Just what we need – a recession
It’s been expected for quite some time. How bad will it be?:
The Fed maintains that it can thread the needle and raise interest rates just enough to clear away that pesky inflation, but not so much as to crush the economic recovery from the catastrophic COVID-19 shutdown policy. But The Street reports:
“Deutsche Bank economists don’t think it will play out that way. Led by Chief Economist David Folkerts-Landau, they see the Fed having to raise the federal funds rate to 5%-6% to get inflation under control. The fed funds rate is now 0.25%-0.5%.
Rate increases, Fed balance sheet reduction and the “financial upheaval that accompanies [them] will push the economy into a significant recession by late next year,” the economists wrote in a commentary.
“Something stronger than a mild recession will be needed to do the job” of controlling inflation.”
That quote is followed by other quotes from other sources saying that there won’t be a recession.
Financial prediction is most definitely not my field of expertise. I’m not even sure that it’s anyone’s field of expertise, but that certainly doesn’t stop a lot of people from making plenty of predictions. I’m not really able to evaluate whether the optimists or pessimists are more correct, but all you have to do is search for the term “recession” and you’ll get tons of prognostications.
My fear is that we will have a depression, or even a Depression.
Things are gonna suck for a while longer. There’s my prognostication.
I’ll just say that living in America in 2022 is definitely far better than living anywhere on Earth in 536 AD (the much vaunted “worst year to be alive”), and better than living in 1922.
I think I can safely predict no positive good will come from the following going into effect, with on the flip side a number of unnecessary evils coming to be: “Biden eyes long-awaited student debt relief starting at $10,000 per borrower” https://thehill.com/news/administration/3471781-biden-mulls-forgiving-10000-in-student-loans-per-borrower/
ugh
(And to be sure I’m aware the Democrat party may suffer reactively induced ills on account of the like stupidity in policy. I don’t however view that suffering itself as any positive good, as it’s altogether unnecessary as said before.)
“Experts are no better at predictions than a dart-throwing chimp.” — Professor Tetlock after studying 28,000 predictions over 15 years.
Starving the economy of reliable fuel is a recipe for hyperinflation famine and unrest
They are actively pursuing inflationary policies which is really insane. The administration is doing nothing to try and counteract it instead cancel student debt (adds more money into system to chase less goods), add all kinds of regulations to countless industries (adds costs to producer) and one of the little mentioned things is they greatly boosted EBT payments two years ago and then made it permanent. I know an older couple that cannot buy enough to use how much they get each month. Inflation in food prices means nothing to them so that is also more money in the system chasing increasingly scarcer goods.
I was a kid in the late seventies so I don’t remember all the things the Carter administration did and I know they did a bunch stupid things like price controls but it seems to me they were at least trying to attack the problem whereas these idiots are hell bent on making it worse.
I was a kid in the late seventies so I don’t remember all the things the Carter administration did and I know they did a bunch stupid things like price controls but it seems to me they were at least trying to attack the problem whereas these idiots are hell bent on making it worse.
The price controls were implemented during the Nixon Administration. Carter worked to dismantle the residue of those controls, with only partial success.
Forgive me for my ignorance and my public school education:
Can anyone explain to me, in relatively simple terms, how the fed raising interest rates results in stopping (slowing? reversing? avada kedavra-ing?) inflation? Or maybe there’s an “inflation for dummies” article or YouTube video I could be pointed to? History and economics are two gaping holes in my knowledge banks, and I always feel dumb for not really understanding what’s going on.
The big problem in making predictions in this current environment is there are so many things causing the problems at the same time and they aren’t the kind of things that have happened before.
An example is the supply chain issues caused by the ridiculous COVID response which is now starting to come into play again with China locking things down. How will that play out and how long will it take to get things in order. If that can be somewhat straightened out that would be a disinflationary action. The Ukraine situation is now beginning to look like a longer term problem economically and all of the sanctions seem to have done nothing to Putin but they have caused pain to the Russian people and also to the people of the world and we haven’t even got to summer when Ukraine would be harvesting wheat, etc.
Just an absolute mess that all goes back to the insane response to COVID. Cannot overstate how destructive that has been on virtually everything and for no good reason.
NS – it reduces the amount of money in circulation which alleviates pressure on prices. For more detail someone here will surely provide a tome size response to your question.
Much like ours, the plagues of Egypt could have been averted. Some people prefer learning the hard way, to which the universe replies “As you wish!”
NS,
Yes, as Skilly says it decreases the money supply which in theory should lower prices.
Simple way to think of it with low rates and all this ‘stimulus’ they have inserted massive amounts of money into the system while at the same time restricting producing many goods which means there is too much money chasing too little goods (demand outstripping supply big time) which leads to rising prices (think housing market right now).
By raising rates it will be harder for businesses and individuals to borrow therefore there will be less money in the system chasing those goods.
The problem is as businesses and individuals borrow (and spend) less that hurts other businesses and can lead to job losses and less growth in the economy and now you are talking about a recession.
Seems like the best case scenario at this point is a shallow recession.
Can anyone explain to me, in relatively simple terms, how the fed raising interest rates results in stopping (slowing? reversing? avada kedavra-ing?) inflation?
Increased interest rates will be a consequence of reducing the growth rate of monetary aggregates.
People always point out that the rates are 0.33% or so now and were close to 20% at the same stage in 1981 and that is true but there is the theory that since rates have been so low for so long raising rates to levels like that won’t be necessary this time.
Some proof of that is how people reacted a few years back when the Fed started raising rates and made it to like 3% or something and the way people reacted you would have thought they were at 30%.
Who knows how this will all play out but having fiscal and monetary policy pulling the same way would certainly help and we definitely don’t have that right now.
