Yikes! We are growing way too fast

Another day, another data point showing an economy dangerously overheating. The economy grew at a 6.4% annual rate in the first quarter, a rate far too high to achieve the Fed’s inflation goals. Given that we are already overheating, we need a period of below trend NGDP growth. Over the past 12 months, NGDP grew by 10.6%.

Some bureaucrats working at a place called the “Bureau of Economic Analysis” came up with a different estimate of economic growth—minus 1.4%—using a murky and hard to understand set of statistical manipulations. But real people don’t spend BEA data points, they spend current US dollars. And that spending is rising way too fast.

In the past, I’ve argued that the health of the labor market depends more on NGDP growth relative to trend than on so-called “real” GDP. The first quarter was an almost perfect example. Notice that (payroll) job creation was at a blistering pace in the first quarter of 2022, growing by almost 1.7 million. Who are you going to believe, me or the BEA (and the economic establishment that supports them?)

How many times to I have to say this: It’s all about the NGDP.



79 Responses to “Yikes! We are growing way too fast”

  1. Gravatar of Capt. J Parker Capt. J Parker
    28. April 2022 at 06:40

    When I saw the WSJ headline the first thing I did was come here. Naturally, we want to believe you. But, there a scenario where, or a model that predicts an overheated economy results in less real output? Real GDP, we are told, moves with nominal GDP. Is the headline RGDP number we are seeing simply a reflection of the difficulties with measuring RGDP?

  2. Gravatar of Philo Philo
    28. April 2022 at 06:41

    “Given that we are already overheating, we need a period of below trend NGDP growth.” I don’t get it; why not move immediately to trend growth, and keep that up forever? The past is irrelevant (except insofar as it is used to establish the trend the Fed will take as its objective); the future is all that matters.

  3. Gravatar of Capt. J Parker Capt. J Parker
    28. April 2022 at 06:42

    Correction: is there a scenario where, or a model that…

  4. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. April 2022 at 06:49

    Gross Domestic Product: Implicit Price Deflator (A191RI1Q225SBEA) =8%

    The monetary “punch” has grown since the pandemic. The percentage of transaction deposits to savings deposits has risen from 1.27% to 1.49%.

    The economy is being run in reverse. Lending by the Reserve and commercial banks is inflationary. Whereas lending by the nonbanks is noninflationary (other things equal). In fact, if savings are not expeditiously activated, then a dampening economic impact is generated.

    The solution is to drive the banks out of the savings business, increasing velocity, while at the same time the FED drains the money stock. The 1966 Interest Rate Adjustment Act is prima facie evidence.

    Link: https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_review/1978/pdf/er640602.pdf#:~:text=Congress%20reacted%20to%20these%20concerns%20in%20September%20of,interest%20rate%20ceilings%20to%20the%20thrift%20insti-%20tutions.


  5. Gravatar of rayward rayward
    28. April 2022 at 07:04

    Asset prices are starting to flatten, which is the signal that consumption will too. What we don’t want to happen is falling asset prices, the risk that Powell understands. Falling asset prices may be inevitable, but there’s no good reason to push them over the cliff. But the potential dynamics make predictions of the future more challenging than usual, with a hot war in Europe, a trade war in Asia, and political war domestically.

  6. Gravatar of ssumner ssumner
    28. April 2022 at 07:28

    Captain, You asked:

    “Is the headline RGDP number we are seeing simply a reflection of the difficulties with measuring RGDP?”

    Probably yes in this case, although the two don’t aways move in tandem due to supply issues.

    Philo, No, the past matters with level targeting, or average inflation targeting.

  7. Gravatar of Todd Ramsey Todd Ramsey
    28. April 2022 at 08:15

    Scott, what do you think an optimal 2022 Q1 Quarter over Quarter NGDP growth would have been?

    To achieve 5% YOY NGDP growth in Q1 2022 would have required NGDP to decline 3.4% Quarter over Quarter.

    Wouldn’t such a rapid decline in NGDP be recessionary?

    After inflationary overshoots like 2021, wouldn’t targeting the NEXT two, five, ten (or whatever) years make a soft landing more likely? FAIT always only forward-looking, not trying to remedy inflationary mistakes of the past?

