NPR's Planet Money Indicator podcast just did an episode[1] of this topic as it relates to Turkey, where the big cheese decided that in fact, no, high interest rates don't fix inflation, and that it was low interest rates that fixed inflation.
The results have been grim for the lira, to say the least.
The episode finishes with a note that they've appointed a new finance minister who has said "the country has to return to a rational basis for its economic policy". So we'll see what changes are made - or whether this person lasts in this role for very long.
The problems Turkey has had due to this are due to misaligned global-trade incentives, though, no? (I.e., having low interest rates during inflation, and so intentionally tanking your currency's foreign valuation, makes your exports even more worthless and your imports even more costly.) There might well be some kind of positive internal-macroeconomic effects, but they'd be impossible to detect through (and mostly irrelevant due to) the overriding external-macroeconomic impacts of these policies.
It would be interesting to see whether a country that had little-to-no dependence on global trade — North Korea, say — would actually see its internal economy benefit from low interest rates during an inflationary crisis.
Weirdly, North Korea is hugely dependent upon external trade for their mafia-like economy to survive. Except, when I say "external trade", I'm not talking about trading widgets for widgets. The only way they can pay for energy imports is to maintain a huge overseas organized crime syndicate to produce, traffic, sell illegal drugs and launder money. They are also involved in counterfeit money printing -- see "superdollar" on Wiki. I am sure they are involved in crypto mining and as well as crypto ransom.
If you don't think lowering interest rates causes the value of money to go down, ask what would happen if the central bank set the interest rate to negative 10%.
Nothing happens in a vacuum. Things can't be reduced so much. But the idea that lowering interest rates will bring down inflation is not mainstream for a reason.
>If you don't think lowering interest rates causes the value of money to go down, ask what would happen if the central bank set the interest rate to negative 10%.
Lowering the interest rate below zero means that QE becomes irrelevant and that the central bank should undo all of it. Afterwards the central bank should raise the minimum reserve requirements above 50% and tighten its money supply as much as feasible. As holders of bank balances want to avoid negative interest fees, they will choose to invest in certificate of deposit accounts. The original borrowers now have an incentive to refinance their debts with this source and repay the money creating loans they have gotten from their banks which ultimately reduces the circulating money supply. If lenders refuse to accept a -10% return and instead lend at the rate of inflation, then borrowers will know when to stop without the government or central bank telling them to restrain themselves.
Erdoğan has invoked religion multiple times to justify his insistence on low interest rates (Islamic finance prohibits interest). I don't know whether it's a genuine belief but it's his stated one.
Islam prohibits Riba which roughly translates to usury or unjust gains. While today it's widely believed to mean all forms of interest, that wasn't always the case. Even Caliph Umar was of the opinion that the definition of riba was ambiguous.
The bulk of Islamic finance today involves structuring financing arrangements that are functionally equivalent to interest bearing loans but let everyone pretend otherwise.
There's a huge chunk of society more or less susceptible to such messages. In the secular West, this is usually phrased as "money doesn't buy happiness", or "there is more to life than material wealth", or "money can't buy me love, can't buy me looo-oove!", etc. And of course Christianity has its own set of memes around it.
The difference is, perhaps, that I haven't heard of a Western politician using such phrases directly when addressing the people - but that might just be because such politician would be considered a hypocrite. It works differently when religion is involved, too.
> Turkey's situation was discussed in the article, I highly recommend reading it.
Oh yep sorry I should have noted that as well - I just thought NPR's (slightly) deep(er) dive was also interesting & worth a read as a bit more of a case study where someone was VERY CONVINCED that low interest rates were the way out of inflation, and, uh, so far the evidence is not compelling that they were correct.
Low interest environments exist because liquidity is growing in the financial system. As that liquidity escapes into the consumer system, which it always does, it causes inflation.
Then how would you explain ultra low interest rate for 10+ years without associated inflation spike? It was only until double/triple whammy of supply chain disruption/ government handing out cash/ opptunistic price gouging that inflation really took hold
It is interesting that you include "stock market" in your list. Can you pick a period where the stock market went up (or down) for an extended period that was not "asset inflation (or deflation)"? To be clear, yes, financing rates will always impact financial assets (stocks, bonds, traded commodities) in the short term, but not over a ten year period. You need real earnings growth in the underlying stocks to see sustained stock market growth.
Crypto is gambling to me, so let's ignore that for my post.
Housing is mostly about debt financing (the same is true for commercial real estate). It is always true that financing rates have a large impact on valuations. People mostly buy homes on the monthly payment (cars too). If rates rise, they monthly payments rise. Most people will elect to buy a cheaper home, or wait for prices to fall.
low interest rates are not always the result of loose monetary policy; given that the low rates didn't result in inflation, they likely reflected lower real growth expectations or other demand side factors.
Supply chain disruption and opportunistic price gouging are actually SIGNS of inflation, not causes of it. In a socialist country I grew up in the opportunistic price gouging was illegal, so supply chain was ALWAYS disrupted…
So, in your list the only true cause of inflation remains.
Our government starting giving away money long before Covid lockdowns.
What is inflation? It’s prices going up. Or quality of service going down while priced the same. What is “supply chain disruption”, now? It is: you should pay more for the same delivery service, or if you refuse - your delivery will be delayed. “It’s not inflation, it’s just supply chain disruption” - was a political slogan then. No need to repeat it now: inflation is officially here already.
Right because once the public has real economic power the rich do not so they juice their prices, and meddle in other ways to deflate the buying power; aka inflate prices.
$200k in the 80s would be $600k buying power now. But it’s barely middle class.
Our society is entirely a wealth preservation scheme for people who cannot prove they did the work, they just have political documents of power.
I don't agree. The majority of the OECD practises contemporary monetary policy, using central bank interest rates to control inflation. All of those countries have inflation well below Turkey. Then we have Turkey, rejecting this policy, and experiencing extremely high inflation.
Economics doesn't allow us to conduct controlled experiments. We have to work with the messy data that we have. When the vast majority of some of the smartest economists in the world who currently live and who have lived, all agree on principle of supply and demand, I find it compelling. When money is removed from circulation, demand drops. This almost always results in a reduction in prices. Rejecting the law of supply and demand is really out there as a fringe argument.
