I think perhaps what is meant is that many people saved tons of money during the pandemic because their previous spending habits involved lots of dining out and entertainment. It isn't supposed to refer just to the stimulus checks. But in reality, it's still not true in general because the "pandemic savings" of some were balanced by pandemic financial losses of others.
Yep wages are NOT to blame for the current high inflation in the US. Instead, the current high inflation is the price being paid for the extreme increase in the money supply (driven by enormous federal government deficits and the monetisation of those deficits by the Fed).
Wages are simply desperately trying to play catch up, but as is often the case during periods of high inflation, the working class, and those who can least afford it, are increasingly falling further and further behind. It's a real extra kick in the guts to these people that so many economists and policymakers are effectively using them as a scapegoat for their own failures in fiscal and monetary policy.
Though with the Fed tightening as aggressively as it has, inflation will come down, and is already showing significant signs of doing so. Most importantly the Fed doesn't need to keep raising rates. Current monetary policy settings have already resulted in the M2 money supply flatlining - the hard work has already been done. Durables prices peaked in February, have fallen significantly since, and are set to decelerate further on a YoY basis from October. Oil prices continue to roll over, which will continue to see the nondurables category decelerate. The main issue with inflation as measured by the CPI are shelter costs. Though again, there is reason for optimism here, as market based measures of rents have decelerated in recent months, and during August, were below the rate of growth being recorded by the CPI. Unfortunately the CPI (as well as the PCEPI), measures rental costs with a SIGNIFICANT lag, raising the risk of the CPI overstating inflation and the Fed overtightening. Though on an underlying basis, everything is pointing to a material decline in inflation over the next year - the bigger concern is will the Fed unnecessarily tip the economy into a severe recession by excessively tightening monetary policy, a scenario which I think is quite possible.
I'm pretty sure it's mostly wage driven. That's a real cost.
I still have not seen ANY facts showing how this increase in money has actually led to an increased level of business. What is see is the SAME level of business and a lack of staff driving wages up.
This can all be true, and the Fed is still behind and needs to continue tightening. Shelter is still rising, albeit more slowly, but still faster than we’d like. And the core non-housing components of inflation are still rising too. This all points to the Fed needing to have made these moves much sooner/faster, as the lags in these measures make it very difficult to judge the right time to stop.
I don’t understand the focus on M2 vs traditional measures of inflation? I keep seeing this on Twitter, but why does M2 have to do with anything? Should we instead look at M2 - Fed assets for a better picture of natural growth of money supply?
Zach, I have written more extensively about this in my newsletter if you were interested, but to also further the conversion here:
When you print more money (i.e. the M2 money supply increases), people now on average have more money to spend, which in isolation, raises the demand for goods & services, and eventually their prices. When you have a huge 25%+ YoY increase in M2 as we have seen during the post-COVID period, you get a surge in demand, and eventually high inflation.
Though just as the surge in M2 created a surge in demand and high inflation, the Fed's tightening + lower federal govt. deficit has meant that M2 is no longer growing. Just as extreme M2 growth created high inflation, flat M2 growth will lower it. Though just as it took a year for the initial surge in M2 to flow through to inflation, it will take time for its current stagnant position to result in a fall in inflation.
Nevertheless, some positive signs are already being seen. Again, this is most chiefly in durables prices which continue to decelerate significantly. Nondurables price growth is set to continue decelerating as long as oil prices continue to fall/don't again spike higher. The last remaining component is services prices, of which rents make up the bulk. Importantly, rents are now also decelerating, which if continued, will mean that the final major piece of the puzzle to achieving lower inflation will have been met - and which no M2 growth and a weakening economy are likely to achieve.
Re natural growth of the money supply, I would posit anything above 10% indicates an artificial stimulation of M2 (again, I have written about this more extensively in my newsletter and reports). Flat M2 growth like we have now is relatively unusual and may be indicating that the Fed has artificially tightened monetary conditions.
Why are you only focused on Y/Y change in M2 vs reverting to long-term M2 growth trendlines? It seems we would need M2 to revert back to M2 trend given the very outsized increase.
E.g., if normal M2 growth is 10% Y/Y, and M2 grows 100% in 1 year, you aren't "on track" the following year just by going back to 10%. You'd have to decline / absorb the increase in monetary supply to impact inflation.
Because when you increase M2, you get an increase in prices - it isn't constrained to long-term trends like that of general production.
100% is an extreme example as a rate of growth that high could lead to hyperinflation, but let's take the >25% YoY growth that we saw during the COVID period. Prices increased significantly as a result (YoY durables growth peaked at 18.7%, nondurables at 16.2% and market rents at over 17%). The adjustment has thus been made - there is no need for any reversion to a long-term trend as prices have adjusted themselves to the increase in the money supply. All that matters now is how the money supply changes moving forward.
Do you have a cross-country analysis along these lines written up anywhere? I tend to doubt monetary explanations of inflation in 21st C developed economies because they tend to focus on single countries even when inflation strikes across countries and continents, like the current inflation. (And I remember that back in the Great Recession people squawked about loose monetary policy unleashing an American inflation spiral, which just didn't happen. But that is a different issue.)
