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The Fed has made a historic mistake on inflation

113 points by RyanShook 4y ago

Jonanin 4y ago
One thing worth noting is that one minor reason the dollar is very strong now is that the Fed was actually the first central bank to start raising rates. A better title is probably: "Central banks around the world have made a historic mistake on inflation"
laurasia99 4y ago
https://archive.ph/QIhCu https://archive.ph/QIhCu
endymi0n 4y ago
Why the Fed has made a historic mistake on inflation: Because it didn‘t want to do the other historic mistake. The Fed‘s basically got binary options here: Keep inflation from ruining lives and savings or saving the economy from collapse. Or trying to do just a bit of both. I’m rather asking myself: When you‘ve got a water pipe with a valve you can just open and shut and the leakage getting larger and larger with less and less water arriving at the end, is it the one operating the valve doing the historic mistake?
- jerf 4y ago
  The historic mistake is all the can-kicking that got us here. "The market can remain irrational longer than you can remain solvent", as the saying goes, but it sure does seem like the road the can has been kicked down is ending pretty darned soon.
  - adventured 4y ago
    They can kick the can for another 20-30 years at least before they're forced to change tactics. In the Japan scenario that the US is following, the US is just now getting to where Japan was in the mid 1990s. And that's Japan without the global reserve currency and the numerous financing benefits that go with it. The US has an enormous asset base to debase against, to eat, before it arrives at truly severe problems. It has plenty of spare taxing capacity across every income bracket. And as the feds crush the income brackets with higher taxes over time, socialized healthcare will continue to creep up the income bracket, taking up more and more of the market (out of necessity due to cost; middle and low income brackets will lose more of their disposable income to taxation, healthcare will become that much more of a burden). Interest rates will remain exceptionally low for decades to come. The average rate the US Govt pays on its debt will continue to sink lower over time, as the mountain of debt soars higher. That can continue until at least the range of $60-$90 trillion in public debt (1% - 1.5% on $60t-$90t is where they'll push it to over time). 1% on $60t is affordable right now. The skeptics will proclaim such low rates on such a giant pile of debt is impossible - it's not; they would have claimed (circa the mid 1990s) that what has already happened would be impossible too. Courtesy of Japan, we already know what can and will happen, and so does the Fed (even though they constantly lie about it). The massive debt accumulation (in government and corporate) will take care of a lot of the inflationary pressure that would otherwise be present, courtesy of mediocre growth (the debt accumulation and maintenance robbing the economy of capital it needs to grow faster; the debt acting as a heat sink, which is exactly what it has done to Japan). This inflation spike is transitory (the people saying that were too early on the duration aspect though and so they got mocked for it), the labor market is about to crack, growth is at recessionary levels, crypto has crashed, bubbly stocks have crashed. The housing market is going to get hit (although it won't be like the great recession) as the labor market gets rattled, people will shift that much more conservative, and blue chip stocks will get hit harder (blue chips like eg KO, which have largely avoided the damage in the market so far). With mediocre growth and a broken labor market, the inflation wave won't be sustainable over a longer time frame. It's better to think of the present inflation wave as a large one-off reset to higher prices (fallout from the various effects and choices during the pandemic), rather than a persistent ongoing event. That type of inflation burst event might happen from time to time over the coming decades as a consequence to various programs the US Govt and Fed run to try to spur the economy and manage high debt levels. For example, as the economy continues to weaken, the Biden Admin will start talking about trying to do another stimulus shot and or infrastructure. Corporations have rapidly sapped their pricing power to counter inflation. Consumers can only take so much of that, and I believe we're clearly seeing weakening by the consumer in their willingness to keep absorbing huge price hikes on consumer goods. The corps will begin slashing the human cost soon (both delaying hiring and firing) and pushing automation more (eg if your local Walgreens or CVS doesn't have a self-checkout, it soon will; if your local McDonald's doesn't have digital kiosks, it soon will; they'll push labor cost onto the customer wherever they can). --- edit: Someone (greyed out account) replied with this, and I thought it was worth touching on: > there's no way you can convince me healthcare costs will go up if we kick the capitalists out of the industry Well that's not what's going to happen and it certainly won't be a smooth event (the US wakes up one day with a shiny new socialized healthcare system where costs are tightly controlled with top-down pressure). Rather, socialized healthcare will gradually climb up the income ladder out of necessity, because more and more people will be unable to afford the cost of healthcare. The US healthcare market, simply put, will continue to bifurcate (public vs private). Private health coverage will continue to get more expensive, pushing more people onto government coverage / subsidy. The government side will see a lot more top-down pressure on cost/pricing (the government has a very strong incentive to control costs, given the fiscal condition of the US Government, and they'll act accordingly over time). Only the top 1/3 (give or take) income group will continue to be able to afford private healthcare coverage. Private coverage isn't going away and the healthcare market overall isn't going to be nationalized (ie the Capitalists are not getting kicked out wholly, their sandbox will get smaller and what they can charge will get more restricted). The US will see a process of gradual, ongoing expansion of socialized healthcare. It will not happen in a big one-off event, as has been dreamed of for decades by the Democrats (they've been making a horrific mistake for decades by pursuing that approach, which was obviously going to fail; a lot more progress could have been made by now via an aggressive piecemeal persistence). The one-off system change premise is a particularly naive fantasy and can be safely disregarded as a potential outcome. The median American will see a decline in their real disposable income. It'll squeeze them in a lot of different ways as that occurs, including on healthcare, education, housing, rent, automobiles, etc. The income classes will fail to keep up - as they largely have over the past two decades - with the damage to the USD from the national debt and the actions the Fed has to take to deal with that (the Fed playing the role of both enabler and fixer, when it comes to public & corporate debt levels). The asset classes will be fine, they'll largely keep pace (or better) with the loss of value in the USD, although their taxes are going to go up by quite a bit over time (and there will be many attempts at pursuing wealth tax plans). As the income classes lose ground over time, the government will step in and take over more of the financial context of the healthcare and education markets in particular.
    - jerf 4y ago
      I think there is one factor you're neglecting, which is that you can no longer just pay attention to the United States and assume that you've described the entire world economy. China and Russia now both have the power and desire to stab the US economy, and more such powers are coming up behind them. It'll hurt them too, but they now both believe it may well be worth it because they can recover faster and better, and it isn't clear that it'll be any better than what the US will already do to them if they defy the US (e.g., taking Taiwan). It is a characteristic of our US elite that they are exceeding and extremely pain averse. It is not shared by everyone else in the world. At some point in the next few years, if not the next few months, someone is going to calculate that knocking down the house of cards that the US-driven economy represents will still net benefit them. The only way the US could stop that is to pull its industry back in and accept cost increases as a result... but see previous comment about the near-total inability of our elite to accept pain.
    - toiletfuneral 4y ago
      [dead]
    - usrn 4y ago
      The US is absolutely not following Japan. Japan has almost no immigration while the US practically has no borders. Our birthrate is also much closer to replacement levels than Japan. Because there are more (and growing) people chasing fewer assets/production the US can easily end up in an inflationary spiral while this is nearly impossible for Japan.
      - eftychis 4y ago
        Well, yes, the birthrates and immigration can help the U.S. but that was not the point the OP was making -- and I am making too -- Japan has showcased boundaries one can reach on relation to debt and fiscal policy; and also that negative interest rates and meddling with rates does not work per se and out of the box.
      - adventured 4y ago
        The US is adding 1.x million people per year, on a decline. The addition is entirely meaningless against the context. The US is also aging persistently, as with most of its peers. Exaggerated, your premise rests on: the US is not exactly like the Japan scenario, it's 98-99% like the Japan scenario. Point being, that tiny population expansion is trivial and will be mostly gone soon anyway. The population addition in question is majority lower income, lower education oriented in numbers. The US has an inverted immigration system vs eg Canada or Australia (they focus on higher income, higher education, skill-based immigration). That fact further debases the potency / value of the population expansion. US education has been eroding for decades in terms of quality, so those lower income, lower education new immigrants are entering the US at a particularly mediocre time for their purposes (and they'll also simultaneously run into the automation, robotics, AI buzzsaw that is in the first or second inning; further devaluing what that population expansion brings to the table).
