22 Comments
Mar 14, 2022Liked by Noah Smith

So in layman's terms: the next year or two might suck, but hopefully we'll come out of this with somewhat minimal damage for the everyday US citizen?

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Hopefully.

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Noah, I feel like we are about to witness a BOOM in private and public investment with the goals of onshoring supply chains and decarbonization. Equiv. to a sort of war mobilization. How would that affect the 'stag' part? I'll assume bad for the 'flation' part b/c of ongoing (accelerating?) supply problems.

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Do the 25% tariffs have nothing to do with inflation. Why tariffs on half the products from China but not the other half? The Democrats said Trump was a moron for tariffs on China but now it seems like a great idea with record inflation, I'm confused.

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I think this article misrepresents the market for mRNA vaccines, and the reasons why China developed it own vaccine. The United States nationalized its vaccine industry and refused to sell mRNA vaccines, or any other type of Covid vaccine, outside America. Even Canada had to buy vaccine from Europe because the U.S. refused to sell. If Canada had problems buying vaccine from a close ally in the early days of the pandemic, I don't think China had much of a choice but to make their own.

I'm sure there are political reasons that China developed its own vaccine, but there is a practical reason too: if you are not an American citizen, you had better not depend on a company in the United States to supply your vaccines.

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That was certainly the case for the first half of 2021. But haven't mRNA vaccines been available around the world for the past few months?

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Actually, I think mRNA vaccines have been available around the world since they were first made. However, the vaccines were coming from European plants, not American ones. Once all Americans who wanted it were vaccinated, the U.S. started donating vaccines to the rest of the world. I am not sure if American plants are allowed to sell vaccine freely yet, or if the U.S. government is still buying all that is produced.

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Are you referring to the restrictions based on Operation Warp Speed? If so, then Pfizer wouldn't have been affected.

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Pfizer was affected, at least in the early days. Canada received Pfizer vaccine from Belgium, not from Michigan. Fortunately, the EU did not stop exports of vaccines, or it would have been very bad for Canada. I'm not sure about the current situation. It is possible that American vaccine manufacturers are no longer forbidden to sell to non-Americans.

My outrage in all this is how the rules of trade change. I thought vaccine manufacturers were private companies that could sell to whoever they wanted; but the pandemic hit and some countries decided that these companies could not ship vaccine to foreigners.

I can see an argument either way about whether free trade in vaccines is a good idea. But Canada once had a large pharmaceutical industry that foreign companies bought, then moved production to larger plants in the U.S. and Europe. Canada looked like a sucker allowing companies to be bought, then being put at the back of the line when it came to Vaccine deliveries.

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Your article is primarily about US inflation expectations. Is this also going to be a case of global inflation? How much can unilateral US actions control the effects of global inflation within the US? Might we need global action of some sort to control the global inflation?

One more thing: could you tell us a little about how such oil shocks could be prevented in the future? We've seen prices below zero, reductions in production, opening of the strategic oil preserve and who knows what else: I could appreciate a recap, explanation of how they work together, and how oil prices could be stabilized long term.

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I apologize/hope it's okay for posting comments/tidbits from other places...

The Heisenberg (daily independent eco blogger) said : “The Fed [that] was already destined for a policy “mistake,” where the scare quotes are there to suggest that although policymakers are all but certain to find themselves tightening into, and thereby exacerbating, a slowdown, it’s hard to call that a mistake considering the inflation backdrop”.

My reply : My understanding is that stagflations are relatively rare and generally due to unusual supply constraints. Here, today, I think most of us think the inflation we got was due to a demand shock – the excess savings of the COVID years (made worse by some composition issues and supply constraints in some specific items like semiconductors).

If demand cools down b/c excess savings are gone and wage gains have dissipated/melted away due to past/present inflation, what would sustain inflation (and drive the Fed to hike 7 times this year) for the remaining of the year?

Now that was my thinking pre-war. I understand war makes oil prices go up/make inflation more persistent i.e. it’s a proper supply shock.