True (edit: well, your first sentence). I was aware that the pandemic fiscal response was bigger than the Great Recession fiscal response but hadn't bothered putting a number on it before; potentially boring arithmetic follows.
Adding it up: the Great Recession fiscal stimulus was about 10.5% of GDP (4.8% from TARP + 5.7% from ARRA), against 19.9% of GDP for the pandemic (0.5% from pre-CARES, 11.0% from CARES, 8.4% from ARP). One could quibble about which years to use as a baseline but that's a percentage-point kind of effect. Pandemic fiscal aid was about twice that of the Great Recession.
1) Most countries artificially increased their money supply in the wake of COVID.
2) The focus is on the US as it is such a large component of the global economy. Therefore if they increase M2 by >25%, this has such a large impact on global demand that it has flow-on effects for prices in other countries (though again, most countries did artificially increased their money supply in the wake of COVID).
3) Loose monetary policy post the GFC in and of itself didn't lead to the extreme increase in M2 that has been seen post-COVID. When the Fed has previously conducted QE the money largely sat as excess reserves at the Fed - it didn't enter the real economy. As Richard points out the key difference was the enormous fiscal stimulus that occurred this time around, which actually resulted in the money entering and flowing throughout the economy.
It makes sense that the COMBINATION of doubled fiscal shock and doubled/tripled monetary shock would have a bigger impact than in the 2010s, when the CPI-U struggled to breach 3%.
Your point about other countries boosting the money supply also seems to be accurate (https://www.yardeni.com/pub/gmsbnklend.pdf). All things considered, your monetary-plus-fiscal hypothesis appears to have legs!
Haha I would hope that it has at least some legs, or else I would have wasted a lot of time spending months writing a 70-page report on the US' current inflation!
That punishes the workers to save the banks by doing the same shit yet again, which is by popular definition insane.
Instead, start using alternative forms of payment and let the system crash & burn, then issue an equity based currency as opposed to our current debt-based one.
Many other things have to happen to fix this (e.g. end the tax on wages) but you get the idea.
The Fed keeps being roughly 1 year behind. The huge stimulus packages as well as supply shocks/snarls led to big inflation a year after they came out. But that also means that inflation will be down in a year even if the Fed did nothing as the stimulus money is spent out. But the Fed seems insistent on forcing a recession and rocketing up unemployment so that they can drop rates to get the country out of recession.
It's an absolutely dumb and crazy strategy.
BTW, I'm on Team Transitory too, but if you look at previous episodes of transitory inflation (like after WWII), transitory inflation lasted 2-3 years, not months.
Good call, Richard. Just as it took time for the huge stimulus/money printing to create today's high inflation, it will take time for its removal/stagnation to lower inflation, but that's all the Fed needs to do - wait. By continuing to tighten further and further they will simply cause a potentially severe recession, only to repeat the whole process over again!
Economists are ignoring the elephant on the table: over a million unanticipated deaths in the U.S., 6.5 million worldwide, and 12K dead in the last 28 days in the U.S.
This scale of death is new, and the implications are not understood. Workers are withdrawing from the job market and changing their demands. Supply chain issues are quirky but ever-present. Construction is booming, and new cars abound on the road in my area. I don't see anyone with an economist's toolkit seriously examining these phenomena.
Clearly we should be taxing the people who became insanely wealthy during the period of easy money, the top ~10%. This would reduce demand and give us a war chest to fight unemployment and improve infrastructure when recession hits. Is reason we don’t do this is because it’s not politically feasible? Would we rather curb demand by giving those with capital a guaranteed return on high interest government and corporate bonds.
Powell is engineering labor-share suppression. Even as the corp profits portion of unearned income shoots up. The proximate cause of price increases, at least, is just...firms raising prices/margins.
If they share those margin increases with labor (they're not doing that), any imagined problem is just money illusion, right?
"After-tax profits as a share of gross value added for non-financial corporations, a measure of aggregate profit margins, improved in the second quarter to 15.5% -- the most since 1950 -- from 14% in the first quarter, according to Commerce Department figures published Thursday." — Bloomberg, "US Corporate Profits Soar With Margins at Widest Since 1950" (https://www.bloomberg.com/news/articles/2022-08-25/us-corporate-profits-soar-taking-margins-to-widest-since-1950)
I'm not sure I understand the argument that you can "compensate people for the loss of their job".
If you fully compensated people for losing their job, presumably they would continue to consume at roughly the same rate they did previously, so aggregrate demand (I hope I'm using the term correctly, not an economist here), stays the same, and supply would actually decrease (because they're no longer producing the good or service that they were previously paid to do).
Therefore, wouldn't such a (hypothetical) policy actually be inflationary rather than deflationary?
I sort of get the theory of higher interest rates making cost of capital more expensive that reduces employment that reduces demand. But what I don’t get is the lost production from that lost employment.
In particular, the companies I’m seeing shrink employment right now are tech companies slowing their hiring and focusing more on operations and less on innovation. But the products they make are tools to increase worker productivity. The tools that would reduce inflation.
