Dec 23, 2022·edited Dec 23, 2022Liked by Noah Smith

This was great overview thanks.

Seems like fighting last war is always a problem especially with something so scarring as the Great Recession

In 2005, too many ingnored the money supply created by banks, private lending and didn't fully comprehend how out of hand private debt had gotten with loosened lending standards.

Then in 2020, too many didn't understand how low interest rates and expanded money could feed inflation even while private debt was tame and savings high, because low rates were into face of much different set up,

I'd add in the age demographics we're overlooked. Beyond overlerage in 2007, the other thing for U.S. that had hurting us more in 2010s was just as housing debt got carried away, the Gen X population trough came of working age, househokd formation age, so big over leverage and over supply right into face of less buyers, really really crahed housing+.

Then in 2020 we had huge population of Millennials hit peak home buying ages, while supply was low and interest rates low and most people had more savings and also huge shift in type of demand towards SFHs (work from home needing extra space etc), and wham, housing went out of control.

So Fed low interest rates weren't at all counter cycle this huge part of economy in 2020. Turns out housing didn't need help of low rates in 2020 like it did in 2010, even with pandemic and really,

partly because pandemic.

Other big lesson of what missed this time is how important supply is to taming inflation. In last war in 2010, that was not a thing because gas was in good supply with fracking boom in U S. and housing had been overbuilt due to overlerage.

This time, in 2020, lack of supply in housing building because of bad policies and because of pandemic supply disruptions worked against free easy money

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Great observation on demographics. How much do you think labor shortages will drive inflation? Less workers could lead to less products. Also better compensated workers (a very good thing) could lead to high demand.

High demand

Less supply

I think Millennials will be entering their peak consumption years as well. This could drive up demand for consumer goods and services.

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I feel like age demographics mostly an issue for housing in U.S. because we have such barriers to housing supply and because way demand has shifted. Baby Boom had abundant housing being built and shift to suburbs that made most cities cheaper.

If we didn't have such housing supply shortage and such a shift in demand to super star cities, likely more balance in supply and demand.

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Labour shortages shouldn’t drive inflation of productivity keeps up.

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Discussing today's economic events with no mention of the war in Ukraine, Russian sanctions, zero-covid in China, the effects of Covid on workforce participation and the effects of climate change on global agriculture seems wrong. Macro is navel gazing and missing the fact that the economy exists in the real world?

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He did mention Ukraine indirectly

"People have argued back and forth about how much demand shocks and supply shocks were responsible for the inflation, but the general consensus answer seems to be that both contributed"

Events that reduce supply, such as Ukraine, sanctions, China, and Climate change are "supply shocks".

For workforce participation: If you're talking about the impact of workforce participation on supply, that counts as a supply shock. If you're talking about the impact of workforce participation on demand, real consumption is still up compared to pre-COVID.

I don't think discussing the minutae of Ukraine or China is relevant to this, because in the grand scheme of things, they can all be accounted for in the category of supply shocks.

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That's a good point.

Also recall how the housing bubble finally burst in 2008 but only after the Beijing Olympics, when oil and raw materials prices spiked ? As in, so much that people wouldn't believe anymore that China's growth could pull us out of any slump.

Come to think of it timing wise we also have

low oil prices with the fracking boom in 2010s -- low inflation

high prices with Russia's war and underwhelming fracking -- high inflation

though it's just a correlation in time, and I understand your point is about more than oil.

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It’s almost like there’s no universal economic theory, and that each problem requires different tools (or old tools with different techniques).

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My Econ 101 teacher taught us the “Principle of TANSTAAFL” (there ain’t no such thing as a free lunch). I think that applied to the QE of the 2010’s. Remember, a lot of wealth was built then by real estate speculators who greatly benefited by low rates during this period. And, of course, the government loved the low rates to cover its deficits. I think what happened this year is that we are paying for those lunches. Hopefully the rest of the 2020’s is a bit more of what Friedman prescribed. Reasonable interest rates should encourage more reasonable financial behavior and benefit those who did not over borrow (the Dave Ramsey crowd).

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Can we just get a quick round of applause for the federal government correcting the insanity that precipitated 2008, i.e. sub-prime loans, etc.? That we could have this kind of decline in housing prices without significant defaults (and not much sign of that on the horizon) seems like a pretty big win to me. Letting households over-leverage was the root of the problem, i.e., underwriting awful mortgages. It didn't help that Wall Street churned out a ton of products that magnified that leverage. They sure did make a ton of money off of the stuff that nearly drove us into another depression. A fairly large lesson to me seems that the finance industry is too critical not to be enormously regulated. Thank goodness we have moved more in that direction.

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This was a helpful piece on something I've been wondering about. Thank you.

