6 ms·

I'd like to find numbers which illuminate how much of the inflation is caused by lack of supply for relatively inelastic commodities. If the way out of shortage

I'd like to find numbers which illuminate how much of the inflation is caused by lack of supply for relatively inelastic commodities. If the way out of shortages is to invest in more production, higher interest rates seems detrimental in the face of that type of inflation. If, on the other hand, inflation is caused by groups/individuals buying lots of silly things because they are flush with tons of cash, then rising interest rates should put a stop to speculative/impulse elastic spending. To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc). I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything. Many people are concerned about the rising price of real-estate and I agree, but I'm not sure interest rates are fine-grained enough for this...ideally Congress could address that with Anti-NIMBY legislation and/or taxes on properties which are not lived in by their owners, which could be directly redistributed to anyone who purchases a new home.

onlyrealcuzzo 4y ago
> If the way out of shortages is to invest in more production, higher interest rates will be detrimental in the face of that type of inflation. Do you have numbers that show that's what people do when interest rates are low? I don't have numbers - but my suspicion is that they mostly just speculate on asset prices. Where was all the investment in the last 20 years that low interest rates should've brought on? What it did bring on was companies borrowing money to buy-back their shares to return >100% of profits to investors. And don't even get me started on how negative real interest rates are a negative wealth tax.
- noirbot 4y ago
  That's why they said "IF the way out". It seems like OP is asking for exactly the same numbers you are - do we need to invest more in making sure things are available/produced? Or will more money just lead to more demand in ways that make things worse like how you've described.
  - runnerup 4y ago
    Honestly, I do agree with the GP. > Do you have numbers that show that's what people do when interest rates are low? I don't have numbers - but my suspicion is that they mostly just speculate on asset prices. I don't know either. I agree with their analysis that we've had an exuberance of speculation on rising assets during a time of unprecendented low interest rates. It just also seems unlikely that rising interest rates will facilitate additional investment towards critical shortages. Maybe this is a problem for Congress more than the fed, I don't know. Would love to hear others opinions.
    - noirbot 4y ago
      Yea, it strikes me as the sort of situation where monetary policy does somewhat intentionally live in a vacuum compared to more general policy. Changing the interest rate doesn't dictate what companies or people do with the money they're borrowing/not lending at that rate. The Fed generally has pretty coarse tools. Whether the increased monetary supply is spent on "good" or "bad" things is up to more general policy choices made in other parts of the government.
      - onlyrealcuzzo 4y ago
        > Whether the increased monetary supply is spent on "good" or "bad" things is up to more general policy choices made in other parts of the government. If we want to "make money" and "increase GDP" - lowering interest rates does appear to do that. But there's no reason you can't "make money" and "increase GDP" and also actually lower productivity and living standards. Imagine an economy where 90% of the economy is people buying land from each other on debt. If suddenly the price of money drops 50%, and people can afford to pay 50% more for land (and do) - all things being equal - GDP increases by 50% * 90% = 45%. If everyone realizes how much money they can make doing this instead of whatever the other 10% of the economy is - say actually working the land to farm apples - then real productivity can drop 100% to 0 - and you still "increase GDP" and people still "make money". At the same time - maybe everyone dies of starvation shortly thereafter? I'm not arguing this is actually happening - especially to this degree - but it is easy to see that it is at least possible*.
- imtringued 4y ago