So we can have an informed opinion based on which to vote, and discuss with others to get them to vote more informedly (and in line with what we want).
As I understand it, fixing inflation has never had much priority for the Erdogan government. They don't raise interest rates because raising them would slow down their internal economy.
Downside is the devaluation of the Lira, but this also has an upside; Turkish exports become more competitive.
This is neither automatic, nor blanket. "Turkish exports" are a result of internal production of inputs, plus imports of inputs, followed by a "value add" phase, followed by exports. In many cases, the greatly increased cost of imported inputs meets or exceeds the export gains.
Also, the naïve view that currency deval is always beneficial to exports is simply untrue. It always complex and multifactor for each scenario and each country... and even each good. A better general rule: A modest, consistent devaluation of currency is good for your exports, as it allows enough time for your value add staged to find internally produced substitute inputs. If deval is very fast, few businesses can adapt fast enough. If deval is very slow, it is hard to notice the effect.
Keep in mind though that Turkey has a very large tourism sector (that has doubled in size as a % of GDP), which is an export with little external inputs and is mostly all 'value add'.
This is an excellent addition to my post. Thank you to share.
I never thought about tourism this way. Hat tip! WTO says:
Tourism is an export sector. It is a source of foreign exchange earnings; it grows a countryʻs national output; it is subject to the rigours of the international marketplace.
You wrote: "that has doubled in size as a % of GDP"
To clarify this phrase: Do you mean: Tourism, as a share of GDP, has _recently_ doubled? Google tells me: 2014: 4.7% -> 2019: 11% (LGTM)
Or do you mean something else? (I promise: I am not nitpicking.)
> In many cases, the greatly increased cost of imported inputs meets or exceeds the export gains.
Can you explain how it can exceed the export gain?
Say there is some Turkish export product, to keep it simple let's say it's a car which needs some metal as an input, that has to be imported.
If the Lira goes down, this means the metal becomes more expensive in terms of Lira's. So this has to be accounted for in the price of the exported cars. However, that accounted price increase is the same as the rise in import price. What is left is the added value within Turkey, which has become cheaper because of the Lira drop.
So even though export price drops are slower than the drop of the Lira, they still drop.
> What is left is the added value within Turkey, which has become cheaper because of the Lira drop.
Does this follow necessarily? If wage-earners have a fair degree of bargaining power or if wages are indexed, then the decrease in value of the lira will result in an increase in nominal wages. And in a condition of steady but substantial inflation, currency can be reduced to a medium of exchange rather than serving as a store of value - or in the case of contract negotiations, as an indication of the future value. Chances are, wage earners and others contracting for future delivery will just naturally take inflation into account when arranging the contract. Their payments might be in lira, but they way they set their prices is derived from the lira/euro exchange.
This is all basically what anti-inflation hawks mean when they say "we have to prevent inflation expectations hardening" etc. They want people to believe that a dollar today will have about the same value as a dollar next year.
So if you have a generally stable currency that depreciates and finds a new level, it might make the economy more competitive. If you have a currency that regularly varies, sometimes up, sometimes down, a depreciation might not mean much to its competitiveness (because an investor expects that the depreciation today has no relation to its value next year). And if you have a currency that is steadily declining, well, everyone has already accounted for that possibility so relative prices quickly adjust to return to the previous levels.
Not necessarily. In fact, the importer will probably have to buy raw materials in USD/EUR then sell back in USD/EUR, they're probably not getting any of that competitiveness at all. Add in the inefficiency of having to translate some of that into an unstable lira, I don't see how they're going to maintain a more competitive price on the lira.
This is my read as well. Claiming that high rates cause inflation, or that high rates are not Islamic, is just BS that sells his actual policy. Though I think the neo-ottoman himself was surprised how bad it actually turned out.
Inflation in Hungary has been very high for the past 1-2 years. Apparently, the government is entertaining the thought of raising the inflation target. (Which should be the central bank's mandate, but that's a different story.) I have just heard a local economist likening this to historical examples of some South American countries. His point was that this is the easiest short-term solution to the inflation problem, i.e., stimulating exports through a weaker currency, but it tends to end in a lot of pain on the long term.
Hungary isn't gonna be the only country that raises the inflation target. In fact all central banks will probably follow through. After all there's no rationale why the current target is 2% and why this is the case for all central banks, it might as well be 1 or 3/4/5. But once someone raises everybody will get on board with the new paradigm and follow through, because otherwise it would be obvious that there's nothing special about 2% and whatever the new arbitrarily-picked number will be. And of course this gives the people in charge leeway too, if the inflation is 10% and the inflation goal is 5% instead of 2%, it doesn't look that awful anymore.
Inflation rate targets can’t be higher than the storage cost of commodities. If the inflation target starts to exceed those costs people will transfer savings into commodities. As people start to hoard commodities prices begin to rise which drives more inflation and more people to hoard commodities and eventually the economy stops functioning.
At some point it makes more sense for commodity producers to leave the oil or copper in the ground because the commodity in the ground is more valuable than what can be earned digging it up, converting it to cash and the losses of holding the cash relative to inflation and taxes.
When things reach that point nations typically have enforced capital controls, fixed exchange rates, and then will nationalize commodity producers and will attempt to implement some form of commodity price controls. Production drops to nothing and the end result is usually a concentration of wealth and power in a small percentage of well connected individuals who strip the country of wealth. This leads to entrenched strong men and oligarchs (Russia, Venezula, Zimbabwe).
The best part is that initially the middle class cheers inflation with rising property values and wages. As the inevitable enshittification and looting of the economy ensues it isn’t obvious that a choice was made and who is to blame. The misery is blamed on foreign powers, the political opposition, and the poor while power and wealth end up in the hands of a few.
A lack of confidence can destroy a smaller currency on Forex markets. It's hard to study internal economic mechanisms in isolation when the world is constantly messing with your relative values.
You can't say with that straight face that Argentina and Zimbabwe are following Orthodox Dogma. They aren't raising rates in an attempt to pull money out of circulation. They are essentially funding the government with the printing press and the results are exactly what you would expect. They are a case study in the problems with so called Modern Monetary Theory.
