> “I think I was wrong then about the path that inflation would take,” she told CNN’s Wolf Blitzer. “There have been unanticipated and large shocks that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly that I ... at the time, didn’t fully understand.”
We put a bunch of money into the economy as a response to Covid. More money means prices go up. But we put in a fixed amount of money, so there should have been a fixed amount of inflation.
The real explanation here is that there is less stuff! International trade is a hot mess right now and things are just literally more expensive because we have become materially poorer.
We did not put a "fixed amount of money". Money is created by both the Fed and by commercial banks. Whenever banks advance new loans, they create money out of thin air. Whenever they refuse a borrower to renew a loan, they destroy money.
When the Fed pumps money in the system (by QE), the banks act as a multiplier. But the multiplier is not fixed. The banks extend loans, businesses load up on debt, then they swim in cash, they do stock buybacks, stock go through the roof, people who own stocks feel they get richer (at least on paper), they consume more, businesses profit, then they want to expand, they go to banks, and the banks seeing how profitable the businesses are are happy to extend new loans, which is the same as to create new money.
It's a "virtuous cycle", depending on your definition of "virtuous".
A different way to look at it is that the economy overheats. The cycle of money creation has gone out of hand, and the Fed has to apply the brakes.
Yellen knows very well all these things. She was the head of the Fed, she is supremely smart. She's just lying through her teeth saying she "didn't fully understand". Of course a statement about her own state of mind is not a falsifiable statement, so she has the luxury to say whatever she wants. But she knows perfectly well how the economy works, it's absolutely impossible she didn't anticipate the results of pumping trillions and trillions of dollars in the economy.
I think you are being a little over confident in your understanding of what is causing the inflation. If it were as simple as pumping money into the economy, we wouldn't be seeing inflation in most every country, everywhere. And no, every country did not pump a lot of cash into their economy.
This chart of M2 looks like the amount of money pumped into the economy was anything but a fixed amount. Unless, if you're talking about the first derivate of M2, then you could argue number is fixed.
That's a great link. If you edit the graph and replace it with "Percent Change from Year Ago", you see the 2008 spike and recovery clearly, and the truly enormous spike starting at 2020. I'm surprised to see ~5% growth since Volker. That is higher than I'd expect.
But if you add Real GDP to that chart, you can see the 2020 contraction was much larger than 2008, so the intervention was at least arguable.
> Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs.
> Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
> For more information on the H.6 release changes and the regulatory amendment that led to the creation of the other liquid deposits component and its inclusion in the M1 monetary aggregate, see the H.6 announcements and Technical Q&As posted on December 17, 2020.
Source for the additional information is the link in your post.
Oh. So the discontinuity is an artifact of the change in the series.
Once the discontinuity ages out (June 2021), M2 is still running 13% over a year prior. That's historically high, but not so much higher than the 10% back in 2003, 2008, and 2012.
Sure. The government injected a bunch of money, but then banks took advantage of low interest rates and created money at a faster clip than the fed anticipated.
The question is why they kept rates so low for so long, and the answer provided here is they didn't plan for a trade retraction.
I call BS.
The Fed can do jack besides scare everyone.
a) There is demand inelasticity on certain things like oil as the economy is in full swing. People need to drive to work, fly/ship for business, produce plastic/material, keep their business powered. There is some elastic demand sure, but given the state of savings, that is hard pressed already.
b) Oil supply is not improving. There is OPEC+ that is making significant profits. Russia is making double profits from EU and India right now -- different conversation. It is a monopoly during war.