  >And don't even get me started on how negative real interest rates are a negative wealth tax. You mean it is an implicit tax on liquidity which isn't to be confused with wealth as money is merely a claim to wealth and not wealth itself.
raymondh 4y ago
Excellent analysis.
cool_dude85 4y ago
Given the large deficits we've run since the 80s and the lack of inflation during those 40 years, I'm going to go ahead and guess that the prime suspects for inflation are covid related supply issues and logistics issues. But since the labor market is tight, you know the fed will not miss the chance to crush workers, so expect rate hikes for a long time.
- dmix 4y ago
  The deficit grew to twice what it was after 2008, the scale of spending is quite a bit different than the recent past (trillion dollar bills are the new $100 billion in the US). The same spending pattern has happened across western countries around the world who are facing similar inflation (and supply side) issues, so the pressure has been global. https://datalab.usaspending.gov/americas-finance-guide/deficit/trends/ https://datalab.usaspending.gov/americas-finance-guide/defic... Everything plays a role even if it may not be the primary one.
- rank0 4y ago
  We weren’t doing QE until 2008 and the scale of the deficit is quite a bit different. CPI is such a wack metric. It doesn’t really measure so much the value of the USD as it does “prices of certain things”.
rebelos 4y ago
Why wouldn’t it be both the (considerable) expansion in money supply and shortages? At a 30000 foot view, price level is determined by money supply divided across the finite set of goods and services.
matwood 4y ago
You've hit on the issue the fed has - the only real tool they have to combat inflation is to kill demand. In this case, inflation is from a mix of demand because people have money and supply shocks due to covid. The feds main tool to address supply issues is to lower rates and spur investment. Problem is, they are also trying to kill demand at the same time. For now, we just have to wait for supply issues to sort themselves out.
- hedora 4y ago
  It doesn't look like supply issues will sort themselves out though. Many of the current shortages (industrial plant failures, food shortages) are due to climate issues. Putin isn't helping, but even without the Russia sanctions, we'd still be facing all sorts of shortages (PVC, microchips, olive/sunflower oil, wheat, mustard, water shortages blocking the Panama Canal, etc, etc). The root cause of all that is climate change, which is worsening linearly with time, which means the backlogged impact on the economy is increasing quadratically.
  - ambientenv 4y ago
    Exactly. And I don't think people, in general, have wrapped their heads around what is truly unfolding right in front of us in terms of availability of cheap, accessible high density energy and the increasing impacts of the climate crisis. Energy is the economy and the economy is energy. I like the term, "energy blind" which I've heard Nate Hagens use [1] [1] https://www.thegreatsimplification.com/ https://www.thegreatsimplification.com/
- slg 4y ago
  Which I think makes the argument that the Fed might not be the right entity to fight this. Powell literally says in this speech that the Fed needs to weaken labor market conditions (4th paragraph) to strengthen labor market conditions (3rd paragraph). But if the goal is strong labor market conditions and he already notes "the labor market is particularly strong", what are we all doing here? Congress should probably be the one tasked with addressing supply side issues instead of the Fed because the demand side issues aren't actually a problem that needs solving.
nine_zeros 4y ago
You are right. There are two sources of inflation: 1. Inflation caused by increasing demand (often due to more money coming into the hands of people/companies/institutions) 2. Inflation caused by reduced supply (often due to logistics, productivity drops and reduced trade) With covid, we had both. At this point, we have far too much money in the hands of speculators and too few producers of goods and services in the world. The Fed can use interest rates to reduce demand. But they will also reduce supply because many producer businesses will go bust. I know this is heavy handed but the real policy help at this point is to ensure that there is more money to be made in real production and less in speculation. All the real estate agents, flippers and day traders need to be sent to factories to produce actual things.
