Inflation is not currently a menace

Great Debates
21

And today’s producer price index came in at 9.6% over last year. The highest jump in
history. Finished products were up 7.7%. So the next round of finished products are going up even more.

Inflation is increasing faster than it did in the 1970’s.

As a reminder: The U.S. and Canada have debt around 100% of GDP. That means if we raise interest, each point of increase costs 1% of GDP in debt-servicing costs when the debt rolls over. Raising rates to where they were in the 1980’s to beat inflation is simply not in the cards.

Inflation has numerous bad effects, mostly hitting the middle and lower classes. The most highly inflated items now are food, energy, and used cars. Real wages for the working class are now declining. If Wednesday’s fed meeting returns an accelerated ‘taper’ (which I think it will), there will be a bloodbath in the markets, and perhaps real estate.

Anyone who thinks inflation of 7% is harmless, or even tolerable, is smoking something. And clearly wasn’t around in the 1970’s. But I expect magazines like the Atlantic to carry water for the Biden administration which is frantically trying to downplay inflation as it’s killing their ‘Build Back Better’ legislation - as it should. If that passes now it would be wildly irresponsible and make the situation worse.

22

I wrote about the ‘economic coffin corner’ a couple of years ago. That’s where we are now. You can’t raise rates without bankrupting the government, You can’t let inflation run without serious economic damage. If you raise taxes, you risk stagflation. If you try to solve the problem by printing money, you push inflation up even higher and increase the malinvestments.

We have essentially borrowed all we can from the future, and printed all the money we can without the economy compensating in bad ways, and shot our wad of all the other normal economic tools in an attempt to avoid every recession. After each episode we left the situation less stable and resilient for the future. Now Keynes’ long run is here, and it’s not going to be fun.

A good analogy is forest management that seeks to avoid all fires, only to leave so much unburned fuel that the result is a megafire. Screwing with complex systems has that feature.

The first thing that CAN be done is to do no further harm. New spending proposals should be halted. Biden’s infrastructure bill implementation should be delayed until the supply chain and worker shortage problems ease, or it will contribute to inflation.

‘Build Back Better’, which the CBO says will add three trillion to the debt over a decade (and would have to be funded with printed money) should be a complete non-starter. In Canada spending needs to be trimmed substantially.

And we have to re-think how we approach global warming, because the current plans are failing hard. Energy is up 35%. Europe is in the middle of an energy crisis, and electricity rates are skyrocketing. In the meantime, many countries are actually increasing their fossil fuel use, and all the efforts we’ve made for 20 years can’t even be found in the climate signal. India just signed a deal with Russia to supply more fossil fuels.

If there is a grid failure in a cold country this winter it could be a mass casualty event. And it would set back the political will for fossil fuel reductions back to where it was in 1990. In the meantime, energy is the core feedstock of the modern economy, and the rapid increase in energy prices is driving cost-push inflation along with the demand-pull inflation from all the free money people are now trying to spend and cost-push from failing supply chains.

It makes me wonder if governments are going to push for more lockdowns as a form of demand rationing. I’ve also heard rumblings of ‘climate lockdowns’ to reduce CO2. But anyone contemplating either of those is blind to public sentiment.

23

:grin::laughing::sweat_smile::rofl:

Oh no - Sam heard some rumblings, we’re all doomed!!!

I’ve heard rumblings that they’ll make all crime legal once a year to let everyone let off some steam so we’ll probably be OK.

24

There is a little room to raise rates but a big raise would hurt. Inflation below ten percent is not great but some of it is due to supply chain issues and it will not be devastating if it is only for a short period. Raising taxes is politically unpopular but might make the most sense after bringing spending under control. The government has already been printing money like hot cakes; some support was justified under Covid but the idea debts do not matter was always problematic and continuing giveaways should be brought under control. Government debt of 100% of GDP is typical of most leading countries but Canada should not minimize the problems as it has done, especially since high debts are at three levels of government.

There is some latitude for spending that is a strong investment, and infrastructure programs have traditionally been effective. Supply chain issues could still be a problem. Worker shortage is regional and depends on cause. America picking now to start tariffs and trade war issues is very puzzling. Probably it would make sense to prioritize the highest return items and delay the pork barrel projects.

Haven’t heard the ridiculous idea of climate lockdowns, though in Mexico City and parts of South America non-essential car use is restricted on certain days. I think they would currently be a non-starter. In terms of energy consumption I think the environmental impact would be modest without taking into account great inconvenience. Canada cannot just depend on future innovation to reconcile its energy needs and wishes to reduce environmental load, especially when the required effort must be made by every country. Two billion trees (minus 0.4%) might help.

