> That aside, Tyler and I are economists, and an economist should be able to say more than “I believe the financial market indicators.” An economist should have a model, or be able to tell a story.
Scott Sumner might say the temptation to do the latter rather than just relying on the former makes economists worse. Financial markets are probably more accurate than you.
Is it true that “an economist should be able to say more than ‘I believe the financial market indicators’.” No, an economist should accept the Efficient Market Hypothesis, and, thus, the financial market indicators.
Then the economist is saying in essence, "the market is right and I have nothing to add."
Then what is the point of an economist? Maybe an inexperienced layperson doesn't have anything to add to the conversation, but if someone is a worthwhile economist, he should have something to add.
Besides, EMT is rubbish, from the perspective of those insightful people who really do understand more than most what is going on. To those who have eyes to see, market inefficiencies and mispricings are everywhere.
I laughed at Tyler's post because he pretends to be George Constanza, but he's not. He doesn't have any model, narrative, or idea about inflation (and about 99% of the issues he writes). His blog is good only at providing information about research (I live far away from the U.S. and I appreciate that) and about restaurants which I have no interest in visiting.
Now, I don't need to repeat my comments on your previous posts about inflation. Nothing has changed. If tomorrow your federal government could not finance its increasing deficits by borrowing, most likely it will print money and inflate its debt away. With government, borrowing is a Ponzi game: it will continue until the day in which the burden of debt service is large enough to scare prospective lenders and government has to pay an interest rate too high just to refinance debt or to finance the deficit. Yes, you can invest in long T-bonds but be sure to get rid of them before their prices collapse.
>In my story, as people spend this paper wealth, we will see inflation.
This also depends on production capacity not coming back online to offset the extra demand, this to an extent that the gap between supply and demand is too great for central banks to manage as you described.
I'm not sure what "stock of saved wealth" and "human capital" means exactly but it might have to do with factories and labor existing but not operating at full capacity until covid is behind us. This could mean that even if there is a surge in demand coming, there might also be a surge in supply that will counter price increases.
When talking about wealth and income and inflation, where is the discussion of stock prices? Since the TARP bailout for rich semi-competents (but highly credentialed!), we've been getting inflation and near hyper-inflation on stock prices. Marginal Rev comments include lots of house price comments; not so many stock price increases.
The interest rate is the cost of money, based on a) amount of money, b) real wealth (or market wealth???), and c) investment opportunities.
Most investment opps are stocks and housing, today.
The USA, and the world, are suffering from select regulation caused supply problems and their inevitable price change adjustments. Like reduced major US extraction of oil, but only modest reduced US use of oil - so oil prices go up. Maybe a LOT - which increases lots of other related prices, but that's a supply constrained price increase, not quite the same as inflation.
But it feels the same, and might even be measured the same.
Because of free (-ish) market capitalism, the USA doesn't have supply production problems. Unlike Venezuela or Zimbabwe, where more printed money fails to allow folk to buy less produced bread, milk, clothes. In the USA and Europe, there is plenty of food and usual consumables being produced. No Big Mac hyper-inflation as long as markets work.
All economic history, and theory based on history, is based on a shortage of investment capital relative to productive production investment targets. We don't have a capital shortage, now. So it's not SUCH a surprise that expected inflation from lots of money printing is not quite happening.
Tyler's being really lazy. He may be right, and in my view it'll tough for inflation to take root, but not so much for the reasons TC flogs. He's sadly an economist living in blog world and not in academia. He's unwilling to create an excel file and get into the weeds at all.
That's a disappointing post by Cowan. Boiling down his model of inflation to "Mom and Dad won't let something bad happen" suggests a fair bit of rot within his mental model of how the world works, and diminishing of his mental grasp. I honestly mean that; I am not trying to be edgy or nasty. Not even addressing "Could the Fed do anything about inflation that wasn't worse politically than the inflation itself" is a big gap. Sometimes Mom and Dad can't actually keep the bad thing from happening, even if they want to.
Now, I can totally get saying "Well, the Fed and administration will just suck up a big recession if inflation gets out of hand," or "Well, the Fed will do something new like paying interest on reserves like they did after 2008, so probably they can stop inflation." It would, however, be a good idea to at least consider the fact that very few governments seem to say "I want LOTS of inflation! Make that happen!"
How the monetary system works is definitely much less understood than economists believe at any given time, but that doesn't strike me as a reason to believe the Fed won't let inflation happen because it doesn't like inflation.
The Fed loves inflation because it reduces the amount that the government must repay in interest and principal on government debt. Inflation will be at least 15% in 3 years and might reach 30%.