hnthrowaway0328 4y ago
I have the same thought. Looks like Fed, like every other institution, is following sort of "KPI" and may or may not care about the implications.
wiremonger 4y ago
> I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything. Just an FYI, any remaining supply chain issues are not really transportation related at this point. We ship several containers a month from Asia to the ports of LA/Long Beach and we haven't seen delays on either side of the Pacific in a while at this point. The other major issue we faced in 2021 was getting containers out of the port complex and on a truck to their final destination. Those delays have also been resolved at this point. We're also seeing transportation prices come down. Trucking is still expensive because of fuel costs, but ocean rates are way, way down. The most we paid for a container from Vietnam to LA/LB last year was $22,000. Right now we're getting quotes for $4,600.
jbay808 4y ago
> To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc). I agree, but I think I lean in the opposite direction as you do. It's relatively easy to produce more Pelotons, grills, and (to a lesser extent) RTX3080s. It's difficult to produce more wheat and houses. When the price of housing is going up nationwide faster than ~4%, that's probably time to increase interest rates, because supply elasticity won't be coming to the rescue. By the time it filters into rent prices, it's too late and you're doomed to overshoot.
- pickovven 4y ago
  Increasing interest rates isn't going to reduce rents. And suggesting it reduces ownership prices misses the point. Sure, maybe list prices will go down but it won't reduce the cost to the buyer.
brightball 4y ago
> taxes on properties which are not lived in by their owners IMO that's the real key to the real estate problem and it should be an escalating process. Property you live in = 1 rate 1 property you own but don't live in = slightly higher rate (family vacation home perhaps) All other property you own but don't live in = much higher rate (this is the business tier)
- christophilus 4y ago
  What if you're renting that property out as a long-term-rental? Jacking up taxes on that is pretty much just going to penalize renters (I'd guess, anyway), which is not really fair, as they're (again generalizing) on average poorer than property owners. I'm not sure what the solution is. There's probably a tax component to it, but I think second order effects need to be carefully considered.
  - brightball 4y ago
    Somewhat the point. With a tiered approach, the costs for a person with a single rental home become lower than the costs for a business buying up the block. If it forces sales, you get more home inventory and lower prices.
    - RhysU 4y ago
      Why would the landlord not push the increased tax expense onto the renter?
      - BirdieNZ 4y ago
        Landlords in supply-constrained cities are able to charge the maximum rent their tenants can afford; and increase in landlord costs is thus not able to be passed onto the tenant, because if the tenant could bear more they would already be charged that much. This is in aggregate, of course; individual landlords may charge less than what individual tenants can bear but across the rental market, landlords extract monopoly rents already. That's why you will find rents increase proportionately to incomes, not landlord costs. This is highly apparent in New Zealand, where mortgages are not fixed rates for more than 5 years; interest rate changes have little to no impact on rents, but supply and tenant incomes do.
bryanlarsen 4y ago
This is why the Inflation Reduction Act is so effective. It attacks inflation from both ends. It raises taxes more than it increases spending, so it reduces the money supply. OTOH, it encourages investments in green energy, likely leading to a substantial reduction in the cost of energy in the long term. The CBO only measured the first effect, but the second is much more important, IMO. It doesn't do much for housing, but that's mostly a local issue (aka zoning).
- adventured 4y ago
