100% of excessive inflation is due to bad monetary policy
Always.
This shouldn’t even be debatable. I don’t know of any respectable theory (monetarist, Keynesian, Austrian, etc.) where this is not true.
And yet according to this recent Vox article, economists have no idea what is causing the current bout of excessive inflation:
Among economists and experts, there’s no strict consensus about what exactly is to blame. There are certain factors widely agreed upon that we’ve been hearing about for months: supply chain woes, rising oil prices, shifting consumer demands. These concerns have hardly subsided. But there are other arenas where there’s more disagreement, such as the role government stimulus has played in increasing prices, and the possibility that corporate greed is an important factor. . . .
Whichever economist or expert or policymaker you ask to explain the current inflation story to you is going to tell you something slightly different. I asked a bunch of economists over the past couple of weeks what was causing inflation and how to fix it. Most kind of laughed for a second before launching into their cases, acknowledging the full answer is, to a certain extent, ¯\_(ツ)_/¯.
The Fed’s job is to insure an appropriate level of demand. On occasion, it may be appropriate for inflation to exceed 2% for a period of time due to supply issues. But that’s no excuse for excessive growth in nominal spending. When inflation is higher than it should be for demand side reasons, it is always 100% due to bad monetary policy.
And now Vox tells us that economists are now talking about “corporate greed”? Seriously?
And just who are these so-called “economists”? According to Vox they are “progressives”:
Many progressive economists and politicians are beginning to argue that it’s corporate consolidation that’s making inflation worse.
Wait, I thought it was right-wingers who were the creationists, global warming deniers, the anti-vaxxers? I thought the left believed we should “trust the science”? Since when did progressive economists become the left wing version of QAnon?
Ezra Klein has a must read interview of Larry Summers. One of Ezra’s questions is interesting. No, “interesting” isn’t quite right, it’s the single most revealing question I’ve ever seen from a reporter in my entire life.
EZRA KLEIN: So I know you’re a hard-nosed economist who looks at the numbers here. But I want to locate, I think, the emotional and to some degree even political frustration of this conversation, because a lot of the dynamics you’re talking about that then get framed as excess demand, there are things that feel just, that many of us have wanted for a long time. More hiring, wage increases, particularly at the bottom end, stimulus checks for people who have had a lot of bad years and didn’t have a lot of cushion behind them, child tax credit for families that could really use that.
And so there are a lot of policies that came together — I mean, there was a reason the Biden administration wanted to run the economy hot. There was a long period when it didn’t just feel, the economic data showed, that expansions were not reaching people on the margins. And it felt, finally, like we were reaching people on the margins. We were putting a lot of firepower to do that. But even in this terrible time, this horrifying pandemic, we were giving people who needed it quite a bit of help.
And then for that to then turn into this horrifying inflation problem, which is now eating back those wage increases, potentially going to require much sharper action from the Fed— I recognize the world doesn’t have to please me, but it is maddening. And I think one of the hard questions, before we even get into Ukraine and China— I think one of the hard questions is, does it have to be this way? Did it have to be this way? Is there some way for this to end without the people we were finally helping suffering?
If anyone wants to know how we got in this mess, it’s right there in Klein’s question. Kudos to Ezra Klein for being willing to reconsider his views when new information comes in. But the passionate desire to “run the economy hot” in a misguided belief it would help workers is precisely how we got into this mess. Jay Powell and all the other the run the economy hot people wanted it to be true that the 1960s never happened. (Recall how Powell cited 1965 as a successful soft landing!) But the 1960s did happen, and could happen again if the Fed doesn’t wake up.
Klein asks Summers about the nonsensical claims that inflation is caused by corporate greed, and Summers has this to say:
So I think it’s, frankly, ridiculous to take businesses saying on a earnings call that they have pricing power as some kind of evidence of perfidy. I just don’t think that is supported by any serious understanding of how the business process works.
And by the way, another way of looking at this is, again, to look at what’s happening to wages. Wage inflation is as pronounced a phenomenon as price inflation. And we don’t think workers have huge pricing power. Or another way to look at this is as relations in terms of what Amazon is paying its suppliers or what Walmart is paying its suppliers. Surely if there’s market power in the relationship between Walmart and its suppliers or between Amazon and its suppliers, the power is on the side of Amazon and Walmart. And they’re paying much higher prices to their suppliers.
So are there market power problems in the American economy? Yes. Is it a good idea to attack those problems? Yes. Is it fine if we use the motivation provided by inflation to do some of that? Yes. Does it make any sense at all to blame inflation on market power? No. That’s not serious economic reasoning and the judgments and forecasts of those who engage in that reasoning should be taken less seriously as a consequence.
The interview is quite long and worth reading in its entirety. Summers makes many of the points I’ve been making, and he recognized the inflation problem well before I did.
At one point the discussion turns to what the Biden administration could do to slow inflation. Summers points out that they could do a few things at the margin, but their actual policy has been almost the exact opposite, to reduce aggregate supply and make the problem worse:
LARRY SUMMERS: Mostly the tools are pretty limited. And the tools that there are, are tools that the Biden administration has so far been very reluctant to adopt. If we reduce tariffs, that would make more goods available at lower prices and perhaps reduce the Consumer Price Index by 1 percent or more. But their rhetoric has gone the other way on tariffs.
If we decided to do public procurement as inexpensively as possible, that would reduce prices of a whole set of things the government buys and increase competitive pressure. But we’ve instead indicated a desire to shift from buying cheap to buying America and buying in ways that protect certain key constituencies.
These policies would not reduce aggregate demand, but by boosting aggregate supply they would make the “appropriate” inflation overshoot of 2% smaller than otherwise (from a dual mandate perspective.)
If we could just stop talking about inflation and focus on NGDP growth then all of these concepts would be so much easier to explain. The language of macroeconomics is such a complete mess.