Historically the Fed has kept inflation lowish, so I am not sure I would say the Fed loves inflation. It does make sense that they would choose inflation instead of stopping it as the lesser of two evils, politically. I would hope they have more thought going into it than what is politically expedient, but alas... they probably don't.
Actually, for at least 20 years, maybe 30, Japan has wanted MORE inflation, in Japan, than their central bank is giving. See Mile Kimball on "negative interest rates".
I'm sure you're right that the monetary system "is definitely much less understood that economists believe."
The Treasury should be massively increasing their use of long dated treasury bonds. If inflation eventually comes then failure to lengthen the weighted average maturity of Treasuries will seem like a gigantic mistake.
Another alternative to slow down inflation is a tax hike. If I recall correctly, the Japanese raised taxes a few years ago to cut inflation. An imposition of a national VAT would fight inflation and be a huge source of revenue.
FYI, in Argentina, since 1951, taxes were increased many times but never produced enough revenue to reduce the deficit. For many years I had to evaluate
In the U.S., I bet you that the deficits will continue increasing with respect to the average of 2015-19 (the deficits for 2020 y 2021 are extraordinarily high because of the pandemic and it will be a great success to reduce the deficit in 2022 to a level close to that average --the new spending looks, however, as an attempt to keep it at a level similar to the average of 2020-21).
With respect to long-dated T bonds, if the current debt were refinanced by issuing perpetual bonds, I bet you that their yield would increase sharply immediately. If future deficits were financed by perpetual bonds, it'd take a little longer but the result would be the same: eventually, the yield of new perpetual bonds would be so high that the government will be forced to print money.
I don't disagree. One reason we have the fed raise rates instead of counter-cyclically varying tax rates is that we can't trust the fiscal authorities to raise taxes counter-cyclically. If anything, American taxes seem to be pro-cyclical (higher in good times).
"With respect to long-dated T bonds, if the current debt were refinanced by issuing perpetual bonds, I bet you that their yield would increase sharply immediately. "
I believe the representative Treasury bond is about 5-7 years and is up about 2 years from pre-financial crisis. I think we could easily raise terms by a few more years, and buy ourselves a lot of interest rate hedge, without triggering a sharp increase in yields. Japan has even more debt to GDP than we do and their weighted average maturity is over 10 years.
I am short the long bond
> That aside, Tyler and I are economists, and an economist should be able to say more than “I believe the financial market indicators.” An economist should have a model, or be able to tell a story.
Scott Sumner might say the temptation to do the latter rather than just relying on the former makes economists worse. Financial markets are probably more accurate than you.
Is it true that “an economist should be able to say more than ‘I believe the financial market indicators’.” No, an economist should accept the Efficient Market Hypothesis, and, thus, the financial market indicators.
It's absurd to believe that markets are efficient. Successful investors exploit inefficient markets constantly.
Then the economist is saying in essence, "the market is right and I have nothing to add."
Then what is the point of an economist? Maybe an inexperienced layperson doesn't have anything to add to the conversation, but if someone is a worthwhile economist, he should have something to add.
Besides, EMT is rubbish, from the perspective of those insightful people who really do understand more than most what is going on. To those who have eyes to see, market inefficiencies and mispricings are everywhere.
That isn't you, and that's fine.
How many have "eyes to see"? A great majority of economists do not, yet many of them are not useless.
I laughed at Tyler's post because he pretends to be George Constanza, but he's not. He doesn't have any model, narrative, or idea about inflation (and about 99% of the issues he writes). His blog is good only at providing information about research (I live far away from the U.S. and I appreciate that) and about restaurants which I have no interest in visiting.
Now, I don't need to repeat my comments on your previous posts about inflation. Nothing has changed. If tomorrow your federal government could not finance its increasing deficits by borrowing, most likely it will print money and inflate its debt away. With government, borrowing is a Ponzi game: it will continue until the day in which the burden of debt service is large enough to scare prospective lenders and government has to pay an interest rate too high just to refinance debt or to finance the deficit. Yes, you can invest in long T-bonds but be sure to get rid of them before their prices collapse.
you were right.
how could large pent up demand ever be anti-inflationary?
>In my story, as people spend this paper wealth, we will see inflation.
This also depends on production capacity not coming back online to offset the extra demand, this to an extent that the gap between supply and demand is too great for central banks to manage as you described.
I'm not sure what "stock of saved wealth" and "human capital" means exactly but it might have to do with factories and labor existing but not operating at full capacity until covid is behind us. This could mean that even if there is a surge in demand coming, there might also be a surge in supply that will counter price increases.
When talking about wealth and income and inflation, where is the discussion of stock prices? Since the TARP bailout for rich semi-competents (but highly credentialed!), we've been getting inflation and near hyper-inflation on stock prices. Marginal Rev comments include lots of house price comments; not so many stock price increases.