Surely there are better ways to reduce demand? Like higher taxes on consumers that buy a lot of labour and energy?
IMO, fiscal policy (the Keynesian way) is a better way to act as a countercyclical measure than monetary policy _if_you_can_trust_Congress_to_act_smartly_.
It’s not just that you need Congress to act smartly. It’s also that, in the Keynesian model, at moments of high inflation, you would need to introduce austerity, cutting programs like Social Security, Medicare, and Medicaid.
That’s a far more painful solution than merely increasing interest rates, and it’s one that generates far more pushback.
It’s on the margin. If rates are zero, less economically valuable expenditures can be justified and yield a return over the cost of borrowing, but if rates are higher then you have to start to stick to more clearly valuable projects for borrowing. Maybe this means we see less innovation from less risk taking, but then maybe it also means we just see less companies in perpetual growth mode with no desire to become profitable. For example, remember a few years ago when Tesla was borrowing a ton to get the Model 3 project moving? A much higher interest rate environment might not have allowed that (the debt cost crush them before it finishes or even now the added cost of servicing the debt would be preventing them from being profitable). Or, it doesn’t mean you lose the job of the guy producing your food or repairing your car, you lose the job of the guy at Facebook trying to build a metaverse. At least that’s the more primary effect, but obvious those lost jobs - or incomes really - do trickle into other things, because now that guy isn’t doing a home remodel so a contractor might go without work.
I know that m/m inflation has caught up to y/y, but I fear that the media's overfocus on y/y has really warped people's sense of how much inflation there actually is. The reporting is always on the y/y number, and then the m/m is just presented as this wierd little extra spin that politicians and pundits are adding, usually with the connotation that the MSM is doing it because they're in the tank for Biden.
But the crazy thing is that most normies with a high-school understanding of inflation assume that the MSM's y/y data is actually m/m. And they get ANGRY about it like it's m/m, even if it's not! As long as there's something real in their daily life to hook it on - maybe the price of nails jumped, or whatever - normies just love to panic about the inflation bogeyman because it's a big scary thing they don't understand and have zero control over - AND because Americans perpetually feel "nickel-and-dimed" by our economy, so there's never any shortage of normie discontent over "the rent/healthcare/childcare/etc is too damned high".
This ultimately also fuels misperceptions about what to do about it and whether that's working. If m/m goes to zero now and stays there, y/y won't be zero until a year from now. Biden could theoretically get m/m back on target today, get hammered for high y/y over the next six months and lose Congress in the midterms, and yet would still have made the absolute perfect policy move.
Not in CPI minus food and energy it won’t be. And even in CPI with food and energy, the energy price drops have that led to those low numbers in July and Aug have flattened out and in many areas (mostly the West) gas prices are back near their yearly highs.
I appreciate your critique of the claim that wages are driving inflation. Clearly, the situation is more complex than that, and wage increases play out as both cause and effect here. Honestly, I'm not a macroeconomist and these dynamic theories are a bit abstract for my grasp. Still, you also seem to be claiming that the labor market is not tight right now (adding tons of jobs, employment-pop ratio increasing). I'd like to pick at that a little. The distinction seems crucial because a very tight labor market creates the conditions for a wage-price spiral, even if we didn't arrive here until recently.
RE: employment-population ratio. It is true that small increases have been eked out recently. However, the March figure (80.0) is not much different from the August figure (80.3). There does not seem to be much more room for growth here relative to the pre-pandemic peak of 80.5 in Feb 2020. Indeed, we've not seen a higher ratio since June of 2001, more than 20 years ago. Perhaps the GFC and pandemic have kept the ratio lower than true potential, but it seems you are waving away a historically high ratio, and all that implies, by pointing out that some recent fluctuations were slightly positive.
The current figure (0.5) is very low, lower that at any other point in the 20+ years I see data for. Looks like tightness.
I'd be delighted if you or others here could comment more on these observations.
As an aside, it does feel like this is all getting wildly over-politicized. Inflation seems high enough to justify raising interest rates based on the historical record and some common sense. I am quite confident that the same voices (Warren, Reich, etc.) that are advancing alternative inflation theories and decrying rate increases are creative enough to advance such theories under *any* inflationary scenarios. These are ideologues that seem to have to spin everything always into a justification for more government control of the economy and more redistribution. The whole area is just complex and murky enough to lend itself to that kind of armchair nonsense if you are so predisposed.
There is nothing natural or normal about near-zero interest rates, either historically or theoretically (time value of money). Interest rates around 4% are not some kind of crazy right wing idea. See Taleb, in particular, on this subject recently.
Politicians and pundits have this need to show rhetorical solidarity with labor. Cool. I am glad the fed just coldly looks at inflation, employment, and interest rates, as is their mandate. I am glad that people are finding employment nowadays! It's great. I also think that too much time under free money conditions is leading to prices rising ahead of wages (as firms can always act more quickly within the spiral). Going away from weird, crisis-justified monetary policy doesn't feel extreme. Maybe I'm just extreme.
