issuer.<br /><br />According to the author, the advantage of paper currency was recognized by commercial interests early on. One version of paper currency traded at a premium to the metallic currency of the day, for example. But, as the history tells it, excessive production of paper currency invariably led to inflation and hyper-inflation. It remains to be seen whether history will repeat in our own case under the on-slaught of excessive expenditures authorised by Congress in 2020 and now in 2021, with more to come (apparently). <br /><br />Mr. Chancellor's column ends with this apt quotation from Jin Xu's book: “History always knocks twice, first as comedy and then possibly as tragedy.”<br /><br />The footnote to the column states: 'Mr. Chancellor is the author of “Devil Take the Hindmost: A History of Financial Speculation".'<br /><br />Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-75699402658092801852021-03-10T23:33:42.339-06:002021-03-10T23:33:42.339-06:00Still sticking with the Phillips Curve nonsense?Still sticking with the Phillips Curve nonsense?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32126181214705804202021-03-10T21:56:43.122-06:002021-03-10T21:56:43.122-06:00So far the Fed and the Government have gotten away...So far the Fed and the Government have gotten away with craeting money at an incredible pace. Maybe they have discovered the Founatin of Yout or the Perpetual Motion Machine. Maybe they haven't.<br /><br />I think we should take Bob Marley's warning seriously:<br /><br />“Every day the bucket a-go a well, one day the bottom a-go drop out.”<br />https://www.youtube.com/watch?v=2XiYUYcpsT4Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37218160154168911722021-03-10T20:37:30.485-06:002021-03-10T20:37:30.485-06:00I don't follow your last paragraph. The Fed ra...I don't follow your last paragraph. The Fed raised interest rates while modeling below 2% inflation years out. From a revealed preference perspective, they wanted an inflation range below 2%. How does their actions, given their expectations, in any way support the idea that they were unable to hit their inflation targets?Anoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56167337336205753592021-03-10T18:14:59.589-06:002021-03-10T18:14:59.589-06:00"that it misses the turn going in as well as ..."that it misses the turn going in as well as coming out" I'm not aware of any anti-cyclical interventions which did not peak long after the peak of the crisis, making private sector recovery more difficult and imposing long-term costs. In Australia, the Rudd government's GFC intervention was a classic example of what not to do.Michael Cunninghamhttps://www.blogger.com/profile/14933921928383382118noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70783844194130264352021-03-10T17:56:05.119-06:002021-03-10T17:56:05.119-06:00When will we see inflation in Japan?
People who a...When will we see inflation in Japan?<br /><br />People who are concerned about inflation should devote a few paragraphs anyway to the elimination of property zoning.<br /><br />Even a nation on the gold standard would have inflation (as measured) if it was afflicted by chronically worsening housing shortages. More importantly, it would have declining living standards.<br /><br />I will note that two luminaries of the industry, Martin Feldstein and Paul Volcker, spent the last 40 years of their lives intoning against impending higher rates of inflation and subsequent interest rates.<br /><br />Instead, the opposite happened. <br /><br />I am not a fan of social welfare programs. However, I think a democratic society, if it wishes the employee class to buy in, needs to maintain chronically tight labor markets.<br /><br />Rather high inflation than high unemployment. <br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-59654422030237456002021-03-10T17:42:09.028-06:002021-03-10T17:42:09.028-06:00Old Eagle Eye,
"History has demonstrated tha...Old Eagle Eye,<br /><br />"History has demonstrated that the FOMC usually gets it wrong; that its sense of timing is far from impeccable.."<br /><br />So this has been going on for a while, and yet...<br /><br />"Good on John Cochrane for his courage and boldness to draw our attention to this emerging issue of concern..."<br /><br />FOMC mistakes in policy are an emerging issue?<br /><br />You can't have it both ways.<br /><br />"Could today's financial titans survive at their current elevated gearing ratios under those conditions?"<br /><br />Sure they (including the federal government) could, but only by relying on less debt and more equity.<br /><br />https://fred.stlouisfed.org/series/TOTDTEUSQ163NFRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-80551244304789500782021-03-10T16:44:44.354-06:002021-03-10T16:44:44.354-06:00Some thoughts...