PS. Here’s what else Biden could do. He could “promote” Powell to Treasury secretary and replace him with Yellen or Summers. In 1979, G. William Miller was promoted to Treasury secretary, and replaced with Volcker.
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30. March 2022 at 09:57
What’s funny about the “corporate consolidation” stuff is that until relatively recently, the Hipster Antitrust people were arguing that antitrust focused too much on whether prices stayed low for consumers – that higher prices might be acceptable as a result of antitrust action if it met other criteria.
Now they’ve completely turned on this, arguing that consolidation is driving up prices – except that if we’ve got monopolies, then shouldn’t that make it easier for them to constrain price growth since they could more readily dictate wages?
What it amounts to is that a lot of folks on the more leftist side of things are finally having to admit that inflation is a problem, but they’re still loathe to suggest anything that might slow wage growth (even if it’s just nominal wage growth, because inflation is eating into its purchasing power).
30. March 2022 at 10:02
I’ve been beginning a process in my mind to concede a point to you on the risk management problem the Fed’s recent policy has represented. I didn’t begin to realize there was a problem until a couple of weeks ago, and it really began to hit home last week, as I saw longer range inflation expectations at around 3%. It seems relatively unlikely that the move up in expectations is due to supply shocks, and longer run NGDP growth expectations are back up to nearly 5% now.
The problem with my thinking before, as I see it now, is that with the path I was comfortable with, there was very little room for negative supply shocks and additional policy error. As I’ve watched the Fed’s window for avoiding a hard landing closing, this has been on my mind.
As we’ve both stated, under a 5% NGDP target, this would not be a problem, but that’s not the regime that exists. And anyway, if real growth potential was revealed to be lower-than-expected, there could be an argument to lower the NGDP target a bit down the line.
The Fed could perhaps afford to take action that would lead rates up by about 1%, without causing a recession, but it would be close. This would bring the mean expected NGDP growth path down to about 4%.
Of course, some positive supply shocks are conceivable, but as one famous coach once said, “Hope is not a plan”.
I’d like the Fed to level target NGDP, even if implicitly, but they’re clearly not doing that.
30. March 2022 at 10:04
What are the reasons why an inflation “Laffer curve” for wages would exist? I would think that unwillingness or inability to change jobs to get better wages would play a large role in people’s real incomes going down due to inflation, but it seems like that would always be true. Is It simply easier for companies to deal with prices that rise more slowly, so that they are more likely to be convinced that they have pricing power or investments that raise productivity, and thus can handle a higher wage structure without eating into profitability too much?
30. March 2022 at 10:25
Scott, A slightly off topic question: Do you know why the Fed introduced IOR? At the same time they were introducing QE to increase the monetary base and jump start the economy, they also introduced a contractionary policy like IOR. Were they afraid of their own (potential) success? If so, why no just do less QE and not introduce IOR. I guess I just don’t understand the reasoning behind it – I like to think that the Fed decision makers are rational and this move seems pretty irrational. So, I must misunderstand something important.
30. March 2022 at 11:46
Scott, you didn’t get the memo. This rule only applies when the science happens to align with left-wing ideology.
30. March 2022 at 12:17
Brett, Good point about hipster antitrust.
Michael, You said:
“As we’ve both stated, under a 5% NGDP target, this would not be a problem, but that’s not the regime that exists.”
That’s the problem, as you say. On interest rates, it’s hard to say because they respond not just to tight money, but also on forecasts for NGDP growth. Another commenter mentioned a Laffer curve for real wages, there might be one for nominal interest rates.
Lizard man, I don’t know about there being a simple Laffer curve; it’s more a question of actual vs. expected stimulus, with wages a bit stickier than prices in many cases, but also responding to the strength of the labor market.
MSS1914, You said:
“At the same time they were introducing QE to increase the monetary base and jump start the economy”
That’s just it; it was not done to help the economy. The first QE (Sept. 2008) was aimed at providing liquidity to help the banking system from freezing up, without boosting demand. At the time they were (mistakenly) worried about high inflation–mostly from oil.
Christian, I never would have guessed.
30. March 2022 at 12:38
Scott,
you are right of course, not my brightest comment. I wanted to incline that I find the method of left-wing politicians particularly insidious, always claiming to follow science. I almost prefer the method of some right-wing politicians because it is a bit more honest. They seem to follow the line: “Okay this might be the science, but guess what, we just don’t care.”
30. March 2022 at 13:03
“I think one of the hard questions is, does it have to be this way? Did it have to be this way? Is there some way for this to end without the people we were finally helping suffering?”
Ezra Klein is represents a line of what I call “millennial thinking” that dramatically underestimates the laws of scarcity and unintended consequences as well as the importance of leaning from history. The narrative of the millennials over the pat 15 years is that their favored solutions to problems have no downside and the only reason they are not being implemented is because evil vested are stopping them. MMT is one example of this – positing that policymakers are foregoing gigantic free lunch by not running macro (aggregate demand) policy much easier. In order to buy this, you would have to ignore most of history and even more recent experience in other countries (eg. Brazil, 2015). But many millennial intellectuals did not care: they were simply determinized to reject the 1980s-2000s neoliberal consensus and this included rejecting (and deriding) the advice one of its most prominent members, Larry Summers.
30. March 2022 at 13:37
Jon Stewart recently had Stephanie Kelton on his podcast. The episode is titled “How Do We Fix The Economy?” It was, of course, nothing but softballs.
The same month he did an episode titled “Corporate Greed Is Causing Inflation”. It was, of course, nothing but softballs.
Jon Stewart is a smart guy, but he’s obviously not an economist. Why is he allowed, without criticism, to have heterodox (to put it charitably) guests pushing unconventional (to put it mildly) narratives on his show, without offering any substantial criticism or challenges or fact-checking?
It’s basically the Joe Rogan problem — he’s a non-expert interviewing guests who are “interesting” because they’re unorthodox, but he doesn’t have the background or the context to differentiate between “interesting” and “bullshit”. Unlike Rogan, Stewart gets away with it.
