We can remain agnostic about which instruments the Fed should use to achieve its targets. It may will be that different circumstances -- deficits, supply shocks, demand shocks -- will call for different combinations of FF rates, QE, IOR, or even new instruments. What we should NOT do is allow changing circumstances to excuse the Fed from achieving it's targets or allow us to lose sight of the fact that deficits drain resources from investment into consumption.
Yes to pushing the Fed to have more stable money - this should be their only mandate. It should be up to other political orgs to maximize employment given the deficit and the other political decisions.
Deficits certainly increase consumption - but it might be that by borrowing/ stealing from the future, we get more current consumption AND current investment. I did not believe this was true in the past, but now I'm more open to the idea. The data doesn't seem to falsify it.
Legally the Fed has to consider both stable prices and maximum employment. I think conceptually the way to do that is what they supposedly do, flexible average inflation targeting. The "average" is what they think the economy needs given that some prices cannot fall in response to real changes that require changes in relative prices to equilibrate. [This is closer to our host's idea of specialization and trade among various sectors than traditional Keynesian homogeneous GDP] It is the inflation rate that maximizes employment. The "flexible" part is how quickly the Fed should try to return inflation to the target rate when it has departed from it.
I think fiscal policy should be about real resource allocation, between consumption and investment to promote long tern growth, and redistribution to shift consumption from where it will do less good to where it will do more good: rich to poor, well to sick, employed to unemployed, from activities causing negative externalities to those receiving the effects of the negative externalities.
When the economy is near full employment (of all resources not just labor) my guess is that this would mean near zero deficits. In recession, when the Fed has reduced interest rates and when many resources are un or under employed, a government that uses NPV as a spending guide will find more activities having NPV>0 during recession than when at full employment and it will make sense to incur a deficit to carryout those additional activities. This "looks like" standard Keynesianism recommendation of deficit during recessions ad surpluses at full employment, but _we_ know better. :)
Hi Arnold. I like your work, and also usually run out of time for podcasts. Will you be posting a write up / summary of what you think, re markets, behind the paywall? (I am a markets guy).
Japan has had 3 decades of increasing national debt, & deficits, and not a lot of inflation, tho prices do rise when energy prices go up. I like that Lyn Alden notes some important facts:
- "Running deficits equal to 8% of GDP while the unemployment is under 4% is very unusual."
Two main causes of rapid money supply growth:
- "first cause is rapid bank lending," (like the 70s, demographics driven)
- "The second cause is large monetized fiscal deficits," which previously was more tied to conflict, but seems more like what we have now. More 40s than 70s - except with much higher national debt.
"for the recent period, year-over-year federal debt increases are larger than year-over-year bank loan creation." -- it makes sense to me that if fed debt increases more than bank loans, the fed debt is driving money growth.
Then, unmentioned by Lyn, the main problem becomes the very low rates of return on gov't debt based "investment" rather than bank loans. But we don't see the low ROIs for a few years of lag.
Lyn astutely addresses interest rate increases, noting: "the Federal Reserve doesn’t really know what else to do, because their tools don’t really address deficit-driven inflation; their tools are meant to deal with lending-driven inflation."
She also notes that inflation depends on who gets the money, the savers or spenders.
"If the government gives $10 billion each to the top 100 richest billionaires in the country (a total of $1 trillion), it’s unlikely to be inflationary for the price of most consumer goods." -- because they already consume as much as they want.
Which is why I think we'll mostly get asset inflation / investment, and less consumption inflation. But while she notes the wealthier get more of this, their spending is higher than the billionaires. I agree with her expectation of "an economy that remains at stall-speed or enters a mild recession rather than experiencing a boom or a bust just yet. "
So not 9% inflation - but not deflation, and no inflation prediction. 2,4, 6% all seem consistent with this analysis.
The most reasonable (agrees with me the most!) investment analyst I've read in the last years.
The FED has been certainly guilty of acting too late and too slowly. At the same time fiscal policy has been dramatically inflationary. So if you want to blame the FED, rightly so, do it on account of being too slow and sleeping on the transitory price increases dream. Right now they should probably stop but with fiscal policy out of control they need to keep pushing on the break....and as often happens someone will get out of the car through the windscreen
Real rates are still negative across a lot of the curve, still, and this is assuming that the inflation rates the government reports aren't understating inflation. So I think money is still too loose to stop inflation. The government is still running a 1.5 trillion dollar deficit with higher rates only now starting to have to be paid on rolling over past debt. The same applies to private sector debts- the higher rates are only now starting to factor in debt rollovers. The Fed only started raising rates 15 months ago- that lag in the past was about 12-18 months, so it shouldn't be a surprise that the recession hasn't arrived yet. So I think Sumner and Alden are correct.
Not a one for one comparison, but FF rates are WAY above 10-year and even 5-year TIPS expectations for inflation (which are below Fed targets). And taken literally, markets expect lower inflation in the shorter term than the longer term.
Can we get the mover and shakers on this subtask :) behind the campaign for the Treasury to issue some intermediate tenor TIPS?