They've had inflation problems since before MMT was named, you can't pin that on MMT. No, they have a very classical balance-of-trade problem: importing more than you export causes the currency to decline against the fixed-point of the dollar, which makes imports more expensive. Increased prices for critical imports like oil == increased inflation.
Money printing tries to paper over this but makes the problem worse, because the money they actually need is dollars, and only the US can print dollars.
I don't think MMT means you can just print as much money as you want, just that conceptually you can decouple how to pay for government programs from how to reduce inflation.
I think you meant "you can't decouple". The only logical thing in MMT was the promise to cut spending when inflation goes up. To which a rational response is that almost never you are able to cut back on social spending once you increase it.
"To which a rational response is that almost never you are able to cut back on social spending once you increase it."
You can once you have actually understood MMT. How is the price anchor managed under MMT theory? How does that work during a boom and thereby solves the problem you posit? What are the three system stabilisation mechanisms in MMT theory?
MMT suggests moving the stabilisation policy from the market for money to the market for labour and leaving the market to determine interest rates. That stops the current problems - price gouging, SME decimation, boom/bust in construction and increased mortgage rates.
Given that MMT rejects the natural rate hypothesis and replaces it with the price anchor hypothesis, that suggests you haven't got your understanding of MMT from the source materials.
MMT moves the stabilisation policy from the market for money to the market for labour. They are not doing that in Argentina and Zimbabwe. They are following IMF dogma.
Therefore they demonstrate the problems with neoliberalism.
Here you have the ex Minister of Economy for the current government of Argentina where on Twitter personally claiming that printing money does not produce inflación and explicitly mentions monetarism:
This is an incredibly complicated question, so I'm glad the author put in the work to really try to flesh out the details. In the end I'd say the US's broken legislative system has forced the fed to make some really tough decisions. The decade following the great recession should have been a time of expansionary fiscal policy. Instead of congress investing in our future they argued and accomplished nothing. The board of the fed saw congress's failure and figured "if this country can't execute fiscal policy well at least we can step in with expansionary monetary policy". Came to kick them in the ass when covid rolled around, but it was also arguably responsible for one the best decades of economic growth in human history.
A decade of government spending on critical infrastructure at low interest rates was missed.
Edit: Want to add also, the rich got richer as monetary policy flowed into capital markets, while inflation increased hurting the poor the most in the last couple years.
Seriously, it's no longer even funny to us Europeans how bad your infrastructure is. I always thought it's because the population density is much lower in the US, but I don't believe any more that it is the primary reason.
No, it is due to population density. If your country has 2× or 4× the amount of road area per capita but not correspondingly more taxes per capita, the infrastructure is going to suffer. Strong Towns ( https://www.strongtowns.org/ ) has many articles on this topic.
I imagine they do consider eventualities, but some things are extremely unlikely. Could someone set off a nuclear bomb under the bridge? Sure. Is it likely? No. Could a tanker truck full of gasoline catch on fire and sit directly under this bridge? Yes. Is it likely? No.
It’s generally a good idea to look into events a tad more than just reading a headline before running around posting about them.
This is especially true when the headline seems to confirm one’s beliefs about something. In fact, most of the USA’s problems if not the worlds are in a big part due to people having that level of engagement.
> Came to kick them in the ass when covid rolled around, but it was also arguably responsible for one the best decades of economic growth in human history.
Yes, the planet got destroyed. But for a beautiful moment in time we created a lot of value for shareholders.
What does this even mean? The planet is not destroyed. US Carbon emissions actually went down over that decade. The environment generally is better in many ways than previous decades.
>US Carbon emissions actually went down over that decade.
The US per capita emissions are still only preceded by micronations and petrostates as far as I'm aware. In fact they're still double of those in the EU despite few countries like Poland relying heavily on fossil fuels. Chinese people have managed to surpass the europeans but even they emit about half as much as Americans and are slowing down.
>The environment generally is better in many ways than previous decades.
It feels a bit like replying to a fictitious argument about declining life expectancy by saying "but car & gun deaths are down!".
I care a bit less for more localized short term bound air quality but it's absolutely great that the ozone hole is shrinking and such. Humanity managed to get togheter and make changes that had great impact. I however feel like we managed to do this because the changes needed were comparatively small.
Now please do not under any circumstances use these victories as argumentation to push back against fixing different issues.
The decline in insect biomass in many places is horrifying and as far as I know still accelerating.
Our fossil fuel extraction is still growing. We'll see it decline when it starts getting harder to extract in a few years yes but I don't see that as reason to pat ourselves on the back.
It's not a problem that fixes itself relatively quickly necessarily in the same way that stopping the use of CFK's was.
Natural sequestration will remain very very slow. Taking it out of the carbon cycle in a good way is many times more difficult than releasing it.
We could have given ourselves so so much more leeway by tackling the easier parts of this dependence but didn't and we still often don't.
Apologies. I would have admittedly ignored Estonia for still being a small outlier but you're correct about Canada and Australia. Seems they overtook the US in 2015.
How much of that growth is paper? Additionally, A lot of infrastructural maintenance and investment was deferred by communities that should have been taking advantage of low rates which will cost a premium in the future, likely compounded by higher rates.
There should have been a lot of expansion at the beginning then a pull back when things started heating up too much. Unfortunately, that never happened under Obama (or we can blame the Obama administration and the Fed for never looking for the right signals), and by the time it was obvious the economy was overheating, Trump was in power.
It would be nice if we could get away from these big boom and big bust cycles. A bit of fiscal discipline could go a long way.
I’m not sure I’m remembering the same thing. I recall quite a bit of infrastructure spending under Obama [1]. It was smaller than needed but Republicans came out heavily against it and then generated the Tea Party wave in the 2010 midterms effectively ending any infrastructure expansion making Obama a lame duck even in his second term (and then followed by the Trump years).
There was some spending, but not a lot. And just 2 years free rein until things grid locked. Most of Obama’s political capital was spent on healthcare, to mediocre affect unfortunately.
Inflation and population growth means that will be true for every president on. Most of the spending in the first two years of his administration was bail the banks out and keep the economy from collapsing. Not much was spent on infrastructure.
