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You can argue either side to this, and make a good case. My personal preference is to trigger a recession and reduce inflation. The easy cop-out solution is to
by mark_l_watson 4y ago
You can argue either side to this, and make a good case.
My personal preference is to trigger a recession and reduce inflation. The easy cop-out solution is to say a "big f*ck off" to pensioners, lower middle class, and poor people and let inflation soar, but I believe that long term this would be more destructive to the general economy. Better take the long term view here and not kick the can down the street.
- JumpCrisscross 4y ago> personal preference is to trigger a recession and reduce inflation These aren't binary outcomes. Tight money does nothing to ease supply-side bottlenecks. It does little to target demand displaced by rising energy prices. If those are the principal drivers of inflation, tightening could depress non-energy demand in a way that causes a recession without alleviating inflation. Stagflation. (To be clear, we're not at tight money yet.)
- deleted 4y ago[deleted]
- Retric 4y agoIt keeps supply side bottlenecks from being inflated with cheap money.
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- ketzo 4y agoPeople aren’t buying gas or groceries with “cheap money.” Housing, business debt — sure. But there’s a long, convoluted path from cheap debt to inflation of consumer goods.
- Retric 4y agoThe thought process goes: Consumer goods like TV dinners are still based on things further up the supply chain like fertilizer. Normally you get inflation when there is a shortage of say crude oil, but when everything is running into random shortages companies get defensive and start trying to stockpile supplies. Hypothetical example: If Dell wants another 2 weeks of GPU’s on hand from Random Supplier X, and Random Supplier X wants 2 weeks of chips for their GPU’s on hand from Nvidia, and Nvidia wants 2 weeks of refined silicon on hand from supplier Y, who wants to source 2 weeks of raw materials early that’s 2 + 2 + 2 + 2 = 8 weeks worth of demand of sand from some mine somewhere out of thin air. Which then dramatically bumps prices for sand and that trickles back down the supply chain. However, higher interest rates should moderate how much each company in that chain stockpiles, which reduces the demand for sand even if the same number of computers are shipped either way.
- ketzo 4y agoInteresting. Thank you for that explanation. That makes a lot of sense.
- jonny_eh 4y agoThat's my fear. In other words, increasing interest rates may not address the cause of the current inflation, so now instead of one problem (inflation) we have two (inflation + recession, aka stagflation).
- dageshi 4y agoUltimately consumer sentiment has a much bigger effect than just about everything else. The public are worried about inflation, it's the issue of the day. They will cut back spending until inflation is seen to be tackled which will likely bring about a recession anyway. Given that, the Fed's hand has been forced, if they do not seem to be aggressively trying to deal with inflation the public will become even more scared and reluctant to spend.
- bko 4y ago> If those are the principal drivers of inflation, tightening could depress non-energy demand in a way that causes a recession without alleviating inflation You don't think the inflation has anything to do with printing $14 trillion out of thin air, or increasing the M1 money supply from ~4tn in march 2020 to over $20tn today? https://www.covidmoneytracker.org/ https://www.covidmoneytracker.org/ https://fred.stlouisfed.org/series/M1SL https://fred.stlouisfed.org/series/M1SL
- mpwoz 4y agoThe M1 jump is not new money for the most part, it's a reclassification of things that used to be M2 as also being M1 (liquid) https://fredblog.stlouisfed.org/2021/05/savings-are-now-more-liquid-and-part-of-m1-money/ https://fredblog.stlouisfed.org/2021/05/savings-are-now-more... M2 increased in 2020, but not by as much as you're saying https://fred.stlouisfed.org/series/M2SL https://fred.stlouisfed.org/series/M2SL
- bko 4y agoThanks for sharing. I never knew that. The post says savings accounts were moved into M1 because they're pretty liquid now. But what was the real rationale or implications? Odd time to do that move (April 24, 2020)
- kccqzy 4y agoIt was because in April 2020 Regulation D was amended to remove the six-transfer-per-month rule. The idea is that COVID may force people to make withdrawals from savings account more often so banks could allow frequent withdrawals from savings accounts, making them more liquid. It's not a coincidence that after the Fed suspended the rule they reclassified savings account as M1. https://www.federalreserve.gov/supervisionreg/caletters/caltr2106.htm https://www.federalreserve.gov/supervisionreg/caletters/calt...
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- symlinkk 4y agoThrough their actions they’re revealing that all of the excuses thus far were a lie. “Chip shortage”, “wood shortage”, “salmon shortage”, were all fake and overblown, and the real problem was too much money the whole time.
- babypuncher 4y agoYou really think that every manufacturer on the planet is conspiring to make people think there is a chip shortage?
- thfuran 4y agoSo all the electronics manufacturers and lumber suppliers are just engaging in some vast conspiracy? All the laptops and access points and microcontrollers and such that are hard to buy are just being hidden in hastily constructed wooden castles somewhere?
