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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: Kee

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.

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.