In trying to predict future inflation, which is related to the printing of money and debasement of the value of the currency, the concept of "Real Interest Rate" (nominal - inflation) is relevant. At the present time with the small increases by the FED, the "real interest rate" has become more negative because the inflation rate has increased faster than the Fed's rate.
A negative real interest rate means that financial intermediaries can still make fortunes by borrowing at Fed rate and buying anything which will maintain value over time. An "investment" doesn't have to actually be profitable, it just has to maintain value. To kill inflation, the real interest rate must become positive. That is what the Fed did in the early '80s by increasing interest to 20%, which did kill inflation. All during the '70s, like today, half measures were taken while unions and all government workers obtained COLA's (cost of living adjustments). Nice for them, but to the great disadvantage of non-government and non-union employees, the value of whose paychecks decreased monthly as the cost of living increased.
Energy and human creativity are fundamentally the only limited resources on our finite planet. Therefore, a savvy investor could just buy steel or aluminum and let it sit as an "investment", all the while making a profit on the borrowed money. Aluminum will maintain its energy value.
I worked on an economic development project in Brazil in 1962. At the time, Brazil's high rate of inflation resulted in people buying rebar and storing it in their yards, essentially bypassing their currency that was loosing its value.
Inflation drives unproductive choices to the benefit of the individual to protect their assets. But these choices are destructive to the well-being of the society as a whole, by diverting investment funds from alternatives that could generate real profits in the long term and be the salvation of society which is being unnecessarily handicapped by the well-intended, but short-sighted maintaining of interest rates below what they actually are in the real world. The "Real Interest Rate" is really the only one that matters.
I am not seeing an economic slowdown. However, layoffs in tech and lending have started. The real estate industry is slammed and spending on advertising - the easiest marginal cost to cut - is dropping. I am also seeing a lot of inflation, especially in food.
Soft landing? Maybe. But as in 2008 I wonder if economic confidence is misplaced. In 2008 the lending and real estate industries were collapsing and the economy held up. And then it all suddenly fell apart.
What could save the economy would be political support for pro-growth policies. Drop the war against fossil fuels. Drop the war against land development. Drop the war against contract labor (the gig economy). In short: Reverse the Biden / Progressive economic and climate policies.
Could happen. Won't happen. Until a pro-growth Democrat appears on the scene and challenges the dominant party ideology, I expect the Biden administration to stick with stupid.
None of this gets at my question, given what it knows now, what should the Fed have done In March 2021 or September 2021. I think it's action and messages would be mor effective if this ongoing self-audit were part of its MO.
Oh, and asking the Treasury to please create more intermediate TIPS and an NGDP linked marketable security. :)
I'm looking forward to the discussion on Monday about these issues. I may be on the road, but if so, I'll pull into a rest area and join via my phone. This is good stuff!
As there are only two real resources that limit humanity and they are human creativity and energy that can provide information about what will be inflation resistant. Given energy, I can give you all other so-called resources such as minerals. Remember atoms of copper and gold don't go away, they just get diluted but can be re-concentrated using energy.
Much as bitcoins are just energy translated into mega floating point operations things like iron is just energy converted into a reduced form of energy from rust, if we look at the thermodynamics of making iron we find that translation amount is almost constant over time. As I witnessed in Brazil, rebar held its value while the currency was debased. Moore's law makes the translation of energy into bitcoin a variable which makes iron, cement, aluminum, etc. better than bitcoin.
Note that paying interest on reserves is a new policy, which doesn't solve the problem of inflation or allowing non-connected individuals access to loans. It is just a subsidy to the banks and connected people on wall street.
Minor countries can still use dollars as a store of wealth as eating the dollar inflation rate is a lot lower theft rate than someone like Erdogan of Turkey. However, I still don't like our government stealing my retirement saving.
'or that new home construction is about to enter a deep contraction, and those things could happen even if my criticisms of the pessimists are accurate. In fact, the pessimists caused the 2008 crisis. (Read about it here!) So, the pessimism could be important, even if misguided. But, I think the base case is still positive.'
Sort of self fulfilling isn't it? We could be entering a deep contraction because of pessimists- but lets get back to that. Why use the 'could' which implies 'no one could know right now', why not look at the data which is what he typically does? Fred has the data- housing starts have fallen from 1.8 million to 1.44 million since April, housing permits have fallen from 1.88 million in March (peak was actually December at 1.89) to 1.56 million in September.
What is the 'base case' for an economic series that has peaked and dropped by 20% over a 6 month period? A quick check of the graphs implies that a 20% decline in these indicators is much more often followed by additional decline than it is stabilization and or rebound.
This is just having your cake and eating it- either we get a soft landing and he's correct or we have an 'unexpected' shock. How could he really be proved wrong? I guess a massive recession that somehow doesn't impact housing any further?
Starts and permits aren't in a vacuum. New mortgage applications have been falling for 5+ months, total applications are down 68% y/y for the most recent numbers.