- cjbgkagh 4y agoI just wish it was done earlier and more cheaply during otherwise good times.
- QuarterReptile 4y agoI think you would need monarchy (or something more tyrannical) to get that. Democracies seem reliably short-sighted. The personal responsibility of taking on debt is so thoroughly attenuated in a democracy that piling on ($90k per citizen and counting, in the US) debt is the expedient thing to do, and it's seemingly impossible to overcome the electoral price paid for trying to reject that expedient option.
- cjbgkagh 4y agoAFAIK it was how Keynesian economics was supposed to work. Also AFAIK the only country that did intentionally tighten at the top always Israel as they were worried that an economic crisis would leave them vulnerable to attack from their neighbors * * source is from a bar talk with an economist, I didn’t do my own research here…
- idlehand 4y agoUnlike socialism, capitalism actually seems to fare better when under a siege mentality. The 50s to 70s was a period of strong growth and right-wing support for worker-friendly policies which made the lives of the ordinary person better, not least because of fear that poor working class conditions would lead to communist uprisings in Western Europe.
- otikik 4y agoIt does sound like socialism helped then, albeit indirectly.
- QuarterReptile 4y agoLong-term prudence is how every system is supposed to work, but motive can't be considered in a system as diffuse as a government of 330million people. The US is Keynesian in bad times, and a giant tax cut celebration in the good times.
- nostromo 4y agoA key driver to inflation is that wages for lower-income workers was finally starting to rise. Tanking the economy will hurt these people the most. But yes, inflation would flatten.
- twblalock 4y agoI think every possible "tanking the economy" scenario always hurts the poor the most.
- QuarterReptile 4y agoThat's a straightforward, non-cynical thing to say just like 'what comes up must come down.' People don't seem to think so. Anyone with $1,000 has the resources to stop any (or several) of a large number of unfortunate circumstances that they may encounter. $10,000 even more so. $100,000 should be years of runway along the same lines. So it makes sense that when everyone is riding an economy downward, the people with the least cushion get hurt the worst.
- xwdv 4y agoFrankly the poor are always going to get hurt no matter what you do. Being poor isn’t a position of strength in the first place. When you’re living hand to mouth you are very sensitive to any changes in the environment.
- imtringued 4y agoI think unemployment hurts the poor the most because bosses fire the least productive people (untrained workers), even when those people spend a bigger portion of their salary on consumption and thereby generate demand for products to sell. A lot of the more "productive" people already have what they want and spend their money on acquiring capital which is kind of pointless if nobody is there to buy your products.
- jcadam 4y agoStill waiting for inflation to hit my effing salary. I know it won't, because we're entering stagflation territory and unemployment is going to go up. COVID was a massive wealth transfer from the lower and (esp) middle class to the oligarchs.
- xxpor 4y agoI'm sure the lower middle class people who lose their job will appreciate it.
- SketchySeaBeast 4y agoWhat's the good play here? Cause a recession or price those lower middle class out of being able to afford the cost of living? Typically they aren't the ones with the best negotiating power.
- xxpor 4y agoRaising taxes to take money out of the system. With that you have control over who the pain hits. Some specific areas that are getting hit hard like housing have specific problems that need to be fixed, like zoning.
- malfist 4y agoBut you can't ask billionaires to pay more!
- salawat 4y agoCost of taxes just gets passed on to the consumer. Or as Traders say... >It's priced in. Tax does not do anything to extract money in the end from anyone but the consumer; or at least not any tax that I've bothered to actually sit down and trace in the rare accounting mood.
- jcalvinowens 4y ago> Cost of taxes just gets passed on to the consumer > It's priced in. That's just not true. It can only be true if you assume all sellers collude not to lower prices. In a free market, one seller might eat the tax, undercut the rest, and net more money at a lower profit margin by attracting business from competitors. That risk generally prevents taxes from being fully priced in.
- Someone1234 4y agoInflation is largely being driven by import problems and oil prices, therefore, it is unclear if a recession is a golden key to lower inflation. Keep in mind that oil is internationally expensive, and even a reduction in the US may not bring down prices significantly. So we could see recession AND inflation at the same time. Then tack on higher interest rates, and everything goes squish.
- toomuchtodo 4y agoThe Fed can only manage monetary policy. If Congress wants to fix the petroleum energy crisis with policy, it has the tools to do so.
- Aloha 4y agoHigh gas prices are mostly a function of insufficient refining capacity, short of the government building more, I dont see a policy fix here. The market is responding to the probability of an electric future.
- toomuchtodo 4y agoMandate work from home capability for anyone who can work from home; prioritize oil consumption for non discretionary use cases where you have no choice but to move atoms vs bits. Agree with your thesis otherwise, no way to juice output in the short term, only shims until electrification ramps faster (which, I argue, should carry the same gravity and speed as a wartime effort, but alas I am not a politician). Edit: Normally I’d suggest a carbon tax and rebate to low income folks, but that would directly work against Fed FFR increasing efforts and Congress is so pathetic as to not be able to get it done.