[b') Ukraine is out of the picture with its natural gas opportunities for the next 5 year at least. Similarly, Greece.]
c) Due to the scare for negative oil futures and the unpopularity due to the climate impact, smaller investment on new oil production experimental does not look promising.
d) U.S. oil companies have clearly stated they are going to not alter their oil output in any way to drop favorable prices, they are going to pass their earnings to their investors.
e) China, the supplier of the world, is experiencing significant issues and they are trying to stay afloat and not have a real estate and society collapse while keeping up with their zero covid policy.
f) Shipping is experiencing issues continuously during these unstable times, including piracy --
https://www.msn.com/en-us/news/world/iran-urges-greece-to-co...https://www.ft.com/content/37bb01c2-8b54-45d4-a93c-215514092...
g) China, and other countries, is actually reducing interest rates faster than U.S. is increasing them.
On items b-f Fed has zero power. By increasing interest rates hard, they are affecting (a) but due to inelasticity that means that the cure will certainly kill the patient. (g) might undo the actions of Fed and drive capital to real estate. Increasing rates might also actually increase housing prices and demand counterintuitively, as mortgages become harder to procure and recession forces people to sell, thus companies that buy houses in bulk in cash like Pretium get to gain a monopoly of the market and drive prices up.
interesting summary. It actually seems that if there is going to be a long process of reshoring manufactured goods it would make sense to keep rates as low as possible to support the long term investments needed
I have an economics degree. I left economics to teach American history and secondary education. Why did I leave economics? Because they’re all guessing. Let me repeat that, they are all guessing. The only people who know what’s going on in the economy have enough money to control the economy with all their money, like Buffet.
Yellen has no idea what’s going on. Economist are constantly guessing and on the chance that they are right there heaped with praise, and when they’re wrong nothing happens. They keep their jobs to predict again.
Fund managers too. Anyone who proclaims to predict the future, whether it's an economist, a fund manager, or a tarot car reader, are mostly just salesmen.
What I don't understand is how they're using prescription drug prices as a key lever for Inflation? I'm all for reducing their prices and that's a good thing, but come on, prescriptions make up a minuscule part of the economic issues that are driving inflation.
First and foremost, Price gouging across industries is self fullfilling the inflation fears, meanwhile record profits of 2x or more are being had (looking at you tyson).
Price gouging is not really a thing - it's entirely in the eye of the beholder. If you can sell something at a price, then that's its price. (And I would much prefer Tyson raising prices than leaving shelves bare.)
For the same reason we wouldn't blame deflation on Memorial Day sales, we shouldn't really blame price increases for inflation. The price increases are the inflation.
Price gouging is definitely a thing when you have a captive consumer base or inelastic demand. How much are you willing to pay for a bottle of water in the desert?
Price gouging is only a thing when you have both inelastic demand and a monopoly (which is why patented products like prescription drugs can be price gouging).
If someone is charging $1M per bottle for water in the desert, then pretty quickly a dozen more water sellers are going to make tracks for the desert.
Well, knowing I'm going to the desert I'm going to bring water. Just like how I eat before going to the airport because of the prices. That doesn't map to prescription drug prices, but it does for most things. What you described is more arbitrage than price gouging.
It's crazy how the cycle of human ignorance just keeps repeating itself.
"Inflation isn't happening, you're just spreading misinformation! Everything is fine!"
"Inflation might be happening, but if it is, it'll only be transitory and not as bad as our detractors suppose it will be!"
"Inflation is happening, it's transitory, it'll be over soon!"
"Inflation is happening, it's not transitory, and we don't know how long it'll last."
"How do we start looking at fixing this inflation problem? Spend more money!"
The economic power of the individual in small, tighter-knit communities/countries vs the influence and economic power of conglomerates competing in the global market is a David vs Goliath-tier battle that was lost a long time ago. Countries/businesses who survived by running lean, trying to keep things local, etc - have been priced out by the power of the global conglomerates and governments trying to get a piece of the pie.
Inflation is such an insidious tax - it affects everything and just domino effects into absolute chaos if mismanaged.
Your bank account is worth x% less.
Your wages are technically worth x% less.
Companies trying to stay afloat or maintain/exceed profits year over year will raise prices of their goods (store cost/"shrinkflation" of packaging) to try and lessen the blow of higher transportation costs, etc.
