> 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.
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 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.
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.
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 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.