These 202x years are not the 70s calling. Then, there was a huge increased demand from Boomers, and a shortage of capital.
Today, no big demographic increase, and no big shortage of capital.
Then, "inflation expectations" were not so much talked about - now they're assumed to be ever-present, and mostly rational. Expecting inflation, and planning for inflation, usually causes individuals to take actions which increase inflation.
Energy price increase ARE similar to the 70s.
Increasing energy prices look a lot like inflation, "(almost) all prices rise", even tho the higher energy using products go up relatively more. While not quite necessary, and certainly not sufficient (there wasn't big inflation with oil at $150/bbl in 2008), higher oil prices, in looking like inflation, DO increase inflation expectations.
The main driver of this years big inflation is last year's excess gov't spending. Trump spent the most that could be spent without big inflation; Biden spending more was spending too much.
But I don't see the dollar getting weaker against the Euro nor the Yen, so it's not like there is an obvious alt currency for investors who don't trust US inflation.
However, if Russia & China combine to lead to an alt BRICS (incl. Brazil, India, South Africa) international payments regime, there might be a viable non-USD international alternative.
1) Milton Friedman's money supply rules required stable money velocity. That broke down as the government deregulated the financial institutions. in the '80s Friedman and his disciples predicted inflation that never occurred because their basic equation no longer held.
2) Bernanke's biggest failure was not realizing that quantitative easing was making the Fed a giant S&L and providing to a way to unwind it.
The Fed's fundamental problem is it has bought into the hubris that it can and should optimize the country's economic performance. If the Fed had authority over everything related to the country's economic and financial activity, this notion might at least be theoretically valid. But seeing the Fed can do nothing about policy mistakes that directly impact supply costs and money velocity the Fed is left pushing on a string.
It appears Powell's hope is that the by slightly increasing the funds rate, and jawboning about future rate hikes, the "excess demand" that has elevated pricing will drain off and the economy will return to the low inflation equilibrium. To Powell's credit, there does not seem to be the income growth necessary to sustain high inflation. If the government stops issuing stimulus and if asset prices don't rebound, then demand should slack, and rather quickly.
What likely will happen is demand will slack more than expected. Politicians and the business lobby will start complaining that their pain needs to be eased. And then Powell will be called on to explain what the Fed is doing to fix those troubles.
Good rejoinder. It is helpful for me as some in between your two camps. Thought I had is that demographics are a massive deflationary or dis-inflationary headwind. It took a lot of dislocation and spending in the economy to create inflation because of that headwind. Most likely that inflation will come out of the system over time. It’s possible the Fed could make the problem worse by cutting again too quickly or by ratcheting too quickly. So we could have some out of trend years but viewed from multi-decades this will overall be a disinflationary period.
These 202x years are not the 70s calling. Then, there was a huge increased demand from Boomers, and a shortage of capital.
Today, no big demographic increase, and no big shortage of capital.
Then, "inflation expectations" were not so much talked about - now they're assumed to be ever-present, and mostly rational. Expecting inflation, and planning for inflation, usually causes individuals to take actions which increase inflation.
Energy price increase ARE similar to the 70s.
Increasing energy prices look a lot like inflation, "(almost) all prices rise", even tho the higher energy using products go up relatively more. While not quite necessary, and certainly not sufficient (there wasn't big inflation with oil at $150/bbl in 2008), higher oil prices, in looking like inflation, DO increase inflation expectations.
The main driver of this years big inflation is last year's excess gov't spending. Trump spent the most that could be spent without big inflation; Biden spending more was spending too much.
But I don't see the dollar getting weaker against the Euro nor the Yen, so it's not like there is an obvious alt currency for investors who don't trust US inflation.
However, if Russia & China combine to lead to an alt BRICS (incl. Brazil, India, South Africa) international payments regime, there might be a viable non-USD international alternative.
Excellent essay. Two observations:
1) Milton Friedman's money supply rules required stable money velocity. That broke down as the government deregulated the financial institutions. in the '80s Friedman and his disciples predicted inflation that never occurred because their basic equation no longer held.
2) Bernanke's biggest failure was not realizing that quantitative easing was making the Fed a giant S&L and providing to a way to unwind it.
"More recently, Presidents Bush and Obama ran large deficits. To be honest, I thought that was enough to destabilize the dollar. I was wrong then."
I think you are too modest, Arnold. I think you were mostly right about the outcome, but just wrong in how long it would take to manifest.
The Fed's fundamental problem is it has bought into the hubris that it can and should optimize the country's economic performance. If the Fed had authority over everything related to the country's economic and financial activity, this notion might at least be theoretically valid. But seeing the Fed can do nothing about policy mistakes that directly impact supply costs and money velocity the Fed is left pushing on a string.
It appears Powell's hope is that the by slightly increasing the funds rate, and jawboning about future rate hikes, the "excess demand" that has elevated pricing will drain off and the economy will return to the low inflation equilibrium. To Powell's credit, there does not seem to be the income growth necessary to sustain high inflation. If the government stops issuing stimulus and if asset prices don't rebound, then demand should slack, and rather quickly.
What likely will happen is demand will slack more than expected. Politicians and the business lobby will start complaining that their pain needs to be eased. And then Powell will be called on to explain what the Fed is doing to fix those troubles.
https://fortune.com/2022/06/26/powells-path-to-2-inflation-needs-luck-or-failing-that-pain-we-cant-afford-to-be-fooled-again-on-this-or-else-its-going-to-get-beyond-us/
Good rejoinder. It is helpful for me as some in between your two camps. Thought I had is that demographics are a massive deflationary or dis-inflationary headwind. It took a lot of dislocation and spending in the economy to create inflation because of that headwind. Most likely that inflation will come out of the system over time. It’s possible the Fed could make the problem worse by cutting again too quickly or by ratcheting too quickly. So we could have some out of trend years but viewed from multi-decades this will overall be a disinflationary period.