Not sure what the solution is other than something similar to what the french did to their ruling class hundred of years ago - I don't condone violence at all, but it seems like it's getting to a tipping point where some bolt is going to finally shear or the last straw will land on the camel's back.
Occupy Wall Street happened 10+ years ago. A large social movement that honestly didn't get very far or do much of anything to raise awareness about the wealth inequality of the united states/the western world. People were already frustrated 10+ years ago and it hasn't gotten any better. Rising inflation, rising housing prices making it harder for people to start their own family or participate in a system that's slowly getting more and more out of reach for the average individual.
Corporations/Governments have figured out (maliciously/intentionally or unexpectedly) that it's easier to placate and distract people from how hard they're getting screwed by integrating their corporate identity with social causes in countries they operate in like Pride (companies LOVE the LGBT community in June in the west, but they're somehow forgotton when they're operating in countries like China, Africa, etc.), co-opting country's identities ("You're not a TRUE citizen unless you buy Y Beer!"), or pretending that they "care" about tragedy and disasters that happen in our world. Corporations don't have emotions so they like to try and manipulate others' feelings for the corporations own benefit.
They're faceless monoliths (machines) ran by millions of people (cogs) that have had their jobs compartmentalized and trained to follow instructions without thinking for themselves - only to follow orders from authority figures because if you don't, you're going to be poor and it'll be all your fault - you should have done what they told you!
Identity politics is used in lieu of class conflict. For various reasons, the US does not perceive itself as having classes… difficult to foment a Revolution if the ‘proletariat’ all think they can grow up to be President someday (or at least a gazillionaire.)
It was determined that race might be a sufficient proxy. Time will tell.
There’s definitely a burgeoning undercurrent of “no political solutions exist that can solve our problems”.
It doesn’t seem exclusively limited to the “very online” folks: anecdotally I’ve had it expressed to me irl from people on both the right and the left here in Portland. Primarily the right but, since the abortion SCOTUS leak, the frequency from the left has increased tremendously.
And if the federal government is truly facing actual questions of legitimacy from both sides, they seem to be doing all they can to make the problem worse.
We needed a Transparency Board and instead got a Disinformation Board.
We need less transparency when it comes to lawmaking. Quit enabling corporations and constituents to buy and coerce our representatives' votes like they have since the 70s (sunshine laws).
The disinformation comes because its an effective way to coerce those populations into influencing elected representatives. You take away visibility of voting (secret ballots, like real elections) and now nobody holds power over how an individual representative votes. No more fixed party line votes. Reduced public backlash to minimize shitty discourse. Its the only way to allow representatives to really align their votes with the people because otherwise we cant afford a seat at the table.
I know, right? It would be nice to see some evidence of an ability to update priors based on new evidence from experience. Yet they keep repeating the same mistakes.
From what I read, she didn't anticipate the variants and didn't anticipate the war in Ukraine. The latter I understand, the former less so. I am curious what was she anticipating? Every goes great? Sometimes I wonder if a system engineer would not be a lot better this type of thing?
I've been thinking recently. We are at near 4 years inflation in 1 year based on the fed's 2% gold standard. This question is mostly rhetorical, but is the target going to be negative to get us back on track? What do we do when we are this far off target, forgive and forget? I say mostly rhetorical because I think that rapid deflation would only be possible with an implosion.
Before I say all this, please please please don't be the guy who replies with fed nihilism. You're not cool or edgy just because you think the fed is hopelessly corrupted and its only role in American is to keep an asset/everything bubble inflated. Take that mess back to the comments under Joe Rogan's YouTube videos.
Ok, so the key takehome for all of this, to me, is that by the end of this decade, we are going to be some serious Fed reform. The Biden team is trying to finesse something here that's unfinesseable.