NS, give Milton Friedman on youtube a watch. He might help get your arms around the thing: https://youtu.be/jE7zxo61Xc8
Well, the St. Louis Fed just released their GDP numbers for the first quarter of 2022, and while they were expecting things to be very slightly positive, in fact their analysis shows GDP (and the economy) shrinking by -1.4%. The last quarter of 2021, it was at 6.9% (moderately strong growth). But this was due to monetary policy, flooding the market with cash. Economically, a sugar high instead of meat & potatoes growth. Now we are through April – are things significantly improved this month, or expected to be in May / June?
I’m definitely not trained as a economist but I don’t know anybody that’s excited about the economy right now. My service providers are getting their profit margins hammered while their suppliers are taking the opportunity to sneak in hefty margin increases while they can still blame ‘inflation’. Meanwhile I see price increases at the meat counter. Try looking at the meats there, sometime. Something that was put out today is sometimes over $0.50 / pound more expensive than the other meat sitting next to it, from yesterday. I’ve seen that twice this week, so far. Things have been run up so much in the past 4 months that people are in shock at the grocery, you can see it on their faces. Shortages are in plain evidence everywhere, and now we get predictions of food shortages. Based on these things, I think a recession is coming, and because people have lost faith in their government, it might be a bad one.
The frustrating thing is that this idiot administration just blames COVID and Putin for everything and then walks away and does nothing. Even if they believe that an administration that actually cared about the people would respond by taking actions to offset the effects of COVID and Putin like cutting regulations to reduce producer prices and greatly increasing domestic energy production which would lower energy prices obviously.
This country has never had leadership that apparently has no interest in making the citizens lives better (even if only for there own personal reelction reasons) until now.
I saw this quote from Ken Rogoff this morning and while I don’t necessarily think he is wonderful just because he is a Harvard Prof., I do think that it sounds to me like basic wisdom given our current situation.
The Fed has behaved like a bunch of wimps since the credit bust of 2008. Put another way, they have been giving the Dems the Modern Monetary Theory action that they always wanted. There was much talk recently about how Chairman Powell would not raise interest rates until after Biden re-appointed him to another term, which happened some (a couple?) months ago. Will they now feel free to really crank up rates? Rogoff seems to doubt it. I don’t know many hard core lefties are voting members of the Fed. currently.
TommyJay,
We will get a little clearer picture next week when the Policy Board meets. Powell strongly hinted that 50 is coming next week and lots of talk about another 50 in June.
They are calling it ‘front loading’. But even that only leaves the rates around 1.5%. Markets seemed to be betting they will be at 3% by year end. Is that enough and will it matter if all these extraneous issues continue to put pressure on things.
Again what is needed is some other non monetary policies that will help the Fed in the fight against inflation. Would be nice to hear Powell mention some of these things at his press conference Wednesday like he used to do when Trump was president.
My fear is that we will have a depression, or even a Depression.
The Great Depression happened because of FDR’s policies after a massive recession. Mostly because he set a high minimum wage.
Obama had a mini-depression they called a “recovery”. But mostly the Great Depression was also a recovery; What happens is the growth goes negative in the recession, then that is followed by very low growth so in effect you recover at a slow rate that is barely a recovery at all. There should have been a sharp recover quickly after the recession, but policy prevented it.
With team Biden in charge and their actions, one suspects they will engineer a depression if there is in fact a recession.
The frustrating thing is that this idiot administration just blames COVID and Putin for everything and then walks away and does nothing.
Oh, they are doing lots of things. shutting down our oil and gas extraction and transport, increasing regulations, pushing green energy.
“don’t know how many …” Sheesh.
I like Griffin’s at 4:11pm comment.
Inflation is a monetary phenomenon if you run the experiment with a normally functioning economy and hold all the basic things constant, except the monetary supply. But we’ve screwed up the economy in a variety of ways, before or in addition to goosing the monetary supply.
Basic supply and demand balance is the most powerful factor in setting prices, and that balance is strongly affected by monetary supply. But when the number trucks and truck drivers and shipping containers somehow gets all screwed up; that has a huge effect as well. Just one example.
______
I agree about the non monetary policies.
3% interest rates are not going to do it. (Of course they may continue to increase in the next year.) Between Rogoff and Deutsche Bank they are saying 4 to 6 percent. We were at something like 5 to 5.5% before the economy fell apart in 2007 (from memory). Here we go again? Or will they wimp out?
Well, we may already be in recession. We are if this quarter is negative. And we have significant inflation.
And morons in charge.
“They are actively pursuing inflationary policies which is really insane. The administration is doing nothing to try and counteract it instead cancel student debt (adds more money into system to chase less goods), add all kinds of regulations to countless industries (adds costs to producer) and one of the little mentioned things is they greatly boosted EBT payments two years ago and then made it permanent. I know an older couple that cannot buy enough to use how much they get each month. Inflation in food prices means nothing to them so that is also more money in the system chasing increasingly scarcer goods.”
The biggest inflation driver is deficit spending. We have known that since Carter and his stagflation. There is a tautology in monetary economics of NV=PQ (M=money supply, V=Velocity of money turning over, P=Price level, and Q=Quantity of goods and services in the economy). Money is a veil, and ultimately this is the steady state solution. Back in the Carter Admin, the Fed tried to use classic supply/demand to bring down interest rates through flooding the banking system with new money, and that in turn was driven by deficit spending.