We are now living in a relatively poor country (compared to other 'advanced' countries) with a few very wealthy people who control a disproportionate amount of financial resources, above and below all the tables, so why is it that when economists discuss the negative aspects of wages and inflation, they speak as if it applies to the whole economy? It doesn't. It seems we are running two parallel economies and penalizing one for the greed of the other. Really, who does the Fed work for and when?
Happy to know that -- I was teaching it from this consumer perspective (https://www.theatlantic.com/newsletters/archive/2022/09/america-mortality-life-expectancy-pandemic/671350/) for years before that article. "Rich" is to be defined -- I'd settle for a longer life-span, the same one the wealthy have -- with private healthcare in reserve. Since I don't subscribe (just one more cost), I could not read Noah's debunking article, but it's nice to know income, if not the wealth it delivers, can be defended.
> And falling oil prices and falling freight prices and the end of supply chain snarls haven’t brought down core inflation yet.
Crude oil's prices have only been falling since mid-June, they take multiple months to properly feed through to general CPI (let alone core CPI), and we don't have inflation data for this month yet. And I don't see that the snarls in the supply chain are over? Through the summer I saw weird empty sections at the store and strike-outs on menus.
I remain basically happy with my June guesses at the biggest inflation contributors (https://noahpinion.substack.com/p/how-are-milton-friedmans-ideas-holding/comment/7259612). Not just oil prices (already elevated before Russia kicked Ukraine's door in), but also the war's impact on gas, wheat, and neon; the pandemic shock of consumer demand bouncing from services to goods and back, and office workers' demand for housing; a noisier and reduced supply of workers; and probably climate change too. Since I wrote that June comment, for instance, a third of Pakistan (a country bigger than Texas) went underwater. That might have some impact!
You can compensate for the financial loss of income because of unemployment to some extent but unemployment has all kinds of social and health costs the government can't directly compensate for. People generally see themselves as a 'worker' that contributes to society but unemployment makes you dependent on the state and changes your relative status and position in society (and the way people talk about you). Unemployment, especially when longer lasting, is terrible for health. Even when adjusting for social class and other factors that negatively impact health, such as alcohol consumption/smoking amongst others, unemployed people have poorer health (and a higher risk of dying) than people with jobs and the effects can be longlasting. The story is similar for mental health and increased deaths of despair. A strong social safety net can attenuate these effects to some extent but i'm not sure that is being considered sufficiently at the moment.
Hopefully we will not enter a period of long-lasting higher levels of unemployment but I feel like causing increased unemployment (for the sake of fighting inflation) is talked about with too much levity on twitter and elsewhere sometimes for the devastating effect it can have on people's lives.
Unemployment programs are also inflationary, which isn't a problem in a deflationary environment but it is self-contradictory. Why sacrifice workers for the sake of inflation, but then immediately try to undo it?
If you care about unemployment, it's better not to create it so aggressively for the sake to inflation to begin with!
I think we should be permanently targeting a higher number than 2% (let's say 4%).
I think it's important to push back against this idea:
"people are slowly working through their pent-up savings from the pandemic"
The last one ($1,400) was 18 months ago. Really??
https://twitter.com/asymptosis/status/1537461695903281152/photo/1
Thread: https://twitter.com/asymptosis/status/1537461695903281152
I think perhaps what is meant is that many people saved tons of money during the pandemic because their previous spending habits involved lots of dining out and entertainment. It isn't supposed to refer just to the stimulus checks. But in reality, it's still not true in general because the "pandemic savings" of some were balanced by pandemic financial losses of others.
Yep wages are NOT to blame for the current high inflation in the US. Instead, the current high inflation is the price being paid for the extreme increase in the money supply (driven by enormous federal government deficits and the monetisation of those deficits by the Fed).
Wages are simply desperately trying to play catch up, but as is often the case during periods of high inflation, the working class, and those who can least afford it, are increasingly falling further and further behind. It's a real extra kick in the guts to these people that so many economists and policymakers are effectively using them as a scapegoat for their own failures in fiscal and monetary policy.
Though with the Fed tightening as aggressively as it has, inflation will come down, and is already showing significant signs of doing so. Most importantly the Fed doesn't need to keep raising rates. Current monetary policy settings have already resulted in the M2 money supply flatlining - the hard work has already been done. Durables prices peaked in February, have fallen significantly since, and are set to decelerate further on a YoY basis from October. Oil prices continue to roll over, which will continue to see the nondurables category decelerate. The main issue with inflation as measured by the CPI are shelter costs. Though again, there is reason for optimism here, as market based measures of rents have decelerated in recent months, and during August, were below the rate of growth being recorded by the CPI. Unfortunately the CPI (as well as the PCEPI), measures rental costs with a SIGNIFICANT lag, raising the risk of the CPI overstating inflation and the Fed overtightening. Though on an underlying basis, everything is pointing to a material decline in inflation over the next year - the bigger concern is will the Fed unnecessarily tip the economy into a severe recession by excessively tightening monetary policy, a scenario which I think is quite possible.
Yep, I agree. The housing component of CPI lagging by quite a bit leads to the Fed consistently being a year behind.
So awful.
I'm pretty sure it's mostly wage driven. That's a real cost.