One would have had to have liv...Some thoughts...<br /> One would have had to have lived through the 60s, 70s and 80s to have an appreciation of the author's take on this topic. Esp., one would have either had to study that period or lived through the years leading up to and during Paul Volker's chairmanship of the Federal Reserve and the monetary policy impacts that Chmn. Volker's decisions gave rise to, to have gained a deep appreciation of the damage that those policy decisions wrought. Those amongst us who have come of age during the past two decades can hardly imagine a world in which the Fed Funds rate is 10% and higher, mortgage rates are 22% or greater, or a world in which the Fed Funds rate rises at the pace that it did in 1981-2. Could today's financial titans survive at their current elevated gearing ratios under those conditions?<br /><br /> John Cochrane is right to be concerned. History has demonstrated that the FOMC usually gets it wrong; that its sense of timing is far from impeccable; that it misses the turn going in as well as coming out; that its members' hubris is the cause of much grief and woe amongst those who have to bear the greater part of the subsequent economic costs; that it shields its own members from recriminations or consequences; that those least able to bear the burden of faulty policy contribute least to the circumstance that create the necessity for the FOMC to act, yet suffer the greatest harm and take the longest to recover, if ever recovery is possible for them.<br /><br /> Good on John Cochrane for his courage and boldness to draw our attention to this emerging issue of concern.Old Eagle Eyehttps://www.blogger.com/profile/05270080708077871311noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76171330859654418552021-03-10T16:30:27.274-06:002021-03-10T16:30:27.274-06:00Why, why, why? This is the equivalent of technical...Why, why, why? This is the equivalent of technical regress.Frank https://www.blogger.com/profile/00272351675231621678noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42827466094518567792021-03-10T15:40:49.887-06:002021-03-10T15:40:49.887-06:00a return to the 70s would see severe supply shocks...a return to the 70s would see severe supply shocks and wages rising to compensate.<br /><br />you really have not addressed that. Did you live in the 70s?Not Trampishttps://www.blogger.com/profile/12738633092867411422noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69345326227867113192021-03-10T15:00:37.894-06:002021-03-10T15:00:37.894-06:00It was one thing to raise rates in 1980 with debt ...It was one thing to raise rates in 1980 with debt ~30% GDP quite another to do it now with debt 100%+ of GDP. Refinancing all that at 1980 rates mean we need to borrow more just to pay interest. Much less find anything else... Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38554794449950939202021-03-10T12:38:00.370-06:002021-03-10T12:38:00.370-06:00I always read your posts. You are great.I always read your posts. You are great.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40274093568853933382021-03-10T12:15:24.306-06:002021-03-10T12:15:24.306-06:00So, how exactly are we going to see substantive in...So, how exactly are we going to see substantive inflation taking place over ensuing years with most economists being wrong with all the money that appeared on the scene post the Financial Crisis?<br />If we in a low growth economy, post getting back to a baseline of pre Covid economy and growth outlook which then was not so great, what are the catalysts for that growth?<br />What is debt capacity of US in terms of magnitude of debt it can carry vs. the ability to raise taxes which in a comparative view vs. other mature economies might suggest there is flexibility here?<br />If we in a low growth economic environment post return to baseline should the worry be more about stagflation if one is really worried about inflation?<br />Like you i think the power of the Fed is overestimated, and do worry about the fiscal side of the equation more. But that has to take in to account not only tax capacity, but also the relative debt burden of US vs. other countries. If all levered up seems less of a concern.<br />Thoughts?stevenoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-8673525382613122412021-03-10T12:05:23.203-06:002021-03-10T12:05:23.203-06:00A couple points you make that concern me on the in...A couple points you make that concern me on the inflation side:<br /><br />(1) You mention fiscal policy may have little effect but do mention that more true power to control inflation lies with the Treasury and Congress... So the Fed can do whatever it wants to stiemy inflation concerns, but if Congress keep pumping out Trillions then there is little the Fed can do to stop the wave. As I write this US Congress looks to sign another $1.9T cheque to what?.... bring back the economy? Personal savings rates are up and we've regained growth, so what do we need another $1.9T for? (I say this half sarcastically as I truly feel for those in the bottom rungs of the socioeconomic ladder who have been hit disproportionately hard by this virus)<br /><br />(2) I feel as though we have seen large inflation in some asset classes that isn't properly captured by the CPI (someone please correct me on this if I am wrong)... while "shelter" is encapsulated as a consumer expense it does not properly reflect the inflation in housing prices. If I have my $100k home on a 20y mortgage, and sell it to buy a $150k home on a 30y mortgage with a lower interest rate it may show that my "shelter" costs have gone down when in reality I have levered up on debt. Same could be said of vehicle purchases where we now have financing plans that on average extend past 60 months.<br /><br />So are we truly as well off from a CPI metric? Or are we hiding the pain in debt that will only materialize when faced with a true economic/liquidity crisis?Duncanhttps://www.blogger.com/profile/03668167176277715657noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-8482611257624088312021-03-10T11:58:06.320-06:002021-03-10T11:58:06.320-06:00flat earth economicsflat earth economicsFish Goldsteinhttps://www.blogger.com/profile/13864053986442147618noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-1211113865112950392021-03-10T11:38:43.024-06:002021-03-10T11:38:43.024-06:00Are any historical lessons applicable in the world...Are any historical lessons applicable in the world of Qe and huge debt.? The US has massive systemic risk. Jameshttps://www.blogger.com/profile/15211759382579305536noreply@blogger.com