30. March 2022 at 14:03
It doesn’t hurt science when people say, “This is science and this is politics, there are conflicting goals, you can’t (always) translate science 1:1 into politics. And maybe you actually shouldn’t.”
But it is harmful to science when certain political movements try to reorient science along ideological, political or “woke” goalposts; or when certain political movements say “follow the science” in such an Orwellian manner that they say science but they do and mean the opposite.
@Will
This is why I have “Trump Defender Syndrome” as Scott has now found out. There are plenty of right-wing idiots out there, but rest assured they don’t get away with it in the serious media and in public opinion.
It’s different with certain left-wing movements. Spout the biggest nonsense like Kelton or Chomsky, and be assured that even in media like FT or NYT or New Yorker you oftentimes pass for intelligent and wise. Hell, you even get to educate the future elite at the universities.
30. March 2022 at 14:42
Quoting from Vox: “Many progressive economists and politicians are beginning to argue that it’s corporate consolidation that’s making inflation worse.”
Isn’t the argument based on consolidation contributing to lack of competition?
ssumner wrote: “Since when did progressive economists become the left wing version of QAnon?”
From way back, and they’re called BlueAnon.
Brett wrote: “the Hipster Antitrust people were arguing that antitrust focused too much on whether prices stayed low for consumers.”
That was the Bork argument that took hold. Antitrust originally was supposed to maintain a competitive environment, not determine if a consolidation would lower prices.
30. March 2022 at 14:45
ssumner wrote: “If we could just stop talking about inflation and focus on NGDP growth then all of these concepts would be so much easier to explain.”
You don’t suggest ignoring inflation, do you? What if inflation were 10% and real gdp were -5%?
30. March 2022 at 15:56
will wrote: “Jon Stewart recently had Stephanie Kelton on his podcast. The episode is titled “How Do We Fix The Economy?” It was, of course, nothing but softballs.”
Kelton discusses solving inflation in a 2022 blog. After dancing around the issue she proclaims that neither MMT nor anyone else has a solution. She pivots, offers lame analogies, and suggests that MMT, properly implemented, would have prevented inflation.
https://stephaniekelton.substack.com/p/how-do-you-solve-a-problem-like-inflation?s=r
30. March 2022 at 15:57
economist manque sumner slips in an admission summers spied inflation problem before he did, but doesn’t say why. perhaps his perorations in trump bashing a year later?
30. March 2022 at 19:44
I think about interest rates a lot. I wonder what one should expect a healthy yield curve to look like under various expected growth rate scenarios, and about what changes in interest rates actually represent. The idea that a healthy yield curve should be steep is consistent in a straightforward way with the idea that an inverted yield curve predicts recessions. It also makes some logical sense. On the other hand, it also makes sense, using different reasoning, for healthy yield curves to be flatter, or even negative. I still wonder why the yield curve was negative in the US for so long more than a century ago, even between recessions.
I’m not with you on the interpretation of interest rate changes, though I’m open to persuasion. My thinking continues to be that all effects are subsumed under market expectations concerning the Fed’s reaction function as real economic variables fluctuate. I think rate changes largely reflect market expectations for Fed changes in rates in the future. This fits with my model of the relationship between stock prices and NGDP growth expectations really. really well.
On the other hand, when it comes to rate levels, clearly there seems to be a discrepancy between the Fed Funds futures market and the yield curve, but, it’s systematic. Looking at the numbers lately, the yield curve matches the Fed Funds futures market, but at twice the time period into the future, whatever that signifies. Perhaps I’m just missing a detail which means there is no actual discrepancy.
On a related point, I just put up a crude website with my streaming market-based NGDP forecast. It is not a site to make money, but just to begin conversations, for those interested. If one compares changes in the mean expected NGDP growth path to changes in interest rates, for example, it all fits together extremely well. Look at the numbers closely enough, and you may discover how to consistently impute the current NGDP forecast, using this approach.
30. March 2022 at 19:47
Oh, and for anyone concerned about making adjustments for one-time tax policy changes, for example, that affect stock prices much more than the broad enonomy, I have easy ways to adjust for that.
30. March 2022 at 20:26
“!00% of excessive inflation is due to bad monetary policy.”
You don’t seem to want to debate that and say that anyone who might debate it is not ‘respectable’. According to you.
I disagree. In as respectable manner as possible. Of course, you use ‘excessive’ as a modifier on inflation. So it would be helpful to know what that means when we see rising costs and prices that are typically called inflation.
What do you mean by ‘excessive’ in your title of the post?
30. March 2022 at 20:29
When did progressive economists become the left-wing version of QAnon?
I blame Krugman. I am sure that at one time he was indeed a fine economist. But, when he became a columnist, he became a partisan cheerleader. He spins all his economic analysis to suit his team. He is still lauded on the left as a great American economist. If you are an academic economist, I can see the temptation to follow the Krugman model.
And it is not just a curse on the left. If you are a consultant to AEI, there must be a pretty strong temptation to provide analysis that aligns with the veiws of your benefactors.
31. March 2022 at 04:41
There’s a very annoying tendency from progressives to think that people who disagree with them don’t care about people on the lower end of the socioeconomic spectrum. We don’t want to run the economy hot because this hurts everyone! Not because we’re opposed to people being better off!
Off the top of my head, Matt Stoller is one ‘economist’ blaming corporate greed for inflation – he ‘calculated’ corporate greed as responsible for 60% of inflation.
31. March 2022 at 05:59
Scott,
I’m much more sympathetic to Ezra. While Larry Summers answer is substantively fine, it does not better prepare Ezra to ask better questions in the future.
My reading of Ezra’s questions is can we have the following without triggering damaging inflation:
“More hiring, wage increases, particularly at the bottom end, stimulus checks for people who have had a lot of bad years and didn’t have a lot of cushion behind them, child tax credit for families that could really use that.”
I haven’t read the whole interview yet, but in this snipet Larry did not answer that question.