How does this work? Back in the Carter years, the Fed would try to bring down interest rates by increasing the quantity of money in circulation. And that was supposed to bring down interest rates, and thus inflation. Where did the money come from to pay for deficit spending? For the most part, from the Fed buying Treasury debt and promising to pay it back some day. Some of it was in printing actual money, but most, even back then, was by just crediting the bank accounts at the Fed for the Treasury debt they bought. Now, it might not have been that bad, except banks make money by lending money, and they can’t loan out all of the money they take in. Rather, they have to keep a certain percentage of their deposits on hand. This percentage is their Reserve Requirements (RR). It turns out that the money lent out ends up back in a bank, to be lent again up to their Reserve Requirements. It’s an infinite sum that essentially sums to 1/RR. This is termed the Monetary Multiplier.
Why hasn’t this been a problem since Carter, until now? The simple answer is that the Fed is the purchaser of last resort for Treasury debt. When it buys Treasury Notes, the money supply (M) increases. But that isn’t a big problem when other countries are buying our Treasury debt. But foreign purchasers for our debt cannot keep up with the massive amount of Treasury debt that financed out the Dems’ massive amount of deficit spending over the last year or so. That means that the Fed had to step in, but can really only do so by pumping up the money supply. More money (?M) chasing the same amount of goods and services (Q) ends up driving up the price level (?P).
What’s scary is that the Dems seem to want to pursue what some call New Monetary Theory. It essentially posits that deficit spending is irrelevant, and we can buy our way out of our current difficulties with massively increased deficit spending. Unfortunately, this is just a regurgitation of Keynesian Economics, which was practiced by FDR to buy our way out of the Great Depression.
We didn’t have a massive National Debt in the 1980’s, compared to GDP, as we do now. Jack up interest rates, and the cost of servicing that debt rises precipitously. We are screwed economically if interest rates get to even 5%.
To answer NS with perhaps more detail than he wants (though it is interesting) the Federal Reserve traditionally adjusts the interest rates and money supply with actions that are called “via POMO” or just POMO. Permanent Open Market Operations.
In the current case they would be going into the bond market every day it’s open and they would be selling short term Treasury bonds. When either a bond trader or average investor buys one of those bonds, they then have a security in place of the cash that used to be in their account. So there’s less cash in the economy.
But how does the Fed encourage someone to buy that bond? By offering it for sale at a lower price, which is the same thing as a higher interest rate.
Summarizing: Less cash and higher rates.
Higher rates means less borrowing and generally less spending. The economy slows. If a vendor raises his/her selling price, will someone buy it in a slowing economy? Better not raise the price and risk it. (Very oversimplified.)
Note that traditionally the Fed is only controlling interest rates at the very short maturity end of the market.
If not a depression, a really bad recession is my guess.
Nonapod,
What was so bad about 1922?
Griffin,
“They are actively pursuing inflationary policies which is really insane.”
Not “insane”. Intentional malevolence.
Skilly,
“NS – it reduces the amount of money in circulation which alleviates pressure on prices.”
Theres another factor that’s going to significantly affect the equation. Supply chain shortages. Supply and Demand 101: reduced supply + constant demand = increased prices
Increased prices + devalued purchasing power = recession/depression
“Ships waiting to be loaded in Shanghai… get ready for more supply side inflation…”
https://www.reddit.com/r/Wallstreetsilver/comments/u5o8xz/ships_waiting_to_be_loaded_in_shanghai_get_ready/
Aggie,
“My service providers are getting their profit margins hammered while their suppliers are taking the opportunity to sneak in hefty margin increases while they can still blame ‘inflation’. – Shortages are in plain evidence everywhere, and now we get predictions of food shortages.”
Steadily shrinking profit margins first result in price increases and then in layoffs.
Griffin,
“The frustrating thing is that this idiot administration just blames COVID and Putin for everything and then walks away and does nothing. – This country has never had leadership that apparently has no interest in making the citizens lives better…”
Their interest lies in making things much worse because desperate people are much more likely to give up their liberties for promised security.
Ken Rogoff. I thought that name rang a bell. He was the US Junior Chess Champion in 1969.
_________________________________
Rogoff on chess addiction and why he had to give up the game
One of the highlights of the London Chess Classic has been the visits of a large number of important and interesting people. One of them, the Professor and world-renowned economist Ken Rogoff, is also a chess grandmaster. He was whisked away from the VIP room at Olympia for an interview with the BBC, in which he very frankly discusses the dangerous side of his former chess career.
https://en.chessbase.com/post/rogoff-on-che-addiction-and-why-he-had-to-give-up-the-game
_________________________________
I reached the same conclusion about chess on a far more minor scale. It’s an amazing game, but it wasn’t going to help me build an adult life.
I am not an economist, thank God, but I have been thinking for the past month we have been in a recession. I agree with those here that 4 or 5% is just not going to do it. Think of all those that have bought houses in recent times that did a variable and you will see a housing bust again. Us retired folks that have a basically fixed income are already feeling price increases. Yes, I know my SS went up this year but so did my Medicare premium.
Well, if we are going to have a recession, heading into one before the Biden midterms is better than after the elections.
A harsh economic downturn is about worst thing that could happen to the Democrats this year.
Certainly some of their policy effects are intentional, but creating a recession and a consequent bloodbath at the polls, which will devastate their political power for the next two to six years, can’t be the plan. IMO it must reflect a combination of incompetence, lack of discipline and factional disarray.
to suppress inflation, at this point, is like collapsing the hindenberg, and not risking an explosion, lets remember the mindset of these people, they want to drastically reduce carbon, that’s the product of human behavior, this is why they are making fuel scarce, and food prohibitive, the zampolit dezinforma *fits right into this strategy,
*political officer for disinformation
of course, bringing tens of millions of desperate people into the country, sort of conflicts with this goal,
I am with you Neo. I have no idea what the financial and political dynamics will produce; and giving their track record I doubt that many experts do either.