These things aren't trade secrets, your friendly neighborhood search engine will give you them. Nor do they require industry insight beyond the fact that home building is driven by home sales, and home sales begin with permits and starts. These aren't leading indicators, they are leading CAUSAL agents, home builders want to build homes- that is how they make money. Construction employment tends to drop off ~ a year after permits and starts stop (when you combine commercial and residential), and broad slow downs tend to come 6 months to a year after that.
'Both currency and deposits have levelled off for some time, and I think for the Fed to target short-term rates above 5% next summer, they would have to engage in the same disastrous types of monetary contraction that they did back in 2008.'
The disastrous types of monetary contraction that occurred in 2008 included dropping rates by 325 points from Augus 2007 to May 2008, and then holding interest rates steady for 3 months. If inaction for a quarter can result into 'disastrous types of monetary contraction' then there is zero way for him to plausibly speculate that the Fed not actually going to 5% would be not disastrous.
Just for context the federal funds rate right now is only 3.08%, if the Fed hard stopped its increases and went back to its 'disastrously contractionary' policies of 2007-08 we would be at negative rates by September of 2023.
What the Fed should have done is to start raising rates in the middle of 2021, and at a faster pace than they are doing today. However, Jerome Powell needed to get reappointed and confirmed first, so he was forced to delay action until that happened. I still believe there is a 50% chance he wavers and starts cutting rates again before inflation comes back down to under 2% as measured by the government. It will take nerves of steel to succeed given how corrupted our entire governing structure has become. And even if he doesn't quail in the face of the criticism, there is still the possibility of getting fired and replaced by someone who will.
Two months ago, I thought you were wrong about the hoarding of labor, but I now see you were right Arnold.
I think until interest rates exceed the inflation rate, the inflation rate won't come down, and the official rates of inflation are under-reporting the actual rate of inflation by at least a factor of 2. My 6-week running average grocery bill (this length of term covers every item I buy, and I exactly the same pool of goods- I am boring that way) for myself and my mother (our household) has risen 32% since January of 2020 (and this is with me using coupons over the last 6 months and swapping out brand names for some store generics where possible).
I just got the information on my health insurance renewal- up 20% for the exact same policy, and this is on top of a 27% increase in cost last year on a less generous policy than the one I had during 2021. The auto insurance bills are due this week, but I expect they will have the same 10% increase I saw in the ones from last June. Fortunately, for us, the house is paid for, but the town is sure to increase the mill rate for the taxes by at least 20%. Inflation isn't at 8-9% from where I am looking at it.
I continue to believe two things:
1. Nobody really understands what is going on.
2. Our “financial forest fire prevention” of the last several decades brought us here.
Maybe we kick the can down the road one more time and again compound the size of the final reckoning. Maybe not. There’s a lot of smoke.
In trying to predict future inflation, which is related to the printing of money and debasement of the value of the currency, the concept of "Real Interest Rate" (nominal - inflation) is relevant. At the present time with the small increases by the FED, the "real interest rate" has become more negative because the inflation rate has increased faster than the Fed's rate.
A negative real interest rate means that financial intermediaries can still make fortunes by borrowing at Fed rate and buying anything which will maintain value over time. An "investment" doesn't have to actually be profitable, it just has to maintain value. To kill inflation, the real interest rate must become positive. That is what the Fed did in the early '80s by increasing interest to 20%, which did kill inflation. All during the '70s, like today, half measures were taken while unions and all government workers obtained COLA's (cost of living adjustments). Nice for them, but to the great disadvantage of non-government and non-union employees, the value of whose paychecks decreased monthly as the cost of living increased.
Energy and human creativity are fundamentally the only limited resources on our finite planet. Therefore, a savvy investor could just buy steel or aluminum and let it sit as an "investment", all the while making a profit on the borrowed money. Aluminum will maintain its energy value.
I worked on an economic development project in Brazil in 1962. At the time, Brazil's high rate of inflation resulted in people buying rebar and storing it in their yards, essentially bypassing their currency that was loosing its value.
Inflation drives unproductive choices to the benefit of the individual to protect their assets. But these choices are destructive to the well-being of the society as a whole, by diverting investment funds from alternatives that could generate real profits in the long term and be the salvation of society which is being unnecessarily handicapped by the well-intended, but short-sighted maintaining of interest rates below what they actually are in the real world. The "Real Interest Rate" is really the only one that matters.
I am not seeing an economic slowdown. However, layoffs in tech and lending have started. The real estate industry is slammed and spending on advertising - the easiest marginal cost to cut - is dropping. I am also seeing a lot of inflation, especially in food.
Soft landing? Maybe. But as in 2008 I wonder if economic confidence is misplaced. In 2008 the lending and real estate industries were collapsing and the economy held up. And then it all suddenly fell apart.
What could save the economy would be political support for pro-growth policies. Drop the war against fossil fuels. Drop the war against land development. Drop the war against contract labor (the gig economy). In short: Reverse the Biden / Progressive economic and climate policies.
Could happen. Won't happen. Until a pro-growth Democrat appears on the scene and challenges the dominant party ideology, I expect the Biden administration to stick with stupid.