I still have not seen ANY facts showing how this increase in money has actually led to an increased level of business. What is see is the SAME level of business and a lack of staff driving wages up.
I'm about ready to hold a séance' and summon the bloodthirsty vengeful ghost of Andrew Jackson.
-=-
Covid 19 vaccine damage repair protocols:
https://davenarby.substack.com/p/covid-19-vaccine-damage-repair-protocol
This can all be true, and the Fed is still behind and needs to continue tightening. Shelter is still rising, albeit more slowly, but still faster than we’d like. And the core non-housing components of inflation are still rising too. This all points to the Fed needing to have made these moves much sooner/faster, as the lags in these measures make it very difficult to judge the right time to stop.
I don’t understand the focus on M2 vs traditional measures of inflation? I keep seeing this on Twitter, but why does M2 have to do with anything? Should we instead look at M2 - Fed assets for a better picture of natural growth of money supply?
Zach, I have written more extensively about this in my newsletter if you were interested, but to also further the conversion here:
When you print more money (i.e. the M2 money supply increases), people now on average have more money to spend, which in isolation, raises the demand for goods & services, and eventually their prices. When you have a huge 25%+ YoY increase in M2 as we have seen during the post-COVID period, you get a surge in demand, and eventually high inflation.
Though just as the surge in M2 created a surge in demand and high inflation, the Fed's tightening + lower federal govt. deficit has meant that M2 is no longer growing. Just as extreme M2 growth created high inflation, flat M2 growth will lower it. Though just as it took a year for the initial surge in M2 to flow through to inflation, it will take time for its current stagnant position to result in a fall in inflation.
Nevertheless, some positive signs are already being seen. Again, this is most chiefly in durables prices which continue to decelerate significantly. Nondurables price growth is set to continue decelerating as long as oil prices continue to fall/don't again spike higher. The last remaining component is services prices, of which rents make up the bulk. Importantly, rents are now also decelerating, which if continued, will mean that the final major piece of the puzzle to achieving lower inflation will have been met - and which no M2 growth and a weakening economy are likely to achieve.
Re natural growth of the money supply, I would posit anything above 10% indicates an artificial stimulation of M2 (again, I have written about this more extensively in my newsletter and reports). Flat M2 growth like we have now is relatively unusual and may be indicating that the Fed has artificially tightened monetary conditions.
Why are you only focused on Y/Y change in M2 vs reverting to long-term M2 growth trendlines? It seems we would need M2 to revert back to M2 trend given the very outsized increase.
E.g., if normal M2 growth is 10% Y/Y, and M2 grows 100% in 1 year, you aren't "on track" the following year just by going back to 10%. You'd have to decline / absorb the increase in monetary supply to impact inflation.
My take here is that we need a lot more pain to get M2 back to long-term trend before we can confidently say inflation is on its way out.
Because when you increase M2, you get an increase in prices - it isn't constrained to long-term trends like that of general production.
100% is an extreme example as a rate of growth that high could lead to hyperinflation, but let's take the >25% YoY growth that we saw during the COVID period. Prices increased significantly as a result (YoY durables growth peaked at 18.7%, nondurables at 16.2% and market rents at over 17%). The adjustment has thus been made - there is no need for any reversion to a long-term trend as prices have adjusted themselves to the increase in the money supply. All that matters now is how the money supply changes moving forward.
Do you have a cross-country analysis along these lines written up anywhere? I tend to doubt monetary explanations of inflation in 21st C developed economies because they tend to focus on single countries even when inflation strikes across countries and continents, like the current inflation. (And I remember that back in the Great Recession people squawked about loose monetary policy unleashing an American inflation spiral, which just didn't happen. But that is a different issue.)
Fiscal stimulus much smaller after the GFC. Fiscal stimulus was the difference between inflation this time and no inflation last time.
True (edit: well, your first sentence). I was aware that the pandemic fiscal response was bigger than the Great Recession fiscal response but hadn't bothered putting a number on it before; potentially boring arithmetic follows.
TARP's size was about $700 billion (https://www.thebalancemoney.com/tarp-bailout-program-3305895); since GDP was $14710 billion in 2008, that's about 4.8% of GDP. The ARRA was about 5.7% of GNP (https://www.stlouisfed.org/publications/regional-economist/first_quarter_2017/the-recovery-act-of-2009-vs-fdrs-new-deal-which-was-bigger — GNP was similar to GDP so that distinction doesn't make a real difference).
By contrast, the 3 pandemic fiscal-aid acts of March 2020 (CPRSAA, FFCRA, and CARES) represented about 11.5% of GDP: 6.9% was direct stimulus from the CARES Act, 4.1% was loans and guarantees from the CARES Act, and 0.5% more was from the CPRSAA and FFCRA (https://www.goldmansachs.com/insights/talks-at-gs/04-01-20-cares-act-impact-on-us-economic-outlook-f/report.pdf). The American Rescue Plan then added another 8.4% of GDP (https://www.gspublishing.com/content/research/en/reports/2021/03/13/db25332e-4a60-45cf-aff2-5c31103185ee.html).