Right now, this pageantry is about Biden trying to find his footing with respect to the economic packages his party expects him to push forward in the run up to the midterms. In 2020, his party pulled out a few surprise wins in states like Georgia to win a thin majority in the Senate by promising people $2,000 checks as a Covid-stimulus. Now, he has to do something that makes good on that promise, and the likely best move is to find a way to forgive consumer debt.
The thing is, if he does that and it pushes inflation in the wrong direction, he's going to come off like (even more of) a total klutz. So, he's trying to preempt the narrative out there that he's Jimmy Carter, Part 2: a one term, deeply religious but left-liberal president who was put into office after a menace was removed who fumbled his way into stagflation. He can't avoid that though. His op-ed in the WSJ this weekend illustrates the point: it's mid. Same with the milquetoast policies he's got Yellen up here selling: total mid. The concept is that policies his administration has already put into place are fighting inflation. As they say in D.C., that dog won't hunt. If Biden is already fighting inflation, why are there pictures of >$9 gas/gallon popping up in L.A.? Why is the price of chicken so high?
What's worse for his political prospects is what's coming: he's going to keep pushing for stimulative spending/consumer debt relief. If he doesn't give economic benefits to his base to make good on that $2k promise, they will not show up for the midterm. That's the 2022 political reality.
Here, to make way for more inflation-spurring policies, I imagine Yellen has to fall on the sword for the current state of inflation, even though she was the former Fed Chair, not the current one, and the current Fed Chair (Trump-appointed/Biden-Reappointed), whose independence Biden is supposedly respecting, Jerome Powell, is the one publicly branded with the "transitory" remark. I think that's Biden trying to give space to Powell to make it that much easier for his Fed to continue their 180-degree flip on whether to use their tools to fight inflation by cooling the economy. So far, Powell is publicly declaring that he's channeling the Carter-appointed Fed Chair Paul Volcker, who raised interest rates dramatically and beat back inflation in the early 80s. Biden is giving Powell room to Volckerize, and my bet is Biden hopes Powell will take his final form a month or two after the midterms, but not before. But all of this is just absurd theatre that's attempting to thread an unthreadable needle: the Fed helped to cause this bubble, and it needs to be reformed.
If you've been following Powell's remarks over the last few months, he has moved from inflation is transitory TO it's time to increase the fed funds rate to hem in the economy through a "soft" landing TO it may not be a soft landing, but the landing will be "soft-ish." Why is Yellen the one to take the blame for that? She shouldn't. But what Biden needs Powell's Fed to do is continue to increase that rate by 50 basis point at each of the upcoming meetings, clear the Mortgage Backed Securities off its balance sheet, and then after the midterms amp the rate up ASAP by 75 basis points at a click or more, so that we can start that recession quickly then hopefully find our way toward something Biden can call a "recovery" by the time 2024 elections roll around. And the Fed isn't going to do that if there's overt pressure from the administration.
I'm listening to Bernanke's latest book on audible (read by the same guy who reads WaPo David Ignatius's thriller novels), and he goes out of his way to decry any political pressure that elected officials apply to the Fed. But that doesn't mean the Fed isn't mindful that if it fails to exercise its "policy tools" in a way that seems reasonable to elect officials, those officials can yank that independence away. Between abolishing the filibuster, packing the Supreme Court, and rendering the Fed less independent, my money (ha) would be on the third option being the most palatable to the most amount of Americans as a way for Biden to make a bold mark on American institutions toward the end of his first term.
Right now, there's a very careful dance. Biden will try to survive the midterms by arming the Ukranians, emphasizing background checks for guns, and forgiving debt. But after this is all over, and the way the federal government has twisted itself into knots to avoid reforming the fed all for naught, the fed is going to have to be reformed.
Jefferson, Adams and Washington all warned about the dangers of central banks. Jefferson went so far as to lament prohibitions on it missing from the constitution.
Slave owners who died before they got to read Adam Smith and who had no concept of a "Free Market" are not expert economists. Think about how much insanity the world has seen since their days. We have developed institutions to mitigate that insanity.