My understanding is that “More hiring, wage increases, particularly at the bottom end” during covid and in the years prior to covid were the result of monetary policy being better during those years than it was during and after the Great Recession. Our current inflation is not a product of monetary policy being too expansionary during covid and prior to covid. It’s a product of monetary policy being too expansionary in the last 6 to 12 months. That’s an important distinction that Larry doesn’t drive home
“stimulus checks for people who have had a lot of bad years and didn’t have a lot of cushion behind them, child tax credit for families that could really use that.”
Does Larry address whether the stimulus check and child tax credits caused inflation? No.
Does Larry address whether or not “Biden ran the economy hot”? no.
Does Larry address Ezra’s basic question. “Can we have full employment that reaches marginal workers, stimulus checks to address crises, and redistributive programs such as child tax credits, “without the people we were finally helping suffering?”
Whether you like stimulus checks or not, I think this answer is yes we can, but the Fed has to stick to policy regime and stop hotdogging it all the time. Larry’s response as quoted hear does nothing to help Ezra avoid asking the same question again, or any other reporter reading the interview.
31. March 2022 at 06:10
In my opinion you are seeing the results of an issue which has been politicized (like most issues nowadays).
Decreasing nominal spending means less perceived ability for the party in power to enact their various programs without tax increases. Since most academics skew Democrat, they don’t want to arrive at this conclusion and therefore must explain away inflation some other way.
If a Republican were to magically become president tomorrow, we’d see a sudden change in opinion among economists. They’d want less “fiscal space” for the regime and would happily conclude our excess inflation is the result of excess stimulus.
Sad but true.
31. March 2022 at 06:14
As an aside, it’s been a while since you’ve been on a podcast I believe. Would be great to hear you debate some of these issues with an economist with differing opinions.
31. March 2022 at 07:22
Classical liberal, Good comment.
Will, Yes, the left is horrified by heterodox thinkers on global warming, and then embraces the Stephanie Keltons of the world.
Vince, You asked:
“You don’t suggest ignoring inflation, do you? What if inflation were 10% and real gdp were -5%?”
Of course I suggest ignoring inflation, and have been doing so for 13 years. The case you cite is a bad outcome, but it’s not bad monetary policy.
Jerry, I meant “above the socially optimal rate”. It is optimal to allow somewhat higher inflation during supply shocks, but not this high.
Or if you prefer, inflation due to excessive NGDP growth.
bb, I disagree with Summers on some details, but he gets the big picture right. I’d put more weight on monetary policy and less on fiscal policy, and I think the mistakes were made later than he does.
31. March 2022 at 07:40
Inflation is a monetary phenomenon. Inflation simply results from a long-term excessive flow of money relative to the volume of real output of goods and services offered in the markets.
If the FED wanted to stop inflation, it would raise the O/N RRP rate higher than .30%. The current level isn’t soaking up any more money.
31. March 2022 at 08:51
ssumner wrote: “Of course I suggest ignoring inflation, and have been doing so for 13 years. The case you cite is a bad outcome, but it’s not bad monetary policy.”
That’s contrary to the Fed’s legal mandate. Sounds impractical.
31. March 2022 at 08:59
Summers: “And so given what supply is, it’s the task of demand to balance supply. And if demand is greater than supply, then you’re going to have excess inflation and you’re going to have the problems of financial excess.” How does excess demand produce “financial excess”? We’ve had financial excess for years with zero inflation, so how in Summers’s telling has “financial excess” suddenly become a problemn caused by excess demand?
31. March 2022 at 09:11
Let’s make a TDS post about this.
Bush years: Financial crisis, endless wars, Putin in Georgia.
Obama years: Economy better but Putin invades Crimea.
Trump years: Economy fine, Putin holds his feet still.
Biden years: Stagflation, Putin invades Ukraine.
Oh those damn Trump years, the worst period America and the world has experienced. Ever.
31. March 2022 at 10:48
MSS1914 asks why the fed introduced IOR at the same time they were implementing QE.
The rationale that the Fed gave at the time was that QE would lead to negative interest rates if not accompanied by IOR. They never did explain how negative their models predicted rates would go, nor what the implications of negative rates might be. But, clearly negative rates scared them.
31. March 2022 at 11:50
It’s true that there are kooks on the left, like AOC, Bernie Sanders, etc., and they have very, very bad policy ideas. However, their intentions seem to be good, and I do think that’s worth something. They aren’t openly trying to undermine democracy, for example. That’s an extremely low standard, I realize, but it’s a standard nonetheless.
31. March 2022 at 15:32
Scott,
Just got around to listening to the interview, and it’s consistent with my experience that most economists sound much more thoughtful in interviews than they do in their writing. Krugman may be the truest case of this.
I do think you are letting him off the hook a bit.
1. He stated very clearly that the 2008 recession was caused by a financial crisis and explicitly said it was not due to monetary policy.
2. He failed to contrast the Fed’s response in 2020 to that in 2008, and more importantly he did not point out that America had a very small recession largely due to the fact that the Fed’s response up until some point in the last 12 months was very successful, and was successful because it had the properties of a monetary regime that was engaged in some form of level targeting.
3. He consistently refers to “controlling demand” but does so in a way is confusing, because he never uses the word nominal. At times, it sounds like he is avoiding the term, and take a very long path around it.
I agree with you more every year that a failure to discuss these issues in explicit nominal terms and specifically nominal demand causes a great deal of confusion.
I stick with my sympathy towards Ezra, because Larry did not provide answers that would enable Ezra to ask better questions in the future.
And again, he failed to asnwer Ezra’s basic questions:
1. Do stimulus checks doom us with inflation? No, unless the Fed signals it will tolerate higher inflation.
2. Does an expanded child credit doom us with inflation? No, unless the Fed signals it will allow inflation.
3. Does extremely low employment that includes our most marginal workers doom us to inflation? Same answer I think.
4. Does ever expanding wage increases doom us to inflation? Yes
I’m sure you would phrase that much better that me, but as a leftist I feel confident that those are the questions Ezra was asking. Larry had answers to each of them, but chose to go with a meandering and quite confusing answer instead. And I think those are actually very interesting questions.