- deleted 4y ago
  [deleted]
- pmalynin 4y ago
  If the same operator also jammed the valve open with a wrench, then ignored the flow meter as it rung up by saying “the leak is transitory”, then yea.
  - dariusj18 4y ago
    Let's beat the metaphor to death. They opened the valve because there was a fire below that needed to be put out. Better to deal with flood damage than lose the whole enchilada.
  - willcipriano 4y ago
    They also weren't really concerned about the leak as it destroyed the households below it, that is until the people on the floors under them started collecting the water for their own use (increased wages) and the pressure in the penthouse bathrooms started being the subject of complaints, then they had sudden urgency to resolve the situation.
    - greggsy 4y ago
      I’m liking this dam analogy thread. If rain and rivers create more volume, would printing money be like placing large boulders to raise the dam level, without creating more actual value?
      - rightbyte 4y ago
        It took like 3 minutes before I got your point. I guess that is accurate? Or like, redefining kWh to kW58min when selling the dam electricity.
    - rnk 4y ago
      The fed worrying that regular workers are getting too large a pay increase was a secondary concern for them. I think it was much more important to consider the overall economy than to worry about salary changes for the little people. Five, no eight, now 10% inflation is a bigger thing than paying dishwashers $15 an hour and you still can't hire enough.
- puranjay 4y ago
  Isn’t this a self-created problem? They had no real excuse to carry on QE past 2010 when the economy had started recovering.
  - voisin 4y ago
    It 100% is. And what’s more crazy is that Alan Greenspan admitted that his biggest career failure was to leave rates too low for too long just prior to the Great Recession. And then… his successors did exactly the same thing. It is almost like the system should have automated rules in place to prevent this from being possible.
    - bryanlarsen 4y ago
      Note that there are probably just as many economists that said rates were too high. After all the target inflation rate was 2-3% yet the inflation was under 2%. That translates into hundreds of people unnecessarily out of work.
      - voisin 4y ago
        Yeah, I think there are a lot of problems with the current system and you’ve nailed it. They set a target using metrics that have radically changed over time and don’t reflect major components of inflation that real people experience (cost of homes) or asset price inflation. Anyone with eyes can look at charts of pretty much everything but a basket of consumer goods and see the massive inflation, and this was fine because it wasn’t in CPI figures… until now. And so that target range based on limited metrics led to exacerbating a massive problem that was evident for at least 5-6 years.
        bryanlarsen 4y ago
        No, I think we completely disagree, you're just misreading my statement. I say that inflation was too low 1990-2020 not because they mismeasured it, but because the Fed kept the rates too high. The CPI basket undermeasures volatility, but it's not bad at measuring inflation. Not great, but every alternative basket I've seen proposed has been worse.
- mc32 4y ago
  to an outsider (me) it looks like the Fed thought that if enough people believed the lie ("it's transitory") that things could go on despite fundamentals being out of whack (and we had quite a few people (economists, financially literate people, etc.,) go along for the ride of the ruse... but as always, the chickens eventually come home to roost in their own nest. and so it has and now we're here. Was it totally preventable? Not likely. Did it have to be so precipitous and ruinous? Nope. They could have come correct and could have adjusted rates and have encouraged people back to work but dialing back the stimulus sooner --slowing the money printer.
  - thoughtstheseus 4y ago
    As a Fed watcher I can dispel a few of these notions. The Fed was never going to tell people inflation was taking hold. The Fed tells people what they would like the market to be… not what it is. They set the “framing” used by many market participants, this framing is one of its key tools. The Fed can’t control government spending. Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that. If anything Powell consistently advocated for a more balanced federal budget precovid.
    - vorpalhex 4y ago
      What are some of the better fed news aggregators?
      - thoughtstheseus 4y ago
        Most central bank news is terrible. Follow Joseph Wang- @Fedguy12 on Twitter. He’s a former Fed trader with good insights, lots of podcasts. His book, central banking 101 is fantastic, very readable.
        selimthegrim 4y ago
        Is this the same HK-based fellow on Quora?
    - 4y ago
- zozbot234 4y ago
  Their only option is to act against inflation, it's a choice of when not if. And the more they wait, the more painful for the economy as a whole.
- tootie 4y ago
  Yeah, this is an odd take. 8% inflation is not great, but it's hardly a historic disaster. Especially given the even odder take that they think the corresponding rise in wages somehow makes it worse. The fiscal stimulus of the pandemic was perhaps too large, but it was extremely effective at forestalling catastrophe in the wake of a black swan event. The mistake was probably tightening too slowly from the 2007-era stimulus that left us without a lot of room to maneuver. If you want to point a finger, maybe point it at the politician who threatened the Fed chair for not setting negative rates 2 years ago.
  - thoughtstheseus 4y ago
    Agreed. The Fed is racing to raise rates so they have something to cut when the economy turns south. We can also blame the politicians who cut taxes in the longest, largest bull market for financial assets in history.
    - rnk 4y ago
      At the time, every commentator not in Congress or the Republican party said it was a bad choice to stimulate the economy with a sugar-high unneeded stimulus. But once that's in the system, correcting it hurts the next guy in charge, thus we don't get anywhere till we hit a crisis point.
  - vimy 4y ago
    Is inflation really 8 % though? Real number is probably closer to 20 %.
    - tootie 4y ago
      No. There is no "real" number. 8% is the indicator we use. When it hits 8% we know it's higher than when it's at 3%. You can't ever take that number and extrapolate what things are actually going to cost you day to day. Some things are way more than 8%. Some prices are going down.
    - randomdata 4y ago
      Yes, most likely. By the definition in use, unquestionably. Cost of living feels like it is up 20% (albeit location dependent), which may be what you are thinking of, but inflation and cost of living are decidedly not the same thing.
- pfortuny 4y ago
  Playing with 0 interest rates as if that were in the least rational was the greatest mistake. Nobody should have the power to subvert the meaning of time. We take the ministry of truth seriously (“the past can be changed”) and get scared by that. Saying thay time is worthless is more or less as grave.
  - toomuchtodo 4y ago
    Fiat is an artificial construct, as are asset values and prices, and the cost of capital/money. No one is guaranteed a rate of return. The whole point of monetary policy is to juggle the imaginary to realize a certain reality, ZIRP, NIRP, rapidly increasing PIRP, etc.
    - voisin 4y ago
      > No one is guaranteed a rate if return. While true, I think it is fair that people broadly share an expectation that time value of money has a positive value and that central banks shouldn’t be subverting market forces to eliminate all opportunity costs of capital.
      - toomuchtodo 4y ago
        I think it’s crucial that this expectation should not be thought of as some sort of natural law. There is no requirement investment capital have value. On the contrary, one would expect the value of capital to continue to decline over time, especially due to structural demographic shifts. It’s also the job of central banks to manipulate capital markets (“rows in a database”) to meet their mandates and desired outcomes. https://www.visualcapitalist.com/700-year-decline-of-interest-rates/ https://www.visualcapitalist.com/700-year-decline-of-interes...
        deleted 4y ago
        [deleted]
  - User23 4y ago
    The natural rate of interest is zero. Any positive interest rate results, in aggregate, in unserviceable household debts[1]. This is elementary for anyone with even a simple and accurate understanding of the US monetary system. Usury is bad and there are other ways to finance underwriting and the other socially useful activities banks perform. [1] Currency issuers can always service debts in the currency they issue of course. Those liabilities are so operationally different from household debts though that they probably ought to be called by a different name altogether.
- RealityVoid 4y ago
  Here's my take: inflation sucks, but they should just let it run its course. For several reasons, but also, my understanding is that the US debt is denominated in USD, so they would effectively be reducing their debt. My suspicion is that the FED will mostly be choosing to inflation to run its course rather than raising rates too aggressively, and they are trying to pull off a balancing act. Once the current panic subsides, probably things will stabilize.
  - technotony 4y ago
    You can't do that though because at a certain point inflation expectations become inbuilt and then people want to get paid more, spend more now rather than save (expecting higher prices next year) etc etc. This makes those inflation expectations self-fulfilling. The fed really needs to be aggressive enough to affect those expectations.
    - starkd 4y ago
      Once inflation gets out of the bottle, it's very difficult to get back in.
      - RealityVoid 4y ago
        Why is that? The FED obviously has levers that it can push to lower inflation. Currently, the levers are kind in a tricky place. But if they let inflation run its course now, and then push the levers later, wouldn't it be effective?
        erichocean 4y ago