  > This is why the Inflation Reduction Act is so effective. It's not very effective because the sum difference is barely a drop in the bucket. It's not enough to significantly impact inflation at the scale of the US economy. Only the Fed's rate hiking is going to do that at this point, as they intentionally attempt to cause a recession to destroy demand. Compare just the annual US Govt debt accumulation versus the difference between spending increase & tax increase in the act. How much new debt is the US going to take on this year? The Inflation Reduction Act, like so many government programs, warns you that it's a lie and a joke right in the title. The moment they chose that name, they were telling you everything about it: it wasn't an inflation reduction act. They championed it also as though it was a huge deal for climate change, it's not, that's a lie as well. Climate change is overwhelmingly global as an issue, there's absolutely nothing they can do to meaningfully offset the expansion of emissions elsewhere around the world. If they were serious about climate change, they'd have named the act: Stop China From Building Another Hundred New Coal Power Plants Act.
  - bryanlarsen 4y ago
    Much of the rest of the world is refusing to do anything about climate change because the US was doing nothing. That excuse has disappeared, so the IRA will have a multiplicative effect. 10s of billions of dollars have been announced for new battery plants to be built in the US and Canada since the announcement of the IRA. It's already having a massive effect.
- bko 4y ago
  > It raises taxes more than it increases spending, so it reduces the money supply. Taxation should be thought of separately from monetary policy. To put this into perspective, M2 money supply grew from 15.33T on Dec 31 2019 to 21.71T on July 31 2022, a growth of 41% in two years ($6.38T). In 2019 it grew 6.6%. The net revenue of the Inflation Reduction Act is 324 billion over over ten years. It's just not in the same ballpark > OTOH, it encourages investments in green energy, likely leading to a substantial reduction in the cost of energy in the long term. Subsidies and investments don't necessarily lead to a reduction in costs. Think about the sectors that have the most public spending in the US (health care through medicare and medicaid, education, real estate via fannie/freddie, etc). These are the fastest growing industries in terms of prices https://ycharts.com/indicators/us_m2_money_supply https://ycharts.com/indicators/us_m2_money_supply https://taxfoundation.org/inflation-reduction-act/ https://taxfoundation.org/inflation-reduction-act/
surfmike 4y ago
NY Fed estimates about 40% was supply chain issues. 60% was demand side. https://www.marketplace.org/2022/08/25/what-was-the-main-driver-of-inflation-from-2019-21/ https://www.marketplace.org/2022/08/25/what-was-the-main-dri...
- throw0101a 4y ago
  The SF Fed: > Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain. * https://www.frbsf.org/economic-research/publications/economic-letter/2022/june/how-much-do-supply-and-demand-drive-inflation/ https://www.frbsf.org/economic-research/publications/economi...
adrianmonk 4y ago
> how much of the inflation is caused by lack of supply for relatively inelastic commodities. If the way out of shortages is to invest in more production, higher interest rates seems detrimental in the face of that type of inflation I'm no economist, but is it really a problem in practice? Shouldn't stuff with both high prices and inelastic demand be a really attractive target for investment? If you can produce that stuff (before the situation changes), you're almost guaranteed to be able to sell it and at a high profit. So getting capital for it should be relatively easy. I'm sure higher interest rates will have some effect, but it seems like it wouldn't be enough to discourage investment that much.
pickovven 4y ago
I would like to add housing to your list of inelastic items.
throw0101a 4y ago
> I'd like to find numbers which illuminate how much of the inflation is caused by lack of supply for relatively inelastic commodities. The SF Fed published a study a little while ago, "How Much Do Supply and Demand Drive Inflation?": > Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain. * https://www.frbsf.org/economic-research/publications/economic-letter/2022/june/how-much-do-supply-and-demand-drive-inflation/ https://www.frbsf.org/economic-research/publications/economi...