We can remain agnostic about which instruments the Fed should use to achieve its targets. It may will be that different circumstances -- deficits, supply shocks, demand shocks -- will call for different combinations of FF rates, QE, IOR, or even new instruments. What we should NOT do is allow changing circumstances to excuse the Fed from achieving it's targets or allow us to lose sight of the fact that deficits drain resources from investment into consumption.
Yes to pushing the Fed to have more stable money - this should be their only mandate. It should be up to other political orgs to maximize employment given the deficit and the other political decisions.
Deficits certainly increase consumption - but it might be that by borrowing/ stealing from the future, we get more current consumption AND current investment. I did not believe this was true in the past, but now I'm more open to the idea. The data doesn't seem to falsify it.
Legally the Fed has to consider both stable prices and maximum employment. I think conceptually the way to do that is what they supposedly do, flexible average inflation targeting. The "average" is what they think the economy needs given that some prices cannot fall in response to real changes that require changes in relative prices to equilibrate. [This is closer to our host's idea of specialization and trade among various sectors than traditional Keynesian homogeneous GDP] It is the inflation rate that maximizes employment. The "flexible" part is how quickly the Fed should try to return inflation to the target rate when it has departed from it.
I think fiscal policy should be about real resource allocation, between consumption and investment to promote long tern growth, and redistribution to shift consumption from where it will do less good to where it will do more good: rich to poor, well to sick, employed to unemployed, from activities causing negative externalities to those receiving the effects of the negative externalities.
When the economy is near full employment (of all resources not just labor) my guess is that this would mean near zero deficits. In recession, when the Fed has reduced interest rates and when many resources are un or under employed, a government that uses NPV as a spending guide will find more activities having NPV>0 during recession than when at full employment and it will make sense to incur a deficit to carryout those additional activities. This "looks like" standard Keynesianism recommendation of deficit during recessions ad surpluses at full employment, but _we_ know better. :)
Hi Arnold. I like your work, and also usually run out of time for podcasts. Will you be posting a write up / summary of what you think, re markets, behind the paywall? (I am a markets guy).
Japan has had 3 decades of increasing national debt, & deficits, and not a lot of inflation, tho prices do rise when energy prices go up. I like that Lyn Alden notes some important facts:
- "Running deficits equal to 8% of GDP while the unemployment is under 4% is very unusual."
Two main causes of rapid money supply growth:
- "first cause is rapid bank lending," (like the 70s, demographics driven)
- "The second cause is large monetized fiscal deficits," which previously was more tied to conflict, but seems more like what we have now. More 40s than 70s - except with much higher national debt.
"for the recent period, year-over-year federal debt increases are larger than year-over-year bank loan creation." -- it makes sense to me that if fed debt increases more than bank loans, the fed debt is driving money growth.
Then, unmentioned by Lyn, the main problem becomes the very low rates of return on gov't debt based "investment" rather than bank loans. But we don't see the low ROIs for a few years of lag.
Lyn astutely addresses interest rate increases, noting: "the Federal Reserve doesn’t really know what else to do, because their tools don’t really address deficit-driven inflation; their tools are meant to deal with lending-driven inflation."
She also notes that inflation depends on who gets the money, the savers or spenders.
"If the government gives $10 billion each to the top 100 richest billionaires in the country (a total of $1 trillion), it’s unlikely to be inflationary for the price of most consumer goods." -- because they already consume as much as they want.
Which is why I think we'll mostly get asset inflation / investment, and less consumption inflation. But while she notes the wealthier get more of this, their spending is higher than the billionaires. I agree with her expectation of "an economy that remains at stall-speed or enters a mild recession rather than experiencing a boom or a bust just yet. "
So not 9% inflation - but not deflation, and no inflation prediction. 2,4, 6% all seem consistent with this analysis.
The most reasonable (agrees with me the most!) investment analyst I've read in the last years.
The FED has been certainly guilty of acting too late and too slowly. At the same time fiscal policy has been dramatically inflationary. So if you want to blame the FED, rightly so, do it on account of being too slow and sleeping on the transitory price increases dream. Right now they should probably stop but with fiscal policy out of control they need to keep pushing on the break....and as often happens someone will get out of the car through the windscreen
Real rates are still negative across a lot of the curve, still, and this is assuming that the inflation rates the government reports aren't understating inflation. So I think money is still too loose to stop inflation. The government is still running a 1.5 trillion dollar deficit with higher rates only now starting to have to be paid on rolling over past debt. The same applies to private sector debts- the higher rates are only now starting to factor in debt rollovers. The Fed only started raising rates 15 months ago- that lag in the past was about 12-18 months, so it shouldn't be a surprise that the recession hasn't arrived yet. So I think Sumner and Alden are correct.
Not a one for one comparison, but FF rates are WAY above 10-year and even 5-year TIPS expectations for inflation (which are below Fed targets). And taken literally, markets expect lower inflation in the shorter term than the longer term.
Can we get the mover and shakers on this subtask :) behind the campaign for the Treasury to issue some intermediate tenor TIPS?