- Aloha 4y agoMind you, I think the electric future s 15-30 years away, not 8-15 - but the lifetime of a refinery is 40-50 years. Thats the issue, it wont pay for itself on a conventional amortization schedule.
- darth_avocado 4y agoHere's another perspective to this. An induced recession at a time when most people and businesses are recovering from historic losses that came about in the pandemic, is the worst. In a recession, spending from the top 10% of the population slows down, which in turn stops the trickle down economics, and hits the lower 90% of the society the hardest. And when that happens after a 2 year long period where they were already hit hard, the effects will be even more long lasting. [Edit]: Since most of you latched on to the argument that "trickle down economics" doesn't work, I'll clarify. Outside the rhetoric of "Billionaires are hoarding all the money", in a healthy economy, trickle down economics is how most of the businesses work. Every time a person earning six figures goes out buys that extra pair of shoes or goes on that extra vacation or orders in food because they were feeling lazy, it's trickle down economics. It works. When the people with higher purchasing power (I said top 10% for a reason and not top 0.1%) feel the pinch, it has a disproportionate impact on people with less money to spare.
- bborud 4y ago
- lovich 4y ago> …which in turn stops the trickle down economics… It ever started?
- mbfg 4y agoplease show where trickle down economics ever worked, anywhere.
- prepend 4y agoI mean the US economy in the 20th century seems like a pretty good example, right? It “worked” by having the wealthiest realize most gains but also making the US the most powerful economy in the world and still has a large sized middle class with houses, pensions, 401ks, etc.
- lovich 4y ago
- idlehand 4y agoEvery central bank in the world is caught between a rock and a hard place. A recession would be bad for the long-term economy, likely reducing aggregate productivity. But if they don't manage to get inflation under control, we'll see a wage/price spiral as high inflation expectations become entrenched among companies and workers.
- ren_engineer 4y agotakes guts to do this and it was needed. Problem is that it will expose that most of the US economy is a sham that needed 0% interest rates to even fake growth. our "leaders" have been kicking the can down the road for a long time. US economy used to grow even with very high interest rates, now even a slight increase puts us into a recession.
- queuebert 4y agoIs this because of the transition to a service economy?
- ahi 4y agoFinancialization. Damn near everything is actually a bank these days.
- ren_engineer 4y agoand even more so the fact that 2008 resulted in no real punishment of this system like a real free market should have caused. The response to 2008 will be seen as a historic gaffe
- JasserInicide 4y agoThe response to 2008 was Trump.
- imachine1980_ 4y agoI thinks most becouse real growth only happens in Asian countries last decades, and usa and europe companies fake growth by overlabredge debt becouse of the lower inters rate, not productivity
- treis 4y agoOh come on. Asia didn't invent the iPhone. They're not leading the self driving car race. The internet runs on AWS/Azure/GCloud not any Asian provider. Asia is making incremental improvements on products invented in the West. They're not the ones inventing classes of devices or breaking new ground.
- FabHK 4y ago> pensioners Are US pensions not tied to the CPI or some other inflation measure? (In Germany, pensions are, in principle, tied to the development of wages, which are generally assumed to outpace inflation.)
- nemo44x 4y agoYes, Social Security is indexed to inflation. You can also buy a certain amount of I-Bonds that are tied to inflation and are paying very nicely nowadays. Tax free too.
- jaywalk 4y agoUp to $10k/year, and they're currently paying 9.62%. There's no other way to get a guaranteed return anywhere near that, and everyone should buy as much as they can afford to. You're basically saying no to free money if you don't.
- dont__panic 4y agoThere is a cap of how many you can purchase in a given tax year, though. 8k or something IIRC.
- bombcar 4y ago$10k per person though you can supposedly double that with trusts somehow.
- quesera 4y ago> Tax free too. I bonds are not tax free. They can be tax-deferred, and some (educational) uses of interest gained can be tax excluded, for some people.
- marricks 4y agoWages have been riser faster than inflation and triggering a recession will reverse that. People love to act like they’re helping poor people when in truth they’re just hurting the labor market ie everyone but rich people.
- susanasj 4y agoI don't think it's that simple. Lower middle class and poor people have debt, and inflation is good for making debt less valuable in real dollars. Pensioners, maybe, but social security is indexed to inflation if I'm not mistaken? I wouldn't be surprised if many public and private pensions are as well. This is much more a move in favor of the rich that are owed money by the poor imo.
- jessermeyer 4y agoThis is a double edged sword, naturally. Old debt becomes cheaper in equal measure to more expensive new debt.