onlyrealcuzzo 4y ago

> If the way out of shortages is to invest in more production, higher interest rates will be detrimental in the face of that type of inflation. Do you have numbers that show that's what people do when interest rates are low? I don't have numbers - but my suspicion is that they mostly just speculate on asset prices. Where was all the investment in the last 20 years that low interest rates should've brought on? What it did bring on was companies borrowing money to buy-back their shares to return >100% of profits to investors. And don't even get me started on how negative real interest rates are a negative wealth tax.

noirbot 4y ago
That's why they said "IF the way out". It seems like OP is asking for exactly the same numbers you are - do we need to invest more in making sure things are available/produced? Or will more money just lead to more demand in ways that make things worse like how you've described.
- runnerup 4y ago
  Honestly, I do agree with the GP. > Do you have numbers that show that's what people do when interest rates are low? I don't have numbers - but my suspicion is that they mostly just speculate on asset prices. I don't know either. I agree with their analysis that we've had an exuberance of speculation on rising assets during a time of unprecendented low interest rates. It just also seems unlikely that rising interest rates will facilitate additional investment towards critical shortages. Maybe this is a problem for Congress more than the fed, I don't know. Would love to hear others opinions.
  - noirbot 4y ago
    Yea, it strikes me as the sort of situation where monetary policy does somewhat intentionally live in a vacuum compared to more general policy. Changing the interest rate doesn't dictate what companies or people do with the money they're borrowing/not lending at that rate. The Fed generally has pretty coarse tools. Whether the increased monetary supply is spent on "good" or "bad" things is up to more general policy choices made in other parts of the government.
    - onlyrealcuzzo 4y ago
      > Whether the increased monetary supply is spent on "good" or "bad" things is up to more general policy choices made in other parts of the government. If we want to "make money" and "increase GDP" - lowering interest rates does appear to do that. But there's no reason you can't "make money" and "increase GDP" and also actually lower productivity and living standards. Imagine an economy where 90% of the economy is people buying land from each other on debt. If suddenly the price of money drops 50%, and people can afford to pay 50% more for land (and do) - all things being equal - GDP increases by 50% * 90% = 45%. If everyone realizes how much money they can make doing this instead of whatever the other 10% of the economy is - say actually working the land to farm apples - then real productivity can drop 100% to 0 - and you still "increase GDP" and people still "make money". At the same time - maybe everyone dies of starvation shortly thereafter? I'm not arguing this is actually happening - especially to this degree - but it is easy to see that it is at least possible*.
imtringued 4y ago
>And don't even get me started on how negative real interest rates are a negative wealth tax. You mean it is an implicit tax on liquidity which isn't to be confused with wealth as money is merely a claim to wealth and not wealth itself.

raymondh 4y ago

Excellent analysis.

cool_dude85 4y ago

Given the large deficits we've run since the 80s and the lack of inflation during those 40 years, I'm going to go ahead and guess that the prime suspects for inflation are covid related supply issues and logistics issues. But since the labor market is tight, you know the fed will not miss the chance to crush workers, so expect rate hikes for a long time.

dmix 4y ago
The deficit grew to twice what it was after 2008, the scale of spending is quite a bit different than the recent past (trillion dollar bills are the new $100 billion in the US). The same spending pattern has happened across western countries around the world who are facing similar inflation (and supply side) issues, so the pressure has been global. https://datalab.usaspending.gov/americas-finance-guide/deficit/trends/ https://datalab.usaspending.gov/americas-finance-guide/defic... Everything plays a role even if it may not be the primary one.
rank0 4y ago
We weren’t doing QE until 2008 and the scale of the deficit is quite a bit different. CPI is such a wack metric. It doesn’t really measure so much the value of the USD as it does “prices of certain things”.

rebelos 4y ago

Why wouldn’t it be both the (considerable) expansion in money supply and shortages? At a 30000 foot view, price level is determined by money supply divided across the finite set of goods and services.

matwood 4y ago

You've hit on the issue the fed has - the only real tool they have to combat inflation is to kill demand. In this case, inflation is from a mix of demand because people have money and supply shocks due to covid. The feds main tool to address supply issues is to lower rates and spur investment. Problem is, they are also trying to kill demand at the same time. For now, we just have to wait for supply issues to sort themselves out.

hedora 4y ago
It doesn't look like supply issues will sort themselves out though. Many of the current shortages (industrial plant failures, food shortages) are due to climate issues. Putin isn't helping, but even without the Russia sanctions, we'd still be facing all sorts of shortages (PVC, microchips, olive/sunflower oil, wheat, mustard, water shortages blocking the Panama Canal, etc, etc). The root cause of all that is climate change, which is worsening linearly with time, which means the backlogged impact on the economy is increasing quadratically.
- ambientenv 4y ago
  Exactly. And I don't think people, in general, have wrapped their heads around what is truly unfolding right in front of us in terms of availability of cheap, accessible high density energy and the increasing impacts of the climate crisis. Energy is the economy and the economy is energy. I like the term, "energy blind" which I've heard Nate Hagens use [1] [1] https://www.thegreatsimplification.com/ https://www.thegreatsimplification.com/
slg 4y ago
Which I think makes the argument that the Fed might not be the right entity to fight this. Powell literally says in this speech that the Fed needs to weaken labor market conditions (4th paragraph) to strengthen labor market conditions (3rd paragraph). But if the goal is strong labor market conditions and he already notes "the labor market is particularly strong", what are we all doing here? Congress should probably be the one tasked with addressing supply side issues instead of the Fed because the demand side issues aren't actually a problem that needs solving.