Adding it up: the Great Recession fiscal stimulus was about 10.5% of GDP (4.8% from TARP + 5.7% from ARRA), against 19.9% of GDP for the pandemic (0.5% from pre-CARES, 11.0% from CARES, 8.4% from ARP). One could quibble about which years to use as a baseline but that's a percentage-point kind of effect. Pandemic fiscal aid was about twice that of the Great Recession.
So a few things:
1) Most countries artificially increased their money supply in the wake of COVID.
2) The focus is on the US as it is such a large component of the global economy. Therefore if they increase M2 by >25%, this has such a large impact on global demand that it has flow-on effects for prices in other countries (though again, most countries did artificially increased their money supply in the wake of COVID).
3) Loose monetary policy post the GFC in and of itself didn't lead to the extreme increase in M2 that has been seen post-COVID. When the Fed has previously conducted QE the money largely sat as excess reserves at the Fed - it didn't enter the real economy. As Richard points out the key difference was the enormous fiscal stimulus that occurred this time around, which actually resulted in the money entering and flowing throughout the economy.
Good answer.
To nitpick your point that fiscal aid was "enormous [...] this time around" a bit: by my reckoning, post-GFC fiscal stimulus was also huge (https://noahpinion.substack.com/p/how-much-will-beating-inflation-hurt/comment/9324769). However, it IS true that the pandemic-era fiscal aid was a lot bigger (about 2× if I have the right numbers) and that M2 grew faster this time round (peaking at 26.9% YOY instead of 10.2% — https://fred.stlouisfed.org/graph/?g=Ud9t).
It makes sense that the COMBINATION of doubled fiscal shock and doubled/tripled monetary shock would have a bigger impact than in the 2010s, when the CPI-U struggled to breach 3%.
Your point about other countries boosting the money supply also seems to be accurate (https://www.yardeni.com/pub/gmsbnklend.pdf). All things considered, your monetary-plus-fiscal hypothesis appears to have legs!
Thanks for your considered responses!
Haha I would hope that it has at least some legs, or else I would have wasted a lot of time spending months writing a 70-page report on the US' current inflation!
If you were at all interested, I go into much more detail on the relationship between the money supply and prices in the aforementioned report, which you can access here: https://economicsuncovered.substack.com/p/follow-the-money-officially-released
That punishes the workers to save the banks by doing the same shit yet again, which is by popular definition insane.
Instead, start using alternative forms of payment and let the system crash & burn, then issue an equity based currency as opposed to our current debt-based one.
Many other things have to happen to fix this (e.g. end the tax on wages) but you get the idea.
The current system must die.
-=-
Covid 19 vaccine damage repair protocols:
https://davenarby.substack.com/p/covid-19-vaccine-damage-repair-protocol
The current system would be fine if Biden had not overextended UI and the Fed hadn’t been asleep at the wheel for 1 year too long
The answer to everything isn’t blowing it all up.
The Fed keeps being roughly 1 year behind. The huge stimulus packages as well as supply shocks/snarls led to big inflation a year after they came out. But that also means that inflation will be down in a year even if the Fed did nothing as the stimulus money is spent out. But the Fed seems insistent on forcing a recession and rocketing up unemployment so that they can drop rates to get the country out of recession.
It's an absolutely dumb and crazy strategy.
BTW, I'm on Team Transitory too, but if you look at previous episodes of transitory inflation (like after WWII), transitory inflation lasted 2-3 years, not months.
Good call, Richard. Just as it took time for the huge stimulus/money printing to create today's high inflation, it will take time for its removal/stagnation to lower inflation, but that's all the Fed needs to do - wait. By continuing to tighten further and further they will simply cause a potentially severe recession, only to repeat the whole process over again!
What’s your proof of this? How do you know that we tightened enough to compensate?
Seems like too high of a risk, especially given the Taylor curve’s prediction that we need to go far higher.
Economists are ignoring the elephant on the table: over a million unanticipated deaths in the U.S., 6.5 million worldwide, and 12K dead in the last 28 days in the U.S.
This scale of death is new, and the implications are not understood. Workers are withdrawing from the job market and changing their demands. Supply chain issues are quirky but ever-present. Construction is booming, and new cars abound on the road in my area. I don't see anyone with an economist's toolkit seriously examining these phenomena.
Clearly we should be taxing the people who became insanely wealthy during the period of easy money, the top ~10%. This would reduce demand and give us a war chest to fight unemployment and improve infrastructure when recession hits. Is reason we don’t do this is because it’s not politically feasible? Would we rather curb demand by giving those with capital a guaranteed return on high interest government and corporate bonds.
Is Jason Furman personally refusing any pay offer above 2.5% ? Or is that just for other ppl?
Surprised that labor share isn't mentioned here. Per Josh Mason et al et al, it's where the "sacrifice" shows itself quite clearly in the #s.
Earned labor compensation = employment (hours worked) * hourly wages
Labor share = earned income/(earned+unearned income)
Powell is engineering labor-share suppression. Even as the corp profits portion of unearned income shoots up. The proximate cause of price increases, at least, is just...firms raising prices/margins.
If they share those margin increases with labor (they're not doing that), any imagined problem is just money illusion, right?