The interest rate is the cost of money, based on a) amount of money, b) real wealth (or market wealth???), and c) investment opportunities.
Most investment opps are stocks and housing, today.
The USA, and the world, are suffering from select regulation caused supply problems and their inevitable price change adjustments. Like reduced major US extraction of oil, but only modest reduced US use of oil - so oil prices go up. Maybe a LOT - which increases lots of other related prices, but that's a supply constrained price increase, not quite the same as inflation.
But it feels the same, and might even be measured the same.
Because of free (-ish) market capitalism, the USA doesn't have supply production problems. Unlike Venezuela or Zimbabwe, where more printed money fails to allow folk to buy less produced bread, milk, clothes. In the USA and Europe, there is plenty of food and usual consumables being produced. No Big Mac hyper-inflation as long as markets work.
All economic history, and theory based on history, is based on a shortage of investment capital relative to productive production investment targets. We don't have a capital shortage, now. So it's not SUCH a surprise that expected inflation from lots of money printing is not quite happening.
We have hyper-inflation of stock prices.
Tyler's being really lazy. He may be right, and in my view it'll tough for inflation to take root, but not so much for the reasons TC flogs. He's sadly an economist living in blog world and not in academia. He's unwilling to create an excel file and get into the weeds at all.
That's a disappointing post by Cowan. Boiling down his model of inflation to "Mom and Dad won't let something bad happen" suggests a fair bit of rot within his mental model of how the world works, and diminishing of his mental grasp. I honestly mean that; I am not trying to be edgy or nasty. Not even addressing "Could the Fed do anything about inflation that wasn't worse politically than the inflation itself" is a big gap. Sometimes Mom and Dad can't actually keep the bad thing from happening, even if they want to.
Now, I can totally get saying "Well, the Fed and administration will just suck up a big recession if inflation gets out of hand," or "Well, the Fed will do something new like paying interest on reserves like they did after 2008, so probably they can stop inflation." It would, however, be a good idea to at least consider the fact that very few governments seem to say "I want LOTS of inflation! Make that happen!"
How the monetary system works is definitely much less understood than economists believe at any given time, but that doesn't strike me as a reason to believe the Fed won't let inflation happen because it doesn't like inflation.
The Fed loves inflation because it reduces the amount that the government must repay in interest and principal on government debt. Inflation will be at least 15% in 3 years and might reach 30%.
Historically the Fed has kept inflation lowish, so I am not sure I would say the Fed loves inflation. It does make sense that they would choose inflation instead of stopping it as the lesser of two evils, politically. I would hope they have more thought going into it than what is politically expedient, but alas... they probably don't.
Actually, for at least 20 years, maybe 30, Japan has wanted MORE inflation, in Japan, than their central bank is giving. See Mile Kimball on "negative interest rates".
I'm sure you're right that the monetary system "is definitely much less understood that economists believe."
Miles Kimball, https://blog.supplysideliberal.com/
The Treasury should be massively increasing their use of long dated treasury bonds. If inflation eventually comes then failure to lengthen the weighted average maturity of Treasuries will seem like a gigantic mistake.
Another alternative to slow down inflation is a tax hike. If I recall correctly, the Japanese raised taxes a few years ago to cut inflation. An imposition of a national VAT would fight inflation and be a huge source of revenue.
FYI, in Argentina, since 1951, taxes were increased many times but never produced enough revenue to reduce the deficit. For many years I had to evaluate
In the U.S., I bet you that the deficits will continue increasing with respect to the average of 2015-19 (the deficits for 2020 y 2021 are extraordinarily high because of the pandemic and it will be a great success to reduce the deficit in 2022 to a level close to that average --the new spending looks, however, as an attempt to keep it at a level similar to the average of 2020-21).
With respect to long-dated T bonds, if the current debt were refinanced by issuing perpetual bonds, I bet you that their yield would increase sharply immediately. If future deficits were financed by perpetual bonds, it'd take a little longer but the result would be the same: eventually, the yield of new perpetual bonds would be so high that the government will be forced to print money.
I don't disagree. One reason we have the fed raise rates instead of counter-cyclically varying tax rates is that we can't trust the fiscal authorities to raise taxes counter-cyclically. If anything, American taxes seem to be pro-cyclical (higher in good times).
"With respect to long-dated T bonds, if the current debt were refinanced by issuing perpetual bonds, I bet you that their yield would increase sharply immediately. "
I believe the representative Treasury bond is about 5-7 years and is up about 2 years from pre-financial crisis. I think we could easily raise terms by a few more years, and buy ourselves a lot of interest rate hedge, without triggering a sharp increase in yields. Japan has even more debt to GDP than we do and their weighted average maturity is over 10 years.