This is politically impossible in the US. The electorate is too short sighted and will blame the current president for killing the economy no matter how sensible the policy actually is. Democrats maybe make a half hearted attempt at this, but Republicans are nakedly partisan in their economic policy, using outright economic stimulus in the best of times: George Bush's "peace dividend", Trump's tax cuts and pressuring the Fed on interest rates. Of course this was right after he attacked the Fed during Obama's presidency for keeping rates low for political reasons. Until these political games become ineffective on voters, economic policy will be stupid.
Ya, we basically get what we vote for. Our political leaders are fiscally not disciplined because we demand them not to be. At best, fiscal discipline is used to fight the otherside’s agenda, like what happened during Bill Clinton’s term coupled with the Republican revolution of 94. That led to a surplus.
If we got rid of First Past The Post voting, third parties could be viable because there wouldnt be a spoiler effect. More players involved would increase the chances of fresh blood and new ideas.
Instead, we are locked into a 2 party system filled with literal fossils. it's obvious to me when there is a tech related congressional hearing that both mainstream political parties are holding us back.
I guess that was good to have people from the cold war Era involved when Russia started pushing Ukraine around. Like a clock that's frozen in time is right twice a day...
Electoral reform is doable one state at a time, some states already use Rankes Choice voting.
Ranked choice voting has led to a stable two party system everywhere it's been tried. Wrong solution if thats the problem you're tying to solve. (Giving third party candidates a chance)
It does tend to reduce polarization of the platforms and drive them to more moderate positions though.
If you want more parties you need a proportional representation system.
Couldn't proportional representation work if the president is selected via electors? Parties get a portion of the electors and then need to form a coalition that has enough electors to select the president.
it's funny you say that, the entire supposed purpose that the Fed was created for was to do just that: get rid of the boom and bust cycles. Unfortunately they never figured it out.
Broken legislative system? Not only was it designed to lock up in a split-Congress scenario, it was also explicitly given the responsibility of minting coinage and the Constitution was written silent on the issue of a central bank (which via the 10th Amendement thus is prohibited to the federal government and reserved to the states). The debate on the very nature of the country's money goes back to its founding. But here you are making very European assumptions about the role of legislature and central banking.
You're free to advocate for those roles, but don't conflate the circumstances with dysfunction. An active legislature and the Fed's existence are diametrically opposed to the federal government's principal design.
Assuming, for sake of argument, that the system was designed to lock up in a split-Congress scenario, that still only constitutes a working legislative system if congress represents the will of the people.
However, the combination of gerrymandering, the electoral college, lobbyists, etc. mean that congress no longer reflects the will of the people in a meaningful way.
It's a pretty far-fetched argument that the federal government doesn't have the power to create a central bank. Who are you to argue against John Marshall?
It's pretty far-fetched to argue that any person, historical or otherwise, has more claim to authority over federal powers than the Constitution. Who are you to argue against Article I Section 8 and the 10th Amendment? And the 9th for that matter?
"Central banking" is an excessively broad interpretation of regulating commerce between the several states. Further, delegation of enumerated powers is not itself an enumerated power. Just these two interpretations alone are enough to give the federal government near limitless economic intervention power, which it is blindingly obvious the Constitution's authors did not favor (see their extensive writings and the Preamble to the Bill of Rights).
The Constitution says they don't. The US government only has the powers explicitly granted to it in the Constitution. Creating a central bank isn't one of those powers.
> The decade following the great recession should have been a time of expansionary fiscal policy. Instead of congress investing in our future they argued and accomplished nothing.
Do is "they" specifically?
Because as I remember it the Republicans wanted to sink a Democratic president, and so hampered/slowed the recovery. And let's forget the right-wing idea of "expansionary austerity":
And the deficit hawks who said that the US had to cut debt or Bad Things would happen (which suddenly wasn't a problem went Trump got into office and tax cuts were desired):
> which suddenly wasn't a problem went Trump got into office and tax cuts were desired
There are plenty of us that rage against _both_ parties' negligence when it comes to balancing the budget. Socially liberal and fiscally conservative as us libertarian-ish types say. Lots of us hated Trump for cutting taxes and bullying the fed to lower rates while the economy was already booming.
At least Keynesian theory had a notion of slowing an economy that needed slowing, and boosting an economy that needed boosting, through a complementary mechanism.
The poisonous application on the other hand is to boost an economy at capacity, and use the inevitable crash to funnel wealth to… who knows where?
> In the end I'd say the US's broken legislative system has forced the fed to make some really tough decisions.
But don't the fed and congress serve the same master? Congress is 'broken' for a reason.
> The board of the fed saw congress's failure and figured "if this country can't execute fiscal policy well at least we can step in with expansionary monetary policy".
No. The idea of using monetary policy over fiscal policy has been in use for decades. It's simpler, quicker and politically easier.
> Came to kick them in the ass when covid rolled around
That's when we had the expansionary fiscal policy. Where's the praise for congress?
> but it was also arguably responsible for one the best decades of economic growth in human history.
It was responsible for the biggest asset price increases ( stocks, housing prices, etc ) along with extreme wealth disparity, stagnant wages, low socio-economic advancement and the political chaos of obama-trump-biden.
Crazy to see someone praise a bunch of unaccountable international bankers for their monetary policy especially when the monetary policy causes the economic problems in the first place. And then put down elected politicians for their lack of fiscal policy and ignore their expansionary fiscal policy during covid. Comment reads like FED PR.
Part of that demand is cash to buy and cost of the goods. If debt costs more then people have less to spend on other things. Like for instance higher credit card rates or student loans. That impacts purchasing power.
Inelastic goods may not be fixed by higher interest rates, especially with other supply chain/geopolitical/environmental impacts and companies debt requirements.
Elastic goods or investments, higher interest rates for loans for larger purchases or business purchases/investments/inventory certainly are impacted by higher rates when debt is involved.
In the end if the higher interest rates affect mostly business/consumer elastic goods then yes interest rates bring down price inflation and affects demand eventually. The flip is if the interest rate increases start to affect the supply like margins or business survivability, then any reduction in demand will just offset with a reduction in supply.