  8. Gravatar of Todd Ramsey Todd Ramsey
    28. April 2022 at 08:19

    Scott, you responded to Philo while I was typing.

    What chapter in The Money Illusion explains why the past matters in level targeting or AIT? I want to understand better. Thanks.

  9. Gravatar of MIchael Sandifer MIchael Sandifer
    28. April 2022 at 09:15

    Yes, and real GDP growth is usually low or negative in the first quarter. What matters is the expected NGDP growth path. That’s still above the pre-pandemic path, so for those who think that is the standard by which we should judge the stance of monetary policy, it’s clear policy must tighen further, though not necessarily so suddenly.

    I was of the opinion that real GDP potential was higher than 2%, but markets are saying that real potential is below 2%, going out years.

    But, even if that were not true, since we’re not level targeting NGDP, the above-trend growth has proven to be a problem, and was theoretically a problem all along. I failed to appreciate that latter fact, until maybe a month ago.

    I still favor level targeting NGDP at 5%, but I’d look closely at lowering that target if real GDP growth continuously disappointed. That’s another way of saying that I’m still optimistic about hugher real growth in the longer run, after the supply-side problems ease.

    28. April 2022 at 09:23

    Scott, did a podcast covering lots of Sumner stuff you’ll enjoy here:


    On topic – even MMT is learning fiscal policy itself ALWAYS has to worry about RGDP vs Inflation.

  11. Gravatar of ssumner ssumner
    28. April 2022 at 09:54

    Todd, 3% NGDP growth annual rate in Q1.

    I don’t recall the chapter, perhaps the one advocating NGDP level targeting?

  12. Gravatar of Todd Ramsey Todd Ramsey
    28. April 2022 at 10:27


    Is 3% annual growth rate in Q1 optimal because you believe in 3% – 5% guardrails?

    So 3% is the lowest the Fed should go after a period of inflationary overshoot?


  13. Gravatar of Tacticus Tacticus
    28. April 2022 at 10:28

    Lowered my NGDP forecast from 9.5% to 8.5% for the year on Hypermind. Had been thinking around 4% real, 5.5% inflation; now thinking 2% real, 6.5% inflation. They have no idea what they’re doing.

    Meanwhile, the NYTimes is blaming higher imports, apparently.

  14. Gravatar of ssumner ssumner
    28. April 2022 at 11:01

    Todd, I picked a number that I thought was low enough to unwind some of the overheating, without triggering an outright recession.

  15. Gravatar of Sean B Sean B
    28. April 2022 at 11:16

    Argentina has great NGDP (in pesos) but a terrible employment picture / labor market.

  16. Gravatar of ssumner ssumner
    28. April 2022 at 11:39

    Sean, You said: “Argentina has great NGDP (in pesos)”

    No, it doesn’t. Argentina’s NGDP growth rate is wildly excessive. That’s why they have so much inflation. Something closer to 4% NGDP growth would be optimal.

  17. Gravatar of Philo Philo
    28. April 2022 at 12:14

    The past matters for average inflation targeting, but not for level targeting, which I thought you were relying on for this post. (For level targeting all that matters is the expected (future) level.)

  18. Gravatar of Todd Ramsey Todd Ramsey
    28. April 2022 at 13:02


    What do you consider the optimal Quarter over Quarter NGDP growth rate for 2022 Q2?

    And for YOY 2023 Q1?

    Thank you!

  19. Gravatar of Mark Z Mark Z
    28. April 2022 at 13:03

    I join Philo in not understanding why deviating in the opposite direction of a previous deviation is necessary. How does overcorrecting help anchor expectations? Why is a central bank that runs the economy hot at 5% one year, then overcorrects to 3% the next year have more credibility going forward that it will it will keep NGDP at 4% going forward than a central bank that doesn’t overcorrect and just targets 4% immediately?

  20. Gravatar of ssumner ssumner
    28. April 2022 at 13:15

    Philo, The past matters under LT because it affects the growth rate needed to get back on track.

    Todd, Somewhere around 3% would be fine, for both your questions.