- susanasj 4y agoyes I don't think it's the case that inflation doesn't hurt the lower half of earners at all, but this entire post is filled with people assuming that inflation hurts poor people the most. I don't know where that assumption comes from but it doesn't make sense to me.
- jessermeyer 4y agoSomeone who could just manage to feed their family on a paycheck-to-paycheck salary before now cannot. That hurts in a way that is .. difficult to compare to when your belly is always full.
- calvinmorrison 4y agoThe mistake is that, most poor peoples largest expense is housing, and most poor people rent. Those who own have mortgages. Sure their $30K student loans (already on income based repayments) may benefit from inflation, but housing prices certainly not.
- thatjoeoverthr 4y agoThey have debt, but they also have work contracts with out of date wages. But even in our sector, with the leverage that we as programmers have, companies don’t bother to match inflation. You have to make some risky or uncomfortable move to renegotiate your wage or find a new job. For many people it can be worse. So, everyone is under additional financial stress.
- mmarq 4y agoThe Fed missed the chance to act quickly in November/December and now it has to show commitment to bring inflation down before it spirals out of control. In the US and the UK, the current burst in inflation is more endogenous than it is in the eurozone (see core inflation), so it can and should be put under control by the central bank and by the government, the former with interest rates and the latter cutting stimulus checks and the like. We’ll see what the BoE and the UK government do, but I’m not an optimist. I don’t see Johnson stop using public money to directly buy votes and I’m very doubtful of the competence of a central banker that goes on TV asking people to not demand pay rises.
- ticviking 4y agoI agree. Selfishly I want inflation to inflate away my debt. But I'm well compensated and able to pursue new opportunities even in pretty lean times. Practically we have to control inflation in order to avoid far worse problems.
- Consultant32452 4y agoSpeaking of lower middle class and poor people. Powell recently stated that workers had too much power and were able to demand too much higher wages. He intended to create policy to tip the balance of power away from workers to resolve this. I don't believe the well-being of lower middle class and poor people are a concern of his. https://www.wsj.com/articles/transcript-fed-chief-powells-postmeeting-press-conference-11651696613 https://www.wsj.com/articles/transcript-fed-chief-powells-po...
- trgn 4y agoYup. The last few years have also seen some of the highest wage growth in decades, and highest saving rates across the board. All that pent up demand and broadly distributed spending power is fueling inflation now. But, in the balance of things, labor did really well. It's capital that being severely punished now, with negative returns (on top of inflation), it will take years to recoup losses. Anybody hoping of becoming a rentier (the FIRE crowd, seniors looking to retire come to mind) has seen their plans evaporate the last year. While the truly rich probably don't care either way, their balance sheets are all shrinking nonetheless. Low inflation may bring price stability and sanity to the markets, but it will not particularly benefit lower incomes.
- Consultant32452 4y agoThe truly rich scooped up a bunch of cash and cash equivalents while interest rates were low. Now that there's going to be a price crash in places like housing, they will be scooping up assets like mad while Main St. suffers. People were complaining about how many houses BlackRock was buying, just wait till the crash. This kind of thing really bothers me, and the more I learn about economics the more I understand why public school economics classes are so poor. If people understood this stuff there'd be a revolution. I think Warren Buffet once said something to the effect of if the average citizen understood how the federal reserve worked there'd be a revolution overnight. I'm sure I got the person or details of the quote wrong, but I'm too lazy to look it up. Regardless, the sentiment stands.
- legitster 4y agoAt the end of the day, inflation on average hurts older people, and older people are more likely to vote.
- hristov 4y agoActually higher inflation may help the poor and the middle class. If the inflation is caused by higher wages it is of great advantage of the poor and middle class. As well as a lot of the upper class (i.e., those of them that work for a living). The present inflation is a bit of a mixed bag. It is partially caused by higher wages, but it is mostly caused by high oil prices, disturbances in grain and fertilizer sales caused by the war in ukraine and various covid related supply chain screwups. I think the solution is to continue to address the things that can be addressed, like the covid supply chain screwups, low refining capacity, etc. Triggering a recession on purpose is really dumb.
- shadowpho 4y agoI would say the inflation hurts middle class significantly more -- they at least have some savings/money. However, if you are poor you would have more debt\less savings. As such a recession would be worse -- especially as it leads to less jobs and lost jobs.
- RspecMAuthortah 4y ago> You can argue either side to this, and make a good case. Here is an argument. Fed is a thief. First it recklessly bailed out all the toxic banks and derivatives in 2008, then kept the interest rates low for too long propping up the asset prices, then basically printed money as if there is no tomorrow, and then the moment middle class started to see wage growth they gave the asset owning class opportunity exit with big margin as they retired and then started raising the rates. End the Fed.
- mountainriver 4y agoIt actually may not be, when you enter a recession you can fall into an equity trap where everyone starts hoarding money and it further plummets the economy