        > if they let inflation run its course What other posters are telling you is that there's no such thing as letting inflation "run its course." What actually happens is that high inflation becomes baked into the normal operation of the economy, at which point it is extremely difficult to get rid of (i.e. not just raising interest rates above the inflation rate).
      - 4y ago
- RickJWagner 4y ago
  The historic mistake was the whistling past the graveyard. 'Transient' was the word used not long ago. Then came the half-hearted small rate raises. Now the piper must be paid.
mattwilsonn888 4y ago
The dollar is highly valuable largely from the promise of its central banks to repay debts - for which the US has a strong reputation of upholding. Now that the Fed is playing games with people's expectations of their plans for interest rates (to scare the market and lower demand without raising rates in proportion), they are also poised to devalue the repayment of their loans while indicating that they will not devalue those repayments. So in combination with inflation that will not slow down as much as it needs to, the trust which made the U.S. dollar the global reserve currency in the first place is also eroding. Inspired by the final statement from the article: > "Inflation that is stable and modestly above 2% might be tolerable for the real economy, but there is no guarantee the Fed’s stance today can deliver even that. And breaking promises has consequences. It hurts long-term bondholders, including foreign central banks and governments which own $4trn-worth of Treasury bonds. (A decade of 4% inflation instead of 2% would cut the purchasing power of money repaid at the end of that period by 18%.) It might add an inflation risk premium to America’s cost of borrowing. And if even America broke its inflation promises in tough times, investors might worry that other central banks—many of which are looking over their shoulders at indebted governments—would do the same. In the 1980s the recessions brought about by Paul Volcker’s Fed laid the foundations for inflation-targeting regimes worldwide. Every month inflation runs too hot, part of that hard-won credibility ebbs away."
- deltarholamda 4y ago
  I've read a lot of opinions from credible people who take opposite positions on every conceivable issue in regards to the economy. The state of the dollar as the reserve currency for the world is just one of many examples. At a certain point it starts to feel like nobody really knows for sure, and they're largely just guessing. It's a weird feeling to understand that there's little that can be done, because so many of the issues we're dealing with were locked in carbonite many decades ago, e.g. Social Security unfunded liabilities. It's like a game of musical chairs, only there is only one chair left, but 27 people are still circling around it, and every few seconds another person shows up to play.
  - phkahler 4y ago
deleted 4y ago
[deleted]
zozbot234 4y ago
We need a new grassroots movement to combat inflation throughout the economy and society, along the lines of the historically successful https://en.wikipedia.org/wiki/Whip_inflation_now https://en.wikipedia.org/wiki/Whip_inflation_now campaign.
- tinalumfoil 4y ago
  Your own link described WIN as, "one of the biggest government public relations blunders ever".
  - TMWNN 4y ago
- wutbrodo 4y ago
  - TMWNN 4y ago
    >Poe's Law in action so sorry if this a dumb question, but r u being sarcastic? One of the symptoms of autism is the inability to recognize sarcasm (<http://www.healthcentral.com/autism/c/1443/162610/autism-sarcasm/ http://www.healthcentral.com/autism/c/1443/162610/autism-sar...>) without the help of idiotic, illiterate signals like "/s".
    - wutbrodo 4y ago
      - dang 4y ago
        Attacking other users like this will get you banned here, regardless of how much they know, or you feel they know. If you'd please review https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html and stick to the rules when posting to HN, we'd appreciate it.
mensetmanusman 4y ago
There are no right answers when a pandemic shuts down the world.
- deleted 4y ago
  [deleted]
- 650 4y ago
  The pandemic didn't shut it down, politicians and social consensus did. I said this at the start of lockdowns and distribution in excess to business, and I'll say it now. It's a fine line between sacrificing the future "economy" to save lives now. We will have to see if overall life loss is less or more due to the human interventions during covid mania.
  - lkjlkjljl45 4y ago
  - Philadelphia 4y ago
    At least 6 million people died worldwide so far, including more than 1 million in the US. In what universe would letting even more people die improve the economy? Dead people don’t work or spend.
    - vinyl7 4y ago
      Well...I guess we'll see in a year or two how many people die from starvation, depression/suicide, or are kicked out and living on the streets due to the collapsing economy.
  - hourago 4y ago
    Full hospitals and collapsing health care would have not improved the economy. You point the downsides of lock downs without mentioning why were enacted. When mothers die giving bird, car accidents become mortal, heart attacks are not treated because there are no beds in the hospital people tend to revolt. But because it did not happen you seem to argue that the remedy was not needed.
readthenotes1 4y ago
Any article that claims the Fed has the tools to address supply troubles is too shallow to believe. Any article that talks about the Fed's response without talking about Powell's reconfirmation is really not worth reading. Once his job was secure, inflation was priority and he set out to destroy demand to reduce wages and the ease the burden on the broken supply chain that he no tools to fix.
- hammock 4y ago
  Your comment will go unappreciated because it’s not that accessible to a broad audience, but you are right the goal right now is demand destruction.
- matwood 4y ago
  Pretty much. He's going to have to force demand to recession levels to deal with the supply issues still going on from covid and now the war. It's like people forget that inflation is not only too much money, but too much money chasing too few goods.
  - wafriedemann 4y ago
    I dont't think so, because supply can't keep up with demand. So lowering demand even significantly would have no impact on supply, i.e. the economic output.
    - legutierr 4y ago
      Surely the problem is that the supply of various goods is hitting physical limits. A reduction in demand wouldn't reduce supply; instead it would cause demand to be more in line with a fixed supply level.
      - aeternum 4y ago
        Which goods are hitting physical limits? This generally doesn't happen with capitalism.
csense 4y ago
If inflation's so bad, why are gold and Bitcoin not posting massive gains?
- fallingfrog 4y ago
  Those are just vehicles for speculation like everything else.
- danuker 4y ago
  Because people are selling investments to buy food and fuel. If you want short-term inflation protection, add some commodities to your portfolio.
  - jollybean 4y ago
    No, they are selling BTC because markets are crashing, they need the cash for other things. BTC will trend perfectly inline with stock valuations as a function of excess liquidity, kind of indicating they are not what they are supposed to be. They are a fun speculative instrument, when things get tough, people stop pretending and move onto other things. That may change, but unlikely. I see a future crypto 'mapped' to the real world in the future some how, not fully but only partically decentralized, that could work.
    - PKop 4y ago
      >No, He said virtually the same as you..
      - jollybean 4y ago
        People are not getting out of crypto to pay for milk and bread, they are getting out because it's falling and they want to put their money in other things. I said 'pay' I meant to say 'invest'. BTC should be counter cyclical to stocks, but my bet is that they won't be. It'll be up during 'fun times' and down during 'scary times' whereas by design it should be the opposite. That could change if something about BTC becomes institutionalized, i.e. everywhere starts accepting BTC for Oil or something but I doubt that will happen.
fallingfrog 4y ago
The inflation/bubble scenario we're in has been a long time coming. I knew it would end this way- lots of people did- keep on propping up the whole economy with printed money long enough and eventually it'll stop working. This time there's no stimulus to save us, because everything is already tapped out. Honestly though, I really thought they would come to their senses back in 2015 or 2016 when they should have closed the taps. Instead they blew everything to magnificent proportions, and the crash will be equally magnificent.
deleted 4y ago
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dralley 4y ago
Of course, it doesn't help when you have politicians constantly making open threats against raising interest rates. https://www.wsj.com/articles/trump-complains-about-rising-interest-rates-calling-the-fed-my-biggest-threat-1539720681 https://www.wsj.com/articles/trump-complains-about-rising-in... https://www.nytimes.com/2019/09/11/business/economy/bonehead-trump-jay-powell.html https://www.nytimes.com/2019/09/11/business/economy/bonehead... Not that the Fed doesn't deserve criticism, because they do, but the public would be pissed about many of the measures that combat inflation as well, and the politicians would make sure they know who to blame (hint: not themselves).
- nightski 4y ago
  It doesn't particularly hurt either. The Fed is supposed to act independently and is solely responsible for its actions. Trying to stir up political controversy is pure FUD.
  - kadoban 4y ago
    It's _supposed_ to be independent. That's not the same thing as actually being independent.
    - nightski 4y ago
      But if it is not, then it's still their responsibility. Plus the Biden administration has kept the same chairman and really it's a board, not just one person.
      - deleted 4y ago
        [deleted]
- zozbot234 4y ago
  There's a real alternative to higher interest rates: bring government spending under control. Notably, this was done during the 1990s Clinton administrations and it worked quite well.
arrosenberg 4y ago