    Mark, A level targeting regime leads to smaller shocks, smaller deviations from trend. It tends to stabilize the economy.

  21. Gravatar of Sean Sean
    28. April 2022 at 14:22

    I’m behind on the data. We are at 10.5% ngdp? Target I assume is around 5-6% for 2% inflation if productivity is normal and around 1.5-2?

    My prior bias was we around 1.5 excess demand growth.

  22. Gravatar of Zachary Bartsch Zachary Bartsch
    28. April 2022 at 17:01

    Why say ‘so-called’ RGDP?
    Is it because it’s derived from expenditure and prices measures?
    Or is it something else?

  23. Gravatar of sd0000 sd0000
    28. April 2022 at 18:55

    Pathetic displays from all the central banks:


    Australia is out of its mind.

  24. Gravatar of Bob Bob
    29. April 2022 at 05:51

    For America, yes. For certain small countries, parts of NGDP (and regular GDP) probably shouldn’t count. Tax evasion schemes, which arem in practice-having minimal effects in the local economy vs their NGDP weight, will give you a different picture of Ireland than on the ground. Far less of an issue in the US or Germany though.

  25. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. April 2022 at 06:27

    There are more benefits to N-gDp targeting than I originally thought. It will flatten the oscillations / injected disturbances.

    Sniders prescient.

    “It’s not really about the “unexpected” minus sign, the overall -1.42%, rather how such weakness beyond inventory has been there for now spanning three-quarters of a year.”

    That tracks the 10-month rate-of-change in money flows, the proxy for real output. The 4th qtr. was an outlier, reflected delayed / saved stimulus spending.

    The 10-month roc in money flows turns up in the 2nd qtr. But the 24-month roc remains too high.

  26. Gravatar of David S David S
    29. April 2022 at 07:18

    I had always wondered what an overheated economy would be like—now I know. Since I’m a historicist/chartist on occasion, I wonder if domestic politics and the economy over the 2 years will resemble 1946-1948 or 1990-1992. I’m inclined to pick the early 90’s—NGDP will run hotter than it should but there will be a return to consistency. For the moment, I’m not going to bet against Tacitus on Hypermind. I’m guessing that the composition by year end will be 3% RGDP growth and 5% PCE inflation. I’ll probably be wrong.

    Some false and or dumb headlines I’ve been seeing consistently in the news:

    -We are in another housing bubble

    -The housing bubble has popped and is crashing (or is about to)

    -Russia has a plan for the war in Ukraine

  27. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. April 2022 at 14:03

    Powell: “It may be that the actual peak was in March, but we don’t know that and so we’re not going to count on it.”

    Johnny Come Lately. No plan. No model. No N-gDp target. Flying by the seat of his pants.

  28. Gravatar of Rodrigo Rodrigo
    29. April 2022 at 19:04


    It feels like the market is pricing in a massive policy mistake, granted one already happened by allowing inflation to run wild but going forward what is the market looking at? That the fed will take too long to get inflation under control? Or that it will at a massive cost? Either way should it not be a given that they will control inflation sooner or later (if they really want to)? Or is this correction simply a technical repricing of assets due to a realization we are in for a higher rate environments for longer than people realize?

  29. Gravatar of Jeff Jeff
    29. April 2022 at 19:45

    My intuitive aerodynamics model is that an economy with low interest rates, sky high asset prices, and massive debt is always going to be flying in the equivalent of “coffin corner.” https://en.m.wikipedia.org/wiki/Coffin_corner_(aerodynamics) Just a hair faster and you rip the wings off (Argentina), just a hair slower and you stall out (Japan). Pick your peril but there’s no easy way down.

  30. Gravatar of William Peden William Peden
    30. April 2022 at 05:33

    I think that inflation has already benefited the right, and will continue to do so. For example, insofar as taxes are not indexed to inflation, high NGDP growth pushes people into higher tax brackets. It also makes savers more worried and more keen on parties that will cut/not raise taxes on capital. Finally, it blocks Keynesian reasoning and makes the crowding-out hypothesis apply: what the government spends/borrows is at the cost of private spending/borrowing.