On a personal note. I have a Financial Advisor for our little bit of wealth (to overstate), who works for a major financial corporation.
Since January of ’21, and accelerating through the first three months of ’22, I have been asking him to be ultra cautious. I expected chaos, and at 86, I can’t bet that it will be resolved before my wife needs those funds. He had many analyses from his company experts to explain why the situation was not so dire, and would improve**; and I let him tweak here and there. Finally, after many thousands of unrealized gains evaporated, I told him to just pull the trigger–to go nuclear– to use a pair of hackneyed phrases. It may have not been the smartest move; but, I sleep better at night. If the economy survives I will be better positioned to take advantage as well.
My comment then, as it had been previously, “I don’t understand all of the numbers, but I recognize chaos when I see it; and I do know that investors, whether individuals or major corporations, have little tolerance for chaos.”
So far the chaos has been much worse than I imagined. Experts be damned. The “ship of state” (to use another cliche) is sailing into very rough seas; and the people on the Bridge have no credibility.
**Note: as an indicator of expert thinking, just before I made the big move I asked what the experts saw that gave them cause for optimism. My FA (who is also a friend, unfortunately, otherwise he would have been fired by now) said that he believed that they saw a 10% market reduction (defined by experts as a correction) and thought that would “test the bottom”. More expert language. So, fairy dust, unicorns, and 10% “corrections” are characteristics of certain mind sets. His answer solidified my decision. .
The Great Depression happened because of FDR’s policies after a massive recession. Mostly because he set a high minimum wage.
It didn’t. You had an implosion in production and real income during the period running from the summer of 1929 to the spring of 1933 that was on the order of 30%. Nearly all of it occurred before FDR took office. You did have a second contraction in 1937 and 1938 of a much smaller size. You had rapid growth from the spring of 1933 to the end of 1936 and from the middle of 1938 to the end of 1941. In terms of production, the economy had fully recovered by 1941. The labor market remained injured (the high minimum wage enacted in 1938 being one problem).
There are, as mentioned by others here, several factors affecting inflation.
IMO, the most basic is energy prices. Energy is required to produce, transport and sell a huge array of goods and services. When the price of gasoline, natural gas, and diesel, increases there are very few producers, transporters, and consumers who don’t feel it. It forces producers to raise prices or take losses. If there isn’t enough money to buy the higher priced goods, prices don’t rise, demand slows, and things stabilize. That’s not the case today.
Same with the supply chain issues. If supply decreases as caused by the broken supply chain, and there is money to chase the fewer goods available, that tends to force prices up. Classic supply demand, but in normal times the producers quickly produce more goods, and it tends to stabilize prices. The supply chain is a problem because vendors got used to managing their inventories on a “just-in-time” basis, but Covid slowed production and bad rules/regulations at our West Coast ports created shortages that are persisting. The Feds could possibly do something to speed things up in our ports, but this administration will not do those things.
Low interest rates and profligate federal government spending on Covid relief has put entirely too much money in the system. Therefore, lots of dollars chasing too few goods, exacerbated by high energy prices that the Biden climate cultists love.
How to get out of this mess? Unleash the U.S. energy industry. Increase incentives for manufacturers to produce more here at home. Change the rules/regulations that are clogging the ports. Reduce government spending while raising interest rates in modest increments. With the Bidden administration in charge, none of this will be done. I predict we will relive the Carter years of high inflation and minimal or negative economic growth. Worst case, we could have an inflationary recession, which will be deep enough to slow price increases, but will be dealt with by Biden and company with more inflationary n policies. 🙁
There are, as mentioned by others here, several factors affecting inflation
Inflation is a monetary phenomenon. You want to restabilize prices, you need to bring monetary growth under control. This Jerome Powell and his co-conspirators have been unwilling to do.
Certainly some of their policy effects are intentional, but creating a recession and a consequent bloodbath at the polls, which will devastate their political power for the next two to six years, can’t be the plan. IMO it must reflect a combination of incompetence, lack of discipline and factional disarray.
My wager would be (1) decision making is defaulting to the communications majors and (2) they think they can limit the damage through massive vote fraud.
The supply chain problem is no longer solely a case of regulatory impediments at California ports. China is not shipping out of Shanghai, its largest port. It is entirely in China’s interests to see a crippled American economy, which leads me to wonder if the freeze on shipping out of China is what the lockdown in Shanghai is really all about.
“China’s shutdown of Shanghai port will ripple across the entire world by summer”
https://www.thehouseofdavid.org/prophetic-map/2022/4/26/chinas-shutdown-of-shanghai-port-will-ripple-across-the-entire-world-by-summer
Yep they would prefer to hobble a large portion of their own economy to facilitate the Brandon junta playing “Thelma and Louise” with the US economy. Makes perfect sense.
Not that cripling a sizeable portion of their own economy might have some consequences in the CCP. Nope. Those inscrutable commies.
Inflation isn’t just a monetary phenomenon. I’m trying to be succinct here. (Te he.)
Here is Milton Friedman from Money Mischief page 193.
I’m typing that by hand, so I’ll summarize a bit more.
Output growth in the US averaged about 3% over decades. (Written in 1980.) It was as high a growth rate as 10% in imperial Japan, but it generally doesn’t grow very fast. However, money supply can grow at 10, 50, 100, or 200% per year.
Then he says, “As these examples show, what happens to the quantity of money tends to dwarf what happens to output; hence our reference to inflation as a monetary phenomenon, without adding any qualification about output.”
Supply chain issues shrink output. Throttling investment and loans to the petroleum industry shrink output.