25

I believe the markets are highly inflated as there is very few other good places to put excess money. I wouldn’t mind a large correction.

26

Sam, to this point you’ve been making reasonable arguments, whether one agrees with you or not. But this seems to be squarely in tinfoil hat territory. Can you point to a single shred of evidence that something like this is even a remote reality in a western democracy?

27

I actually agree with you. All asset classes seem overbought to me, after 13 years of free money. I’d really like to see things cool off a bit.

28

Well, the ‘rumbling’ I herd was a headline in the Guardian that said something like, “Study: Solving global warming will require a ‘climate lockdown’ every year.” I Googled ‘climate lockdown’ after reading that and found a bunch of other sites, including several supporting the idea.

Now for the mea culpa: The Guardian screwed up with the title, and later changed it. What the study actually said was that a reduction in CO2 similar to what happened under the lockdowns would be required to meet the 1.5 degree target, which is a completely different thing.

There are still right-wing pages out there trying to gin up alarm over a ‘climate lockdown’, but it appears to me that they took a useful headline and ran with it. I could find no other left-wing leaders callihg for a ‘climate lockdown’, so I will assume it’s total bullshit and was started by a bad headline in a reputable paper and continued by the right for partisan gain.

This is one of the reasons I still stay on this board - it’s good to have your assumptions challenged, because sometimes they were just assumptions based on thin information, and wrong. I don’t want to live in a bubble.

29

See my previous post. I was in error.

As for asset prices, they are definitely in major bubble territory. Things are more out of whack now than they were in 2007. But hoping for them to crash is hoping for a wipeout of 401(k)s, pension funds, and other major collateral damage.

I’ve been planning to pull a lot of my funds out of the market, but it’s hard finding a refuge because things are so screwed up. Leaving money in cash means losing at least 5-6% of it per year. Normally ‘safe’ investments like bonds are paying nothing and will get wiped out if interest rates go up.

The best strategy I can think of is simply to invest in whatever durable goods you think you’ll need in the next few years. Buy them now, before the prices inflate. So we re-did our patio, installed a high effciency furnace, and we are looking at buying an electric vehicle. But it appears everyone is thinking this way, so cars are not available, our hot tub won’t be delivered until April, and getting service work done is hard to do because of labor shortages.

I was going to install a rooftop solar system, but I can’t make the math work. It’ll never pay for itself.

I do have a few hedges - inflation-protected bonds, some commodity mutuals and precious metal ETFs. But I’m still looking for places to protect what money we still have.

The key is interest rates. The best place to be when there is inflation is in stocks and other hard assets, Which is one reason the market is booming. But if the Fed actually raises rates those stocks will get hammered. You have to hope for inflation without increases in interest rates, which is why the markets have a seizure every time Jerome Powell clears his throat.

If I could convince myself that the Fed is unwilling or unable to raise rates, I’d leave my money in the market.

High inflation with low interest also opens the door to arbitrage - borrow money at a rate lower than inflation, buy gold or something that you think will hold value, and pay the loan back later with inflated dollars. That’s one reason why I can’t see rates staying well below inflation. But I can’t see how rates can go up enough to matter without cratering our over-leveraged economy. As I said earlier, we seem to be in an economic ‘coffin corner’. I don’t know how we get out of it.

Disclaimer: i’m not a financial professional, and this is not official investing advice of any sort. Just one layman’s thinking.

30

The real issue in this debate is predictive ability.

History tells us that neither monetary policy or debt have any predictive ability. Neither had any effect on inflation for the past decades, nor did they predict the current increase. The flair-up is due to the unpredictable COVID pandemic. (Unpredictable specifically: people have been warning of a pandemic for years.)

A myriad of factors stemming from the worldwide effects of COVID lead to today’s confounding contradictions of low unemployment and low job growth, massive consumer demand and unprecedented supply and delivery shortages. They are obvious in hindsight but their projection isn’t. The proper question is not why we are experiencing inflation now but what the numbers will be a year from now.

Most economists are predicting that the current snarls will work themselves out. Gas prices are dropping just as other previous price spikes also proved to be temporary. Employers have been raising wages and are likely to continue doing so, and general wage increases have historically always benefited the economy. The Fed has been making noises about small interest rate rises. The Powers That Be are not going to sit back and do nothing just to see what happens.