The Fed doesn't have the tools to deal with this problem, so there is no point in blaming them. The Fed can add to the money supply and they can regulate the velocity of money, but they can't destroy it. Congress, and only Congress, can reduce the money supply by taxing and using the taxes to pay back the original issuance to balance the books. As we know, conservatives in Congress (which includes a bunch of Democratic members) refuse to pass taxes unless they fall disproportionately on the poor. Thus, we are unlikely to see a real resolution to this problem, just more can kicking.
- zozbot234 4y ago
  The Fed can absolutely reduce the money supply, by selling assets that they're holding on their books. You're right though that an austerity policy by Congress (running budget surpluses by lowering spending and/or increasing taxes) would have much the same effect.
  - arrosenberg 4y ago
    Are they actually able to sell those assets? My understanding may be incomplete, but it seems like most of those assets are distressed - that's the whole reason the fed is holding them in the first place.
    - Rury 4y ago
      They don't have to sell assets to destroy money. All they have to do is let their securities mature, and not replace them with anything.
- rhexs 4y ago
  Or they could just spend less. The solution is in middle, but good luck getting that across in these polarized times. I think there will be more willingness to negotiate across the aisle as inflation/fuel continues to heat up.
- s1artibartfast 4y ago
  Monetary policy just borrows from the future to spend in the present. Like any borrowing, this can be smart or stupid. The federal government policy over borrowed and spent on frivolous things that did not produce a return. You can absolutely hold them accountable for past actions
phkahler 4y ago
The Fed has been given two objectives: 1) Regulate inflation and 2) Regulate the economy. They only have one knob to turn - interest rates. QE might be considered a second knob but it's really just an extreme booster on the first knob used when it reaches the end of travel (zero). >> and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin. How about congress look in the mirror and all the free money they've been handing out AND spending. On a related note, why does boosting the economy always involve borrowing money - either on the consumer side or the government side? We never talk about debt (deficit isn't debt, it's the rate of change of debt). Fiscal responsibility is always pushed aside for short term goals.
thepasswordis 4y ago
Yes, and the administration has also made historic mistakes on energy and foreign policy. We've got a brewing war in China. We've got an active war in Eastern Europe. People literally cannot feed their infant children. Is there anybody who seriously and honestly believes that Joe Biden should be in charge of assembling a team to solve these issues? Does anybody seriously believe that people like Pete Buttigieg should be in charge of doing anything to help alleviate these supply chain and energy problems?
- lkjlkjljl45 4y ago
- rnk 4y ago
  Trump was the one who tried his hardest to screw China. Trump got his Congress to pass unneeded tax cuts. I agree Dems went along w COVID stimulus. Trump wanted on more stimulus, Congress deferred, then Biden got one. Biden didn't cause the war in Ukraine, if anything Trump encouraged it by talking about getting the US out of NATO.
howmayiannoyyou 4y ago
Can someone help me understand why the economist is blaming the US Federal Reserve when the US Congress threw roughly 4 trillion dollars at the economy in the form of: ...the Coronavirus Preparedness and Response Supplemental Appropriations Act (2 trillion) ...Families First Coronavirus Response Act (FFCRA) ...Coronavirus Aid, Relief, and Economic Security (CARES) Act ...Lost Wages Assistance (LWA) Program ...the 12/20 CAA ...the American Rescue Plan Act (1.9 trillion)? Perhaps I'm being a tad cynical but this seems a lot like scapegoating so Congress can escape liability for legislation it thought (wrongly) would lead to a glorious congressional reelection landslide in 2022.
- adastra22 4y ago
  The Fed didn’t pull the trigger, but they didn’t do anything to mitigate Congress’ bad decision making either. They spent a year with their head in the sand pretending inflation was ‘transitory’ (wtf does that mean anyway?) before raising rates by any significant amount—which they still haven’t really done.
- lkjlkjljl45 4y ago
- emn13 4y ago
  Add to that the corporate tax cuts a few years ago which are of a similar scale (though harder to account for), and didn't even have the excuse of pandemic to support it. I do think that there's a bit much teeth gnashing and blame flinging going around in any case - a 10% inflation for 1 year after years of low inflation isn't the end of the world - if it stays at that. And some of this was almost inevitable given all the shocks of the past few years - how realistic was it that there wasn't going to be some economic hit down the line? It seems rather plausible that earlier, higher rate raises might well have caused a recession; and had the pandemic exit played out only slightly differently and the fed raised rates earlier - we might be making the opposite complaint now. Even now, it's not like higher interest rates won't cause damage. And to the extent that some of the inflation is due to supply shocks, raising interest rates won't even do as much as you'd like, all while causing more damage than is ideal. By contrast, it's worth noting that the eurozone interest is still at -0.50%, and they're talking of months to even return to 0. The challenges may not be identical, but it's no coincidence they've not rushed to raise rates so far either.
j_m_b 4y ago
Everyone is focused on the rates, but what about the 2T USD of mortgage backed securities on the Fed's balance sheet? They promised to wind-down their holdings of MBS but they have persistently held them all the while housing prices have continued to sore. Another thing that bothers me about this is the fact that they don't even include housing in their inflation measurement... despite owning MBS!
- jacobolus 4y ago
  Shelter accounts for 33% of the CPI’s bundle of goods. So “don't even include housing in their inflation measurement” is not a good summary. Also the CPI is computed by the Bureau of Labor Statistics, not the Federal Reserve.
  - j_m_b 4y ago
    The Fed doesn't use the CPI, they use the PCE. The PCE is calculated based on rental prices, not home prices. I should have said more accurately that they don't include the PRICE of homes in their inflation measurement. It seems like it would be quite important when you are holding 2T in MBS.
    - jacobolus 4y ago
      The “price of housing” is also a very large proportion of the PCE. I am not sure what percentage of the total it makes up this year (maybe you can figure that out with more searching), but I believe it is broadly comparable to CPI. The PCE is computed by the Bureau of Economic Analysis (part of the Commerce department; BLS is part of the Labor department). Like the CPI, the PCE includes both Rental of tenant-occupied nonfarm housing and Imputed rental of owner-occupied nonfarm housing among its categories. The estimates of these (and other) individual categories in the PCE are directly lifted from the CPI. The main thing that differs between the two in my understanding is how the categories get combined. Property values are not really directly relevant for an inflation index, because property values are not directly reflected in monthly personal expenditures. What matters (and gets counted) is the price of people’s housing-related expenses. > As noted in Chapter 2 purchases of newly constructed housing are treated as private fixed investment rather than as consumption expenditures in the NIPAs, and the stock of housing is treated as fixed assets. The housing stock provides a flow of housing services that are consumed by persons who rent their housing and by persons who own the housing they occupy (referred to as “owner-occupants”). In the NIPAs, owner-occupants are treated as owning unincorporated enterprises that provide housing services to themselves in the form of the rental value of their dwellings. Thus, PCE for dwelling services includes both the monetary rents paid by tenants and an imputed rental value for owner-occupied dwellings (measured as the income the homeowner could have received if the house had been rented to a tenant). This treatment is designed to make PCE (and GDP) invariant to whether the house is rented by a landlord to a tenant or is lived in by the homeowner.
lkjlkjljl45 4y ago
wafriedemann 4y ago
If you ask journalists everything is mono-causal all the time. There are several factors that all play a significant role imho. FED not raising rates when the economy was already in full recovery is one. Then excessive fiscal spending during Corona while the economy was partially shut down. And then of course the war in Ukraine. Another factor China's ridiculous No-Covid strategy (if it's even about Covid).
- somewhereoutth 4y ago
  China's zero Covid strategy has saved, and continues to save, millions of lives. Over any reasonable time period, the economic benefits of having a healthy populace out weigh the temporary cost of lockdowns. Our current problems with inflation may well be in part caused by workers unable to work due to chronic illness caused by Covid (and indeed the endless rounds of acute illness too).
ckastner 4y ago
Note that this article is from April 23rd, just before the recent escalation.
ParksNet 4y ago
We'll only solve inflation when we solve the Welfare state. We need to abandon unemployment and single-parenthood payments, and raise the pension access age to 70 alongside a privatization of social security. This will force people back into the workforce and free up capital so that we can friend-shore supply chains.
swills 4y ago
I liked The Atlantic's article on this topic: https://www.theatlantic.com/ideas/archive/2022/06/what-is-causing-inflation-janet-yellen-jerome-powell/661237/ https://www.theatlantic.com/ideas/archive/2022/06/what-is-ca...
t_mann 4y ago
Funny that after almost one-and-a-half decades of excessive monetary expansion the reasons for inflation lie so far outside the realm of monetary policy: zero-Covid policies in China that have lastingly disrupted global supply chains, a terrible war that has bogged down 40% of the world's grain supply, highly justified sanctions that drive up energy prices, and a domestic workforce that has become disillusioned about the work treadmill. The Economist very liberally glances over those issues for the sake of a strong-hitting headline and a compelling story.
Proven 4y ago
Vladimof 4y ago