Im surpised its taken so long. Im pretty much even on the year which seems like a big win right now. How much money was added to the economy the last 2 years? Trillions.
And again, whos fault is it? The Russians.
Economic forecasting was created to give astrologers a good name.
Nixon was about as bad, he of the Wage and Price controls.
What do you call an economist making a prediction?
Ans: Wrong
huxley,
That’s cool that Rogoff was a chess master or thereabouts. I didn’t know that. I only know him from this book,
This Time Is Different: Eight Centuries of Financial Folly Kindle Edition
by Carmen M. Reinhart (Author), Kenneth S. Rogoff (Author)
This was book was big in congress in 2010. It’s boring as hell, but has some very important things in it, such as statistically how much debt can a country carry before it goes bust?
There was one very funny and ironic bit in the book, especially considering that Rogoff was previously an IMF economist. The book states (could have been Reinhart’s material) that Greece has a long history of reneging on its debt, over and over. But the IMF has done detailed work and analyses with Greece and we are confident that Greece has genuinely turned over a new leaf. Greece will henceforth be willing and able to honor all of its debt obligations. (Or words to that effect.) It’s a pity they didn’t literally say, “This time it’s different.”
Within a few years of the book’s publication, the Greek debt situation imploded yet again.
The US federal government and most state/municipal governments are solely propped up because of low interest rates on governmental bonds. Most municipal and state bonds can’t be serviced at interest rates above 6%, because the government entities (and most private entities) can’t afford that much interest. One could argue that the Treasury will have trouble funding with any interest above 0 (they’re really just rolling over Treasury notes right now), but at 6 to 8%, funding the debt load becomes impossible (there’s not enough debt servicing money in the budget to pay the interest, much less principal).
The “expert consensus” to stop inflation is to drive primary interest rates above the rate of inflation. Shadowstats has the “real” rate of inflation at 20% yearly right now.
The current party is all supported by insanely low interest rates and intentional inflation. The Fed has been spending the last decade spiking the punch, trying to keep everyone just drunk enough. The COVID stimulus was the economic equivalent of Jagermeister straight to the stomach with a funnel and hose. Now “the people in the know” are now surprised that the economy has inflation poison.
…but at 6 to 8%, funding the debt load becomes impossible (there’s not enough debt servicing money in the budget to pay the interest, much less principal).
–Kentucky Packrat
^^^ Key point.
We can’t drive up interest rates and take our medicine like we did in the 70s. It will be interesting to see how this plays out.
However, I would prefer read about it later in a book, rather than live through it.
We can’t drive up interest rates and take our medicine like we did in the 70s.
If they’re serious about re-stabilizing prices, the process can be complete in two years. We can take our medicine.
The US federal government and most state/municipal governments are solely propped up because of low interest rates on governmental bonds.
Most municipal and state bonds can’t be serviced at interest rates above 6%, because the government entities (and most private entities) can’t afford that much interest.
They can. Outstanding state and local bond issues currently sum to about $3.3 tn. Servicing that at 6% is a charge just shy of $200 bn, or about 9% of state and local revenues as we speak. State and local officials whine a great deal in order to justify tax hikes and wheedle money out of Washington and state capitals.
The “expert consensus” to stop inflation is to drive primary interest rates above the rate of inflation. Shadowstats has the “real” rate of inflation at 20% yearly right now.
Why do you take Mr. Shadowstats seriously? He’s a business school graduate sitting at his desk.
— No one has mentioned the impact of the Fed reducing the balance sheet. There is a lot more going on than simply short term rate increases.
— FDR did a whole lot of things that hurt the economy. Massive regulation that strangled in various ways.
FDR is the reason the depression was worse in the USA than most everywhere else in the world.
— perhaps the worst of FDR’s damage came via his campaign rhetoric during the 1936 campaign where he vilified business and wealthy people. As a result, net private investment, the most important (not largest, most important) factor in driving a healthy economy went negative for two years. Those were the only two years it did so and they were the worst two years of the depression.
See Amity Shlaes, The Forgotten Man, for more on this.
“ No one has mentioned the impact of the Fed reducing the balance sheet. There is a lot more going on than simply short term rate increases.”
In the end, interest rates are not a cause of inflation, but an effect. This was the key thing that the Fed had to accept before it could stop the inflation of the 1970s. Before that, it was targeting interest rates, which caused them to increase the money supply, that caused inflation, and thus increases in the interest rates. It was a vicious cycle that they had to break, before inflation could be tamed.
“ If the quantity of goods and services available for purchase — output, for short — were to increase as rapidly as the quantity of money, prices would tend to stable. Prices might even fall gradually as higher incomes led people to want to hold a larger fraction of their wealth in the form on money. Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation. There probably is no other proposition in economics that is as well established as this one.”
MV=PQ according to the expert, Milton Friedman. BTW – V (Velocity) is what he is talking about when he says: “Prices might even fall gradually as higher incomes led people to want to hold a larger fraction of their wealth in the form on money.” Velocity of money is how quickly it turns over, or how long people hold onto it. Inflation tends to drive people to spend their money now, instead of later, increasing the turnover of the money supply.
As an aside, I got a call today for delivery of a custom (Amish) built cabinet. I had put down about $2400 for half payment, and need to pay the rest on delivery next week. When I grumbled about the cost, the salesman reminded me that it is now listed at over $6k, and that I should be happy that I had ordered it when I did, six months ago. And yes, I was. That is what drives V (Velocity) being (weakly) dependent on P (Price level). You buy things now, because they will be more expensive next month.
FDR is the reason the depression was worse in the USA than most everywhere else in the world.
He isn’t. Again, the economic contraction during the period running from 1929 to 1933 was on the order of about 30% of production in the United States and also in Canada. This implosion occurred before Roosevelt took office.
