I'd like to find numbers which illuminate how much of the inflation is caused by lack of supply for relatively inelastic commodities. If the way out of shortages is to invest in more production, higher interest rates seems detrimental in the face of that type of inflation. If, on the other hand, inflation is caused by groups/individuals buying lots of silly things because they are flush with tons of cash, then rising interest rates should put a stop to speculative/impulse elastic spending.
To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc).
I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything.
Many people are concerned about the rising price of real-estate and I agree, but I'm not sure interest rates are fine-grained enough for this...ideally Congress could address that with Anti-NIMBY legislation and/or taxes on properties which are not lived in by their owners, which could be directly redistributed to anyone who purchases a new home.
You've hit on the issue the fed has - the only real tool they have to combat inflation is to kill demand. In this case, inflation is from a mix of demand because people have money and supply shocks due to covid. The feds main tool to address supply issues is to lower rates and spur investment. Problem is, they are also trying to kill demand at the same time. For now, we just have to wait for supply issues to sort themselves out.
Which I think makes the argument that the Fed might not be the right entity to fight this. Powell literally says in this speech that the Fed needs to weaken labor market conditions (4th paragraph) to strengthen labor market conditions (3rd paragraph). But if the goal is strong labor market conditions and he already notes "the labor market is particularly strong", what are we all doing here? Congress should probably be the one tasked with addressing supply side issues instead of the Fed because the demand side issues aren't actually a problem that needs solving.
I think the Fed would agree with you. Powell and Yellen before him have indicated that they think fiscal policy is a much better means of addressing some of the issues they’ve tried to deal with via monetary policy, but the Fed can actually act while congress generally refuses to do so (IRA aside).
But those goals are redundant because they all effectively mean keep inflation in check. According to Powell's own argument in the 3rd paragraph in this speech, keeping inflation in check is a goal because "without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all."
I'm not going to argue that these things are completely orthogonal, but as the current inflation crisis illustrates, we can have steep inflation and high labor participation (of course, sustaining that labor participation in the midst of steep inflation is infeasible, but most people aren't economically literate and even professional economists get it wrong with troubling frequency).
Something people don't appear to understand is that the fed only controls the brake pedal and maximum speed limit. They can't force more money into the economy as so many people seem to believe.
So half the time, the Fed is just some sort of con man, trying to trick the economy into doing what they want through press releases and optimistic predictions, etc.
The other time they are just slowing the economy down for good or bad reasons.
It doesn't look like supply issues will sort themselves out though.
Many of the current shortages (industrial plant failures, food shortages) are due to climate issues. Putin isn't helping, but even without the Russia sanctions, we'd still be facing all sorts of shortages (PVC, microchips, olive/sunflower oil, wheat, mustard, water shortages blocking the Panama Canal, etc, etc).
The root cause of all that is climate change, which is worsening linearly with time, which means the backlogged impact on the economy is increasing quadratically.
Exactly. And I don't think people, in general, have wrapped their heads around what is truly unfolding right in front of us in terms of availability of cheap, accessible high density energy and the increasing impacts of the climate crisis. Energy is the economy and the economy is energy. I like the term, "energy blind" which I've heard Nate Hagens use [1]
> I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything.
Just an FYI, any remaining supply chain issues are not really transportation related at this point. We ship several containers a month from Asia to the ports of LA/Long Beach and we haven't seen delays on either side of the Pacific in a while at this point. The other major issue we faced in 2021 was getting containers out of the port complex and on a truck to their final destination. Those delays have also been resolved at this point.
We're also seeing transportation prices come down. Trucking is still expensive because of fuel costs, but ocean rates are way, way down. The most we paid for a container from Vietnam to LA/LB last year was $22,000. Right now we're getting quotes for $4,600.
That's why they said "IF the way out". It seems like OP is asking for exactly the same numbers you are - do we need to invest more in making sure things are available/produced? Or will more money just lead to more demand in ways that make things worse like how you've described.
> Do you have numbers that show that's what people do when interest rates are low? I don't have numbers - but my suspicion is that they mostly just speculate on asset prices.
I don't know either. I agree with their analysis that we've had an exuberance of speculation on rising assets during a time of unprecendented low interest rates. It just also seems unlikely that rising interest rates will facilitate additional investment towards critical shortages. Maybe this is a problem for Congress more than the fed, I don't know. Would love to hear others opinions.
Yea, it strikes me as the sort of situation where monetary policy does somewhat intentionally live in a vacuum compared to more general policy. Changing the interest rate doesn't dictate what companies or people do with the money they're borrowing/not lending at that rate.
The Fed generally has pretty coarse tools. Whether the increased monetary supply is spent on "good" or "bad" things is up to more general policy choices made in other parts of the government.
> Whether the increased monetary supply is spent on "good" or "bad" things is up to more general policy choices made in other parts of the government.
If we want to "make money" and "increase GDP" - lowering interest rates does appear to do that.
But there's no reason you can't "make money" and "increase GDP" and also actually lower productivity and living standards.
Imagine an economy where 90% of the economy is people buying land from each other on debt.
If suddenly the price of money drops 50%, and people can afford to pay 50% more for land (and do) - all things being equal - GDP increases by 50% * 90% = 45%.
If everyone realizes how much money they can make doing this instead of whatever the other 10% of the economy is - say actually working the land to farm apples - then real productivity can drop 100% to 0 - and you still "increase GDP" and people still "make money".