    Just as deflationary conditions are good for the left, inflationary conditions are good for the right. The Great Depression gave the world the New Deal, Swedish social democracy, the Post-War Settlement, and the USSR as the place where “I have seen the future and it works.”

    The 1970s inflation gave the world Reaganism, Thatcherism, and similar variants even in places like Australia/France that had left wing leaders.

  31. Gravatar of ssumner ssumner
    30. April 2022 at 07:59

    Zachary, The government doesn’t know how to measure the price level. Nor do I. Nor does anyone.

    Bob, Yes, but rates of change in NGDP are still useful, even if the total is off by a certain percentage.

    Rodrigo, Many factors impact the market. War, Covid in China, recession fears, public policy, tech earnings, etc.

    William, The Depression also gave us Hitler.

  32. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. April 2022 at 10:32

    Interest is the price of credit. The price of money is the reciprocal of the price level.

    Powell: “That classic relationship between monetary aggregates and economic growth and the size of the economy, it just no longer holds. We have had big growth of monetary aggregates at various times without inflation, so something we have to unlearn.”

    Monetary Policy Rules, the Effective Lower Bound, and the Economic Recovery


    The Keynesian economists have achieved their objective, that there is no difference between money and liquid assets.

  33. Gravatar of William Peden William Peden
    30. April 2022 at 16:07


    In his economic policies, Hitler wasn’t very different from a social democrat: expand demand, government mobilization, but all within a mostly market economy. It’s misleading to say that he was a socialist, but he also wasn’t conventionally right-wing on economic issues, especially by the standards of the 1930s.

  34. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. May 2022 at 07:52


    Hetzel: “To control inflation, the FOMC must control the growth rate of nominal GDP relative to the growth rate of potential real GDP. Figures for GDP are available only with a long lag and are subject to revision”

    So, we need hypermind predictions.

    Hetzel: “Another characteristic of the FOMC’s Keynesian framework is the assumed transmission of monetary policy through the influence exerted on financial intermediation. That is, monetary policy works through its influence on the cost and availability of credit…
    Effectively, the FOMC managed a search procedure by the bond markets for the natural rate of interest.”

    Never are the banks financial intermediaries in the savings-investment process. The utilization of bank credit to finance real investment or government deficits does not constitute a utilization of savings since financing is accomplished by the creation of new money. Savings are not synonymous with the money supply.

  35. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. May 2022 at 09:07

    Imports subtracted -3.2 percentage points from the GDP in the 1st qtr. The FED monetized 75% of all new Treasury issuance over the last 24 months. M2 grew at a blistering 36% rate over the last 24 months.

    The money stocks rate of growth must be drastically cut over the next 24 months.

  36. Gravatar of ssumner ssumner
    1. May 2022 at 09:07

    William, Yes, Hitler believed in a mixed economy, but that has no bearing on whether he was an extreme right-winger. The extreme right does not believe in free markets, and never has. Hitler was a fascist. Fascists are not libertarians.

    Politics does not lie along a left/right linear spectrum.

  37. Gravatar of anon anon
    1. May 2022 at 18:41

    ssumner, how does one aver that there are no bubbles but there is overheating.

  38. Gravatar of Bolo man Bolo man
    2. May 2022 at 03:06

    The reson is very simple. When you measure everything by wrong currency which is systematically depreciated regardless market value of USD, you are in Matrix seing everything is rising. Only figures are higher, not the fundament. GESARA is a general change all of the financial Matrix. WG1WGA…

  39. Gravatar of Bolo man Bolo man
    2. May 2022 at 03:21

    Simply said, everything measured with USD is crucially overvalued and seem raising. Look at the substance of economy and money – the first is a factory of lies and trade cheatings, the latter an instrument of market exchange used as a systematically devaluated commodity. Take the red pill! WG1WGA…

  40. Gravatar of Michael Rulle Michael Rulle
    2. May 2022 at 06:19

    The more I read the less I understand. Today’s example—-“no one knows how to measure price level”. While I am open to believing that (why not?), how do we measure inflation? To quote the Federal reserve

    “Inflation is the increase in the prices of goods and services over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy”

    Maybe you are referring to how we weight goods and services nd its difficulty—or maybe we do it wrong all the time but we do it wrong consistently

    –still–it does feel like intellectual “nihilism”

    As I said, each day, unrelated to age (its own issue) I feel like I know less.