See Amity Shlaes, The Forgotten Man, for more on this.
See her bibliography. She consulted a mess of secondary literature of a historical or journalistic character. She made very little use of literature in economics or of statistical sets.
Those were the only two years it did so and they were the worst two years of the depression.
They weren’t. The year-over-year decline in real gross domestic product was 3.3% comparing 1938 to 1937. The year-over-year decline for 1930 / 31 was 6.4%, for 1929 / 30 was 8.5%, and for 1931 / 32 was 12.9%.
FDR did a whole lot of things that hurt the economy. Massive regulation that strangled in various ways.
There were a number of ill advised measures which certainly had ill effects. However, the economy was growing rapidly just the same. Again, real domestic product in 1936 was 36% higher than it had been in 1933. It was 38% higher in 1941 than it had been in 1938.
https://mises.org/library/how-fdr-made-depression-worse
https://reason.org/commentary/fdr-policies-doubled-the-lengt/
Besides being theft, gold confiscation didn’t work. The price of gold was increased from $20.67 to $35.00 per ounce, a 69% increase, but the domestic price level increased only 7% between 1933 and 1934, and over rest of the decade it hardly increased at all. FDR’s devaluation provoked retaliation by other countries, further strangling international trade and throwing the world’s economies further into depression.
Having hobbled the banking system and destroyed the gold standard, he turned next to agriculture. Working with the politically influential Farm Bureau and the Bernard Baruch gang, Roosevelt pushed through the Agricultural Adjustment Act of 1933. It provided for acreage and production controls, restrictive marketing agreements, and regulatory licensing of processors and dealers “to eliminate unfair practices and charges.” It authorized new lending, taxed processors of agricultural commodities, and rewarded farmers who cut back production.
1. About 40% of the banks in the United States failed during the period running from the fall of 1930 to the spring of 1933. The bank failures stopped dead with the bank holiday, modifications to federal banking laws, and the devaluation of the currency.
2. You’ll notice he never quotes any production statistics during the course of the article. Austrian economists are very resistant to doing so because empirical measures of economic activity are inconvenient.
In regard to your article in Reason, you’ll notice he never offers comparative statistics on the annual growth rate in per capita product in each affluent country from their economic nadir to the beginning of the 2d World War in 1939. Countries reached their nadir at different times – 1932 most commonly, 1933 for the United States, 1934 for stragglers (Italy, IIRC), 1931 for a few. On a list of 24 affluent countries, the growth rates in the United States ranked 6th.
Chile: 8.1%
Germany: 7%
Austria: 6.3%
Canada: 6%
New Zealand: 5.9%
United States: 5.6%
Japan: 4.7%
Uruguay: 4.4%
Finland: 4.2%
Sweden: 4.1%
This fellow fancies per capita product should have grown at a rate of 11% per annum, if I’m to take his remarks literally. Which economy grew at that rate?
Why do you take Mr. Shadowstats seriously? He’s a business school graduate sitting at his desk.
Being a widower, I pay every single bill of my own now. My groceries are up at least 20%. Gas is up over 20%. Prepared food is approaching 100% over 2 years at most places.
John Williams has every incentive to document using the process he describes. The government has every incentive to lie. I trust my lying eyes and my screaming bank account.
Outstanding state and local bond issues currently sum to about $3.3 tn. Servicing that at 6% is a charge just shy of $200 bn, or about 9% of state and local revenues as we speak. State and local officials whine a great deal in order to justify tax hikes and wheedle money out of Washington and state capitals.
Most states are either hiding chronic deficits (Illinois), barely stringing along (most of the US), or acting a bit flush because they have COVID money left over (KY, etc.). The states with the worst debt issues are the ones with the highest taxes and worst revenue models already.
The problem also isn’t older bonds, it’s new bonds. Let’s say I-290 needs another remodel because the contractors cheaped out on the concrete for the last one. This time, instead of 3%, bond rates are up to 8 to 12% (or more), because the state rating’s junk. Interest payments are now triple to quadruple what they were last year. Illinois started this year with a $4 billion deficit they claimed to patch, where are they going to get that kind of money?
The US Government is already in the same position. We’re running $1T deficits that need to be removed from the budget BEFORE we consider the impact of 6 to 8% on new Treasury paper. And to stop the inflation, the Fed has to start selling their paper to unwind their books, and that only drives up note rates (supply is up, prices are down). I’m not sure the Treasury and Congress can get us to budget parity without a Treasury market collapse (whether real or effective like what almost happened under Carter in the 70s).
Do we get this, or a hyper inflationary destruction of dollar value to ruin the value of current debt? Makes one want to pop some popcorn….
I’ve been staying at a 4 star hotel this weekend, and my very local impression is that maintenance is suffering, and that some of the staff is inexperienced. This might to be a long term problem going forward.
“Most states are either hiding chronic deficits (Illinois)…”
These are the states that are very much looking forward to “Biden”‘s Bonkers Bribe Back Better Bonanza.
Such states KNOW that they DESERVE special consideration.
“Biden” certainly agrees.
(And it’s not just states but all the “right” universities, media organizations, unions and “social justice” cohorts, etc.)
It’s no wonder that Manchin and Sinema are so fiercely hated…by all the usual suspects..
…since those two are merely forcing “Biden” to have to work harder, lie a bit more, be a bit more duplicitous.
But that’s really no problem, not really. “Biden” will find a way to reimburse those who are deserving…at the expense of those who most certainly are NOT.