I am probably reading too much into his words, but I think I could sum up most of his interview by saying “I correctly predicted that the Fed would allow inflation to become unpinned, because I correctly suspected that they don’t really believe in AIT. I also don’t believe in policy regimes, but I think my discretion is better than theirs.” I’m definitely reading too much between the lines, but that’s how it felt to me.
I’ve seen your interviews, and I think you would have answered Ezra’s questions in a way that benefited the listener much more.
31. March 2022 at 20:38
Vince, No, it’s not contrary to their mandate. If they kept inflation at 2% and unemployment soared, then they’d violate the maximum employment mandate. NGDP targeting is the best way to balance the two mandates.
Christian, This post is on monetary policy. Your monomaniacal obsession with Trump is getting kinda creepy.
bb, You said:
“1. He stated very clearly that the 2008 recession was caused by a financial crisis and explicitly said it was not due to monetary policy.”
Yes, but keep in mind that 99.99% of economists agree with him. So I’m not going to make a big deal about that issue.
I think this is a very good observation:
“I am probably reading too much into his words, but I think I could sum up most of his interview by saying “I correctly predicted that the Fed would allow inflation to become unpinned, because I correctly suspected that they don’t really believe in AIT. I also don’t believe in policy regimes, but I think my discretion is better than theirs.” I’m definitely reading too much between the lines, but that’s how it felt to me.”
1. April 2022 at 00:44
Scott, for the one millionth time, there is a big difference between those who describe themselves as anti-vaxx, and those who usually get vaxxed but don’t want the COVID vaxx. It’s not a subtle difference, so please stop confusing the two. There are more progressives that are part of the anti-vaxx movement than conservatives. In fact, the leader of the anti-vaxx movement is a radical progressive!
And progressives have never cared about science. They care about pushing their agenda, and will use science only when it benefits them. Harvard School of engineering says windmills have high cost impact on the environment, but that science is ignored by the progressives – especially progressives with clean energy stocks!
These are not your JFK democrats Scott. You are still living in 1960’s Camelot. These people want to destroy capitalism as a mode of production, and they are willing to do whatever it takes to accomplish that goal.
Vox is not known for their moderate views.
1. April 2022 at 06:58
Tim, When a new commenter shows up here with stuff like this:
“These are not your JFK democrats Scott. You are still living in 1960’s Camelot. These people want to destroy capitalism as a mode of production, and they are willing to do whatever it takes to accomplish that goal.”
Don’t expect to be taken seriously, or even for me to read your future comments.
1. April 2022 at 07:33
Doug M. re: “The rationale that the Fed gave at the time was that QE would lead to negative interest rates if not accompanied by IOR.”
The fact is that Zoltan Pozsar didn’t know a debit from a credit. The IOR caused nonbank disintermediation, where the size of the nonbanks shrank by 6.2 trillion dollars whilst the banks were unaffected (since 1933), growing by 3.6 trillion dollars.
The IOR was introduced contrary to Bagehot’s lending dictum. The IOR represented a penalty rate during deflation, whereas during Volcker’s years it was a subsidy during inflation.
1. April 2022 at 10:50
ssumner wrote: “No, it’s not contrary to their mandate. If they kept inflation at 2% and unemployment soared, then they’d violate the maximum employment mandate. NGDP targeting is the best way to balance the two mandates.”
You say ignoring inflation is not contrary to the Fed mandate, and then say inflation is one of the Fed’s two mandates. What percentages do you consider a good balance between the mandates?
1. April 2022 at 14:11
Commodity speculation is driven by LSAPs, coupled with the remuneration of IBDDs. If you suppress interest rates, money flows out of the bond market, to physical assets, to risk assets, e.g., real-estate, etc.
The recent intensification in inflation is due to the FED’s failure to maintain N-gDp. The first quarter would have been negative even without Covid-19. The contraction in N-gDp between 2018 and 2019 exacerbated the supply chain disruptions.
2018-07-01 3.3
2018-10-01 3.0
2019-01-01 3.7
2019-04-01 5.6
2019-07-01 4.1
2019-10-01 3.6
2020-01-01 -3.9
1. April 2022 at 14:43
Scott,
It was more about Bush/Obama/TDS/Biden, not only TDS, but I give you that you learnt from me what to say in the right moment. I remind you of that at your next TDS post. 👍
Let’s make a mixed monetary policy/TDS post then.
Bush years – Bernanke was fine with me.
Obama years – Yellen. You said her perfomance was good. Way too political and too partisan for my taste.
Trump years – Powell. Huge mistake in my opinion. A lawyer, are you kidding me? And I said that way before you did. If you ever did say it, idk.
Biden – Still Powell. No, thank you. Would Yellen currently perform better than Powell? I don’t think so, most likely even worse in this specific situation. At least Powell is not a politician.
1. April 2022 at 21:13
Vince, “What percentages do you consider a good balance between the mandates?”
The mandate is vague enough that NGDP targeting would roughly do the job. It puts equal weight on inflation and RGDP (and thus by implication employment.)
Christian, You said,
“And I said that way before you did. If you ever did say it, idk.”
About 2010, I did a post saying that the FOMC should be composed of nothing but our leading monetary economists, even if you had to pay them a billion dollars a year.
You have no idea how often commenters come on here with ideas they assume they thought up, which they forgot that they got from me. (And that applies to me too. I steal from others, and often forget doing so.)
1. April 2022 at 21:24
“Wait, I thought it was right-wingers who were the creationists, global warming deniers, the anti-vaxxers? I thought the left believed we should “trust the science”? Since when did progressive economists become the left wing version of QAnon?”