  41. Gravatar of ssumner ssumner
    2. May 2022 at 07:25

    anon, Asset markets are efficient and labor markets feature sticky nominal wages. If stock prices were sticky then you could have stock bubbles.

  42. Gravatar of Robert Robert
    2. May 2022 at 16:03

    A bit of a humorous representation of the issue, but I find his tweet here good. It’s funny how people get antsy about recession when Fed policy is off course, yet a portion of those people might be resistant to market monetarist views.


  43. Gravatar of ssumner ssumner
    3. May 2022 at 07:27

    Thanks Robert.

  44. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    3. May 2022 at 11:57

    “The number of job openings jumped further into the astronomical zone, to a record 11.55 million (seasonally adjusted) at the end of March, up by 36% from a year ago”

  45. Gravatar of Stephen Youtzy Stephen Youtzy
    3. May 2022 at 21:19


    I’m a practical guy. I wish you talked more about what specifically you would do besides saying NGDPPLT. I know that is all the fed needs to do, but since they won’t do it, what policies should they do under their current framework to meet quasi price level targeting.

    So today jpow comes out. Last meeting you said you wanted 50 BP instead of 25. I assume this time you want 75 or 1?

    Obviously them just saying “well do whatever it takes to hit 5%” would be a dream, but that’s not happening so I’m curious as a money illusion newbie what I should be “cheering for”.

  46. Gravatar of Effem Effem
    4. May 2022 at 11:19

    Today was one of the silliest Fed press conferences i’ve heard. This is not a central bank that is serious about tackling inflation. They seem much more concerned with not upsetting asset markets – which is what Fed critics have claimed for decades.

  47. Gravatar of bill bill
    4. May 2022 at 13:10

    I noticed this in the FOMC statement:

    To ensure a smooth transition, the Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves.

    What might this mean for interest on reserves? I couldn’t even find the interest on reserves in their statement which is so odd given how much more important that number has become compared to the Fed funds rate.

  48. Gravatar of ssumner ssumner
    4. May 2022 at 14:00

    Stephen, If not NGDPLT, the FAIT would be a good second best. The Fed indicated they would do that policy, and then abandoned the policy. Big mistake.

    They need to tighten policy by more than markets currently expect.

    Bill, I presume the IOR is roughly the same as the fed funds target.

  49. Gravatar of Todd Ramsey Todd Ramsey
    4. May 2022 at 14:32

    10 year Treasury rate fell by 800 basis points and 10 year TIPS rate fell even more, immediately after Powell said a 75 bps hike was off the table.

    Why? Doesn’t a Fed statement that they won’t have unexpected rate increases raise the market’s inflation expectations?

    Can someone explain why this might have happened?

  50. Gravatar of Stephen Stephen
    4. May 2022 at 16:39

    Thanks for the reply. Comments from today’s meeting? He said good things about Volcker and the importance of expectations that they were going to tighten. On the other hand them saying that 75 points was mostly off the table at this point isn’t probably what you wanted to hear though either.

  51. Gravatar of ssumner ssumner
    4. May 2022 at 17:22

    Todd, What happened to the TIPS spread?

    Steve, I don’t think anything changed, they are still behind the curve.

  52. Gravatar of Todd Ramsey Todd Ramsey
    4. May 2022 at 20:20

    (Oops, I meant 8 basis points.)

    TIPS spread widened (I think); that seems in line with increased inflation expectations.

    Why would the 10 year Treasury rate fall?

  53. Gravatar of Jeff Jeff
    4. May 2022 at 20:34

    >Why would the 10 year Treasury rate fall?

    Belief there will be enough interest rate repression over those 10 years that it’s better than waiting for a better deal?

  54. Gravatar of Tacticus Tacticus
    5. May 2022 at 01:18

    From what I understand from trading desks, a large number of hedge funds were short Treasuries, betting that Powell would announce a 75 bp increase. When Powell came out more dovish than they expected, they quickly covered, sending the yield down.