While wages are a component of inflation that could be produced, aren't profits also a component? Would it make sense to cut profits instead?
Sure looks that way to me!
"After-tax profits as a share of gross value added for non-financial corporations, a measure of aggregate profit margins, improved in the second quarter to 15.5% -- the most since 1950 -- from 14% in the first quarter, according to Commerce Department figures published Thursday." — Bloomberg, "US Corporate Profits Soar With Margins at Widest Since 1950" (https://www.bloomberg.com/news/articles/2022-08-25/us-corporate-profits-soar-taking-margins-to-widest-since-1950)
I'm not sure I understand the argument that you can "compensate people for the loss of their job".
If you fully compensated people for losing their job, presumably they would continue to consume at roughly the same rate they did previously, so aggregrate demand (I hope I'm using the term correctly, not an economist here), stays the same, and supply would actually decrease (because they're no longer producing the good or service that they were previously paid to do).
Therefore, wouldn't such a (hypothetical) policy actually be inflationary rather than deflationary?
Yeah, the truth is, most people who lose their jobs aren't fully compensated.
Except in a pandemic apparently…. Which is part of what got us here.
I sort of get the theory of higher interest rates making cost of capital more expensive that reduces employment that reduces demand. But what I don’t get is the lost production from that lost employment.
In particular, the companies I’m seeing shrink employment right now are tech companies slowing their hiring and focusing more on operations and less on innovation. But the products they make are tools to increase worker productivity. The tools that would reduce inflation.
Surely there are better ways to reduce demand? Like higher taxes on consumers that buy a lot of labour and energy?
IMO, fiscal policy (the Keynesian way) is a better way to act as a countercyclical measure than monetary policy _if_you_can_trust_Congress_to_act_smartly_.
Seems that few people do.
It’s not just that you need Congress to act smartly. It’s also that, in the Keynesian model, at moments of high inflation, you would need to introduce austerity, cutting programs like Social Security, Medicare, and Medicaid.
That’s a far more painful solution than merely increasing interest rates, and it’s one that generates far more pushback.
You don’t actually need to cut those programs for austerity. Increasing taxes also leads to austerity.
But yes, I shouldn’t blame Congress that much and should say “if you trust the voting public as well as politicians to act smartly”
+1 . And not to blow my own horn but I've said the same thing... increase taxes! :)
It’s on the margin. If rates are zero, less economically valuable expenditures can be justified and yield a return over the cost of borrowing, but if rates are higher then you have to start to stick to more clearly valuable projects for borrowing. Maybe this means we see less innovation from less risk taking, but then maybe it also means we just see less companies in perpetual growth mode with no desire to become profitable. For example, remember a few years ago when Tesla was borrowing a ton to get the Model 3 project moving? A much higher interest rate environment might not have allowed that (the debt cost crush them before it finishes or even now the added cost of servicing the debt would be preventing them from being profitable). Or, it doesn’t mean you lose the job of the guy producing your food or repairing your car, you lose the job of the guy at Facebook trying to build a metaverse. At least that’s the more primary effect, but obvious those lost jobs - or incomes really - do trickle into other things, because now that guy isn’t doing a home remodel so a contractor might go without work.
I know that m/m inflation has caught up to y/y, but I fear that the media's overfocus on y/y has really warped people's sense of how much inflation there actually is. The reporting is always on the y/y number, and then the m/m is just presented as this wierd little extra spin that politicians and pundits are adding, usually with the connotation that the MSM is doing it because they're in the tank for Biden.
But the crazy thing is that most normies with a high-school understanding of inflation assume that the MSM's y/y data is actually m/m. And they get ANGRY about it like it's m/m, even if it's not! As long as there's something real in their daily life to hook it on - maybe the price of nails jumped, or whatever - normies just love to panic about the inflation bogeyman because it's a big scary thing they don't understand and have zero control over - AND because Americans perpetually feel "nickel-and-dimed" by our economy, so there's never any shortage of normie discontent over "the rent/healthcare/childcare/etc is too damned high".
This ultimately also fuels misperceptions about what to do about it and whether that's working. If m/m goes to zero now and stays there, y/y won't be zero until a year from now. Biden could theoretically get m/m back on target today, get hammered for high y/y over the next six months and lose Congress in the midterms, and yet would still have made the absolute perfect policy move.
Not in CPI minus food and energy it won’t be. And even in CPI with food and energy, the energy price drops have that led to those low numbers in July and Aug have flattened out and in many areas (mostly the West) gas prices are back near their yearly highs.
Noah,
I appreciate your critique of the claim that wages are driving inflation. Clearly, the situation is more complex than that, and wage increases play out as both cause and effect here. Honestly, I'm not a macroeconomist and these dynamic theories are a bit abstract for my grasp. Still, you also seem to be claiming that the labor market is not tight right now (adding tons of jobs, employment-pop ratio increasing). I'd like to pick at that a little. The distinction seems crucial because a very tight labor market creates the conditions for a wage-price spiral, even if we didn't arrive here until recently.