None of this gets at my question, given what it knows now, what should the Fed have done In March 2021 or September 2021. I think it's action and messages would be mor effective if this ongoing self-audit were part of its MO.
Oh, and asking the Treasury to please create more intermediate TIPS and an NGDP linked marketable security. :)
I'm looking forward to the discussion on Monday about these issues. I may be on the road, but if so, I'll pull into a rest area and join via my phone. This is good stuff!
As there are only two real resources that limit humanity and they are human creativity and energy that can provide information about what will be inflation resistant. Given energy, I can give you all other so-called resources such as minerals. Remember atoms of copper and gold don't go away, they just get diluted but can be re-concentrated using energy.
Much as bitcoins are just energy translated into mega floating point operations things like iron is just energy converted into a reduced form of energy from rust, if we look at the thermodynamics of making iron we find that translation amount is almost constant over time. As I witnessed in Brazil, rebar held its value while the currency was debased. Moore's law makes the translation of energy into bitcoin a variable which makes iron, cement, aluminum, etc. better than bitcoin.
Note that paying interest on reserves is a new policy, which doesn't solve the problem of inflation or allowing non-connected individuals access to loans. It is just a subsidy to the banks and connected people on wall street.
Minor countries can still use dollars as a store of wealth as eating the dollar inflation rate is a lot lower theft rate than someone like Erdogan of Turkey. However, I still don't like our government stealing my retirement saving.
Point 2 on Erdman-
'or that new home construction is about to enter a deep contraction, and those things could happen even if my criticisms of the pessimists are accurate. In fact, the pessimists caused the 2008 crisis. (Read about it here!) So, the pessimism could be important, even if misguided. But, I think the base case is still positive.'
Sort of self fulfilling isn't it? We could be entering a deep contraction because of pessimists- but lets get back to that. Why use the 'could' which implies 'no one could know right now', why not look at the data which is what he typically does? Fred has the data- housing starts have fallen from 1.8 million to 1.44 million since April, housing permits have fallen from 1.88 million in March (peak was actually December at 1.89) to 1.56 million in September.
What is the 'base case' for an economic series that has peaked and dropped by 20% over a 6 month period? A quick check of the graphs implies that a 20% decline in these indicators is much more often followed by additional decline than it is stabilization and or rebound.
This is just having your cake and eating it- either we get a soft landing and he's correct or we have an 'unexpected' shock. How could he really be proved wrong? I guess a massive recession that somehow doesn't impact housing any further?
Starts and permits aren't in a vacuum. New mortgage applications have been falling for 5+ months, total applications are down 68% y/y for the most recent numbers.
These things aren't trade secrets, your friendly neighborhood search engine will give you them. Nor do they require industry insight beyond the fact that home building is driven by home sales, and home sales begin with permits and starts. These aren't leading indicators, they are leading CAUSAL agents, home builders want to build homes- that is how they make money. Construction employment tends to drop off ~ a year after permits and starts stop (when you combine commercial and residential), and broad slow downs tend to come 6 months to a year after that.
Point 1
Erdman-
'Both currency and deposits have levelled off for some time, and I think for the Fed to target short-term rates above 5% next summer, they would have to engage in the same disastrous types of monetary contraction that they did back in 2008.'
The disastrous types of monetary contraction that occurred in 2008 included dropping rates by 325 points from Augus 2007 to May 2008, and then holding interest rates steady for 3 months. If inaction for a quarter can result into 'disastrous types of monetary contraction' then there is zero way for him to plausibly speculate that the Fed not actually going to 5% would be not disastrous.
Just for context the federal funds rate right now is only 3.08%, if the Fed hard stopped its increases and went back to its 'disastrously contractionary' policies of 2007-08 we would be at negative rates by September of 2023.
What the Fed should have done is to start raising rates in the middle of 2021, and at a faster pace than they are doing today. However, Jerome Powell needed to get reappointed and confirmed first, so he was forced to delay action until that happened. I still believe there is a 50% chance he wavers and starts cutting rates again before inflation comes back down to under 2% as measured by the government. It will take nerves of steel to succeed given how corrupted our entire governing structure has become. And even if he doesn't quail in the face of the criticism, there is still the possibility of getting fired and replaced by someone who will.
Two months ago, I thought you were wrong about the hoarding of labor, but I now see you were right Arnold.
I think until interest rates exceed the inflation rate, the inflation rate won't come down, and the official rates of inflation are under-reporting the actual rate of inflation by at least a factor of 2. My 6-week running average grocery bill (this length of term covers every item I buy, and I exactly the same pool of goods- I am boring that way) for myself and my mother (our household) has risen 32% since January of 2020 (and this is with me using coupons over the last 6 months and swapping out brand names for some store generics where possible).
I just got the information on my health insurance renewal- up 20% for the exact same policy, and this is on top of a 27% increase in cost last year on a less generous policy than the one I had during 2021. The auto insurance bills are due this week, but I expect they will have the same 10% increase I saw in the ones from last June. Fortunately, for us, the house is paid for, but the town is sure to increase the mill rate for the taxes by at least 20%. Inflation isn't at 8-9% from where I am looking at it.