I’m aware of this in outline, and follow A Random Walk Down Wall Street advice.
However, 18 percent is not chopped liver at election time. What is their median and mean?
So, why doesn’t the government reinstitute postal savings, and give the monthly inflation rate as interest? Is there any reason other than harm to retail banking jobs and campaign contributions?
I suspect it has to do with keeping down interest rates for business and government AKA financial repression, but could be wrong.
The postal savings program ended in 1966, exactly around the time that savings accounts started to become irrelevant. However, savings bonds continue to be offered. The Series I bonds have an interest rate that varies with inflation over time. They have a limit of $10,000 a year, but that’s well within the savings potential of the lower percentiles. The other limitation is that there are penalties if cashed in within 5 years. Nevertheless, the first six months guarantee a 9.62% return.
What percent of total wealth is in that population? One percent? Less? Around the same as the percentage of chopped liver that a modern supermarket counts towards its total revenues??
This is misleading because of the rather exception current circumstances. Interest rates were at zero, and then inflation suddenly spiked. However, the Fed does not generally act precipitously by immediately raising rates a huge amount. Instead, barring any manifest need for emergency action, the Fed is predicted to act in the steady progressive manner it usually does under these circumstances, i.e. to raise rates in standard increments of 25bp or 50bp at each routine Fed meeting for the next 9 months or so until they reach around 3%, then stop.
The other thing is that there is market consensus that these crazy high inflation numbers are very temporary, and we will eventually settle in at a similar figure of around 3% inflation.
What this means is that in short term interest rates you’re still seeing numbers around 1% because the Fed is only in the early stages of raising rates. But if you wished, you could easily lock in an interest rate close to 3% to any maturity beyond 2 years. Or the other way of looking at this is if you left your money on short term deposit, that 1% will very soon start increasing and continue to do so.
Either way, what the market says about expected interest rates (about 3%) does in fact correspond closely to market expectations of inflation (about 3%). These things have not in fact decoupled, even if it might temporarily appear that way.
3% is not even remotely high enough to stop 9% inflation. According to the Taylor rule, stopping inflation generally requires interest rates 2% above the real rate of inflation.
https://www.investopedia.com/terms/t/taylorsrule.asp
Now, some of our inflation is due to temporary shocks like the war in Ukraine, but not all of it. Further, we might be heading into stagflation (likely, imo), where the rule is less well established. But any way you slice it, a 3% fed rate is not nearly enough to seriously curb current inflation. If we assume that half of our inflation is transitory, and that a good inflation rate is 2%, that would imply a necessary fed rate of 4.5%.
The other problem is that if high rates kick off a recession, the idiots in the government are likely respond by adding more ‘stimulus’, counteracting the fed’s efforts. That happened in the 70’s. And we are already hearing rumblings about price controls on gasoline and other goods, proving that we are incapable of learning from the past.
Beating inflation requires a lot of pain. I don’t know if today’s political class is up to the challenge.
The question is, who gets to inflict the pain and who must bear it? There are many ways to fight inflation, but these are political choices, not simple “economic” choices. Price and profit controls, for example, will bring about howls from capital, while unemployment will bring forth smiles from the same few people. Since capital–the business “community”–has much more influence over the political framing of issues and much more access to politicians, we will be told all about the “evils” of price and profit controls. It’s back to Thucydides and “the strong do what they can and the weak suffer what they must.” Perhaps the small resurgence in the labour movement will lead to stronger resistance from working people and different solutions will be found, but my guess is that is unlikely.
As a matter of interest, here is the detailed market prediction of the path of interest rates. These are euro$ futures at Friday’s close. These represent the market consensus for prevalent 3-month interbank lending dates starting at a given date in the future. They are expressed as a discount to par, and interbank lending rates are ~20bp higher than Treasury rates, so I’ve converted to what they represent in terms of Treasury Bill rates.
Jun 22 98.19 - 1.61%
Sep 22 97.39 - 2.41%
Dec 22 96.87 - 2.93%
Mar 23 96.72 - 3.08%
Jun 23 96.70 - 3.10%
Sep 23 96.83 - 2.97%
So the Fed is predicted to continue to tighten fairly aggressively (but without emergency action) from the current 0.75%-1% target up to just over 3% in early 2023, after which rates are steady to slightly lower.
If you believe that rates will need to go substantially higher, you can make a very direct bet on that by shorting one of these contracts.
I don’t think that principle is in dispute, but the market is predicting these crazy high inflation numbers will not need to be “stopped” in the usual manner because they are an aberration.
Nice spin, considering what your site actually says.
During periods of stagnant economic growth and high inflation, such as stagflation, the Taylor rule provides little guidance to policy makers, since the terms of the equation then tend to cancel each other out.
This is too perfect to allow any further comment.
A look into some of the information I previously posted, but updated:
5-year breakeven is today 2.87, down from a high of around 3.50. It was 2.65 when I last linked that page. 10-year breakeven is 2.55, down from a high of around 3.00. It was 2.38 on my December 17 post. (Both those numbers changed from when I started drafting this post, to when I finally posted it.)
These numbers aren’t good.
The Fed has abandoned its claimed target. There’s now a much larger chance of a later over-correction in order to get back on track, which could lead to a future monetary recession which would be their fault (as opposed to something out of their control, like the Covid contraction). This isn’t the biggest fuckup they’ve committed, or are likely to commit in the future. Nevertheless. It’s not great.
One of the possible feedback loops here is political. Policy becoming worse, because previous policy is bad. Problems beget problems. “Something must be done. This is something. Therefore we must do it.”
Stupid people will make stupid suggestions about controlling inflation.