Where there’s a will there’s a way.
https://en.wikipedia.org/wiki/Triumph_of_the_Will
And from the “Nice Work If You Can Get It” Department:
“Twitter’s $17 Million Per Year Censorship Czar Could Get Axe Under Musk”—
https://www.zerohedge.com/political/twitters-17m-year-censorship-czar-could-get-axe-under-musk
Life just isn’t fair, is it?…
She’s lucky, though: no doubt “Biden” is currently looking for “A Few Good, um, People”….
The timing couldn’t be more perfect….
“Just what we need—a recession”
…is in fact THE NAKED TRUTH (as befits a naked emperor)…i.e., if one replaces “we” with “Biden” and “his” “Never-Let-A-Crisis-Go-To-Waste” (NLACGTW) Project for a Transformed America (PFTA).
To be sure, NLACGTW has been updated and turbo-implemented by “Biden” to: “If there already is a crisis, make it worse; if there isn’t yet a crisis, create one; and if there aren’t enough crises, create them—the more the better” (ITAIACMIWITIYACCOAITAECCT—TMTB…which we should probably just shorten to TMTB).
To be fair, this grand “strategy” was instigated by Obama (under the guise of “Transforming America”(TM)…widely advertised, falsely of course, as meaning “Improving America”) and it was all set to be have been continued by Hillary…alas and alack—so one can appreciate the shock and horror when Hillary didn’t manage to steal enough votes in 2016 (she didn’t have to strain herself since it was so obviously in the bag—besides the Russia Hoax was going to work like a charm)…
Anyway, back to the upcoming—absolutely necessary—recession, which will soon also have to be updated to “DEPRESSION”…keeping in mind TMTB.
In keeping with which is the need to help out as many deserving “friends” as possible…
“Dem appropriators tuck funds for ski jump, bike trail in $1.5T spending bill’s 367 pages of earmarks”—
https://justthenews.com/accountability/waste-fraud-and-abuse/sundem-appropriators-tuck-ski-jump-bike-trail-funds-15t
Which comports magnificently with this bit of “historical” context (heh)…
“A BRIDGE TOO FAR”—
https://www.powerlineblog.com/archives/2022/04/a-bridge-too-far-2.
File under: It’s the “Infrastructure”, stupid
John Williams has every incentive to document using the process he describes. The government has every incentive to lie. I trust my lying eyes and my screaming bank account.
He’s a guy sitting at his desk. He has no specialized training to do what he purports to be doing. He has no process to collect the necessary data to construct alternative price indices. He is not consulted by any private agency which produces economic data (e.g. the Conference Board).
As for your screaming bank account, I can point out to you that food and beverages consumed at home along with motor fuels accounted for about 9% of personal consumption expenditures among all the households in this country in 2019, but you’re going to turn around and tell me that the government made that up and Mr. Shadowstats tells you it’s actually 50%.
Mr. Shadowstats has been peddling a thesis for at least 15 years now. His incentive, in service to his own ego if nothing else, is to produce arguments that he’s been right all along.
Prepared food is approaching 100% over 2 years at most places.
Not any place in which I’ve set foot.
The problem also isn’t older bonds, it’s new bonds.
The paragraph which follows does not respond to my point. Even if you retroactively apply an interest rate of 6% to the debt stock, it’s still within the capacity of state and local government to service if their officials can be bothered to get their act together. You were the one who offered the figure of 6%, which you now wish to amend to 8-12% in an attempt to juice your argument.
If all this talk of recession comes true then I picked a bad time to retire.
I think the inflation is more of a danger to your retirement than is a recession.
Just what we need — a DOJ that does its best to cover up its shadowy shenanigans!
Coverup ‘R Us, indeed!!
“Biden DOJ coordinated legal assault on Georgia election integrity law with liberal groups;
“Justice Department now hiding contents of communications, claiming they are protected by attorney privileges, according to memo released under FOIA.”—
https://justthenews.com/politics-policy/elections/biden-doj-coordinated-legal-assault-georgia-election-integrity-law
How very strange! It’s as though Merrick Garland is taking lessons from Obama “Wingman” Eric Holder…
The Sultans of Swinging Elections!
(But not so strange as all that…since the DOJ has also been weaponized—like everything else in and about “Biden”—against the Constitution….)
I missed the continued interest in this thread.
Stan on April 30, 2022 at 5:35 pm:
— No one has mentioned the impact of the Fed reducing the balance sheet. There is a lot more going on than simply short term rate increases.
I used the word “traditionally” a couple times because of that. Ignoring balance sheet effects, which could be dominant.
Here is the current Fed balance sheet summary.
Outside the Treasury securities that they are normally chartered to trade, the big daddy is the mortgage back securities at $2.7T. There’s the credit bust of 2008. Several more years of this level of inflation, and that $2.7T won’t seem so big. Well done Ben Bernanke, Yellen, and Powell.
Down in the weeds are a few interesting asset/liability lines. Agency securities. Fanny and Freddie I think.
A Municipal Liquidity Facility? Muni bonds? Hmm, it’s very small.
TALF II? The wiki: The Term Asset-Backed Securities Loan Facility (TALF) is a program created by the U.S. Federal Reserve (the Fed) to spur consumer credit lending. The program was announced on November 25, 2008, and was to support the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).
Almost missed this: TALF 2 was initiated in 2020 during the COVID-19 pandemic.
Main Street Lending Program. That sounds like the old TARP legislation to me from 2008.
Well done Ben Bernanke, Yellen, and Powell.
There was very little inflation when Bernanke and Yellen ran the Fed. It’s all erupted during the tenure of Powell and his allies on the Board.
‘Something stronger than a mild recession will be needed to do the job” of controlling inflation.’
A new dark age would do the trick. It did the last time it was used.