At the same time - maybe everyone dies of starvation shortly thereafter?
I'm not arguing this is actually happening - especially to this degree - but it is easy to see that it is at least possible*.
Well, what you are describing is actually what happens during economic depressions. People who need to eat don't have money so economic activity is diverted from producing food even though any sane individual would think that producing enough food is the highest priority for any civilization.
What I personally find strange is that there are economic schools of thought that just axiomatically conclude that nothing is wrong and these people are rightfully starving even though there are economic schools that prevent starvation and end up with superior output.
This is why the Inflation Reduction Act is so effective. It attacks inflation from both ends. It raises taxes more than it increases spending, so it reduces the money supply. OTOH, it encourages investments in green energy, likely leading to a substantial reduction in the cost of energy in the long term.
The CBO only measured the first effect, but the second is much more important, IMO.
It doesn't do much for housing, but that's mostly a local issue (aka zoning).
> This is why the Inflation Reduction Act is so effective.
It's not very effective because the sum difference is barely a drop in the bucket. It's not enough to significantly impact inflation at the scale of the US economy. Only the Fed's rate hiking is going to do that at this point, as they intentionally attempt to cause a recession to destroy demand.
Compare just the annual US Govt debt accumulation versus the difference between spending increase & tax increase in the act. How much new debt is the US going to take on this year? The Inflation Reduction Act, like so many government programs, warns you that it's a lie and a joke right in the title. The moment they chose that name, they were telling you everything about it: it wasn't an inflation reduction act.
They championed it also as though it was a huge deal for climate change, it's not, that's a lie as well. Climate change is overwhelmingly global as an issue, there's absolutely nothing they can do to meaningfully offset the expansion of emissions elsewhere around the world. If they were serious about climate change, they'd have named the act: Stop China From Building Another Hundred New Coal Power Plants Act.
Much of the rest of the world is refusing to do anything about climate change because the US was doing nothing. That excuse has disappeared, so the IRA will have a multiplicative effect.
10s of billions of dollars have been announced for new battery plants to be built in the US and Canada since the announcement of the IRA. It's already having a massive effect.
> It raises taxes more than it increases spending, so it reduces the money supply.
Taxation should be thought of separately from monetary policy. To put this into perspective, M2 money supply grew from 15.33T on Dec 31 2019 to 21.71T on July 31 2022, a growth of 41% in two years ($6.38T). In 2019 it grew 6.6%. The net revenue of the Inflation Reduction Act is 324 billion over over ten years. It's just not in the same ballpark
> OTOH, it encourages investments in green energy, likely leading to a substantial reduction in the cost of energy in the long term.
Subsidies and investments don't necessarily lead to a reduction in costs. Think about the sectors that have the most public spending in the US (health care through medicare and medicaid, education, real estate via fannie/freddie, etc). These are the fastest growing industries in terms of prices
> Medicare and education are strongly impacted by Baumol's cost disease.
I disagree. Healthcare isn't necessarily labor intensive. New technologies should make care cheaper. If anything labor efficiencies have made the actual labor required of medical care a lot less. Doctors used to make house calls and spend more time with you. Now you go into a doctor's office, wait up to an hour sometimes, sit in a room, have some lower paid aids take your vitals, get your information, etc and you end up seeing the doctor for 15 min. Doctors see about 20 patients a day and spend normally 15 minutes per patient. Compare that to 50 years ago and you can bet that there have been "labor efficiencies" since that time. That doesn't even account for tele-medicine for routine stuff like getting ear drops for a sick child.
As for education, teachers aren't paid a lot, all the new costs are administration. Education expenses did not grow proportionally to educator's salaries, but far exceeded them, so your theory doesn't hold up.
In my jurisdiction, 71% of the education budget goes to teacher salaries, so education expenses couldn't have grown substantially faster than teacher salaries.
And Baumol doesn't require salaries going up, it works just fine if salaries stay constant while the price of consumer goods goes down.
Here's an alternative explanation that explains the rise in both education and health care as well as the drop in the price of consumer electronics: the customer doesn't pay.
In both health care and education, the final customer often does not pay. When I go to a doctor and ask them how much something will cost, I get bewildered looks. They rarely hear that question. I don't pay, my insurance pays and I pay some co-pay. Same thing for education. I'm pretty much stuck with my local school district, or if its college, I get subsidized no questions asked student loans.
But compare that to something that's paid out of pocket by the consumer. Consider something like Lasik surgery. It costs about $2-3k per eye an. Pretty incredible considering its relatively new procedure. I can't find a single outpatient surgery covered by insurance that costs that little. Cosmetic surgery is similarly cheap. And the difference is that the Lasik surgery is paid by the consumer and most people would shop around, ask about prices, etc. No subsidized Lasik loans, no insurance coverage, just straight forward pricing.
You're helping my argument, not yours. :) The energy market is different/better than education and health care, so subsidies are more likely to flow to the consumer.
You are right. There are two sources of inflation:
1. Inflation caused by increasing demand (often due to more money coming into the hands of people/companies/institutions)
2. Inflation caused by reduced supply (often due to logistics, productivity drops and reduced trade)
With covid, we had both. At this point, we have far too much money in the hands of speculators and too few producers of goods and services in the world.
The Fed can use interest rates to reduce demand. But they will also reduce supply because many producer businesses will go bust.
I know this is heavy handed but the real policy help at this point is to ensure that there is more money to be made in real production and less in speculation. All the real estate agents, flippers and day traders need to be sent to factories to produce actual things.