The return to historically normal rates may or may not happen, and the schedule for it is completely unknown. New variants, new lockdowns, new crises are unpredictable and so are their effects. The point is that a decrease in inflation is economically predictable as a result of known current trends and is in fact being predicted.

This is the “eventually” that is the basis for the predictions of inflation hawks but is curiously being ignored in favor of short-term numbers.

I don’t know the future, but I can read history. History tells me that the current mess is transitory rather than a harbinger. I’ll be curious to come back to this thread in a year and see what the result is.

31

FWIW the papers I read (Toronto Globe, NYT) featured columns predicting inflation would max out in the US at 7.1% in Jan and Feb than get lower as holiday demand lessens and supply chains become more normal. The Economist says wholesale price inflation hit 9.6% in the US in Oct-Nov which would suggest higher consumer inflation.

Inflation in Canada is around 6.3% IIRC but predictions are similar and the central banque has set future targets for 1-3%, which seems optimistic given the limitations in available levers. Wishful thinking? They’ve also given a partial mandate for reducing unemployment (long extant in the US Fed, but new in Nanaimo).

Boring detail, sure. But if we’re coming back to this thread tine-capsule like in a year or so just sayin’.

32

Politicians (especially Democrats, it seems) love inflation. It’s music to their ears. Why? Because it gives them the opportunity to look like heroes by “fixing” the problem, with the “fix” being more government subsidies for lower and middle-income folks. When these people complain about rising food & energy prices, some politicians will take advantage of the situation: “Oh, you poor people. We hear you and feel your pain! If you qualify, you will now receive a generous subsidy to pay your heating and food bills.” It’s nothing more than vote buying. And inflation gives the politicians this opportunity that they wouldn’t otherwise have.

33

I agree that it’s a strong article from @Exapno_Mapcase in the OP. It hits most of the right points. The optimal inflation rate is not 0%. Given the supply chain and other Covid problems, it’s completely natural that inflation be even higher than normal.

This is all correct.

Nevertheless, my personal take is that inflation has been running about a point higher than it should. You can get an idea of whether “inflation” is out of control by looking at total nominal spending in the economy. Obviously, that is not a real factor but a nominal figure. And it is also running a little hot right now.

Maybe not much. The data comes in quarterly and it’s noisy. But some. If total spending is growing normally, and inflation is higher than normal, then yes, the higher prices are supply-side problems. But if nominal spending is outpacing the previous trend – and it currently is, at least a bit – then that must, necessarily, have an inflationary effect above and beyond any structural problems in the economy.

It’s not anything to sweat unless it continues.

But I can’t read the political winds at all here. Kirschner relates an anecdote from Fed officials when they were stupidly hawkish. But being stupidly hawkish in the past does not eliminate the possibility of being stupidly dovish in the future. Intellectual fashions change over time. We’ll see about this, very slowly, when more data comes in.

The Fed has some insulation from outside political pressure. But its decision-making apparatus is a government agency and government agencies are not totally blind to which way the political wind is blowing. The Fed was far too docile in 2008. But they doesn’t mean they aren’t erring, slightly, in the opposite direction now.



The first sentence is correct, in the sense that a “perfect thermostat” creates a room temperature that can’t be predicted from the effort of the heater.

The heater turns on, it turns off, it turns on. Yet the room is always the same temperature. There is no correlation (technically, no covariance and undefined correlation) between how hard the heater is working and the constant room temperature. No predictive ability.

Therefore the heater is doing nothing?

No.

Inflation was relatively low and stable because monetary policy made inflation low and stable. Inflation was under control because the Fed decided it wanted inflation under control, and then enacted a monetary policy that would result in that outcome. Successfully.

The monetary authority is the ultimate driver of the nominal aggregates. A long period of extremely stable price growth is not a sign of impotence on the part of the monetary authority. Quite the opposite.

Kirschner is stuck in the old-style models of trying to determine “monetary policy” exclusively from the stock of money, as Milton Friedman would have done. But Friedman lived in a time of relatively stable monetary velocity. MV = PY = nGDP. With modern monetary systems, we have think about both the stock of money and also its circulation: the amount of blood in the body, and also how fast the heart is beating. (A related mistake, from a large class of contemporary models, is trying to use interest rates to determine the stance of monetary policy. This is also almost entirely useless.)

The underlying point is correct: inflation is not an enormous problem right now. Well, maybe politically it is. But not economically.

