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It makes more sense when you consider that the market has never believed long-term inflation was a serious issue because frankly the narrative around structural

by kypro 4y ago

It makes more sense when you consider that the market has never believed long-term inflation was a serious issue because frankly the narrative around structurally higher inflation has never made much sense given demographics, technology and debt levels. For the most part where the uncertainty has existed has been in the path of the Fed. For the last several months (since Jackson Hole) markets haven't been sure how quickly inflation would come down and therefore how high the Fed might risk taking rates. But today we have much more certainty. We now know the Fed really can't raise rates much more near-term given the risks and longer-term the stimulus and supply bottlenecks which created the majority of the inflationary pressures will ease. Another thing you need to remember is that inflation easing is actually deflationary because real yields are calculated by nominal yields minus inflation. So as inflation comes down you're actually getting paid more to lock your cash up in bonds which continues to tighten financial conditions. The risk of a larger financial crisis is very low given this isn't a credit event, but a duration event. As long as the Fed doesn't raise rates further we can rule out a financial crisis and so long as you don't believe there is a structural inflationary problem in the economy rates should trend downwards over the coming months.

analognoise 4y ago
Isn't a huge part of the inflation simply corporate greed? It's not really supply chain bottlenecks. It's greed. Same thing for "14 year olds can work in meat packing plants". Greed is having a moment and must be countered by policy (top marginal tax rate of 90%, let's go!)
nostrademons 4y ago
Except that the narrative around demographics and technology has shifted to support higher inflation. Inflation was kept low through the 2000s despite massive quantitative easing because you had the entry of 3 billion workers into the global economy, keeping wages low even though the money supply was high. That trend has reversed. China hit peak workforce employment in 2015 and their workforce is now shrinking fast, the result of their One Child Only policy in the 70s. The same demographic headwinds affect all major developed economies. Fertility rates fell below replacement rate in most of the developed world in the 1990s - that baby bust is now entering the workforce. Similarly, technological progress has slowed down over the last 40 years. Much of the low-hanging fruit has already been picked; only a select few industries still show significant technological development. In particular, the major need-to-live industries like housing, health care, food, and energy have seen few yield-increasing technological developments over this period, and their price has risen accordingly.
- kypro 4y ago
  > Except that the narrative around demographics and technology has shifted to support higher inflation. We don't understand the drivers of inflation very well and people have different theories on this. You may be correct though. Fundamentally inflation is driven by the change in the supply and demand for goods and services, and in a globalised world with rapidly changing geopolitical landscapes and technological advancements it's hard to predict actually how supply and demand pressures will balance out in the coming years. However, what we do know is that demographics have historically correlated well with inflationary pressures. The inflation in the 70s was likely in part driven by the huge growth in demand which came from the baby boomers entering the economy. Then more recently you have examples like Japan where demographics have clearly played a role in their sluggish economic growth and low inflation. But to be clear, I'm not saying the market is necessarily right in its pricing, I'm just suggesting that there's a lot of good reasons to believe the Fed funds rate is currently too high and will need to come down. Even if you're correct you would still have to explain why inflation rocketed up in 2021 right after trillions of dollars of stimulus entered the economy. The trends you're describing have been in place for years. The inflation we've seen over the last couple of years in my opinion is just far easier to explain via the combination of reckless monetary policy, fiscal stimulus and lockdown policies.

by kypro 4y ago

analognoise 4y ago

Isn't a huge part of the inflation simply corporate greed? It's not really supply chain bottlenecks. It's greed. Same thing for "14 year olds can work in meat packing plants". Greed is having a moment and must be countered by policy (top marginal tax rate of 90%, let's go!)

nostrademons 4y ago

Except that the narrative around demographics and technology has shifted to support higher inflation. Inflation was kept low through the 2000s despite massive quantitative easing because you had the entry of 3 billion workers into the global economy, keeping wages low even though the money supply was high. That trend has reversed. China hit peak workforce employment in 2015 and their workforce is now shrinking fast, the result of their One Child Only policy in the 70s. The same demographic headwinds affect all major developed economies. Fertility rates fell below replacement rate in most of the developed world in the 1990s - that baby bust is now entering the workforce. Similarly, technological progress has slowed down over the last 40 years. Much of the low-hanging fruit has already been picked; only a select few industries still show significant technological development. In particular, the major need-to-live industries like housing, health care, food, and energy have seen few yield-increasing technological developments over this period, and their price has risen accordingly.

kypro 4y ago
> Except that the narrative around demographics and technology has shifted to support higher inflation. We don't understand the drivers of inflation very well and people have different theories on this. You may be correct though. Fundamentally inflation is driven by the change in the supply and demand for goods and services, and in a globalised world with rapidly changing geopolitical landscapes and technological advancements it's hard to predict actually how supply and demand pressures will balance out in the coming years. However, what we do know is that demographics have historically correlated well with inflationary pressures. The inflation in the 70s was likely in part driven by the huge growth in demand which came from the baby boomers entering the economy. Then more recently you have examples like Japan where demographics have clearly played a role in their sluggish economic growth and low inflation. But to be clear, I'm not saying the market is necessarily right in its pricing, I'm just suggesting that there's a lot of good reasons to believe the Fed funds rate is currently too high and will need to come down. Even if you're correct you would still have to explain why inflation rocketed up in 2021 right after trillions of dollars of stimulus entered the economy. The trends you're describing have been in place for years. The inflation we've seen over the last couple of years in my opinion is just far easier to explain via the combination of reckless monetary policy, fiscal stimulus and lockdown policies.