> how much of the inflation is caused by lack of supply for relatively inelastic commodities. If the way out of shortages is to invest in more production, higher interest rates seems detrimental in the face of that type of inflation
I'm no economist, but is it really a problem in practice?
Shouldn't stuff with both high prices and inelastic demand be a really attractive target for investment? If you can produce that stuff (before the situation changes), you're almost guaranteed to be able to sell it and at a high profit. So getting capital for it should be relatively easy.
I'm sure higher interest rates will have some effect, but it seems like it wouldn't be enough to discourage investment that much.
Given the large deficits we've run since the 80s and the lack of inflation during those 40 years, I'm going to go ahead and guess that the prime suspects for inflation are covid related supply issues and logistics issues. But since the labor market is tight, you know the fed will not miss the chance to crush workers, so expect rate hikes for a long time.
The deficit grew to twice what it was after 2008, the scale of spending is quite a bit different than the recent past (trillion dollar bills are the new $100 billion in the US). The same spending pattern has happened across western countries around the world who are facing similar inflation (and supply side) issues, so the pressure has been global.
> I'd like to find numbers which illuminate how much of the inflation is caused by lack of supply for relatively inelastic commodities.
The SF Fed published a study a little while ago, "How Much Do Supply and Demand Drive Inflation?":
> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
Why wouldn’t it be both the (considerable) expansion in money supply and shortages? At a 30000 foot view, price level is determined by money supply divided across the finite set of goods and services.
What if you're renting that property out as a long-term-rental? Jacking up taxes on that is pretty much just going to penalize renters (I'd guess, anyway), which is not really fair, as they're (again generalizing) on average poorer than property owners.
I'm not sure what the solution is. There's probably a tax component to it, but I think second order effects need to be carefully considered.
Somewhat the point. With a tiered approach, the costs for a person with a single rental home become lower than the costs for a business buying up the block.
If it forces sales, you get more home inventory and lower prices.
Landlords in supply-constrained cities are able to charge the maximum rent their tenants can afford; and increase in landlord costs is thus not able to be passed onto the tenant, because if the tenant could bear more they would already be charged that much.
This is in aggregate, of course; individual landlords may charge less than what individual tenants can bear but across the rental market, landlords extract monopoly rents already.
That's why you will find rents increase proportionately to incomes, not landlord costs. This is highly apparent in New Zealand, where mortgages are not fixed rates for more than 5 years; interest rate changes have little to no impact on rents, but supply and tenant incomes do.
> ...individual landlords may charge less than what individual tenants can bear...
I lived in a supply-constrained city once and my landlord, a nationwide public company, could have charged me significantly more without prompting me to move. I am one individual though and you called out that exception.
However, had I been priced out of the unit in which I lived I would have found a smaller and/or less desirable unit at lower cost. Rental units vary in size and quality.
The existence of individuals who can pay more and the non-fungibilty of rental stock makes me suspect that such taxes will simply be passed on.
The theory sounds good, but in practice we can see that rents stay quite stable as a ratio of income, and not as a ratio of interest rates, or house prices, or anything else that would be a landlord cost. Check out the rent to income ratio in your own municipality and compare to, say, rent-to-interest rate, or rent-to-property-price. Landlord costs only get passed down when there is significant room to increase rents in the tenants income and there is insufficient supply to handle the number of potential tenants.
> To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc).
I agree, but I think I lean in the opposite direction as you do.
It's relatively easy to produce more Pelotons, grills, and (to a lesser extent) RTX3080s.
It's difficult to produce more wheat and houses. When the price of housing is going up nationwide faster than ~4%, that's probably time to increase interest rates, because supply elasticity won't be coming to the rescue. By the time it filters into rent prices, it's too late and you're doomed to overshoot.
Increasing interest rates isn't going to reduce rents. And suggesting it reduces ownership prices misses the point. Sure, maybe list prices will go down but it won't reduce the cost to the buyer.
I made a little side project https://totalrealreturns.com/ to plot inflation-adjusted asset and asset class returns, including the USDOLLAR virtual symbol which represents a nominal dollar. (Most users just enter symbols they care about, though.) In real (purchasing power) terms, I think this announcement means:
1. The Fed thinks the green line is declining too fast. (Green line = purchasing power of a nominal USDOLLAR, such as a paper dollar bill, or a zero-interest checking account.)
2. In order to make the green line flatten out a bit, we're going to raise interest rates more, reducing the supply of capital.
3. In the short-term to medium-term, raising interest rates will have an adverse effect on the blue line (bonds), due to interest rate sensitivity.
4. In the medium to long term, the effect on bonds may in fact be positive due to higher interest rates, but this depends on future Fed actions as well. (It seems to me structurally unlikely to create substantially positive real retuns for treasury bonds, at least. Maybe corporate bonds will benefit.)
5. Raising interest rates is intended explicitly to reduce aggregate demand in the short-term to medium-term. This reduces corporate revenues and corporate profits, which should hurt the red line (equities).
6. Raising interest rates also increases the discount rate which is applied to net-present-value (NPV) calculations, which means that future cash flows are discounted more heavily. This should also hurt the red line (equities).
We're talking about long time periods, but my sense is that the real return of bonds (blue line) has slowed, while the real returns of equities (red line) has not.