One key thing missing out from many peoples understanding is the strength of currency. Perhaps less applicable to the US, but if your country has low interest rates demand for its currency reduces and then imports increase in price. If non elastic goods like fuel and food are imported, this drives inflation.
If you have high interest rates and that leads to increased demand for currency then your imports will be cheaper and thus inflation lower.
However that stronger currency reduces demand for exported goods, so just like domestic policymakers high rates risk reduced demand which leads to recession.
The main problem with a low interest rate environment is that it allows failing companies to artificially stay afloat, using resources (workers, fuel, goods) better deployed elsewhere.
This essay seems to rely explicitly on the idea that Government deficits are always monetised, and that the Central Bank is forced to do this and has no say in the matter, which causes inflation.
That seems empirically incorrect - debt monetisation is practically peformed using quantitative easing (where new money is issued to buy government debt) which is a policy instrument under the direct control of western Central Banks. If Central Banks cease quantitative easing, or engage in quantitative tightening (as all western Central Banks have done), then there's no reason for a fiscal deficit to be inherently inflationary, and therefore no reason for rising interest rates to cause inflation.
I think her argument is that while QE on its own is not necessarily inflationary, as it increases base money supply but not necessarily broad money supply, fiscal deficits are inflationary due to them ending up directly as broad money. And… This does seem to be the case, I can’t think of any government spending that wouldn’t directly become broad money.
Note also that she’s not implying that therefore not raising the rates would reduce inflation. In fact she states clearly that this would lead to even more problems and picks on Erdogan for doing this.
Her argument seems to be that inflation is going to be persistent for the foreseeable future until something changes. E.g. commodities becoming cheaper due to external factors and/or debt to GDP ratio slowly getting inflated away as inflation persists and rates stay just below it.
Inflation is a mismatch of [desire/ability to purchase goods * purchasing power] and [volume of goods produced * cost to produce goods] that forces an adjustment in the price level. The options to fix high inflation, therefore, involve messing with one of those four variables.
High Interest rates can fix things to the extent that they are able to influence one of the above variables - usually by making things more expensive without changing the nominal price (via embedded interest expense). Taxes are another way to fix high inflation by reducing purchasing power / desire to buy things (without affecting nominal price level).
Technically, price controls can also "fix" measured inflation, with the unfortunate side effect of a goods shortage.
You have to always be careful and think about what you are measuring and what units of measure you are using when you talk about inflation.
I'm surprised that desire/ability to raise prices doesn't get a representation in that formula. The consumer isn't the only party with agency, after all.
No, but that just puts you on a normal supply/demand curve. If suppliers discover that they can raise prices and make more money that way, then they will, with or without inflation.
What normally stops this from happening is that 1) higher prices from supplier X shift business to supplier Y (presuming a functioning competitive market) and 2) higher prices decrease demand. But suppliers have been free to increase prices, as much as they want, forever. That's why I have a hard time blaming profiteering for most of the price increases.
> But suppliers have been free to increase prices, as much as they want, forever.
This is not at all true and is the direct product of a lack of anti-trust enforcement in the US. We have monopolies and near monopolies in many industries and open collusion between firms on pricing. Most of this would be impossible in a more competitive landscape or one where the Feds did anything other than attempt (and often fail) to squash the most egregious consolidations.
Not saying monopolies aren't a problem, but I'm not able to connect the dots on how monopolies are responsible for the inflation since 2021 unless monopolies have gained power since then.
Otherwise shouldn't we expect the inflation to have started before covid?
Means plus opportunity. During COVID, there were legitimate shortages and supply chain disruptions that caused price spikes and (in some cases) additional profits. When these subsided, firms now had the opportunity to test whether holding prices at this newly elevated level would be tolerated. When the state failed to act to stop them, instead colluding with firms and the media to blame the price increases on thing like spent-and-gone stimulus and labor shortages, they saw they had a free hand to keep prices (and profits) as is. There was no guarantee that this would play out this way until it did, which these monopolies then took advantage of to keep prices artificially high.
There's one key mistake you're making in your assessment. That stimulus is not "spent-and-gone." That money continues to stay in circulation. You can see a graph of the monetary supply here [1]. And you can observe that inflation only started to get reigned in once the monetary supply started to decline. This is why many individuals tend to be against 'printing' money. It's not like people get a boost and things then go back to what they were before, but rather you now have trillions of more dollars floating about in the economy which will tend to drive prices up.
I'd also encourage you to look at the financials reports from most companies. If your profits increase by 5% at the same time inflation increases by 8% then you're both (1) getting absolutely economically wrecked, and (2) reporting 'record profits.' As companies are motivated to frame their earnings as positively as possible, this can be misleading to people who take those reports at face value.
This doesn't really matter for inflation. Let's say there is a "cheese monopoly" and they increase the price of cheese 10x. But everyone must have their cheese, so they keep buying it. Now they have less $ to buy other things, so they will either substitute with cheaper goods or the producers will have to lower the price to maintain sales. Thus you see that one seller or industry raising prices does not inherently cause inflation.
That’s a wonderful fairy tale from an Econ 101 textbook, but the reality is instead that the state will intervene to lower input costs for the cheese monopoly by doing things like loosening child labor laws and imposing work requirements for Medicaid.
There are two things in tension though. One high interest rate puts the brakes on lending, which contracts the money supply. On the other hand, interest rates in general necessitate creation of money to satisfy interest rates-proportional to the rate. in order to "save the economy", because bank failures and defaults are "bad". If you increase rates, the existing system might not have the money to pay off the interest because we've increased rates.
Whether inflation is stopped or not depends on the interplay between loans winding down and the systems' needs for interest payments.
The fed can always QE to pay the debt. Debt ceiling is mostly about other contractual payment obligations by the government. Remember, the government != the fed
It's a facile question. The causes of inflation are varied and sundry. There's a billion discrete parameters that cause inflation and inflation is not a uniform phenomenon. Interest rate hikes are the simplest and most broadly useful tool. The Fed can't fix supply chains or make people be fair or raise minimum wage or create housing supply or stop wars.
Notice that she rarely cites any sources. This is because most of the stuff she writes is counter to standard economic theory. Some parts are heterodox economics, other parts are entirely made up.