But it’s still true that I don’t get what is to be gained by raising rates in a stagflation environment. Higher rates won’t cure supply shocks. Unless the intent is to cause a recession to lead to such demand destruction that the reduced supply no longer affect prices. And I mean, ok, though that’ll be a bitch to sell to the poor suckers whose jobs and lives got to be destroyed for the sake of fighting inflation.

Seems to me it’d be better to force corporations to take a margin hit – i.e. force them not to pass along rising input prices. Appeal to their patriotism and if that doesn’t work (smirk), threaten them with special confiscatory taxes.

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A commentator, Manuel López, replied : "You answered your own question. Higher rates push purchasing power down for anyone who needs to borrow: companies and individuals at the margin of profitability.

The alternative you’re suggesting is a form of public overtake of private enterprise. Despite all the criticism of big-whatever, I would rather politicians not make decisions on the day-to-day workings of production.

The best tool the government has to improve this situation is spending more to incentivize production/competition in the areas that are the source of inflation: food, housing, fuel. Yeah, we’re screwed when those three are suffering supply shocks and climate change is impacting two of those exponentially harder by the season.

Without demand destruction, money would become meaningless. We’re in for a pretty rough landing".

To which I replied : Thanks for engaging. I’ll note that the Fed certainly doesn’t advertise wanting a recession… 🙂

Don’t get me wrong on the ‘solution’ – I think we should have thought of abundance sooner (Germany willingly surrounding its energetic autonomy to Russian gas is something we knew was problematic since 2014 at least) and I think we should push hard there (with renewables now cheaper than fossil fuels, a lot can be done to speed up infrastructure building) and I’m with you to encourage competition and alternatives etc.

But that’s medium and long term. Someone got to take a hit for higher input costs right now. Either the consumers via higher prices, the companies via lower margins, the workers via lower wages or the government via lower taxes. Split it out if you can. But there is no law of nature that says higher input prices must lead to higher consumer prices. It’s a human decision and we need to make the smart one(s), as opposed to what happened in ’73 ’74 and ’79.

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So... does anyone think there's any chance major economic actors (government, unions, business chambers) all get together to spread the pain of higher input prices without the adjustment being entirely on "higher prices for the consumer" --> Fed engineers a recession --> Trump gets elected and wannabe incompetent proto fascist rules the world again.

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2024 is a long ways away. By then, WWIII might be full blown.

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So inflation looks like it’s gonna be about 3.5%

Whatever happened to the ZLB concerns and the arguments to increase the inflation target to 4%

Ppl act like the 2% target was bought down from Mt Sinai on stone tablets but it was chosen by men and we still don’t know for sure it’s the ideal target

So why not start discussing the 4% target again?

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In terms of breakevens, I wonder how much of that is actual inflation expectations vs market technicals. The TIPS market is small and the Fed owns ~20% of outstanding bonds. If we are gauging the market, watching the 10-year is important (saw a decent move up today). Also, looking at fwd curves, the market is actually pricing in a rate cut in 2024

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O.S.B. is $43 a sheet. Can someone please talk about this?

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What do you do with your cash savings then? Stocks?

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Max out your series I savings bonds first.

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By which I mean, stocks might normally protect vs inflation, but if theres a recession. Durable goods? Gold? Specific stocks domestic production?

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For energy driven inflation, there isn't necessarily a good save haven. Energy is a consumable good and even energy companies might not turn bigger profits with higher energy prices. This is different from asset/monetary supply driven inflation like we have seen in the last 12 years, where if you owned stocks or real estate, which have inflated greatly, then you've benefitted from that inflation. In demand-side inflation, you just have to be working and producing the goods that are in demand or invested in those things in demand. With oil, gas, energy driven price increases, nothing is safe. You could never speculate on enough oil barrels to fight off inflation.

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Noah, what is your view on the yield curve as a leading indicator of recession? The 2-10y spread has only had one false positive in 1965.

And have you read Foldvary's geo-Austrian synthesis? I'm guessing not since you're distinguishing recessions induced by the Fed from the real estate cycle, when they should be treated as two interrelated factors in the business cycle.

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