If nothing else, it seems like bonds increasingly require investors to take on long duration risk (and more interest rate sensitivity) in order to realize positive real returns, while short-duration bonds barely or do not even keep up with inflation anymore: https://totalrealreturns.com/s/VFISX,VFITX,VUSTX for a duration comparison on Treasuries.
At the height of the gas prices I paid $8.00 per gallon of diesel for several weeks (some drunk asshole totaled my other non-diesel vehicle) so I felt what truck drivers felt. It should be no surprise that when gas doubles, everything that is carried on those trucks goes up in price. When the truck is carrying super cheap items, the price of those super cheap items is roughly double. Transportation cost of expensive and small things aren't affected as much because the price of gas was already a smaller percentage of the overall price.
Large items, like RVs saw a roughly $4k markup (in CA) because they literally drive each one from Indiana. Not to mention everyone is buying them because they are alternatives to expensive homes now.
We really need to get off gasoline and encourage people to build. Messing with inflation with the feds "only tool" is fucking idiotic.
We have the technology today to have the vast, vast majority of our transportation miles powered by electricity, and the ability to generate electricity from numerous sources. Like you said, out of control energy prices ripple to everything else. Electrifying everything provides a counterbalance to the volatility of oil on the global market.
Agreed. An excessive money supply is a small part of the problem here. There are intrinsic economic issues (e.g. supply chain problems) that need to be solved.
2: No government will reduce the printing of money. It is just too convenient. It is like taxing more and more without getting much complaints.
3: Governments will rather use tricks to lower inflation. Change the definition. Make laws to restrict prices. Subsidize the production of goods to make them cheaper.
Conclusion: The value of money will go down the drain faster and faster forever.
This is mostly true most of the time, but this is not the only story. There is also a supply side to the equation: if supply can expand it can suck up a lot of money that is being printed without causing inflation.
I highly recommend Lyn Alden's overviews and analysis. Here is her recent one on inflation (a subsection that points to broad money vs inflation -- the trend you indicate as well as some exceptions). https://www.lynalden.com/inflation/#supply
This is definitely a huge factor, especially when understanding short term inflationary trends, or inflation in a particular good or service.
But very long term and holistic, systemic inflation, that 2-3% annual target, has very little to do with supply and is almost exclusively printing money. It's a slow drip, a covert tax on savers and gift to debtors, that the government can feed off indefinitely so long as they never get too overleveraged and forced to print money too fast to cover their obligations, shattering the trust that supports the system.
This is only half the story. Inflation is measured based on the prices of goods in the wild. Yes, prices can increase when the value of a dollar falls based on the supply of dollars increasing. At the same time, the price of a good can increase when supply of the good decreases. We're in an era of unprecedented supply chain disruption due to covid, so it would be wrong to forget to account for this side of the story WRT inflation.
If the disruption of supply chains is the actual culprit for inflation, shouldn't we observe gradual deflation as they recover?
If on the other hand it's printing money (as I'd expect from the trillions of free money in recent months) it should only get worse. What I observe is more consistent with money printing than disruption of supply chains
in some ways you already are - the price of gasoline and even diesel have eased significantly over the last few months, for example. Long term, that will pull prices of energy-intensive products (shipping, etc).
However, "prices are sticky", they go up quickly and go down slowly. Companies aren't going to race to bring their margins back down, if people are paying X then they'll keep prices at X. Especially if they are worried that prices might continue increasing in the future - this is the "inertial" part of inertial inflation, it isn't just about inflation itself but about managing expectations in the economy around future inflation. So far there supposedly hasn't been a big inertial component but who knows.
Really what we needed to discourage it was a massive windfall profits tax - the Fed is also basically saying that we need actual fiscal policy here and that they don't really have the tools to manage this like they want - but this gets back to "there are 48 definite no votes for any bill, and we're dependent on what we can get those last 2 senators to agree to". The fed is using the only levers it has, and that lever is "a gut-shot to aggregate demand for the next decade", that is not the right policy tool but it's the only one that congress can't block.
This is why you don't throw gasoline on the fire during 2018-2019 when the economy is already going gangbusters, because when the economy inevitably dipped, suddenly those policy tools like government spending become much more "expensive" to implement when there's already tons of money sloshing around the economy.
>If the disruption of supply chains is the actual culprit for inflation, shouldn't we observe gradual deflation as they recover?
Both China (most importantly) and Russia (to a lesser extent) have not recovered. China seems to be getting worse with a historic once-in-a-century heatwave and drought that is currently destroying productivity.
#1 is incomplete. There's obviously a supply side component. You think the price of lumber quadrupled because of excess money? Some countries printed a lot more money than others during COVID, but the correlation between the money printing and inflation is very low.
#2 is wrong. The fed can print money using QE and low interest rate loans. They can destroy money via reversing the easing and high interest rates. They've done this. Congress can destroy money through taxes. The Inflation Reduction Act does this.
You're being downvoted but this is entirely correct. Inflation or deflation is a mismatch between the amount of money and the demand for money - if your economy increases at the same rate as the money supply, you won't have inflation even though you are "printing money". Similarly, you can have an absolutely fixed currency supply and still experience inflation (if your demand drops off a cliff).
Money is just another good. It has its own demand and supply. Ideally, you want those to match - which is what central banks try to do.
"Hard-currency advocated" (gold standard people) have been arguing against this concept since its inception, but, their system doesn't have a way to manage the money supply, which leads to frequent recessions. The gold period is marked by recessions that took place every couple years - and that was in a 19th century economy that moved far slower and was far less interconnected.