113 points by RyanShook 4y ago

One thing worth noting is that one minor reason the dollar is very strong now is that the Fed was actually the first central bank to start raising rates. A better title is probably: "Central banks around the world have made a historic mistake on inflation"

laurasia99 4y ago

https://archive.ph/QIhCu https://archive.ph/QIhCu

endymi0n 4y ago

Why the Fed has made a historic mistake on inflation: Because it didn‘t want to do the other historic mistake. The Fed‘s basically got binary options here: Keep inflation from ruining lives and savings or saving the economy from collapse. Or trying to do just a bit of both. I’m rather asking myself: When you‘ve got a water pipe with a valve you can just open and shut and the leakage getting larger and larger with less and less water arriving at the end, is it the one operating the valve doing the historic mistake?

jerf 4y ago
The historic mistake is all the can-kicking that got us here. "The market can remain irrational longer than you can remain solvent", as the saying goes, but it sure does seem like the road the can has been kicked down is ending pretty darned soon.
- adventured 4y ago
  They can kick the can for another 20-30 years at least before they're forced to change tactics. In the Japan scenario that the US is following, the US is just now getting to where Japan was in the mid 1990s. And that's Japan without the global reserve currency and the numerous financing benefits that go with it. The US has an enormous asset base to debase against, to eat, before it arrives at truly severe problems. It has plenty of spare taxing capacity across every income bracket. And as the feds crush the income brackets with higher taxes over time, socialized healthcare will continue to creep up the income bracket, taking up more and more of the market (out of necessity due to cost; middle and low income brackets will lose more of their disposable income to taxation, healthcare will become that much more of a burden). Interest rates will remain exceptionally low for decades to come. The average rate the US Govt pays on its debt will continue to sink lower over time, as the mountain of debt soars higher. That can continue until at least the range of $60-$90 trillion in public debt (1% - 1.5% on $60t-$90t is where they'll push it to over time). 1% on $60t is affordable right now. The skeptics will proclaim such low rates on such a giant pile of debt is impossible - it's not; they would have claimed (circa the mid 1990s) that what has already happened would be impossible too. Courtesy of Japan, we already know what can and will happen, and so does the Fed (even though they constantly lie about it). The massive debt accumulation (in government and corporate) will take care of a lot of the inflationary pressure that would otherwise be present, courtesy of mediocre growth (the debt accumulation and maintenance robbing the economy of capital it needs to grow faster; the debt acting as a heat sink, which is exactly what it has done to Japan). This inflation spike is transitory (the people saying that were too early on the duration aspect though and so they got mocked for it), the labor market is about to crack, growth is at recessionary levels, crypto has crashed, bubbly stocks have crashed. The housing market is going to get hit (although it won't be like the great recession) as the labor market gets rattled, people will shift that much more conservative, and blue chip stocks will get hit harder (blue chips like eg KO, which have largely avoided the damage in the market so far). With mediocre growth and a broken labor market, the inflation wave won't be sustainable over a longer time frame. It's better to think of the present inflation wave as a large one-off reset to higher prices (fallout from the various effects and choices during the pandemic), rather than a persistent ongoing event. That type of inflation burst event might happen from time to time over the coming decades as a consequence to various programs the US Govt and Fed run to try to spur the economy and manage high debt levels. For example, as the economy continues to weaken, the Biden Admin will start talking about trying to do another stimulus shot and or infrastructure. Corporations have rapidly sapped their pricing power to counter inflation. Consumers can only take so much of that, and I believe we're clearly seeing weakening by the consumer in their willingness to keep absorbing huge price hikes on consumer goods. The corps will begin slashing the human cost soon (both delaying hiring and firing) and pushing automation more (eg if your local Walgreens or CVS doesn't have a self-checkout, it soon will; if your local McDonald's doesn't have digital kiosks, it soon will; they'll push labor cost onto the customer wherever they can). --- edit: Someone (greyed out account) replied with this, and I thought it was worth touching on: > there's no way you can convince me healthcare costs will go up if we kick the capitalists out of the industry Well that's not what's going to happen and it certainly won't be a smooth event (the US wakes up one day with a shiny new socialized healthcare system where costs are tightly controlled with top-down pressure). Rather, socialized healthcare will gradually climb up the income ladder out of necessity, because more and more people will be unable to afford the cost of healthcare. The US healthcare market, simply put, will continue to bifurcate (public vs private). Private health coverage will continue to get more expensive, pushing more people onto government coverage / subsidy. The government side will see a lot more top-down pressure on cost/pricing (the government has a very strong incentive to control costs, given the fiscal condition of the US Government, and they'll act accordingly over time). Only the top 1/3 (give or take) income group will continue to be able to afford private healthcare coverage. Private coverage isn't going away and the healthcare market overall isn't going to be nationalized (ie the Capitalists are not getting kicked out wholly, their sandbox will get smaller and what they can charge will get more restricted). The US will see a process of gradual, ongoing expansion of socialized healthcare. It will not happen in a big one-off event, as has been dreamed of for decades by the Democrats (they've been making a horrific mistake for decades by pursuing that approach, which was obviously going to fail; a lot more progress could have been made by now via an aggressive piecemeal persistence). The one-off system change premise is a particularly naive fantasy and can be safely disregarded as a potential outcome. The median American will see a decline in their real disposable income. It'll squeeze them in a lot of different ways as that occurs, including on healthcare, education, housing, rent, automobiles, etc. The income classes will fail to keep up - as they largely have over the past two decades - with the damage to the USD from the national debt and the actions the Fed has to take to deal with that (the Fed playing the role of both enabler and fixer, when it comes to public & corporate debt levels). The asset classes will be fine, they'll largely keep pace (or better) with the loss of value in the USD, although their taxes are going to go up by quite a bit over time (and there will be many attempts at pursuing wealth tax plans). As the income classes lose ground over time, the government will step in and take over more of the financial context of the healthcare and education markets in particular.
  - jerf 4y ago
    I think there is one factor you're neglecting, which is that you can no longer just pay attention to the United States and assume that you've described the entire world economy. China and Russia now both have the power and desire to stab the US economy, and more such powers are coming up behind them. It'll hurt them too, but they now both believe it may well be worth it because they can recover faster and better, and it isn't clear that it'll be any better than what the US will already do to them if they defy the US (e.g., taking Taiwan). It is a characteristic of our US elite that they are exceeding and extremely pain averse. It is not shared by everyone else in the world. At some point in the next few years, if not the next few months, someone is going to calculate that knocking down the house of cards that the US-driven economy represents will still net benefit them. The only way the US could stop that is to pull its industry back in and accept cost increases as a result... but see previous comment about the near-total inability of our elite to accept pain.
  - toiletfuneral 4y ago
    [dead]
  - usrn 4y ago
    The US is absolutely not following Japan. Japan has almost no immigration while the US practically has no borders. Our birthrate is also much closer to replacement levels than Japan. Because there are more (and growing) people chasing fewer assets/production the US can easily end up in an inflationary spiral while this is nearly impossible for Japan.
    - eftychis 4y ago
      Well, yes, the birthrates and immigration can help the U.S. but that was not the point the OP was making -- and I am making too -- Japan has showcased boundaries one can reach on relation to debt and fiscal policy; and also that negative interest rates and meddling with rates does not work per se and out of the box.
    - adventured 4y ago
      The US is adding 1.x million people per year, on a decline. The addition is entirely meaningless against the context. The US is also aging persistently, as with most of its peers. Exaggerated, your premise rests on: the US is not exactly like the Japan scenario, it's 98-99% like the Japan scenario. Point being, that tiny population expansion is trivial and will be mostly gone soon anyway. The population addition in question is majority lower income, lower education oriented in numbers. The US has an inverted immigration system vs eg Canada or Australia (they focus on higher income, higher education, skill-based immigration). That fact further debases the potency / value of the population expansion. US education has been eroding for decades in terms of quality, so those lower income, lower education new immigrants are entering the US at a particularly mediocre time for their purposes (and they'll also simultaneously run into the automation, robotics, AI buzzsaw that is in the first or second inning; further devaluing what that population expansion brings to the table).
deleted 4y ago
[deleted]
pmalynin 4y ago