–Yes, but I think you mistake what is science. Students don’t argue with an astrophysicist. When the astrophysicist tells us there is gravity, and shows proof through observation and calculation, then students say “I understand”. When a Surgeon cuts open the head, and shows students the brain, explaining its parts and processes, students say “I understand”. When an economist says outsourcing is good for the economy, and Joe loses his job, and can’t buy food for his family, Joe says “WTF” is this dude talking about? When an economist says we can control inflation, but inflation is 9%, Joe says “dude, you haven’t a clue”.
Modern monetary economics is not a science! At best, managing the supply of money is an art. A dangerous art, best life to the invisible hand, and best left from the hands of a spendthrift government.
2. April 2022 at 06:57
Biden’s support of Zelenskyy will be our undoing. If Zelenskyy wants to be a martyr let him go it alone. Quintus: People should know when they’re conquered.
See Poszar’s Money, Commodities, and Bretton Woods III
https://plus2.credit-suisse.com/shorturlpdf.html?v=51io-WTBd-V
2. April 2022 at 07:12
I have a question about the U.S. dollar reserve currency status.
It appears the U.S. will lose that status shortly. Our inability to stay neutral during conflicts has now destroyed investor confidence; no investor wants their money or assets seized because they don’t share the same values, and so this sanction-happy, cancel-culture, has now isolated us from the global markets.
RU will most likely peg the ruble to gold in the coming weeks, along with demanding payment in Gold or Ruble, and others will follow.
How much do you economists think the dollar will devalue. 50%? 75%? What are your predictions?
2. April 2022 at 08:00
I am sympathetic. And then you look at the EU, and see that they also have very similar inflation to the US right now, also mostly driven by a few sectors.
So then we wonder how excessive the inflation is, whether the Fed and de ECB really have very similar policies right now, or whether the Fed is just so powerful and aggressive, and the ECB is just letting Fed policy’s effects happen in their turf, without trying to do anything to fight said excessive inflation.
2. April 2022 at 08:04
And if you were wondering, our good friends the Australians, masters of controlling inflation, expect to get to about 4% this year. So should we assume that they have the right policy, and that the extra 3-4% is the bad policy penalty?
2. April 2022 at 08:42
ssumner wrote: “The mandate is vague enough that NGDP targeting would roughly do the job. It puts equal weight on inflation and RGDP (and thus by implication employment.)”
Surely you exaggerate when you say to ignore inflation. Consider 1986 and 1957. NGDP was 5.5 both years, but inflation was 1.9 and 3.3 respectively. Meanwhile, unemployment was 6.6 and 5.2 respectively. The policy prescriptions should differ. Do you also suggest ignoring unemployment?
2. April 2022 at 12:06
Scott,
Hypothetical inflation question: If Jeff Bezos went to a small town in West Virginia and bought all of the goods in the store, does that create inflation?
What if he paid everyone in the town a $1 Million salary. Does that increase inflation in West Virginia?
2. April 2022 at 12:11
Inflation is always, everywhere, a lack of effective competition.
The state always buys things with new money and it generally doesn’t cause inflation. And that’s because of the competitive equilibrium and the state only buying what is available for sale that nobody else is demanding.
Firms don’t like to lose market share. If you have two hairdressers competing and one puts their price up, whereas the other works late at the old price, then the one working late (quantity expanding) will take market share from the other (price expanding).
What that tells us is that there must always be spare capacity to supply in all markets for prices to remain stable. If a firm tries to boost turnover by putting prices up, competition needs to ensure they fail in that attempt by losing more in market share.
In other words inflation is always, everywhere, a lack of competition.
Ask yourself this. Is anti-trust and anti-monopoly action strong at the moment or weak?
The state has another weapon in its locker. It just refuses to pay the higher price and waits. Taxes still have to paid at the same rate though so everybody will start to get short of money. That suppression of demand will force suppliers to lower their price to get money from government.
What that tells us is that government indexing payments causes inflation. They shouldn’t do that. Government should wait and let taxation and competition do their job of forcing the private sector price back down.
2. April 2022 at 12:27
But is the problem nominal spending shooting through the roof? Sure the % change from previous year shows a negative than a huge positive but when I look at the actual spending in billions of dollars:
https://fred.stlouisfed.org/graph/?g=NOj0
I’m seeing what seems to be a return to the trend line. I hate to say team transitory but that has to be a factor here. Everything shut down, perceptions changed, as things come back online you need to pull people back into the workforce but you also need to adjust the workforce to accommodate the shifts (for example, fewer waiters and more drivers since ordering out is now bigger than it would have otherwise been).
2. April 2022 at 16:24
As I condect my weekly review of forward market indicators, the oil futures curve is still significantly negative, and inflation expectations are still well above 2% going out 5 and 10 years. This seems to be more support for the idea that inflation expectations are too high, at least sans the implicit expectation for 5% NGDPLT.
As Scott has pointed out many times, there were periods during the Great Moderation during which there was something roughly approximating NGDP targeting. This was even true during the anemic recovery after the Great Recession. I was hoping that FAIT+ would allow for even longer such periods, with less volatility, but again, hope is not a plan. Given recent Fed moves, it’s obvious they do not intend to have a policy that implicitly leads to consistent 5% NGDP growth.
This speaks to the value of formal education and greater experience on the part of economists such as Scott. If Fed discretion is involved, better to have him run a monetary authority than someone like me. On the other hand, if I were running monetary policy, I’d just adopt Scott’s preferred rule-based policy anyway, and would not engage in discretion, unless inflation increased on a permanent basis, coupled with lower real growth, such that adjusting the NGDP target gradually down might make sense. That’s not really much discretion though. It’s just adjusting the target within the rule.
2. April 2022 at 16:34
By the way, for what it’s worth, I don’t think Scott was that late to the party. Summers and El Erian were right for the wrong reasons early on, so I don’t give them the credit that many others do.
I, on the other hand, am late to the party, having really begun to arrive a couple of weeks ago, after the risks of recession were already elevated. I still don’t think a recession is likely, but the probability is uncomfortably high.