nine_zeros 4y ago

You are right. There are two sources of inflation: 1. Inflation caused by increasing demand (often due to more money coming into the hands of people/companies/institutions) 2. Inflation caused by reduced supply (often due to logistics, productivity drops and reduced trade) With covid, we had both. At this point, we have far too much money in the hands of speculators and too few producers of goods and services in the world. The Fed can use interest rates to reduce demand. But they will also reduce supply because many producer businesses will go bust. I know this is heavy handed but the real policy help at this point is to ensure that there is more money to be made in real production and less in speculation. All the real estate agents, flippers and day traders need to be sent to factories to produce actual things.

hnthrowaway0328 4y ago

I have the same thought. Looks like Fed, like every other institution, is following sort of "KPI" and may or may not care about the implications.

wiremonger 4y ago

> I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything. Just an FYI, any remaining supply chain issues are not really transportation related at this point. We ship several containers a month from Asia to the ports of LA/Long Beach and we haven't seen delays on either side of the Pacific in a while at this point. The other major issue we faced in 2021 was getting containers out of the port complex and on a truck to their final destination. Those delays have also been resolved at this point. We're also seeing transportation prices come down. Trucking is still expensive because of fuel costs, but ocean rates are way, way down. The most we paid for a container from Vietnam to LA/LB last year was $22,000. Right now we're getting quotes for $4,600.

jbay808 4y ago

> To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc). I agree, but I think I lean in the opposite direction as you do. It's relatively easy to produce more Pelotons, grills, and (to a lesser extent) RTX3080s. It's difficult to produce more wheat and houses. When the price of housing is going up nationwide faster than ~4%, that's probably time to increase interest rates, because supply elasticity won't be coming to the rescue. By the time it filters into rent prices, it's too late and you're doomed to overshoot.

pickovven 4y ago
Increasing interest rates isn't going to reduce rents. And suggesting it reduces ownership prices misses the point. Sure, maybe list prices will go down but it won't reduce the cost to the buyer.

brightball 4y ago

> taxes on properties which are not lived in by their owners IMO that's the real key to the real estate problem and it should be an escalating process. Property you live in = 1 rate 1 property you own but don't live in = slightly higher rate (family vacation home perhaps) All other property you own but don't live in = much higher rate (this is the business tier)

christophilus 4y ago
What if you're renting that property out as a long-term-rental? Jacking up taxes on that is pretty much just going to penalize renters (I'd guess, anyway), which is not really fair, as they're (again generalizing) on average poorer than property owners. I'm not sure what the solution is. There's probably a tax component to it, but I think second order effects need to be carefully considered.
- brightball 4y ago
  Somewhat the point. With a tiered approach, the costs for a person with a single rental home become lower than the costs for a business buying up the block. If it forces sales, you get more home inventory and lower prices.
  - RhysU 4y ago
    Why would the landlord not push the increased tax expense onto the renter?
    - BirdieNZ 4y ago
      Landlords in supply-constrained cities are able to charge the maximum rent their tenants can afford; and increase in landlord costs is thus not able to be passed onto the tenant, because if the tenant could bear more they would already be charged that much. This is in aggregate, of course; individual landlords may charge less than what individual tenants can bear but across the rental market, landlords extract monopoly rents already. That's why you will find rents increase proportionately to incomes, not landlord costs. This is highly apparent in New Zealand, where mortgages are not fixed rates for more than 5 years; interest rate changes have little to no impact on rents, but supply and tenant incomes do.

bryanlarsen 4y ago

This is why the Inflation Reduction Act is so effective. It attacks inflation from both ends. It raises taxes more than it increases spending, so it reduces the money supply. OTOH, it encourages investments in green energy, likely leading to a substantial reduction in the cost of energy in the long term. The CBO only measured the first effect, but the second is much more important, IMO. It doesn't do much for housing, but that's mostly a local issue (aka zoning).