But this evaluation could easily change. If we start having quarter after quarter after quarter of strongly above average nominal spending growth, such that we end up on a path of spending noticeably steeper than the previous path, then it will be clear that the Fed has been pouring gasoline into the fire.

34

A lot of things in economics are not problems until enough people are under the perception that they are - you might just think your heart is beating too quickly.

35

By ‘Build Back Better’, I assume that you mean the bill intended to pass under reconciliation? You know, the Senate rule which says you can pass a bill with only 50% approval so long as it’s budget neutral - as judged by an impartial third party?

Any chance that we know exactly how it will be paid for, because the pay-fors are written directly into the bill, and that it isn’t printing money?

36

Yes, I am totally aware of that. The Senate Parliamentarian has apready ruled several times against provisions in tye bill. What’s the relevance? Do you think the CBO is an impartial party? If so, does them scoring it as NOT budget neutral kill the thing?

And the Democrats have been calling this ‘Build Back Better’ for quite a while.

I don’t quite understand what you are saying. How do you mean it’s not printed momey? Who do you think is going to lend the U.S. three trillion dollars? Bedause the pay-fors in the bill don’t come close to covering the costs, which was the point the CBO was making. There’s a three trillion dollar shortfall between the cost of the provisions of the bill and the amount allocated to pay for it, once you take out the budgeting gimmicks.

37

I think that they are an impartial party.

But let’s say that NASA publishes a study which says that there’s this thing called gravity and that gravity causes everything to want to collapse into a giant ball. Does that mean that the sky is falling and we’re all going to die? Well, no, because NASA also wrote at the beginning of their study that they’re discussing only a small part of the equation and that there may be other forces counteracting gravity and that no inferences on the future of Earth should be made on the basis of gravity alone. If you run around like a chicken with its head cut off, even though the very first thing that they said is “You should not interpret this document as a notification that the sky is falling! You are wrong if you do so!” Well, that’s just not smart.

As you are aware, the current CBO report is purely a tallying of costs and disregards pay-fors.

Even if we assume that tax enforcement doesn’t do anything, $367b is peanuts for the US government over a 10 year period. And assuming that tax enforcement would do nothing is ridiculous.

Build Back Better may well be a horrible piece of legislation that wants to do stupid things. Arguing against it on the basis of cost, when it’s designed as a reconciliation bill, though, is stupid. If it contains bad stuff, argue against the bad stuff. If you can’t do that then coming up with nonsense that will fool the rubes is not adding to the world. You’re just shooting yourself in the foot.

Quoting ridiculous numbers like $3 trillion when it’s a $2.2 trillion bill, and attributing that to the CBO when you can just Google the report and see it first damn thing that that ain’t what they said is wasting your own time. There are better things to do in life than repeating demagoguery that doesn’t help anyone.

38

Three quick thoughts. Inflation over 2 years is lower than over just the last year, so taking the current annual figure is a little alarmist. And most money in the economy is not “printed by the government” but in fact is created by banks, so stop blaming the government for everything. Finally, wage, price, and profit controls, especially, the latter two, can take care of inflation. Inflation is always and everywhere a political issue, not a monetary or fiscal problem, but the wealthy have more political influence than the rest of us.

39

Hi, Hellestal. I was really hoping you’d see this thread.

One small point. When I used the term “monetary policy” I was quoting Sam_Stone. He was using the term to include printing money, something that would invariably lead eventually to disaster. Since he starts this period in 2007, I feel safe in denying that disaster has ensued accordingly. (Obviously, the events of 2008 were long in developing and were not caused by printing money in 2007.) Kirshner’s article says "Milton Friedman famously proclaimed inflation is always and everywhere a monetary phenomenon.’” Sam is the one who is equating the two, not me. Me, I fully agree that times change, politics change, and the unforeseeable occurs, which is why I need to wait a year or so to study the consequences.

While you’re here, perhaps you could examine another point of difference between us. I quoted Kirshner as writing that “reams of studies—often undertaken by scholars eager to demonstrate the perilous dangers of inflation—have failed to show any real economic cost to inflation below levels of 20 percent per year, if not more.” Sam responded that “Anyone who thinks inflation of 7% is harmless, or even tolerable, is smoking something.”

Where is the line to be drawn?

40

Inflation over the last ten years is even lower, but no one uses this as a common metric. I try to print my own money but the government says I cannot. Controls are possible and politically unpopular, but are certainly have a political flavour. So does inflation. The government should perhaps plan carefully, avoid a quick overreaction and stop announcing new spending which is unprofitable.