If a nuclear war ever sets us back technologically 300 years, then I'll start to take the founding fathers ideas seriously again.
>Here, to make way for more inflation-spurring policies, I imagine Yellen has to fall on the sword for the current state of inflation, even though she was the former Fed Chair, not the current one, and the current Fed Chair (Trump-appointed/Biden-Reappointed), whose independence Biden is supposedly respecting, Jerome Powell, is the one publicly branded with the "transitory" remark. I think that's Biden trying to give space to Powell to make it that much easier for his Fed to continue their 180-degree flip on whether to use their tools to fight inflation by cooling the economy. So far, Powell is publicly declaring that he's channeling the Carter-appointed Fed Chair Paul Volcker, who raised interest rates dramatically and beat back inflation in the early 80s. Biden is giving Powell room to Volckerize, and my bet is Biden hopes Powell will take his final form a month or two after the midterms, but not before. But all of this is just absurd theatre that's attempting to thread an unthreadable needle: the Fed helped to cause this bubble, and it needs to be reformed.
>If you've been following Powell's remarks over the last few months, he has moved from inflation is transitory TO it's time to increase the fed funds rate to hem in the economy through a "soft" landing TO it may not be a soft landing, but the landing will be "soft-ish." Why is Yellen the one to take the blame for that? She shouldn't. But what Biden needs Powell's Fed to do is continue to increase that rate by 50 basis point at each of the upcoming meetings, clear the Mortgage Backed Securities off its balance sheet, and then after the midterms amp the rate up ASAP by 75 basis points at a click or more, so that we can start that recession quickly then hopefully find our way toward something Biden can call a "recovery" by the time 2024 elections roll around. And the Fed isn't going to do that if there's overt pressure from the administration.
This is an excellent possible observation of a strategy we may be watching.
To add to your point, without some Volcker-level hikes we won't be able to escape this inflation. I'm a broken record about this (if you check my comment history haha), but the aging demographics of advanced economies (china is also an advanced economy!) guarantee that we will have less hands able to feed the hungry mouths out in the world. Prices are guaranteed to rise. Perhaps we'll have so many wealthy retired people chasing so few goods that we'll need hikes so large that they will have to crush asset values altogether to keep prices as they are today.
No matter what, similar to you, I don't see the fed's independence surviving the decade.
> Perhaps we'll have so many wealthy retired people chasing so few goods that we'll need hikes so large that they will have to crush asset values altogether to keep prices as they are today.
Really? That would be a paradigm shift. For the most part we've had no problem producing as much stuff as people can consume.
It's possible that resource exhaustion and declining population will challenge that.
But what we see now is economic shock in the wake of covid, and the usual/predictable energy price spikes as a result of war.
Why wouldn't we recover now?
Even if population decline is happening, it's not happening now -- it'll happen slowly.
The economic shock from the wake of covid is, in my view, primarily caused by early retirements in Advanced Economies. There is also the rising tide of on-shoring, but I think it's still related to the initial shrinkages of labor in Eastern Europe and in China.
I think that the changes in price from the lack of labor will be fairly wild, even though the change in laboring population will be fairly predictable.
Please compare these graphs, unfortunately they are USA only but similar trends can be found in most Advanced Economies:
I made a custom graph and while a lot of 55+ have left a lot of 16-24 have also left, so these graphs turned out to not be as convincing to my argument as I thought. Wanted to update if anyone follows this thread!
Why would it have been transitory? We're printing (creating) money faster than ever before, a century's worth a year now. When an expert like this lies to your face while smirking and hitting you in the ribs with their elbow you don't have to pretend to believe them.
We put a bunch of money into the economy as a response to Covid. More money means prices go up. But we put in a fixed amount of money, so there should have been a fixed amount of inflation.
The real explanation here is that there is less stuff! International trade is a hot mess right now and things are just literally more expensive because we have become materially poorer.