RE: employment-population ratio. It is true that small increases have been eked out recently. However, the March figure (80.0) is not much different from the August figure (80.3). There does not seem to be much more room for growth here relative to the pre-pandemic peak of 80.5 in Feb 2020. Indeed, we've not seen a higher ratio since June of 2001, more than 20 years ago. Perhaps the GFC and pandemic have kept the ratio lower than true potential, but it seems you are waving away a historically high ratio, and all that implies, by pointing out that some recent fluctuations were slightly positive.
Another piece of data that (if I recall) Summers has pointed to is the ratio of job seekers to unemployed. See https://dol.ny.gov/unemployed-job-seekers-opening
The current figure (0.5) is very low, lower that at any other point in the 20+ years I see data for. Looks like tightness.
I'd be delighted if you or others here could comment more on these observations.
As an aside, it does feel like this is all getting wildly over-politicized. Inflation seems high enough to justify raising interest rates based on the historical record and some common sense. I am quite confident that the same voices (Warren, Reich, etc.) that are advancing alternative inflation theories and decrying rate increases are creative enough to advance such theories under *any* inflationary scenarios. These are ideologues that seem to have to spin everything always into a justification for more government control of the economy and more redistribution. The whole area is just complex and murky enough to lend itself to that kind of armchair nonsense if you are so predisposed.
There is nothing natural or normal about near-zero interest rates, either historically or theoretically (time value of money). Interest rates around 4% are not some kind of crazy right wing idea. See Taleb, in particular, on this subject recently.
Politicians and pundits have this need to show rhetorical solidarity with labor. Cool. I am glad the fed just coldly looks at inflation, employment, and interest rates, as is their mandate. I am glad that people are finding employment nowadays! It's great. I also think that too much time under free money conditions is leading to prices rising ahead of wages (as firms can always act more quickly within the spiral). Going away from weird, crisis-justified monetary policy doesn't feel extreme. Maybe I'm just extreme.
We are now living in a relatively poor country (compared to other 'advanced' countries) with a few very wealthy people who control a disproportionate amount of financial resources, above and below all the tables, so why is it that when economists discuss the negative aspects of wages and inflation, they speak as if it applies to the whole economy? It doesn't. It seems we are running two parallel economies and penalizing one for the greed of the other. Really, who does the Fed work for and when?
You are plagiarizing an idea that was advanced in the FT, and discredited by Noah on this very blog.
https://noahpinion.substack.com/p/no-the-us-is-not-a-poor-society-with
Thanks for playing!
Happy to know that -- I was teaching it from this consumer perspective (https://www.theatlantic.com/newsletters/archive/2022/09/america-mortality-life-expectancy-pandemic/671350/) for years before that article. "Rich" is to be defined -- I'd settle for a longer life-span, the same one the wealthy have -- with private healthcare in reserve. Since I don't subscribe (just one more cost), I could not read Noah's debunking article, but it's nice to know income, if not the wealth it delivers, can be defended.
> And falling oil prices and falling freight prices and the end of supply chain snarls haven’t brought down core inflation yet.
Crude oil's prices have only been falling since mid-June, they take multiple months to properly feed through to general CPI (let alone core CPI), and we don't have inflation data for this month yet. And I don't see that the snarls in the supply chain are over? Through the summer I saw weird empty sections at the store and strike-outs on menus.
I remain basically happy with my June guesses at the biggest inflation contributors (https://noahpinion.substack.com/p/how-are-milton-friedmans-ideas-holding/comment/7259612). Not just oil prices (already elevated before Russia kicked Ukraine's door in), but also the war's impact on gas, wheat, and neon; the pandemic shock of consumer demand bouncing from services to goods and back, and office workers' demand for housing; a noisier and reduced supply of workers; and probably climate change too. Since I wrote that June comment, for instance, a third of Pakistan (a country bigger than Texas) went underwater. That might have some impact!
I still see only August's 0.1% and 8.3% on bls.gov/cpi/.
Aha, thanks for the link!
You can compensate for the financial loss of income because of unemployment to some extent but unemployment has all kinds of social and health costs the government can't directly compensate for. People generally see themselves as a 'worker' that contributes to society but unemployment makes you dependent on the state and changes your relative status and position in society (and the way people talk about you). Unemployment, especially when longer lasting, is terrible for health. Even when adjusting for social class and other factors that negatively impact health, such as alcohol consumption/smoking amongst others, unemployed people have poorer health (and a higher risk of dying) than people with jobs and the effects can be longlasting. The story is similar for mental health and increased deaths of despair. A strong social safety net can attenuate these effects to some extent but i'm not sure that is being considered sufficiently at the moment.
Hopefully we will not enter a period of long-lasting higher levels of unemployment but I feel like causing increased unemployment (for the sake of fighting inflation) is talked about with too much levity on twitter and elsewhere sometimes for the devastating effect it can have on people's lives.
Unemployment programs are also inflationary, which isn't a problem in a deflationary environment but it is self-contradictory. Why sacrifice workers for the sake of inflation, but then immediately try to undo it?
If you care about unemployment, it's better not to create it so aggressively for the sake to inflation to begin with!
I think we should be permanently targeting a higher number than 2% (let's say 4%).