adventured 4y ago
> This is why the Inflation Reduction Act is so effective. It's not very effective because the sum difference is barely a drop in the bucket. It's not enough to significantly impact inflation at the scale of the US economy. Only the Fed's rate hiking is going to do that at this point, as they intentionally attempt to cause a recession to destroy demand. Compare just the annual US Govt debt accumulation versus the difference between spending increase & tax increase in the act. How much new debt is the US going to take on this year? The Inflation Reduction Act, like so many government programs, warns you that it's a lie and a joke right in the title. The moment they chose that name, they were telling you everything about it: it wasn't an inflation reduction act. They championed it also as though it was a huge deal for climate change, it's not, that's a lie as well. Climate change is overwhelmingly global as an issue, there's absolutely nothing they can do to meaningfully offset the expansion of emissions elsewhere around the world. If they were serious about climate change, they'd have named the act: Stop China From Building Another Hundred New Coal Power Plants Act.
- bryanlarsen 4y ago
  Much of the rest of the world is refusing to do anything about climate change because the US was doing nothing. That excuse has disappeared, so the IRA will have a multiplicative effect. 10s of billions of dollars have been announced for new battery plants to be built in the US and Canada since the announcement of the IRA. It's already having a massive effect.
bko 4y ago
> It raises taxes more than it increases spending, so it reduces the money supply. Taxation should be thought of separately from monetary policy. To put this into perspective, M2 money supply grew from 15.33T on Dec 31 2019 to 21.71T on July 31 2022, a growth of 41% in two years ($6.38T). In 2019 it grew 6.6%. The net revenue of the Inflation Reduction Act is 324 billion over over ten years. It's just not in the same ballpark > OTOH, it encourages investments in green energy, likely leading to a substantial reduction in the cost of energy in the long term. Subsidies and investments don't necessarily lead to a reduction in costs. Think about the sectors that have the most public spending in the US (health care through medicare and medicaid, education, real estate via fannie/freddie, etc). These are the fastest growing industries in terms of prices https://ycharts.com/indicators/us_m2_money_supply https://ycharts.com/indicators/us_m2_money_supply https://taxfoundation.org/inflation-reduction-act/ https://taxfoundation.org/inflation-reduction-act/

surfmike 4y ago

NY Fed estimates about 40% was supply chain issues. 60% was demand side. https://www.marketplace.org/2022/08/25/what-was-the-main-driver-of-inflation-from-2019-21/ https://www.marketplace.org/2022/08/25/what-was-the-main-dri...

throw0101a 4y ago
The SF Fed: > Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain. * https://www.frbsf.org/economic-research/publications/economic-letter/2022/june/how-much-do-supply-and-demand-drive-inflation/ https://www.frbsf.org/economic-research/publications/economi...

adrianmonk 4y ago

> how much of the inflation is caused by lack of supply for relatively inelastic commodities. If the way out of shortages is to invest in more production, higher interest rates seems detrimental in the face of that type of inflation I'm no economist, but is it really a problem in practice? Shouldn't stuff with both high prices and inelastic demand be a really attractive target for investment? If you can produce that stuff (before the situation changes), you're almost guaranteed to be able to sell it and at a high profit. So getting capital for it should be relatively easy. I'm sure higher interest rates will have some effect, but it seems like it wouldn't be enough to discourage investment that much.

pickovven 4y ago

I would like to add housing to your list of inelastic items.

throw0101a 4y ago

> I'd like to find numbers which illuminate how much of the inflation is caused by lack of supply for relatively inelastic commodities. The SF Fed published a study a little while ago, "How Much Do Supply and Demand Drive Inflation?": > Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain. * https://www.frbsf.org/economic-research/publications/economic-letter/2022/june/how-much-do-supply-and-demand-drive-inflation/ https://www.frbsf.org/economic-research/publications/economi...