3. April 2022 at 06:26
https://wolfstreet.com/2022/04/03/my-wealth-disparity-monitor-of-the-feds-money-printer-era-holy-moly-april-update-of-the-greatest-economic-injustice-in-recent-history/
We necessarily have regulated capitalism, not lassez faire capitalism. N-gDp level targeting doesn’t go far enough.
4. April 2022 at 04:03
Scott Sumner is a brilliant economist. Yet he ridiculed people like Peter Schiff who for years were warning about the dire consequences of loose monetary policy. To be fair, the piles of money printed during Covid and after came after the enormous printing during the Obama years when inflation was firmly under control. Peter Schiff was badly wrong in terms of the timing of inflation; but can Scott Sumner at least admit that he was wrong to downplay the impact of the massive expansion in money supply that has taken place in the last fourteen years?
4. April 2022 at 06:55
vince, Under a NGDP targeting regime, I’d favor keeping NGDP growth constant, regardless of inflation and unemployment. We were not under a NGDP targeting regime in either 1957 or 1986. You’d examine each case in the context of trend NGDP growth at the time.
Dr. Richards. No. The Fed creates inflation.
Theodore, Your second sentence is false. As for this:
“can Scott Sumner at least admit that he was wrong to downplay the impact of the massive expansion in money supply that has taken place in the last fourteen years?”
No, because I was correct. Inflation was low during the 2010s. Policy was excessive in the second half of 2021.
4. April 2022 at 09:34
Theodore Mavroidis,
Peter Schiff has been predicting hyperinflation ending in a total dollar collapse for at least 20 years. No one’s been more wrong than he has.
4. April 2022 at 18:08
Peter Schiff was badly wrong in terms of the timing of inflation
Just that? Let’s see:
Throughout the early 2000s Peter Schiff and his acolytes proclaimed an economic crisis was coming due to imminent hyperinflation. In 2007 he wrote “Crash Proof” in which he advised people to get out of the dollar before it plunged in value, and to get out of US stocks before the market collapsed. (And to get into foreign stocks — how was that supposed to work?)
In 2008 a crisis arrived due to deflation (the dollar going up in value) and negative interest rates. His acolytes cried out “See, he was right!”
From 2007-2021 the US had the lowest inflation in 60 years – and the US stock market more than doubled, the S&P 500 going from 2,000 to 4,500, +125%.
A blind squirrel finds more nuts.
5. April 2022 at 02:05
Andrew, probably not that high. I would predict 20-30% devaluation. If you are looking for an alternative, I would recommend the Singaporean dollar. Politically stable, neutral, and high growth country. It will surpass the U.S. dollar in the next decade.
“From 2007-2021 the US had the lowest inflation in 60 years – and the US stock market more than doubled, the S&P 500 going from 2,000 to 4,500, +125%.”
– Yes, but only because we printed our way out of trouble, and only because we used tax payer money to bail out the entire banking and insurance industry. Interest rates were also near zero. For investors living off dividends, equities were the only viable choice. That inflated the market beyond its intrinsic value.
Peter Schiff is simply pointing out that the dollar will collapse. Indeed, the word “soon” is extremely vague, but economists are not known for their preciseness. Is there anything more vague than Keynes “long run”? What the hell does that even mean? That is the very definition of a blind squirrel searching for a nut. Let us just say “long run” and then we’ll never be wrong. It’s the most bizarre theory in economics. I will never understand why that garbage won out over the Austrian school.
As Peter and other investors recognize, the value of fiat is predicated upon trust, and global trust in the dollar is waning. Corrupt politics, huge debt, cultural degeneracy, totalitarian foreign policy and CCP style domestic policy, is a warning to most of the world. The only reason the Yuan has not replaced the dollar is because the CCP is even more unstable. But other options exist. As we’ve seen in Nigeria and Costa Rica, BTC can easily replace the dollar. The lightening network solves the scale problem, and the federal government cannot steal from Americans through devaluation, stop free trade via sanctions, or fund their bank wars, when currency is decentralized.
Furthermore, elections and growth trends are proof of sentiment. Victor Orban dominated, because Hungarians want nothing to do with cancel culture, transgenderism in children’s books, and restrictions on their inalienable rights. Across the globe, you are seeing a total and complete rejection of corporatism and radical marxist socialism. Californians are fleeing the state. businessmen are flocking to Southeast Asia where they have more freedom and opportunity, and woke companies like Nike, Netflix, Twitter and Disney are losing support abroad and at home as people prefer merit to quota’s. I suspect the conservative party will win in a landslide. It will be a historic.
I would choose BTC over Gold, but Peter’s conclusions are correct.
5. April 2022 at 03:32
Hi Scott, What do you make of the RBA holding rates at 0.10%?
“The Board has wanted to see actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates.”
https://www.rba.gov.au/media-releases/2022/mr-22-11.html
5. April 2022 at 11:31
If you’re taking requests, I’d love to hear your reaction to John Cochrane’s steelmanning of the Fed’s recent behavior, against his instincts:
https://johnhcochrane.blogspot.com/2022/04/is-fed-fisherian.html
More generally, who makes the best case that the Fed’s recent (1 or 2 year) approach to controlling inflation is, well, pretty decent? (Irrespective of your overall disagreement with their argument, and the obvious fact that, at best, it isn’t working perfectly.)
5. April 2022 at 22:44
X2 on the request Dzhaughn made about Cochrane’s post.
Personally, I think the Fed should do two or three 50 bp hikes in a row and see what happens. And we have to hope that Putin doesn’t start nuking Ukrainian cities.
6. April 2022 at 06:42
re: “The usual wisdom says that to reduce inflation, the Fed must raise the nominal interest rate by more than the inflation rate.”
Cochrane is stuck. You don’t analyze inflation via interest rates, you analyze the impact interest rates have on the expansion or deceleration in the money stock.
6. April 2022 at 06:52
Ross, I’ll need to research that a bit more before commenting.