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It does remind me a bit of 1994 when both the stock and bond market sold off at the same time. The main difference is that in the 1990s underlying productivity growth was faster, but we could see that again if the YIMBYs keep winning.

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I think that recent years do not tell us that easy money is inflationary after all but that QE+fiscal stimulus at a global scale works to bring a solid recovery and possibly inflation if you go too far.

And one thing we have to the masters need to learn is how to deal with inflation caused by too strong demand but also supply shocks from multiple sources, including sector reallocations. Is it better to have inflation or to reduce demand enough to offset the inflationary supply shocks. I was on the impression that the latter was not the right prescription so why all central bankers going around saying they will only sleep well when inflation is at 2 % and a bunch of people no longer work: is it not a bit simple to point to the invisible and not well-understood inflation expectation danger!

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One difference is that a significant? portion of the run-up in housing prices was driven by corporations purchasing houses for rentals, not individuals. That might be part of why the housing collapse looks different.

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Doesn’t fiscal policy have long and variable lags too? I never see people talking about that

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No one seems to understand the implications of massive covid deaths. The immediate effect is the lack of bodies to fill jobs. Although the deaths have been largely not job-holders, job-holders have moved away from jobs to fill new roles. In addition, the psychology of work has changed. Motivation for work has changed. These effects are out of the usual scope of economic thought but still profoundly affect the economy.

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Dec 26, 2022·edited Dec 26, 2022

Since those who died from COVID were disproportionately not in the workforce in the first place, and yet were still spending money (thus providing demand for jobs), it seems to me this might be on-net deflationary, not inflationary - that the drop-off in demand from these folks outpaces the drop-off in labor supply.

Then again, as some of that wealth becomes inherited, it could actually push demand out more if marginal propensity to consume is higher. But that's a very different mechanism than labor supply.

If 20% of the population dies proportional to labor force participation & MPC, then 20% of your labor supply evaporates. But so does 20% of your demand. Net effect: unclear, no?

It's worth also testing theories about COVID deaths against quasi-control countries that have had very few COVID deaths. Australia & NZ have low COVID deaths and pretty high inflation.

I do think the psychology of work effects are under-appreciated, though.

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Worth pointing a key difference between QE after 2008 and what happened in the wake of COVID: the former did not really recapitalize the balance sheets of the millions of people whose home equity was wiped out and QE just put money in the hands of rich people. But the fiscal response to COVID resulted in a lot of cash immediately in the hands of average joes who went out and spent it. This is only gently alluded to in the article.

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Dear Noahpinion,

The following might bear reconciling:

"(Ben Bernanke’s models were one of the very few exceptions, which is why he won the Nobel prize this year)."

From Jaime Galbraith's 12/15 Monetary Policy Institute blog " Bernanke’s “Nobel” lecture reflects his personal qualities. It is free of self-advertisement, indeed practically self-effacing, which is perhaps suitable when one considers that Bernanke was Chair of the Board of Governors of the Federal Reserve System when the greatest financial crisis of our lifetimes hit, which by his own words, then and later, he did not see coming."

Thank You

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Going forward, there are 3 huge factors that will affect the economies of the world.

1/ The end of cheap easy credit.

2/ The end of cheap easily accessible energy

3/ The end of cheap labour from offshoring.

These 3 factors have underpinned economic growth for the last 40 years or more...

Have you got land? Have you got oil?

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I don't think MMTers axiomatically support tax cuts. They just object to the idea that taxes are requires to fund social programs. The piece you linked to was largely Stephanie Kelton objecting to PAYGO and the idea that a billionaires' tax was required to "pay for" social programs. Whether we need tax cuts or not depends on broader economic cibtext, according to MMTers.

To the broader points raised, I think Bill Janeway's work on asset bubbles makes sense here. To the extent that these asset bubbles permeate and infect the banking system (eg the 2008 housing bubble), they have broader systemic implications.

But sometimes asset bubbles do not infect the banking system, and therefore do not create broader financial risks. Janeway cites the railway bubble of the 19th century, or the dot.com bubble of the late 1990s, as examples of bubbles which, when they burst, did not cause major financial crashes and in fact, left behind some useful social infrastructure (even though individual companies or sectors may have been adversely affected when such asset bubbles burst(.

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At what point do economists distinguish a “housing price bubble” like the pre-2007 housing market from “housing price temporary insanity” which better describes the thing that happened during the last two years?

I ask because the lived experience of myself and most homeowners I know is that things got a little weird on Zillow for a very short time and now they appear to be returning to trend, quickly enough that only a few lucky (or well-timed) buyers/sellers are really affected by it. Whereas in the early 2000s the housing bubble was durable and long lasting, plus it worked its way into the consumer economy through home equity loans.

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