The reason we have inflation and deflation is that people don't have to talk to each other to coordinate supply and demand on specific days.
The gold standard doesn't solve the short term inflation deflation problem because to solve that you must ensure that for every buyer there is a seller that can handle the demand and the opposite, that for every seller there is also a buyer at any given point in time.
The purpose of saving is to sell today and buy tomorrow and trade places with someone that wants to buy today and sell tomorrow.
When you are saving for retirement you must sell to a future worker that will take care of you when you are old and that future worker must take on debt and buy from you. Then when you retire the positions reverse, you are buying and he is selling.
Only if those positions are in balance do you actually get no inflation.
But nobody even wants to think about coordinating production and consumption schedules because they fooled themselves into thinking liquid money does it automatically when the fact that we have inflation and deflation really just shows that it doesn't work.
People save more than others want to be in debt leading to deflation. Or people take on more debt than others want to save and reduce consumption leading to competition over products and services and higher prices aka inflation.
Inflation can exist without the printing of money so I'm not sure it qualifies as the root. Supply and demand seems more likely to be the root, which can be affected by the printing of money and by other things such as supply chain constraints.
The Fed can only control the too much money side of the equation. In the case of inflation do to a supply side shock to an inelastic good, that is necessities with few or no substitutes, there is nothing the Fed can do.
Stop printing money? After a few years population will increase, the workforce will be larger, and there won't be enough money to go around. This will result in deflation. (And is supported by evidence of what happened when people used physical gold and silver as money. As population went up, and people stockpiled, deflation happened.)
In this case, part of the cause (in the US) is a smaller work force. Not only did people retire early at the beginning of the pandemic, the baby boomers are retiring. This means there's less workers to go around. The remaining workers can demand more money.
But calling it excessive fiscal deficits and public debts would be both more accurate and actually address a real problem.
The next step would be to then ask ourselves why the government has to constantly micromanage the economy, the answer has very little to do with the fact that inflation is a tax but rather because of structural problems in the economy.
Governments always run a deficit for a fear of a recession worse than 2008. Why is government debt the only way to prevent a financial crisis? Why does it never get better but exponentially worse?
If you just say money printing people turn their brains off and think it is as simple as political overspending.
The way I understand it (and this is not my area of expertise), this view could have been cutting-edge 50-100 years ago, but now it’s not really sophisticated enough.
It's not a bad sketch of inflation in countries where central bankers follow orders from the head of state, and the head of state needs to win elections. Such as Argentina, or Turkey.
Would you explain how as a potential buyer of raw land it will become more affordable to me with the land value tax? Doesn't that just move part of the cost to taxes instead of up front pricing?
One of the ideas kicking around is that there is so much extra low-interest money kicking around that people snapped up real estate with bidding wars, perhaps as an inflation hedge. That one makes sense to me. But discounting the price of real estate through taxation disincentives doesn't make sense, because the one paying the tax is ultimately the property owner(s). So the owner is still paying the price, only now he's splitting the payment check to two entities: he's paying (1) the previous owner and (2)a rent-seeking tax machine enforced by men with guns. Any cost savings would effectively be by turning it into a hybrid ownership, hybrid open ended lease with society being the part owner, and thus could be considered a cheapened form of ownership rather than the same thing for better value.
In effect, LVT is saying "land is cheaper... if you're only buying N% of it and society owns the rest." Well of course it's true... but remember you're paying your rent-seeking landlord (government) your annual lease payment on their (100-N)% ownership. Move N to 0, and you now don't have to spend anything on the land, but everyone is a serf to government ownership of land. In effect, LVT is fractional communism of the land, with extremes of N=100% being full individual property rights and N=0% being full communism.
That's not how it works. If someone makes a claim, by default they are neither right nor wrong. But once you make the statement a claim is wrong (or "not sophisticated enough") then that person has made an additional assertion.
Burden of proof doesn't mean it default to "you're wrong." It means it defaults to "your position is unfounded." To change it to "you're wrong" requires evidence of your own.
Having no evidence is not the same as being wrong. For instance, I can claim there is a flying spaghetti monster in heaven watching over us. My argument would be unfounded, with no supports to attack, but an assertion to the contrary would be similarly wrong. There is essentially no way to disprove it.
Of course OPs statement is arguably one that is able to be disproven, or at least evidence towards disproving it. Unfortunately, the person claiming it was not sophisticated enough failed to provide that evidence. So in my book, they both made unfounded statements.
If you claim there is a flying spaghetti monster in heaven watching over us, the default position isn't "well maybe it's true maybe it's not, so let's call it 50/50". The default position is that's silly until you can show some evidence.
> 3: Governments will rather use tricks to lower inflation. Change the definition.
That is an unsophisticated view. Lowering inflation by 'changing the definition' is like trying to lose weight by switching from pounds to kilos. The measurement is not the thing being measured. Do politicians play around with highlighting different measures? Of course they do - but that is a (ineffective) solution to a political problem not an economic one.
Up until Covid we had low and stable inflation dating back to the 80s. It was not going "up and up" except to the extent that we consider moderate inflation to be desirable.
The claim being asserted is that the viewpoint is not sophisticated enough (despite it being the commonly held, intuitive belief about inflation). That's the claim that needs to be proven.
> No government will reduce the printing of money. It is just too convenient. It is like taxing more and more without getting much complaints.