If the same operator also jammed the valve open with a wrench, then ignored the flow meter as it rung up by saying “the leak is transitory”, then yea.
- dariusj18 4y ago
  Let's beat the metaphor to death. They opened the valve because there was a fire below that needed to be put out. Better to deal with flood damage than lose the whole enchilada.
- willcipriano 4y ago
  They also weren't really concerned about the leak as it destroyed the households below it, that is until the people on the floors under them started collecting the water for their own use (increased wages) and the pressure in the penthouse bathrooms started being the subject of complaints, then they had sudden urgency to resolve the situation.
  - greggsy 4y ago
    I’m liking this dam analogy thread. If rain and rivers create more volume, would printing money be like placing large boulders to raise the dam level, without creating more actual value?
    - rightbyte 4y ago
      It took like 3 minutes before I got your point. I guess that is accurate? Or like, redefining kWh to kW58min when selling the dam electricity.
  - rnk 4y ago
    The fed worrying that regular workers are getting too large a pay increase was a secondary concern for them. I think it was much more important to consider the overall economy than to worry about salary changes for the little people. Five, no eight, now 10% inflation is a bigger thing than paying dishwashers $15 an hour and you still can't hire enough.
puranjay 4y ago
Isn’t this a self-created problem? They had no real excuse to carry on QE past 2010 when the economy had started recovering.
- voisin 4y ago
  It 100% is. And what’s more crazy is that Alan Greenspan admitted that his biggest career failure was to leave rates too low for too long just prior to the Great Recession. And then… his successors did exactly the same thing. It is almost like the system should have automated rules in place to prevent this from being possible.
  - bryanlarsen 4y ago
    Note that there are probably just as many economists that said rates were too high. After all the target inflation rate was 2-3% yet the inflation was under 2%. That translates into hundreds of people unnecessarily out of work.
    - voisin 4y ago
      Yeah, I think there are a lot of problems with the current system and you’ve nailed it. They set a target using metrics that have radically changed over time and don’t reflect major components of inflation that real people experience (cost of homes) or asset price inflation. Anyone with eyes can look at charts of pretty much everything but a basket of consumer goods and see the massive inflation, and this was fine because it wasn’t in CPI figures… until now. And so that target range based on limited metrics led to exacerbating a massive problem that was evident for at least 5-6 years.
      - bryanlarsen 4y ago
        No, I think we completely disagree, you're just misreading my statement. I say that inflation was too low 1990-2020 not because they mismeasured it, but because the Fed kept the rates too high. The CPI basket undermeasures volatility, but it's not bad at measuring inflation. Not great, but every alternative basket I've seen proposed has been worse.
mc32 4y ago
to an outsider (me) it looks like the Fed thought that if enough people believed the lie ("it's transitory") that things could go on despite fundamentals being out of whack (and we had quite a few people (economists, financially literate people, etc.,) go along for the ride of the ruse... but as always, the chickens eventually come home to roost in their own nest. and so it has and now we're here. Was it totally preventable? Not likely. Did it have to be so precipitous and ruinous? Nope. They could have come correct and could have adjusted rates and have encouraged people back to work but dialing back the stimulus sooner --slowing the money printer.
- thoughtstheseus 4y ago
  As a Fed watcher I can dispel a few of these notions. The Fed was never going to tell people inflation was taking hold. The Fed tells people what they would like the market to be… not what it is. They set the “framing” used by many market participants, this framing is one of its key tools. The Fed can’t control government spending. Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that. If anything Powell consistently advocated for a more balanced federal budget precovid.
  - vorpalhex 4y ago
    What are some of the better fed news aggregators?
    - thoughtstheseus 4y ago
      Most central bank news is terrible. Follow Joseph Wang- @Fedguy12 on Twitter. He’s a former Fed trader with good insights, lots of podcasts. His book, central banking 101 is fantastic, very readable.
      - selimthegrim 4y ago
        Is this the same HK-based fellow on Quora?
  - 4y ago
zozbot234 4y ago
Their only option is to act against inflation, it's a choice of when not if. And the more they wait, the more painful for the economy as a whole.
tootie 4y ago
Yeah, this is an odd take. 8% inflation is not great, but it's hardly a historic disaster. Especially given the even odder take that they think the corresponding rise in wages somehow makes it worse. The fiscal stimulus of the pandemic was perhaps too large, but it was extremely effective at forestalling catastrophe in the wake of a black swan event. The mistake was probably tightening too slowly from the 2007-era stimulus that left us without a lot of room to maneuver. If you want to point a finger, maybe point it at the politician who threatened the Fed chair for not setting negative rates 2 years ago.
- thoughtstheseus 4y ago
  Agreed. The Fed is racing to raise rates so they have something to cut when the economy turns south. We can also blame the politicians who cut taxes in the longest, largest bull market for financial assets in history.
  - rnk 4y ago
    At the time, every commentator not in Congress or the Republican party said it was a bad choice to stimulate the economy with a sugar-high unneeded stimulus. But once that's in the system, correcting it hurts the next guy in charge, thus we don't get anywhere till we hit a crisis point.
- vimy 4y ago
  Is inflation really 8 % though? Real number is probably closer to 20 %.
  - tootie 4y ago
    No. There is no "real" number. 8% is the indicator we use. When it hits 8% we know it's higher than when it's at 3%. You can't ever take that number and extrapolate what things are actually going to cost you day to day. Some things are way more than 8%. Some prices are going down.
  - randomdata 4y ago
    Yes, most likely. By the definition in use, unquestionably. Cost of living feels like it is up 20% (albeit location dependent), which may be what you are thinking of, but inflation and cost of living are decidedly not the same thing.
pfortuny 4y ago
Playing with 0 interest rates as if that were in the least rational was the greatest mistake. Nobody should have the power to subvert the meaning of time. We take the ministry of truth seriously (“the past can be changed”) and get scared by that. Saying thay time is worthless is more or less as grave.
- toomuchtodo 4y ago
  Fiat is an artificial construct, as are asset values and prices, and the cost of capital/money. No one is guaranteed a rate of return. The whole point of monetary policy is to juggle the imaginary to realize a certain reality, ZIRP, NIRP, rapidly increasing PIRP, etc.
  - voisin 4y ago
    > No one is guaranteed a rate if return. While true, I think it is fair that people broadly share an expectation that time value of money has a positive value and that central banks shouldn’t be subverting market forces to eliminate all opportunity costs of capital.
    - toomuchtodo 4y ago
      I think it’s crucial that this expectation should not be thought of as some sort of natural law. There is no requirement investment capital have value. On the contrary, one would expect the value of capital to continue to decline over time, especially due to structural demographic shifts. It’s also the job of central banks to manipulate capital markets (“rows in a database”) to meet their mandates and desired outcomes. https://www.visualcapitalist.com/700-year-decline-of-interest-rates/ https://www.visualcapitalist.com/700-year-decline-of-interes...
      - deleted 4y ago
        [deleted]
- User23 4y ago
  The natural rate of interest is zero. Any positive interest rate results, in aggregate, in unserviceable household debts[1]. This is elementary for anyone with even a simple and accurate understanding of the US monetary system. Usury is bad and there are other ways to finance underwriting and the other socially useful activities banks perform. [1] Currency issuers can always service debts in the currency they issue of course. Those liabilities are so operationally different from household debts though that they probably ought to be called by a different name altogether.
RealityVoid 4y ago
Here's my take: inflation sucks, but they should just let it run its course. For several reasons, but also, my understanding is that the US debt is denominated in USD, so they would effectively be reducing their debt. My suspicion is that the FED will mostly be choosing to inflation to run its course rather than raising rates too aggressively, and they are trying to pull off a balancing act. Once the current panic subsides, probably things will stabilize.
- technotony 4y ago
  You can't do that though because at a certain point inflation expectations become inbuilt and then people want to get paid more, spend more now rather than save (expecting higher prices next year) etc etc. This makes those inflation expectations self-fulfilling. The fed really needs to be aggressive enough to affect those expectations.
  - starkd 4y ago
    Once inflation gets out of the bottle, it's very difficult to get back in.
    - RealityVoid 4y ago
      Why is that? The FED obviously has levers that it can push to lower inflation. Currently, the levers are kind in a tricky place. But if they let inflation run its course now, and then push the levers later, wouldn't it be effective?
      - erichocean 4y ago
        > if they let inflation run its course What other posters are telling you is that there's no such thing as letting inflation "run its course." What actually happens is that high inflation becomes baked into the normal operation of the economy, at which point it is extremely difficult to get rid of (i.e. not just raising interest rates above the inflation rate).
    - 4y ago
RickJWagner 4y ago
The historic mistake was the whistling past the graveyard. 'Transient' was the word used not long ago. Then came the half-hearted small rate raises. Now the piper must be paid.