    I’m not sure that explains the full story, but something to keep in mind. Will be interesting to see where the yield ends the week.

  55. Gravatar of Effem Effem
    5. May 2022 at 03:18

    BoE also demonstrating today they are comfortable being behind the curve. It can’t be a coincidence that nearly all major central banks are comfortable being slow to act against high inflation.

    It’s time the Economics profession accepts that there is a fundamental asymmetry in monetary policy. Extreme measures in the face of below target inflation are seen as having “the courage to act.” Extreme measures in the face of high inflation are seen as too risky and are “not considered.”

    Any future target will have to account for such asymmetry. eg, If you want 4% NGDP growth, you’ll need to actually target 3.5%.

  56. Gravatar of Todd Ramsey Todd Ramsey
    5. May 2022 at 04:59

    Thanks Tacitus, that’s a plausible explanation.

  57. Gravatar of David S David S
    5. May 2022 at 06:09

    I’m bothered by the phrase “inflation is flattening”—because that implies we’ve reached a permanently high plateau of price increases. We need inflation to be going DOWN, not sideways.

    Saying that a 50bp is the hike limit is like an artillery commander saying he can’t use high caliber rounds on the advancing enemy.

  58. Gravatar of Tacticus Tacticus
    5. May 2022 at 06:30

    David, we can’t use high calibre rounds on the enemy, that’ll scare our horses!

  59. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    5. May 2022 at 06:56

    What’s R * now? The optimal collaborative problem-solution is to target future N-gDp.

    Powell is a banker’s banker. This prevents him from draining the money stock, and at the same time releasing monetary savings (savings impounded in the payment’s system). The 1966 Interest Rate Adjustment Act is the model.

    Interest is the price of credit. The price of money is the reciprocal of the price level as determined by American Yale Professor Irving Fisher’s truistic “equation of exchange”.

    Link bank debits to deposit accounts. Money flows are mathematical constants.

    You can see the same cycles with required reserves, contingent on the prior money multiplier. That’s how I predicted both the flash crash in stocks on May 6, 2010 and the flash crash in bonds, on October 15, 2014.

  60. Gravatar of Virginia Virginia
    5. May 2022 at 07:39

    Yeah Yikes!

    We have negative growth, lower real wages (nominal is up), are 30+ trillion in debt, and have the highest trade deficit in history, which means we don’t manufacture anything anymore.

    But you think we are “growing too fast”? So cute. Growth, in your view, must mean the money you forcefully injected, which permitted poorly run, insolvent companies, to hang around the market place slightly longer using tax payer dollars. Trust me. It didn’t help. Those guys will all file for bankruptcy once the middle class tax payer distribution (you call it stimulus) runs out.

    I respect financial professionals in the banking industry who devise products for their clients, but gosh, I have no respect for economists. You guys are like roaches. Slippery, egotistical, always plotting in the shadows, and a tremendous nuisance.

    You should all just drop the pretentious and useless economic modeling, and return to your roots. I.e., Philosophy/politics, and get away from controlling money and regulating industry. Let the entrepreneurs/banks handle their own risk, and if they fail, then fuck it. They failed. Better luck next time. We need more Adam Smith’s, and fewer Ben Bernanke’s. We need more classical economists, and fewer Keynesian mega losers.

  61. Gravatar of ssumner ssumner
    5. May 2022 at 07:41

    Virginia, Um, did you read the post?

  62. Gravatar of sd0000 sd0000
    5. May 2022 at 08:22

    @Todd – 10 year fell hard, 30 year fell less, TIPS spread increased. Doesn’t that imply market baking in higher probability of near-term recession due to Powell’s comments?

  63. Gravatar of sd0000 sd0000
    5. May 2022 at 08:33

    Actually I guess S&P increased significantly during that same period…

    Also just looking now – 10 year TIPS shortened, not widened

    So Powell says “75 bps off the table”…

    10 year falls a lot
    10 year TIPS shortens
    30 year falls (but less than 10 year)
    Stock market surges

    Also just looked at CME Fed Funds Future probabilities – likelihood of future rate hike also fell across the boards..