Perhaps, but this comment seems like FUD being so unspecific. Unless you want to point out what parts you deem as "heterdox economics" or "entirely made up"
She took the smarter approach of Wolf Richter selling a doom-tinted "alt econ" narrative, but has monetized it with a paid newsletter with stock picking advice. Very clever.
I will add though, that academia has been taken over by Keynesians for decades, effectively establishing themselves as "standard economic theory" and not giving any funding to competing ideas.
This post could be much clearer if the author was more clear about what the actual mechanics of what the Fed does. When they raise or lower rates, it’s not like they publish a number and that’s the new rate. Rather the Fed Open Market Committee goes into the market and buys or sells bonds until the rate hits their target.
So I have to admit I’m not sure I understand the distinction being made between banks extending credit to the govt or the private sector.
- Yield (Curve) Control ("FOMC goes into the market and buys or sells bonds until the rate hits their target" - the BOJ does this) with
- the FED interest rate (the rate which banks have to pay to borrow money from the FED)
Just check the bond yield of various US govt bonds (e.g. here: https://finance.yahoo.com/quote/%5EFVX), they vary all the time and are not necessarily close to the FED rate
The discount rate is the rate at which banks pay when they go to the discount window to borrow money. This is simply set and posted by the Fed. Borrowing at the discount window is a backstop for banks and not a typical part of their operations and not the usual lever of monetary policy.
The Fed Funds rate is the rate which banks will lend to each other overnight on the Fedwire. This is the rate the Fed targets in monetary policy. This target rate is achieved by the Fed conducting open market operations and doing repos or reverse repos with primary dealers. Open market operations are literally the Fed going into the market and literally entering repurchase agreements for Treasury securities. I understand that they are really buying and selling money, not the securities.
Yes, you make credit harder to get you reduce the amount of new money being injected into the economy reducing currency velocity and "taking" inflation.
The problem is balancing credit access versus outright making credit expensive to acquire.
Make it too expensive and you slow economic growth.
At least that's what the Keynesians say with a "fractional" reserve system. The only problem with this system is it benefits asset owners over labourers.
Interest rates at the Fed do not dictate the interest rates you get in your personal checking account. It's loosely linked yes but a 7% fed funds rate and industry collusion mean you'll never get more than 1-2% on a checking / savings account.
I mean yeah there are a few banks out there with 4.5% on savings accounts so you can use those.
> And what about all the "free money" being granted to those already holding a high balance?
Not enough people have that for it too matter. The rich getting richer doesn't cause any real inflation but the masses getting a couple of checks does. It's all a numbers game.
Not many people have a high balance, and those who are, are getting the short end of the stick.
Contrary to what common wisdom would lead you to believe, rich people don't usually hold a high balance. In fact, rich people are often highly indebted and hoard wealth through other means. They're good at using debt to accrue wealth, and reducing having to repay debts (just see our government).
What you are saying is that there is some implicit transfer of money from the rich to the poor. If that is the case why worry about inequality or unemployment? Why are there well off people ascribing to Austrian economics who insist on saving money instead of assets?
I question this idea because it makes no sense to me.
1. because those rich people who currently hold stocks will switch to interest bearing accounts the moment it makes sense, so looking at what they do today isn't enough.
2. because for rich people to buy overpriced stocks off poor people, those people would have to own stocks in the first place.
3. There is significant evidence that major companies are net lenders and therefore their owners are also indirect net lenders.
4. Rich people have more of everything, including money.
There is not much data about it but there is data about cash holding and it shows a simple relationship of rich people having more cash, duh.
5. Poor people's most valuable asset is their own healthy body and mind which is a highly illiquid asset. If you ignore this asset it will look like poor people keep the vast vast majority of their wealth as money, which is true but also misleading because having a job is a much greater source of income for them which is not worth giving up for a few percent of interest. Of course I am assuming excessive interest rates here, high enough to cause widespread unemployment, but the rich do want them and they don't care if people end up unemployed.
>What you are saying is that there is some implicit transfer of money from the rich to the poor
No, I'm saying that who you think is rich and poor isn't so black and white.
Think about it for a moment. If you could borrow something, and then never pay back what you borrowed, you'd in fact end up gaining wealth...
In other words, I'm saying that the rich more often use debt as leverage to acquire assets, and then work to pay back less in real terms what they owe (essentially nudging their borrowing a fraction closer to stealing), than they acquire wealth by scrimping and saving/lending. Sure they might lend once they have acquired wealth, but they don't initially acquire their wealth that way (it's way too slow).
Governments do this anytime they choose to inflate their debts away. Instead of paying back in real terms what they owe, they bail themselves out with printed money reducing their debt burden. But the principle also happens in the stock market with derivatives (such as with a gamma squeeze for one example), and with mortgages and renting amongst other things.
Additionally, if you work to look... tax schemes are debt favored. This is particularly true when it comes to corporate taxes, as debt financing is tax deductible, but dividend payments are not: https://www.imf.org/external/pubs/ft/sdn/2011/sdn1111.pdf
And lest not mention how interest rates where near 0% for over a decade. Who do you think that benefits? People with lots of debt - and the greater the debt the greater the benefit.
The amusing part is that depending on the economic model some do predict that there will be inflation in exact proportion to the interest rate. I am convinced that if you have a 100% free capital market with no coercion, then in theory the interest rate will just reflect capital scarcity and be a reward for possessing something many people want and that needs to be allocated to the highest bidder, but if it turns out that such a free market is a fantasy, then there is something to the interest causes inflation argument in real life simply because a responsible government that has the option to pay interest or not, could use the savings to pay off even more debt. The interest payments have to circulate once through the economy and this generates additional demand which can lead to inflation.
In truth, nobody has any idea how interest rates affect inflation. It's a combination of dogma, wishful thinking and a lack of options that lead to the central banks using monetary policy to try to reduce inflation. The central banks should never have been made "independent" let alone given the responsibility of controlling inflation. It's a political cop-out.
Price controls are rarely the best option (there are price controls, e.g. utilities are highly regulated). But in general you should address the causes, not try to mess with the outputs. E.g. break down the monopolies. The only reason those were allowed to raise their head again was the promise of efficiency and lower prices. I think they forgot it.