You don’t have to look far to see this kind of thing. If the political process caters to the ignorant and ideologically bent, things can become even worse. David Shor’s median projection right now for 2024 is 60 Republican Senators, and a Republican president. That’s not just about inflation, which is probably a small part of the larger political currents. It’s more general than just inflation.
But it would be nice if policy were somewhat more responsible, including with respect to inflation. They’re now continuing to let it burn hotter than it should, over a much longer time frame, contrary to their own claimed target.
The article linked in the OP seems to ignore that inflation has been worse in the US than in other developed countries, as well as the timing of when that divergence took place. Per an article in Vox, there is general consensus among economists that stimulus spending in the US is a big cause of this, although there is disagreement as to the extent of this particular factor.
Biden’s American Rescue Plan worsened inflation - Vox
Speaking of disagreement among economists, the key point from my lay vantage point is that there’s been disagreement among economists for some time now. And the thing is that the inflation alarmists have been proven right about their early predictions and the “transitory” arguers have been wrong. So when contemplating who to listen to on the subject now, I would think the former have a lot more credibility than the latter. Further, in assigning blame for the current situation, I would think that those who advocated a viewpoint which turned out to be wrong and acted on that viewpoint deserve to shoulder that.
The article linked in the OP is about six months old. It does not “seem to ignore” the current situation, but instead would be absolutely amazing if the writer had said a word about it.
Yes, the extent to which there is “general consensus” seems to depend on how you define “big”, according to your article.
Depends on the reasons why the alarmists have turned out to be more right than their opponents at present. If the unexpected persistence of inflation is largely due, as several economists seem to be arguing, to impacts of the Russian invasion of Ukraine three months ago, then that in no way affects the “credibility” of the non-alarmist arguments on which they based their economic predictions prior to the invasion.
E.g., if I’m working on my roof and you predict that I’m going to fall off and have to go to the hospital,
and I assert that my safety equipment and precautions are sufficient to keep me from falling off and going to the hospital,
and then a car coming down my street crashes into a nearby telephone pole which falls over and knocks me off the roof and I have to go to the hospital,
that outcome has not demonstrated that your predictions are in any way more “credible” than mine.
It looks like you might be responding to me based on your use of quotes. But I didn’t say the article in the OP ignored “the current situation”. I said it ignored “that inflation has been worse in the US than in other developed countries, as well as the timing of when that divergence took place”. According to the Vox article, that divergence “started to stand out shortly after President Biden took office”. This predates the article in the OP considerably. Therefore, the omission of any mention of this in the article is a serious flaw.
You’re choosing an example where it’s completely obvious that the accident had nothing to do with the earlier prediction. But that’s not nearly the case here, and the fact that “several economists seem to be arguing” that doesn’t mean that it’s so.
You have some guys who nailed the prediction and other guys who were wrong, and the now the latter are trying to argue that well yeah they really would have been right but for other factors, and it absolutely does mean that the first group has more credibility.
How did that group do during the Obama years, when some people were hoping and praying for inflation that never came? Can you name a few names?
I read Paul Krugman, and he’s constantly reminding us how he got the current situation wrong, that inflation is higher and has been around longer than he expected, and that the Fed is doing the right thing by raising rates.
He has often posted about how the people who were wrong about the Obama years (when the Fed was injecting trillions into the economy) never revisited their assumptions and predictions, never admitted to being wrong. If those are the people who were right this time, well, even a stopped clock is right twice a day.
If those people who are currently right have been predicting higher inflation forever now, I’m not sure they should get any credit at all.
The main name which comes to mind is Larry Summers. (He served as the head of the NEC under Obama, but I don’t recall what he may have been predicting back then, if anything.)
Yeah, he was an early predictor of this inflation, and I think he was pretty good during the Obama years.
Yes, that was my point. And the point still applies, though with less ironclad certainty, to cases where unexpected events may have had nothing to do with the earlier prediction.
And the fact that several economists dispute it doesn’t mean that it’s not so. You simply have not in any way proven your attempted case that earlier “anti-alarmist” predictions about inflation would have turned out to be wrong with or without the Ukraine war.
Because the fact is that the Ukraine war did happen, and we don’t have an alternate-history time machine to go back and do a controlled economic experiment in some universe where it didn’t happen.
Nope, none of this stubborn repetition of what you want to be true in any way negates the existence of the confounding factors that might make it not true.
From a logical standpoint, it’s a form of Bayesian probability.
That seems self-evident since high inflation was already here long before the war started. Here’s an article from Dec 2021:
By January 2022 core CPI was already at 7.5%. War in Ukraine was not on the financial radar screen.
Inflation may be exacerbated or extended by the Ukraine war, but it wasn’t caused by it. For all we know, supply chain issues may even be tempering demand, lowering inflation. For example, lots of people would buy a new car today but can’t becuae of availability. And the high cost of gas should be choking demand for driving, RVs, etc. Global instability could be causing more saving behaviour, easing demand. Or maybe it’s the opposite - we aren’t going to know for a long time, and it’s complex.
But one thing is sure - the war in Ukraine cannot be responsible for inflation that started a year earlier. A much better starting point would be the trillions in printed Covid benefits and ‘stimulus’ money helicopter-dropped on the population to stimulate demand in an already-overheated economy. The graph I linked to shows inflation going up sharply and continuing the same trend from shortly after Biden was elected.
Nobody in this thread AFAICT, or in any of the sources quoted in this thread, is claiming that it was.
The issue under discussion (at least in my post that you were replying to) is why some so-called “anti-alarmist” predictions about subsequent decrease in inflation were not borne out by events during the past few months.
Nobody is trying to argue that the Ukraine war caused the start of the current inflation spike, obviously.