    Scott: how do you interpret that? I have no idea.

    Stock market increasing implies good for economy. TIPS shortening means disinflationary… but Fed Funds Future probability decreasing means…lower Fed Funds rates.

    Only way I can interpret is market is too spooked by hard landing? Wouldn’t that go against your argument that Fed should tighten more than market is expecting?

  64. Gravatar of sd0000 sd0000
    5. May 2022 at 08:40

    Actually my mistake – 10 years TIPS did *increase* slightly.

    So greater inflation expectations… lower real growth, but higher stock prices?

    My head hurts.

  65. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    5. May 2022 at 10:40

    @sd0000 We are in the 3rd Elliott Wave down, the biggest drop.

    In the late 1970’s, a surge in money was associated with a subsequent surge in the transactions’ velocity of funds. That appears to be the case in 2022.

    Vi is a “residual calculation – not a real physical observable and measurable statistic.” I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M).

    Income velocity has moved in the opposite direction as the transaction’s velocity of money, as in 1978, where all economist’s forecasts for inflation were drastically wrong. Income velocity falls as the proportion and volume of savings increases in the payment’s system.

    You would have to segregate and weight the various aggregates, like the Divisia Monetary Aggregates Index does, in order to determine monies impact. Center for Financial Stability (CFS)

  66. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    5. May 2022 at 13:02

    As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”

    As Dr. Philip George says: “When interest rates go up, flows into savings and time deposits increase.”

    So I think we should watch the growth in large time deposits for any deceleration in Vt:
    Large Time Deposits, All Commercial Banks (LTDACBM027NBOG)

  67. Gravatar of c8to c8to
    5. May 2022 at 16:23

    I think asset prices dropping will cause a panic and people will pull money out of the market and stick it where? Maybe not even in bonds for animal sentiments reasons and just hold money in deposits – banks won’t necessarily lend this because there’s no real returns anywhere (at least not perceived)

    The real economy will see these financial tremors and velocity will collapse – low labour forcé participation will persist. Inflation – whatever – that is – will go up as the fed is forever backwards looking. I think real wealth will drop – hours worked for your Big Mac.

    I don’t know what will pull us out of this – first the fed stabilizing prices late – but also a long period of low asset prices and doom and gloom. The swings and roundabouts suck because people watch the finance sector – we should censor the Dow lol.

    I think 2-5 years of no growth with a recession at the beginning of this until people feel optimistic again.

    History first as tragedy then as farce.

  68. Gravatar of Jim Glass Jim Glass
    5. May 2022 at 17:10

    the highest trade deficit in history, which means we don’t manufacture anything anymore.

    Actually manufacturing has post-pandemic just risen to equal the highest level since the 2008 Great Recession, which is the second-highest level ever, all-time.


    The trade deficit means people are making purchases like crazy. Perhaps that is because they are so poor.

  69. Gravatar of sd0000 sd0000
    6. May 2022 at 04:14

    @Spencer – no idea what you’re saying. In the 10 year there’s embedded real growth and inflation. A widening in TIPS and a fall in 10 year means that real growth expectations * fell more than inflation* when the Fed took 75 bp hike off the table. That makes sense to me.

    BUT that was combined with equities surging at the same time. (IF i’m looking at all the data correctly). I don’t know how to square that circle. Wondering if Scott does.

  70. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    6. May 2022 at 06:37

    @sd0000 Link: https://danericselliottwaves.org/

    M2 is now about $4.8 trillion larger than it would have been with a continuation of 6% annual growth…Money demand (M2/GDP) is a decent proxy for the percent of the average person’s annual income that he or she wants to hold in the form of cash, checking and savings accounts (which together comprise M2, the sum of all readily-spendable money). For many years the country’s currency and bank deposit holdings were 55-60% of annual income. Yet now they are a staggering 90%”

  71. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    6. May 2022 at 10:18

    Milton Friedman wrote Leland Pritchard a letter, see Hoover Institution.

    All deposit taking, money creating financial institutions, should have uniform legal reserve requirements, for all deposits, in all banks, irrespective of size, both as to types of assets eligible for reserves, as well as the level of reserve ratios. There is no reason for differential reserve requirements in the first place (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959).