It's not surprising. Price controls very commonly fail in horrific fashion. Many of the basketcase economies of the last 50 years have infamously tried such. Governments are not remotely equipped to manage price controls effectively (including needing to rapidly + correctly adjust to changes), and none have ever successfully managed blanket price controls well (there isn't a single modern economic record of that occurring in non-war time). There are only niche instances of price controls being effective (narrowly targeted, often either temporary or offset).
What makes price controls on medicine work is the other side of the equation: Massive subsidies to supply. How expensive is it to become a doctor in Europe? How many are trained every year? Who builds the hospitals? Ultimately it's not a matter of price controls, but turning a large percentage of the whole thing into a public service. And even then, it's not hard to find some issues, it just works better, in most ways, that the US' bad mix of public and private incentives and regulation.
When we discuss price controls, we tend to be talking about situations where the supply of goods is provided by the private sector. Then price controls often lead to supply shortfalls and black markets. It's easy to understand if we make labor to be the good with a price ceiling. Many american companies would love programmers at $20/hr, but they can't find any. Imagine that the government caps said salaries at $20: We'd see fewer people going into the field vs something easier, or that just was allowed to pay more. The companies that still get $200+ worth of value for programmers would still want to pay more, but without the supply, they'd try to skirt regulations by becoming more competitive in indirect ways. Maybe your benefit package would include a mansion, and an expensive company car, and a live-in staff. Keeping prices down when demand vastly exceeds supply is very hard.
There is such thing as excessively high prices though, via monopolies and regulations that force waste. I think that's a bigger reason for the US' healthcare pricing problems than the magic of government healthcare. What socialized medicine does is make sure that even the poorest can afford it, which can be seen as a valid objective onto itself.
Pharmaceutical companies will continue to develop new drugs so long as Americans are willing to spend infinite money on them. If they can make a marginal profit on selling some to a European country, that's a nice bonus. If the US also implemented price controls, companies would have little incentive to fund the development of new drugs.
> If the US also implemented price controls, companies would have little incentive to fund the development of new drugs.
Your comment is correct except this sentence. In reality, if the US implemented price controls, it would simply reduce the negotiating power of European countries. Prices in the US would go down, and prices elsewhere would increase. The pharmaceutical profits would decrease on net, but there would still be plenty of incentive for R&D (much of which is already derisked by the massive amounts of public money spent on it with zero expectation of return).
Whatever is the least "cozy" rhetorically, that is associated with good feelings, mother and apple pie style bullcrap, gets to be the designated scapegoat.
Offsetting R&D costs and directing R&D are a policy problem, and a completely different beast. The antibiotic resistance crisis is in front of us, yet the big returns are in cancer, with the additional wrinkle being that what is needed is new antibiotics of last resort. That's a problem of a kind that the market cannot solve.
Also: generic shortages. Generics are a low-margin business with maybe 6 suppliers workdwide. If one facility goes off-line for this or that reason there's going to be a shortage, and slack capacity is punished by the market. Right now the cisplatin shortage is in the news, and again the market is no help.
Generics may be a low-margin business for manufacturers, but they are emphatically not so for retailers. The likes of CVS make a lot of profit from generics, which makes it surprising that this hasn’t spurred pressure from on the manufacturers to amp up supply.
It's a constrained market - people aren't going to buy more cisplatin or cephalosporin just because it's cheaper. (Yes, people do shop around for a butt enlargement or Lasik but these things are strictly optional and can wait until the next month, however when you need a prescription drug you really need it.)
That's because the government is a monopoly on buying those services from the service providers (Don't get me wrong I am fully in support). If there is less than Monopoly control by the government price controls don't work.
Read Basic Economics by Thomas Sowell. The only thing price controls do is cause shortages and long term price increases.
If companies are able to raise prices for long periods and make large prophet, that means something is completely broken.
Competition would bring in new people that offer the same goods or services at lower prices. Government regulations controls, etc stop that and interfere with natural markets.
Russia had a long history of price controls, and it never worked well.
Do you also propose to stop interfering in the market by providing massive government subsidies to the farmers? True market economy tend to run away and blow, big players tend to consolidate and form monopolies, the thing we have not is a very complicated compromise between free market, regulations and unspoken traditions. Please stop pretending that these things are obvious and easy.
You can solve price gouging from the other end. Instead of capping prices at the point of sale, tax profits.
Right now, prices are growing, mostly due to an increase in profit margins. If the market is failing us, because it can't optimize those profit margins down, it's the government's job to take and redistribute that surplus.
They tried price controls in the 1970's. It led to lines at gas stations, shortages, and rationing.
Price controls are always either a no-op (if supply meets demand below the mandated price), or lead to shortages.
For the good and simple reason that, if there's 100 units of X and people want 120 units, you have to have some algorithm to decide who doesn't get as much X as they want. With no price controls, businesses see X is selling quickly and raise the price (hopefully before the inventory hits zero all along the supply chain). Long-term, the high price encourages suppliers to produce more; the price provides a feedback signal that says "make more of this."
With price controls, that doesn't happen. The product simply sells out because there's not enough to go around, and the 20 unlucky people who don't get their X are whoever happens to walk into the store when the shelves are empty, or are at the back of the line when a shipment comes in.
I'll chime in because everyone is replying to complain about price controls. There is an alternative: windfall profit taxes. These have been proposed (by one political party) and blocked (by the other political party).
That's because the debate and popular press around all this discussion in Australia (and elsewhere) is a populist/political cluster fuck and has almost nothing to do with economics.
Reserve bank doesn't want to talk about its roll in credit/ monetary expansion during the pandemic, gov doesn't want to talk about its policies to do the same and not wanting to address inflation through taxation or fiscal policy, business wants to pretend its not self interested and profit seeking, consumers don't want to admit that they might actually have to make some price-elastic decisions or change behaviours based on how much things cost, and everyone wants to pretend that we weren't responsible for fucking up housing over the last 20 years of policy or that there will be real repercussions from the boomers aging out.
So instead we get economic discussion that looks more like the multiple spider-man pointing meme.