Well the Fed just reduced the effective rate it was printing money quite substantially by switching to Quantitative Tightening and increasing rates.
You could even argue that with QT, not only is the Fed no longer printing money, but they are taking money that was printed back out of circulation and effectively destroying it.
> Well the Fed just reduced the effective rate it was printing money quite substantially by switching to Quantitative Tightening and increasing rates.
Currently they are tightening, yes. Let's see how long they'll keep this up when not only the US but also Europe and China are caught up in this recession that's currently lurking.
I say we're just seeing a short intermezzo of expensive money that'll soon be over again (no later than 3 years from now) when the world is going to be hit by crisis after crisis that politicians prefer to solve with yet more money.
The only time I can think of that the fed continually contracted the money supply was during the great depression. Would be interesting to look at a monetary supply chart since the fed was founded (I think ~1913 or 1915?)
> M2 supply was practically monotonically increasing from 1970-1990
This is correct [1]. The American economy has grown, decade to decade, every decade of its existence. If the economy grows and the money supply does not, bad things happen
1. A bad graph. I know it is an government website and not something you produced, I need to call it out.
From 1970 to 1980, the metric jumped to 300% (an increase of 200%).
From 1980 to 1990, the metric jumped to 210% (an increase of 110%).
Whereas from 2010 to 2020 (just before covid), the metric jumped about to about 190% (an increase of 90%). But this is not obvious on the graph.
They should use log scale.
2. The covid jump is something else. But I can understand why they spent money then.
(Even from 1960s to 1970s they went up by 100% or to 200%, so I buy your point, just do not like the FRed's visualization)
Edit: Just plotted these in Excel. Bush-1 and Clinton-1 were the only years with flat curve on logarithmic basis, every other era is a gradual increase.
I plotted the growth of the above mentioned data, and I compared each value with its value exactly 4 years back. So I compared Jan 1, 2022 with Jan 1, 2018. The idea is to see if there are trends based on presidential terms or crises. Since the data is still plotted monthly, you can pick and choose an arbitrary start date - some people say it takes time for presidencies to show results, so whatever yardstick you use, use it for all. Rest: see for yourself as long as these links are allowed :(
Completely wrong, the gold standard had a mostly fixed supply that was growing over time but the price went up over the long term but there was inflation over the short term anyway.
Deflation happens when people save more than others have a desire to spend and invest. Inflation happens when people spend and invest more than other people want to save.
The other problem is that no printing is happening, that operation simply doesn't exist beyond the creation of physical dollar bills.
>No government will reduce the printing of money
Do you live under a rock? Germany was running a hard debt brake before the pandemic and right now the debt isn't excessive either. How about you actually look what is happening around the world before making universal claims?
>The value of money will go down the drain faster and faster forever.
What did you expect, did you really think the opposite is going to happen? That you are going to enslave the future faster and faster forever?
> Governments will rather use tricks to lower inflation. Change the definition.
I may agree with the rest, but not with this one. The definition of inflation (or CPI) is owned by the Bureau of Labor Statistics, which is obviously part of the Government. Still, nobody in this bureau will get a bonus or a salary increase, or anything really, if they tweak the definition. Moreover, how many times can the Government change the definition?
Just to be clear, you're suggesting we cut the program but retain the payroll taxes that fund it, right?
that's the problem with mixing social security and medicare in with the rest of the "general budget items"... it's specifically built to be a self-funding program and people have been paying taxes for decades (regardless of whether you think the government has mismanaged it) with the expectation of receiving the benefit.
(note that nowhere here have I said "lockbox", I am firmly aware that it's a "pay as you go" concern at the end of the day, and it's irrelevant to this point, which regards the human factor.)
In contrast, let's say the military is not specifically funded with any specific tax that was intended to go towards that program. It's just something we spend money on. That's what a general budget item is, and that's where the general budget largely gets spent. Medicare/social security are handled differently.
> 1: The root of inflation is the printing of money
The root of inflation is an increase in the cost of goods & services.
If the money supply increased, but the head of every company willfully elected to ignore this (due to patriotic duty, for instance) and continue charging the same for their goods & services, then inflation would not occur.
And a black market would rapidly develop to subvert the government's artificial constraint on the free market, and inflation would happen there to counter the shortages by creating real price signals to allow people to allocate resources as efficiently as possible to get to where they're most needed and earned.
This is exactly what's happening in countries like Venezuela and Argentina with high inflation right now. The government has set an official forex exchange rate to try to make believe their currency is more valuable than it actually is, while the black market currency exchange gives you the true exchange rate that is reflected by real world markets.
In some cases, this situation is fine, because the government just needs the fake numbers to push a political narrative. More commonly, I feel like this action starts a downward spiral of trust in a society's political class or the political system itself. This is probably a big thing that led to the collapse of communism.
No, it's not. Inflation, by definition, is a decrease in the purchasing power of money.
Money can be spent on many things besides goods & services. Consider, for instance: securities, land/real estate, entire businesses, foreign currency, bribes, and gifts (of money).
> Conclusion: The value of money will go down the drain faster and faster forever.
Most Western countries try to keep inflation low, and succeed. If what you were saying were true, wouldn't we have hyperinflation everywhere? Right now we're having a supply shock, but that's not normal.
> Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.
There were several months where officials continued to refer to inflation as "transitory," when it was obviously anything but. I wonder how much that was deliberately misleading, in an attempt to stem inflation by adjusting people's expectations. And I wonder how bad it might have gotten if officials had told the full truth.