    Nobel Laureate Dr. Milton Friedman argued that “there is a continuum of assets possessing in various degrees the qualities we attribute to the ideal construct of ‘money’ and hence there is no unique way to draw a line separating ‘money’ from ‘near-moneys’” (1960, p. 90). (or money products from savings’ products)

    “According to Dr. Milton Friedman, the main reason for the non-neutrality of money in the short-run is the variability in the time lag between money and the economy.”

    China rose reserve ratios to stop excessive growth:

    As David STockman says, raising rates will crater the interest on the deficit:

  72. Gravatar of sd0000 sd0000
    6. May 2022 at 15:06

    Here’s a mystery for you, Scott.

    Govt bond yields are driven by:

    1. Inflation expectations
    2. Real growth rates
    3. Probability of default

    TIPS strips out #1 and gives you a good read of 2 + 3.

    Since the pandemic, TIPS yields have been negative. i.e. implying negative real growth rates (since default probability by definition can’t be <0). Yet equity markets soared almost all of 2021. What explains that? Is there some kind of hidden asset inflation that isn't picked up in the TIPS inflation adjustment?

    A bonus: Over the past few weeks, TIPS yields started surging while equities fell and inflation forecasts remained flat – that has to imply increased probability of default, right? The thing is, the increase was nearly 35bps. Is there approximately half a percent chance that the U.S. defaults on its debt in the next 10 years? I guess that theoretically is close to the probabilty forecast from 5 year CDS (~30 bps)

  73. Gravatar of bill bill
    6. May 2022 at 17:37

    @Jim Glass,
    I tell people this all the time. It’s the best kept secret in the world.

  74. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. May 2022 at 07:27


    The FED bought too many tips, distorting the market. Use N-gDp and the deflator:
    Q1 2022:  ,,, 6.5 ,,, 8 ,,, -1.5
    Q4 2021:  ,,, 14.5 ,,, 7.1 ,,, 7.4
    Q3 2021:  ,,, 8.4 ,,, 5.9 ,,, 2.5
    Q2 2021:  ,,, 13.4 ,,, 6.2 ,,, 7.2
    Q1 2021:  ,,, 10.9 ,,, 4.3 ,,, 6.6

  75. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. May 2022 at 10:54

    Friedman: “There is one and only one basic cause of inflation: too high a rate of growth in the quantity of money.”

    Friedman: “If you keep the money supply fairly steady, the historical records suggest that the changes in velocity are rather moderate. . . . On the average, velocity tends to move in the same direction as the quantity of money.”

    Covid-velocity displayed large quarter-to-quarter movements. The Fiscal helicopter drops injected sharp destabilizing disturbances in money demand. The rapid rise in M2’s rate-of-change will not quickly reverse except for over a two year period of stringent money growth.

  76. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. May 2022 at 11:40

    If you don’t think the economy is running far too hot, just look at the dollar index:
    Nominal Broad U.S. Dollar Index (DTWEXBGS)

  77. Gravatar of ssumner ssumner
    7. May 2022 at 20:38

    sd0000, I don’t think you can infer default risk from real interest rates on TIPS.

    High saving rates in 2020-21 (plus low investment) put downward pressure on rates.

  78. Gravatar of sd0000 sd0000
    8. May 2022 at 04:44

    Scott – all other things equal (inflation and real growth), wouldn’t an investor demand higher returns for taking on risk? Default risk is certainly built into corporate yields, why wouldn’t it be for government? I’m not saying you can calculate the specific implied default rate, but what else would explain the movements since early March? Real interest rates increased significantly while equities plummeted. I’m not sure what else would explain that.

    “High saving rates in 2020-21 (plus low investment) put downward pressure on rates.”

    Why would anyone accept negative returns when implied future economic growth (through equity prices) is strong? That doesn’t make sense to me

  79. Gravatar of sd0000 sd0000
    8. May 2022 at 04:46

    I guess another way to put it:

    What is the implied assumption about the future when this is the case?

    “High saving rates in 2020-21 (plus low investment)”

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