mattwilsonn888 4y ago

The dollar is highly valuable largely from the promise of its central banks to repay debts - for which the US has a strong reputation of upholding. Now that the Fed is playing games with people's expectations of their plans for interest rates (to scare the market and lower demand without raising rates in proportion), they are also poised to devalue the repayment of their loans while indicating that they will not devalue those repayments. So in combination with inflation that will not slow down as much as it needs to, the trust which made the U.S. dollar the global reserve currency in the first place is also eroding. Inspired by the final statement from the article: > "Inflation that is stable and modestly above 2% might be tolerable for the real economy, but there is no guarantee the Fed’s stance today can deliver even that. And breaking promises has consequences. It hurts long-term bondholders, including foreign central banks and governments which own $4trn-worth of Treasury bonds. (A decade of 4% inflation instead of 2% would cut the purchasing power of money repaid at the end of that period by 18%.) It might add an inflation risk premium to America’s cost of borrowing. And if even America broke its inflation promises in tough times, investors might worry that other central banks—many of which are looking over their shoulders at indebted governments—would do the same. In the 1980s the recessions brought about by Paul Volcker’s Fed laid the foundations for inflation-targeting regimes worldwide. Every month inflation runs too hot, part of that hard-won credibility ebbs away."

deltarholamda 4y ago
I've read a lot of opinions from credible people who take opposite positions on every conceivable issue in regards to the economy. The state of the dollar as the reserve currency for the world is just one of many examples. At a certain point it starts to feel like nobody really knows for sure, and they're largely just guessing. It's a weird feeling to understand that there's little that can be done, because so many of the issues we're dealing with were locked in carbonite many decades ago, e.g. Social Security unfunded liabilities. It's like a game of musical chairs, only there is only one chair left, but 27 people are still circling around it, and every few seconds another person shows up to play.
- phkahler 4y ago

deleted 4y ago

[deleted]

zozbot234 4y ago

We need a new grassroots movement to combat inflation throughout the economy and society, along the lines of the historically successful https://en.wikipedia.org/wiki/Whip_inflation_now https://en.wikipedia.org/wiki/Whip_inflation_now campaign.

tinalumfoil 4y ago
Your own link described WIN as, "one of the biggest government public relations blunders ever".
- TMWNN 4y ago
wutbrodo 4y ago
- TMWNN 4y ago
  >Poe's Law in action so sorry if this a dumb question, but r u being sarcastic? One of the symptoms of autism is the inability to recognize sarcasm (<http://www.healthcentral.com/autism/c/1443/162610/autism-sarcasm/ http://www.healthcentral.com/autism/c/1443/162610/autism-sar...>) without the help of idiotic, illiterate signals like "/s".
  - wutbrodo 4y ago
    - dang 4y ago
      Attacking other users like this will get you banned here, regardless of how much they know, or you feel they know. If you'd please review https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html and stick to the rules when posting to HN, we'd appreciate it.

mensetmanusman 4y ago

There are no right answers when a pandemic shuts down the world.

deleted 4y ago
[deleted]
650 4y ago
The pandemic didn't shut it down, politicians and social consensus did. I said this at the start of lockdowns and distribution in excess to business, and I'll say it now. It's a fine line between sacrificing the future "economy" to save lives now. We will have to see if overall life loss is less or more due to the human interventions during covid mania.
- lkjlkjljl45 4y ago
- Philadelphia 4y ago
  At least 6 million people died worldwide so far, including more than 1 million in the US. In what universe would letting even more people die improve the economy? Dead people don’t work or spend.
  - vinyl7 4y ago
    Well...I guess we'll see in a year or two how many people die from starvation, depression/suicide, or are kicked out and living on the streets due to the collapsing economy.
- hourago 4y ago
  Full hospitals and collapsing health care would have not improved the economy. You point the downsides of lock downs without mentioning why were enacted. When mothers die giving bird, car accidents become mortal, heart attacks are not treated because there are no beds in the hospital people tend to revolt. But because it did not happen you seem to argue that the remedy was not needed.

readthenotes1 4y ago

Any article that claims the Fed has the tools to address supply troubles is too shallow to believe. Any article that talks about the Fed's response without talking about Powell's reconfirmation is really not worth reading. Once his job was secure, inflation was priority and he set out to destroy demand to reduce wages and the ease the burden on the broken supply chain that he no tools to fix.

hammock 4y ago
Your comment will go unappreciated because it’s not that accessible to a broad audience, but you are right the goal right now is demand destruction.
matwood 4y ago
Pretty much. He's going to have to force demand to recession levels to deal with the supply issues still going on from covid and now the war. It's like people forget that inflation is not only too much money, but too much money chasing too few goods.
- wafriedemann 4y ago
  I dont't think so, because supply can't keep up with demand. So lowering demand even significantly would have no impact on supply, i.e. the economic output.
  - legutierr 4y ago
    Surely the problem is that the supply of various goods is hitting physical limits. A reduction in demand wouldn't reduce supply; instead it would cause demand to be more in line with a fixed supply level.
    - aeternum 4y ago
      Which goods are hitting physical limits? This generally doesn't happen with capitalism.

csense 4y ago

If inflation's so bad, why are gold and Bitcoin not posting massive gains?

fallingfrog 4y ago
Those are just vehicles for speculation like everything else.
danuker 4y ago
Because people are selling investments to buy food and fuel. If you want short-term inflation protection, add some commodities to your portfolio.
- jollybean 4y ago
  No, they are selling BTC because markets are crashing, they need the cash for other things. BTC will trend perfectly inline with stock valuations as a function of excess liquidity, kind of indicating they are not what they are supposed to be. They are a fun speculative instrument, when things get tough, people stop pretending and move onto other things. That may change, but unlikely. I see a future crypto 'mapped' to the real world in the future some how, not fully but only partically decentralized, that could work.
  - PKop 4y ago
    >No, He said virtually the same as you..
    - jollybean 4y ago
      People are not getting out of crypto to pay for milk and bread, they are getting out because it's falling and they want to put their money in other things. I said 'pay' I meant to say 'invest'. BTC should be counter cyclical to stocks, but my bet is that they won't be. It'll be up during 'fun times' and down during 'scary times' whereas by design it should be the opposite. That could change if something about BTC becomes institutionalized, i.e. everywhere starts accepting BTC for Oil or something but I doubt that will happen.

fallingfrog 4y ago

The inflation/bubble scenario we're in has been a long time coming. I knew it would end this way- lots of people did- keep on propping up the whole economy with printed money long enough and eventually it'll stop working. This time there's no stimulus to save us, because everything is already tapped out. Honestly though, I really thought they would come to their senses back in 2015 or 2016 when they should have closed the taps. Instead they blew everything to magnificent proportions, and the crash will be equally magnificent.

deleted 4y ago

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dralley 4y ago

Of course, it doesn't help when you have politicians constantly making open threats against raising interest rates. https://www.wsj.com/articles/trump-complains-about-rising-interest-rates-calling-the-fed-my-biggest-threat-1539720681 https://www.wsj.com/articles/trump-complains-about-rising-in... https://www.nytimes.com/2019/09/11/business/economy/bonehead-trump-jay-powell.html https://www.nytimes.com/2019/09/11/business/economy/bonehead... Not that the Fed doesn't deserve criticism, because they do, but the public would be pissed about many of the measures that combat inflation as well, and the politicians would make sure they know who to blame (hint: not themselves).

nightski 4y ago
It doesn't particularly hurt either. The Fed is supposed to act independently and is solely responsible for its actions. Trying to stir up political controversy is pure FUD.
- kadoban 4y ago
  It's _supposed_ to be independent. That's not the same thing as actually being independent.
  - nightski 4y ago
    But if it is not, then it's still their responsibility. Plus the Biden administration has kept the same chairman and really it's a board, not just one person.
    - deleted 4y ago
      [deleted]
zozbot234 4y ago
There's a real alternative to higher interest rates: bring government spending under control. Notably, this was done during the 1990s Clinton administrations and it worked quite well.

arrosenberg 4y ago

The Fed doesn't have the tools to deal with this problem, so there is no point in blaming them. The Fed can add to the money supply and they can regulate the velocity of money, but they can't destroy it. Congress, and only Congress, can reduce the money supply by taxing and using the taxes to pay back the original issuance to balance the books. As we know, conservatives in Congress (which includes a bunch of Democratic members) refuse to pass taxes unless they fall disproportionately on the poor. Thus, we are unlikely to see a real resolution to this problem, just more can kicking.