That trick is a double-edged sword, because those predictions were ultimately incorrect, which reduces credibility. Now even an honest forecast of declining inflation is less likely to influence expectations, making stronger action is necessary.
> Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions.
The Fed has some tools, most notably the interest rate, that can probably slow down inflation but at the cost of probably slowing down growth. A big question has been the degree to which the Fed will give up growth in order to try to reduce inflation. This speech makes it sound like the Fed is likely to trade off a lot of growth in order to hit inflation targets.
What does that mean for most people? Probably bad things in the short term.
> While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.
It makes it sound like the Fed is willing to inflict some damage to hit its inflation target. This isn’t a change exactly, but it’s a confirmation about what lots of people have speculated might happen.
yeah, that's, colloquially, fed-speak for "don't make me turn this car around, I'll do it, so help me god".
What he's saying there is they're willing to crank interest rates even if it slows the economy down and pushes unemployment sky-high. The Fed's dual mandates are price stability and full employment and they've just signaled which horse they're gonna back.
This is the first time in living memory that we've seen a market where labor is valuable and has the upper hand in negotiations and the wealthy absolutely will not abide that.
Most of the problem is still pandemic-related supply shocks and supply chain bubbles, plus energy going nuts from the russia thing. It truly is transitory and not based on changes to long-term market fundamentals. But the needle was starting to move up on worker compensation/etc and they gotta put a stop to that, can't let the plebs get a taste for financial stability.
As if the workers don't care about inflation and it doesn't affect their financial stability? At the lower wage end these price increases are eating up all of their nominal wage growth and more. There is a reason this inflation has become such a major political issue, people are angry about it. So yes, slowing the economy will slow down business demand e.g. for oil and that will bring some stability to gasoline prices. Powell's wishlist I'm sure is that companies will be able to freeze wages and stop new hiring for a while but avoid mass layoffs. That may not work out but the conspiracist mindset is absurd.
And outside the lines, we have a demographic problem with fewer and fewer young people to juice the economy and provide the labor needed to meet expected return on assets that went into many decisions borrowing wealth from the future.
The fed during the 1970s brought down inflation for a little while, but it spiked again. The hope is that Powell has learned this lesson and will keep interest rates high enough for long enough to stop it from being more persistent.
But then you have those that argue that inflation is a bit more transitory and different than the 1970s, as it is more supply chain induced. And if we keep interest rates high for too long, it will hurt the economy, as cheap money isn't the cause of inflation.
Interest rate hikes will continue until inflation subsidies and interest rates will remain high after that.
"Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy"
Right, do not expect rates near 0 in the foreseeable future and as a follow on to that, mortgage rates will go up. So if you are locked in for 30 years with a mortgage purchased the last few years, you did well.
> So if you are locked in for 30 years with a mortgage purchased the last few years, you did well.
Unless prices go down and you end up losing a bunch of money (or worse, underwater).
That's the problem, rates and housing prices don't exist in isolation. People don't generally care about the actual sticker price of the house, they care about what the monthly payment is going to be, so lower interest rates imply willingness to bid higher... and the opposite is also true, higher interest rates mean people can't afford to bid as high and sale prices go down.
Essentially, people are locked in at higher principal/lower interest, but now the housing market is moving towards lower principal/higher interest, and that means that a huge amount of housing "net worth" (whether current or future) just evaporated for a lot of people. Your $300k house is now a $250k house again and you just lost all that money you spent years paying down (inflation ain't the only way for value to evaporate).
If interest rates double, then so does the interest portion of the mortgage for new homebuyers. It's not quite double, since some of the mortgage goes to principal, but it'll be almost double. And with the interest rate so low... it doesn't make much in "real terms" to make a big relative increase. I refi'd at... 2.75%? So if the fed raises interest rates from 0% to 2%, that nearly doubles my interest rate. Obviously I am not buying today but other people are, and that still determines the value of my asset.
I suppose it's the old "don't buy the house as an investment, buy it to lock in a rent that you can afford" but it's definitely been worrying me. Thankfully the last few years have put me far enough ahead that I'm not in any danger even with a big dip.
And I suppose the counterargument is that institutional buyers are still making big cash offers, so maybe there won't be that much of a dip. But without the hike, values would have gone higher, it's still a loss of expected value. And the institutional investors aspect of the market is really not a great thing either right now.
Yea, we don't know which way anything is going to go so it might end up being better to wait. As of now though, home prices haven't dropped much in many areas due to lack of supply. I think both positions have merit, but for a variety of reasons I think the lower rate home is the better position. And you also don't really “lose” money, but yes the house value on paper could go down from the historic highs.
"Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth"
I think the key take aways are as follows. Prerequisite is the understanding that the Fed has a mandate to: maximize (productive?) employment, and maintain inflation at 2%.
- Employment is very high, as it stands. The intention of easy money was to maintain purchasing power, and prevent household shocks due to government shutdowns during the pandemic. It is being used by companies to game the market, and win as evidenced by this change, producing demand-side inflation.
- Productivity is low, as measured presumably by per-capita GDP projections. Indicating continued economic dislocations between prices and corporate activities. Investments are concentrating into unproductive sectors. Capital inflows aren't improving productivity, so the cost of productivity is going up -- supply-side inflation.