A new dark age would do the trick. It did the last time it was used.
Take a pill.
Again, the rate at which goods and services were being produced in the economy declined by about 2% during Mr. Volcker’s successful effort to re-stabilize prices. The problem we have now is that the people who would be in charge of the effort are the people who have caused the problem we face.
Even if you retroactively apply an interest rate of 6% to the debt stock, it’s still within the capacity of state and local government to service if their officials can be bothered to get their act together.
And blue pigs could fly if they’d just flap their wings.
Most state budgets would require an approximate 20% cut to just reach short-term balance. The US Federal budget is approximately the same. However, this doesn’t include long-term unfunded liabilities like pensions and Social Security. For most states and the Treasury, there is no way the 50%+ cuts needed are possible.
If we had statesmen capable of dealing with the problem, we wouldn’t HAVE the problem.
Prepared food is approaching 100% over 2 years at most places.
After further calculations on my part to justify, I will withdraw this blanket statement and go with this:
Most restaurant bills in the area are up between 50% and 100% over 2 years here.
If all you eat is a Big Mac, you’re probably not up any. (McDonalds has been cooking the price of the Big Mac ever since they learned about the Big Mac index.) Our local Chinese buffet has gone from $7 weekdays to $12 weekdays. The $20 that would buy the car food three or four years ago at Wendy’s is now $14 or so for just the Great Dane (6 nuggets) and myself. I’ve noticed most restaurants hiding the increases in drinks and ingredients. My second-favorite pizza place is now at $3 per meat topping when it used to be $2.
Most state budgets would require an approximate 20% cut to just reach short-term balance.
Over the period running from 2007 to 2019, a cut of about 10% would have been required to bring the sum of state and local budgets into balance. Transfers from the federal government have erased the state and local deficit for the time being.
The US Federal budget is approximately the same. However, this doesn’t include long-term unfunded liabilities like pensions and Social Security.
They use a cash accounting system. Why would it include that? Social Security is a transfer program, revenue streams and expenditure streams can be adjusted via legislation.
If all you eat is a Big Mac, you’re probably not up any.
I haven’t been to McDonald’s in several years.
If we had statesmen capable of dealing with the problem, we wouldn’t HAVE the problem.
If I follow the logic of this statement I would have to conclude that we could never develop problems we could possibly repair.
There was very little inflation when Bernanke and Yellen ran the Fed.
True, true. I might very well be wrong about this, but a $20T economy is not an instantly responsive system or even 1 or 2 year responsive on some things. I think this bout of inflation has been building up for a long time.
Back in the early days of ZIRP (effectively zero fed funds rate) there was plenty of discussion about how several years of 3 or 4+% inflation over a number years would cure much of the toxicity of the Fed or somebody taking trillions of mortgage crap onto their balance sheet. It just never happened in spite of the Fed having the pedal mashed to the floorboard. But talk is cheap and may not have meant much.
Then with covid we actually shrunk output. Plus there was an ending of lockdowns (or pull backs?) with a snapback in demand. Plus a bunch of helicopter money. Presto chango; inflation.
I’m of the opinion that a recession is just what we need to cool off the labor market and bring inflation under control (a large component of inflation seems to be supply constraints, so a recession would reduce demand and bring price hikes under control). Lots of business that haven’t been solvent in 10+ years but for money printing and 0% loans will probably go under – which unfortunately needs to happen so they aren’t crowding out healthy businesses. The only problem is that the Federal Government learned the wrong lesson in 2007/2008, and will probably start printing money like crazy again as soon as the recession is recognized, thereby worsening all of the problems the left claims to care about (e.g., wealth/income inequality, housing costs, etc.).
NewYorkCentral,
You haven’t seen businesses shuttered yet? There have been quite a few in my CA community. I’m probably overly sensitive to it, so I don’t think the numbers are big yet. The nice storefronts on the bigger streets now have a huge property values which also means big property taxes. Sell out, and the owner can take that pile of cash.
I am a fan of the idea of poor businesses getting washed out by your average economic downturn. However, I fear that we are losing our lower profit margin businesses to parasitic local and state gov., and only the high margin cash cows will survive.
I think this bout of inflation has been building up for a long time.
It hasn’t. They monetized the spending puke.
They’ve been monetizing the spending since 2008. That’s what ZIRP is effectively. You may be correct that this last puke was a critically huge one.
Part of my point is that it takes guts for the Fed to tighten substantially. It seems that the Fed may be institutionally gutless at this point.
They’ve been monetizing the spending since 2008.
Done in the context of paying interest on reserves, which reduced the money multiplier. Also, they purchased mortgaged back securities rather than Treasury debt. Again, the last round of QE was in 2012. It’s not going to take 8 years for the results to appear in the real economy. The problems we’re facing are those which derive from monetary policy followed after 2019.
No, they bought mortgaged back securities in addition to Treasury debt. They’ve always bought Treasury debt maintaining a roughly zero Fed funds rate (that’s how POMO works) with the exception of a couple years during Trump.
Then there is this written on March 14, 2022.
Fed’s QE Is Over (Until It Comes Back…)
“The Fed will officially end the latest round of QE on Wednesday. The schedule below shows that on March 9th, the Fed will make its last QE purchase of about $4 billion of shorter-term Treasury notes. Since March 2020, the Fed’s balance sheet has risen by nearly $5 trillion due to QE. The Fed will still purchase bonds but only to offset maturing bonds and keep its balance sheet stable. Given the new monetary policy regime, we must focus beyond the Russian conflict. This entails better risk management as a key source of liquidity is now officially ending.”
Note that according the Fed terminology, even when QE is over they’re still buying enough to maintain the same scale, as some of their holdings mature out.