zozbot234 4y ago
The Fed can absolutely reduce the money supply, by selling assets that they're holding on their books. You're right though that an austerity policy by Congress (running budget surpluses by lowering spending and/or increasing taxes) would have much the same effect.
- arrosenberg 4y ago
  Are they actually able to sell those assets? My understanding may be incomplete, but it seems like most of those assets are distressed - that's the whole reason the fed is holding them in the first place.
  - Rury 4y ago
    They don't have to sell assets to destroy money. All they have to do is let their securities mature, and not replace them with anything.
rhexs 4y ago
Or they could just spend less. The solution is in middle, but good luck getting that across in these polarized times. I think there will be more willingness to negotiate across the aisle as inflation/fuel continues to heat up.
s1artibartfast 4y ago
Monetary policy just borrows from the future to spend in the present. Like any borrowing, this can be smart or stupid. The federal government policy over borrowed and spent on frivolous things that did not produce a return. You can absolutely hold them accountable for past actions

phkahler 4y ago

The Fed has been given two objectives: 1) Regulate inflation and 2) Regulate the economy. They only have one knob to turn - interest rates. QE might be considered a second knob but it's really just an extreme booster on the first knob used when it reaches the end of travel (zero). >> and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin. How about congress look in the mirror and all the free money they've been handing out AND spending. On a related note, why does boosting the economy always involve borrowing money - either on the consumer side or the government side? We never talk about debt (deficit isn't debt, it's the rate of change of debt). Fiscal responsibility is always pushed aside for short term goals.

thepasswordis 4y ago

Yes, and the administration has also made historic mistakes on energy and foreign policy. We've got a brewing war in China. We've got an active war in Eastern Europe. People literally cannot feed their infant children. Is there anybody who seriously and honestly believes that Joe Biden should be in charge of assembling a team to solve these issues? Does anybody seriously believe that people like Pete Buttigieg should be in charge of doing anything to help alleviate these supply chain and energy problems?

lkjlkjljl45 4y ago
rnk 4y ago
Trump was the one who tried his hardest to screw China. Trump got his Congress to pass unneeded tax cuts. I agree Dems went along w COVID stimulus. Trump wanted on more stimulus, Congress deferred, then Biden got one. Biden didn't cause the war in Ukraine, if anything Trump encouraged it by talking about getting the US out of NATO.

howmayiannoyyou 4y ago

Can someone help me understand why the economist is blaming the US Federal Reserve when the US Congress threw roughly 4 trillion dollars at the economy in the form of: ...the Coronavirus Preparedness and Response Supplemental Appropriations Act (2 trillion) ...Families First Coronavirus Response Act (FFCRA) ...Coronavirus Aid, Relief, and Economic Security (CARES) Act ...Lost Wages Assistance (LWA) Program ...the 12/20 CAA ...the American Rescue Plan Act (1.9 trillion)? Perhaps I'm being a tad cynical but this seems a lot like scapegoating so Congress can escape liability for legislation it thought (wrongly) would lead to a glorious congressional reelection landslide in 2022.

adastra22 4y ago
The Fed didn’t pull the trigger, but they didn’t do anything to mitigate Congress’ bad decision making either. They spent a year with their head in the sand pretending inflation was ‘transitory’ (wtf does that mean anyway?) before raising rates by any significant amount—which they still haven’t really done.
lkjlkjljl45 4y ago
emn13 4y ago
Add to that the corporate tax cuts a few years ago which are of a similar scale (though harder to account for), and didn't even have the excuse of pandemic to support it. I do think that there's a bit much teeth gnashing and blame flinging going around in any case - a 10% inflation for 1 year after years of low inflation isn't the end of the world - if it stays at that. And some of this was almost inevitable given all the shocks of the past few years - how realistic was it that there wasn't going to be some economic hit down the line? It seems rather plausible that earlier, higher rate raises might well have caused a recession; and had the pandemic exit played out only slightly differently and the fed raised rates earlier - we might be making the opposite complaint now. Even now, it's not like higher interest rates won't cause damage. And to the extent that some of the inflation is due to supply shocks, raising interest rates won't even do as much as you'd like, all while causing more damage than is ideal. By contrast, it's worth noting that the eurozone interest is still at -0.50%, and they're talking of months to even return to 0. The challenges may not be identical, but it's no coincidence they've not rushed to raise rates so far either.

j_m_b 4y ago

Everyone is focused on the rates, but what about the 2T USD of mortgage backed securities on the Fed's balance sheet? They promised to wind-down their holdings of MBS but they have persistently held them all the while housing prices have continued to sore. Another thing that bothers me about this is the fact that they don't even include housing in their inflation measurement... despite owning MBS!

jacobolus 4y ago
Shelter accounts for 33% of the CPI’s bundle of goods. So “don't even include housing in their inflation measurement” is not a good summary. Also the CPI is computed by the Bureau of Labor Statistics, not the Federal Reserve.
- j_m_b 4y ago
  The Fed doesn't use the CPI, they use the PCE. The PCE is calculated based on rental prices, not home prices. I should have said more accurately that they don't include the PRICE of homes in their inflation measurement. It seems like it would be quite important when you are holding 2T in MBS.
  - jacobolus 4y ago
    The “price of housing” is also a very large proportion of the PCE. I am not sure what percentage of the total it makes up this year (maybe you can figure that out with more searching), but I believe it is broadly comparable to CPI. The PCE is computed by the Bureau of Economic Analysis (part of the Commerce department; BLS is part of the Labor department). Like the CPI, the PCE includes both Rental of tenant-occupied nonfarm housing and Imputed rental of owner-occupied nonfarm housing among its categories. The estimates of these (and other) individual categories in the PCE are directly lifted from the CPI. The main thing that differs between the two in my understanding is how the categories get combined. Property values are not really directly relevant for an inflation index, because property values are not directly reflected in monthly personal expenditures. What matters (and gets counted) is the price of people’s housing-related expenses. > As noted in Chapter 2 purchases of newly constructed housing are treated as private fixed investment rather than as consumption expenditures in the NIPAs, and the stock of housing is treated as fixed assets. The housing stock provides a flow of housing services that are consumed by persons who rent their housing and by persons who own the housing they occupy (referred to as “owner-occupants”). In the NIPAs, owner-occupants are treated as owning unincorporated enterprises that provide housing services to themselves in the form of the rental value of their dwellings. Thus, PCE for dwelling services includes both the monetary rents paid by tenants and an imputed rental value for owner-occupied dwellings (measured as the income the homeowner could have received if the house had been rented to a tenant). This treatment is designed to make PCE (and GDP) invariant to whether the house is rented by a landlord to a tenant or is lived in by the homeowner.

lkjlkjljl45 4y ago

wafriedemann 4y ago

If you ask journalists everything is mono-causal all the time. There are several factors that all play a significant role imho. FED not raising rates when the economy was already in full recovery is one. Then excessive fiscal spending during Corona while the economy was partially shut down. And then of course the war in Ukraine. Another factor China's ridiculous No-Covid strategy (if it's even about Covid).

somewhereoutth 4y ago
China's zero Covid strategy has saved, and continues to save, millions of lives. Over any reasonable time period, the economic benefits of having a healthy populace out weigh the temporary cost of lockdowns. Our current problems with inflation may well be in part caused by workers unable to work due to chronic illness caused by Covid (and indeed the endless rounds of acute illness too).

ckastner 4y ago

Note that this article is from April 23rd, just before the recent escalation.

ParksNet 4y ago

We'll only solve inflation when we solve the Welfare state. We need to abandon unemployment and single-parenthood payments, and raise the pension access age to 70 alongside a privatization of social security. This will force people back into the workforce and free up capital so that we can friend-shore supply chains.

swills 4y ago

I liked The Atlantic's article on this topic: https://www.theatlantic.com/ideas/archive/2022/06/what-is-causing-inflation-janet-yellen-jerome-powell/661237/ https://www.theatlantic.com/ideas/archive/2022/06/what-is-ca...

t_mann 4y ago

Funny that after almost one-and-a-half decades of excessive monetary expansion the reasons for inflation lie so far outside the realm of monetary policy: zero-Covid policies in China that have lastingly disrupted global supply chains, a terrible war that has bogged down 40% of the world's grain supply, highly justified sanctions that drive up energy prices, and a domestic workforce that has become disillusioned about the work treadmill. The Economist very liberally glances over those issues for the sake of a strong-hitting headline and a compelling story.

Proven 4y ago

Vladimof 4y ago