- Households and businesses are still gobbling up a lot of debt OR a lot of savings, spurred on by USD inflation -- to employ those individuals, to live outside reasonable means -- or preparing "for the worst." This is the manifestation of the K-shaped recovery, where activities are significantly altered, in anticipation of near-term economic changes. Acquisitions probably would highlight this, but the branches of government have talked FAANG out of this but Broadcom-VMWare highlights a counterexample.
The narrative that is latched onto by investors pertains to the Fed's intention to hike rates until employment begins to fall, he states that they're planning on "overshooting" the fed-funds rate, so that business investment will fall, and concentrate onto more reliable business-models. Jerome Powell also invoked Paul Volkert, basically to signal that risk assets are no longer a key-metric being observed.
When Google ripped Microsoft a new Chrome, this was supposed to free up some gears, and it did -- because of under-investment in employees at the time, and the malleability of software it was all soft goods.
Bottom line, the product improved.
When Zillow rips the housing sector an expensive and unfunded demand for renovation -- this is where the "growth" investment thesis starts to break down, a massive acquisition of hard goods, made possible because of risk-asset price inflation.
Bottom line, the product is worse for the foreseeable.
It's icky, but thankfully these types of radioactive business models are getting identified sooner rather than later.
I asked OpenAI to write it as an "explain like I'm five":
[edit: which according to a comment below is a mix of copy paste and a 180 degree misreading, lol. I'd be curious if the synopsis would be better had I pasted his remarks rather than passed a link in, but I'm not at my desk to try rn.]
The Federal Reserve is responsible for ensuring that the economy is stable and that inflation is low. In order to do this, they use a number of tools, one of which is interest rates.
When the economy is doing well, the Fed will raise interest rates in order to prevent inflation from getting too high. When the economy is not doing well, the Fed will lower interest rates in order to encourage spending and help the economy grow.
The Fed has been keeping interest rates low for a while now because the economy has not been doing well. However, as the economy has begun to improve, the Fed has been slowly raising interest rates.
In his speech, Powell said that the Fed plans to continue to raise interest rates slowly as the economy continues to improve. However, he also said that the Fed is prepared to lower interest rates again if the economy begins to slow down.
Unsurprisingly, the first part is apparently copy pasted from an intro macroeconomics text and the second half is exactly the opposite of what Powell said.
The fed is going to try to put the economy into a recession by jacking up rates in the hopes that it eviscerates demand which will (maybe, but I don't think so) bring inflation down by balancing supply and demand. Fun times.
He said, "We're going to jawbone a lot about inflation and make some token steps, but not actually do what will solve the issue. Who do you think I am, Paul Volsker? We're in debt trap and more worried about springing the trap than about persistent and high inflation. Don't worry, young whippersnapper, in the future you'll own nothing and you'll be happy!"
Which middle class are we talking about? The plumbers and nurses or the techies and doctors?
Because I think the former would justifiably be very, very, very happy to see the latter take a big haircut since the latter's money is a large part of what's propping up asset prices (and the prices of many consumer goods) and directly reducing the access the former has to such things.
Middle class was defined by whitehouse recently wrt student debt cancellation as anyone who isn't in top 5% of income ( i.e household income of < 250k).
What is the general recommendation for buying a house in this economic climate? Hold off until interest rates go down or just buy if you are ready and not time the market?
Assuming you plan to live in the house, I wouldn't try to time it.
Inflation could cause the price of houses to skyrocket (and the value of your down payment to tank), and interest rates will certainly increase for the next few years.
Current prices reflect people's best guess as to which way things will move.
If you want to buy as an investment, I suggest diversifying as much as possible. If you already have enough assets to tolerate the additional risk and can still get a sub-5% mortgage, then maybe buy an investment property right now (in expectation, it's still free money at those rates, and, even if the market tanks, the price of the house will probably bounce back in the long term).
Real estate is very local and housing is a necessity so its not a purchase you can think about like a pure investment.
I am finally in a place where I am looking to move to a house (currently in a condo) and am very happy that rates are increasing right now. The local real estate market has slowed considerably and I've watched multiple listings of mediocre houses with huge price tags sit for a month before being quietly delisted. It seems like sellers are just now realizing that the days of one weekend of open house followed by multiple competing offers are over. The overpriced flips are getting hammered right now. Well priced properties are still moving, but it will take time for the new reality to filter through the market.
Personally I'm giving it about a year to see where things are next summer.
I'm hopeful that the interest rate increase causes prices to drop but real estate prices (like wages) are sticky. Prices may come down, but sellers could also just decide to hold off and hoard. Hard to tell.
I'm pretty much in the same situation right now. Inflated prices are already dropping where I live, but I'm afraid the more I wait the higher interest rates will be since that's fairly guaranteed to happen according to the Fed.
Same as everything else. If you like it, you can afford it, and you think it will provide you sufficient utility relative to the price you pay (this would be based on your available options), then you buy it.
"Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth"
For as long as I can remember, there has been a vocal group of doomsayers predicting financial catastrophe. Powell's speech is like catnip to that group.
Were you born in 2009? Because if your memory worked in 2008, you'll recall that massive government bailouts were required to prevent full on collapse: the doom you dismiss as though anyone fearing it is no less in control of their critical faculties than a household pet. That happened less than twenty years ago.
To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc).
I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything.
Many people are concerned about the rising price of real-estate and I agree, but I'm not sure interest rates are fine-grained enough for this...ideally Congress could address that with Anti-NIMBY legislation and/or taxes on properties which are not lived in by their owners, which could be directly redistributed to anyone who purchases a new home.