Dzhaughn, The mistake made by NeoFisherians is to assume that interest rates are monetary policy. In other words “reasoning from a price change”. A low rate policy can be either easy money (the US in 2021) or tight money (Japan.)
I think it’s pretty hard to defend the Fed’s decision to allow excessive NGDP growth and to abandon FAIT. Perhaps there is a good argument, but I haven’t seen it.
I do think inflation will eventually return to 2%, but I would not view that as success. Inflation is supposed to average 2%.
6. April 2022 at 08:20
How does Klein influence any of this? How do we even know Powell wants to run the economy hot for the same reasons Klein wants to run the economy hot? And I guess, other than at the margins, Biden really plays virtually no roll either in my estimation.
If they’re all in cahoots so to speak, I certainly would like to understand the mechanism(s). Otherwise, I’m inclined to just say Klein is wrong but powerless, Biden could have done some marginal stuff, and the real blame sits with Powell and the FED power structure.
6. April 2022 at 09:16
Few people in life are as wrong as often as Peter Schiff. I will never understand why people take fools like him seriously.
Also, LOL @ people thinking the dollar is about to devalue by 25-75%.
6. April 2022 at 13:57
re: “I do think inflation will eventually return to 2%,”
I’ll take that bet. Stagflation will persist longer than expected.
6. April 2022 at 14:01
Okay Scott, you won, I’ll leave it at that because it’s such a nice reflective comment.
8. April 2022 at 05:56
You’ve got to like Jeffrey Sniders take:
https://alhambrapartners.com/2022/04/07/every-time-debt-ceiling-impacts-collateral-producing-inevitable-deflationary-currency/
Repo fails signal a deceleration.
8. April 2022 at 07:24
Scott – Are you familiar at all with Jeffrey Snider’s work (Spencer’s a Bradley Hall linked to a piece of his above)?
Would be interested to get your take on his general view (I’m paraphrasing here) that the Fed does not and cannot create inflation, because the Fed cannot create the monetary unit that is usable to non-banks. I.e. they can only create bank reserves.
Member banks are the primary driver of money creation, which only occurs when bank reserves are transformed to deposits via credit creation/lending.
As you know, the Fed created a ton of bank reserves, however, those reserves in large part have not been transformed, so therefore, the “inflation” we are seeing is not monetary in nature (and therefore not really inflation) and instead driven by good ole exogenous supply shocks.
Would love to get your views. Thanks.
8. April 2022 at 12:11
Nick, I just wrote a book explaining why that view is wrong, and have about 100 blog posts saying the same.
BTW, the Fed can create currency.
9. April 2022 at 06:58
Sumner’s got too many “irons in the fire”. Snider is fixated on E-$s. The E-$ market has been in contraction since 2007. The E-$s demise is about its wholesale funding changes. Bernanke first destroyed MBS values. Then he destroyed all of the short-term funding, in the borrow short to lend longer, for the resulting toxic assets. I.e., Bernanke destroyed both sides of the ledger.
Basel III’s LCR, and Sheila Bair’s assessment fees on foreign deposits, changed the landscape of FBO regulations. It helped make E-$ borrowing more expensive, less competitive with domestic banks (the exact opposite of the original impetus that made E-$ borrowing less expensive, when E-$ banks were not subject to interest rate ceilings, reserve requirements, or FDIC insurance premiums).
There is no IOR in the E-$ market. Can’t you hear the sucking sound? The only reason for the US $s continued dominance, and not an absolute free fall, is the decline in Snider’s international units of accounts.
9. April 2022 at 12:21
Scott – You said “BTW, the Fed can create currency.”
Yes, but unless I’m missing something, this can only be done when a member bank requests to convert its reserves to cash. The Fed does not have a conventional mechanism to create AND distribute currency to non-banks. The only way for them to do this, is via an unconventional “helicopter money” type program, which would require collusion with government fiscal policy makers (govt spending financed with monetized debt) or direct transactions with private sector parties (although we may already be there considering the Fed now allows private money market funds to access the reverse repo facility, effectively increasing non bank deposits directly).
9. April 2022 at 14:31
Nick, The Fed always has the option of stopping the payment of IOR, or even making the rate negative. Before 2008, banks held only a tiny about of non-cash reserves, barely 2% of the monetary base.
The Fed can control the currency stock if it wishes to.
10. April 2022 at 15:42
Scott – Not sure exactly what your point is here, unless you’re saying that the Fed can “force” banks to lend by charging a negative IOR? If this was the case, banks would just charge even more negative rates on deposits or shift from reserves to perhaps holding other sovereign debt.
Yes, the Fed has the option of toying with IOR and the rate on RRP, but that doesn’t mean that the market will respond with money creation. As you can see now, 4-week tsy bills are trading INSIDE of both the RRP facility rate AND IOR. Why would anyone pay up for a 4 week tsy bill when you could lend on a completely risk free basis to the Fed? Because there must be reasons NOT related to returns on the investment itself that the market is paying up for (I.e. physical collateral is king). The Fed doesn’t not have nearly as much control over the money supply as one would think.
Banks create money, not the Fed. The Fed creates reserves.
14. April 2022 at 08:24
Nick, The Fed creates base money. Prior to 2008, 98% of base money was currency. Prior to 1913, 100% was currency. I’d encourage you to go back and look at how the Fed used to operate. There are many ways to do monetary policy, not just the (floor) approach adopted in 2008.
19. April 2022 at 09:39
Hey Dr. Sumner! In the case of NGDP level targeting how would the Fed’s response have been different during the pandemic? I’m sure you have written about this before. If so could you point me to that article? Specifically, you have alluded before to how NGDP level targeting is able to differentiate between supply shocks and demand shocks (how exactly?). As the pandemic caused a supply shock rather than a demand shock (or if anything artificially causing a demand shock through lockdowns) the Fed should not have acted as drastically. In this case should the Fed have acted at all?