I think it's the other way around - without the government stabilizing the market with subsidies, dairy would be dirt cheap, then expensive, then cheap, then totally unavailable, etc.
Edit/correction: actually, the USDA doesn't operate price floors anymore. "Eventually, the USDA decided it had had enough, ending the price support program in 2014."[1]
Average person would on average pay the same, less taxes for subsidies and more in the store.
The problem is with smaller countries, where your local milk will be more expensive (and you less taxed) but your neigbor countries' subsidized milk will still be cheaper, and you'd buy that and in the process, destroy your local milk industry.
They want inflation. How else are they suppose to get rid of all the debt they acquired during the pandemic and continue to meet ongoing demands?
Look at the signs:
- increased immigration during a housing crisis.
- pay rises for the masses to push them into higher tax brackets.
- slow gradual rate rises below inflation levels to avoid crashing the markets and to allow debtors to exit their positions without triggering a recession.
They want inflation. In a high inflation environment the entities that win have income generating assets (in this case tax payers) and high levels of debt. The debt essentially gets inflated away.
Applying Hanlon's Razor here: I do not believe the Australian government wants inflation. I believe they are generally incompetent, not malevolent.
They are too scared to do anything and risk losing the next election, despite the fact that they literally just won one, and they are too uncoordinated to do anything useful. It's easier to literally sit there and do nothing and put all the blame on the RBA and hope that it magically fixes itself somehow.
There are studies, but the studies are flawed. It depends very much on the country/union. The US raising rates will absolutely slow/stop inflation in the US, and at least slow down worldwide inflation. North Korea? yeah, good luck…
Outside of those extremes, it depends on the population of the country/union and how widely the currency is used.
I saw an NPR piece mentioned by trog, but that does not change my viewpoint. The NPR piece appears to not focus on currency usage %, which is why I think it isn’t all that relevant.
I think the author hit the nail on the head when they said that increasing interest rates creates deflation in private sector but accelerates gov deficit... That would result in stronger gov influence over economy and lower efficiency. Gov essentially kills off private sector this way as it creates an uneven playing field for companies who receive direct gov money/contracts and those which don't.
The conventional perspective is that as money supply increases, so does demand for goods and services. But we were suffering acute supply chain shortages that would have increased prices even if demand was static. This doesn't seem to be talked about very much.
Yes, this is because conventional wisdom assumes that monetary velocity stays constant (it has been dropping instead).
Basically, it comes down to who actually gets the money generated by an increase in M2. If it's people with a low propensity to consume / buy things (i.e. the rich), then extra M2 is not inflationary (caveat: not inflationary for goods. It's inflationary for stocks/real estate/etc instead, since that is what rich people "consume").
If it's people with a high propensity to consume (i.e. the average citizens), then it is.
So, it wasn't until the working class got pay raises that it was a problem. Company after company raised prices during COVID and reported RECORD profits. But the moment worker salaries go up, it's a crisis, interest rates need to be RAISED NOW, and company after company starts doing layoffs - while maintaining RECORD profits.
The only way to meet the demand of the masses without inflation is increasing supply without increasing the marginal cost of the extra supply. These days, that's mostly driven by technological progress and aggressively pursuing efficiency. The primary driver of inflation is the human desire to procreate and improve their living conditions; not to say that's necessarily bad, but it imposes a constraint that can't be resolved by the rhetoric of rich vs poor people. While I agree economists seem to be too obtuse to realise the hypocrisy of increasing unemployment to reduce inflation, a primary issue is that we as a society haven't figured out how to control consumption in a way that makes everyone happy.
That's not a physical law. It only happens sometimes in some parts of the supply chain in the form of economies of scale. But if you run out of easily drilled oil sources, the unit cost of produce more oil increases. If you want to build more cars, you would increase demand for parts, and would in turn be willing to pay more for the scarcer parts, and your BOM increases.
It only makes sense to refer to what you described as a phenomenon you want to pursue if you want to run a successful business, but can never be used to describe the economy as a whole.
Yes and no. If you own a factory operating at design capacity, and a supply shock bumps prices up enough to incentivize you to increase supply, your marginal cost is probably going to go up to get from %100 to 120%. (Overtime, more expensive downtime, increased duty cycles on equipment, more expensive rush repair, etc.
You have it backwards. The Fed kept interest rates low while wages outpaced inflation during the recovery of the 2008 recession. They only raised interest rates after inflation started rising faster than wages and companies reported record profits.
Of course there was inflation. It's true that it didn't exactly match the rapid growth of M2 but it's still consistent with it. Obviously the other big factor is velocity.
Not necessarily. Demand for goods + services and supply of goods + services can both expand in parallel, this is generally expected in a healthy economy.
People who make this claim have a poor understanding of the supply/demand dynamic. Just because inflation is caused by supply constraints doesn't mean you can't fix it by reducing demand. Think about it like a container with an input (supply) and an output (demand) for water. You don't want the container to overflow or to dry up. Too much input without enough output will cause it to overflow. Too much output without enough input will cause it to dry up.
Let's say that this inflation is caused by supply constraint (not enough input). The container is starting to dry up. So what do you do? You have two options: you can either increase the input (fix the supply constraint) or reduce the output (reduce demand) to match the low input. The second option is the one the Fed has chosen as the first is beyond their purview and likely too complex and poorly understood to be immediately fixed at all.
Well the government screwing up the supply chain is certainly a big factor. The same level of spending that governments did the same thing as printing huge amount of money. Something that still not really slowing down.
I presume you are blaming the American federal government? Why?
"The supply chain" is a global emergent phenomena across a variety of capitalist nations. Personally, I would blame corporate greed that took advantage of short-term supply-demand misalignment transitioning through COVID and now persisting high prices/restricted supply to pad their profits. Capitalism and all.
Perhaps the US government could do more to limit this profiteering or break monopolies, but we are doing a reasonable job supporting re-shoring key industries.
There's also the incredibly cheap debt those corporate interests used to make large purchases, to then extract profits for as long as possible while the debt could be forgotten about
I'd like to believe all the big brains at the FED have teams of math/finance wiz's crunching these exact same points and would not raise rates if this were the case.
Raising rates is the best way to kick the can down the road in the current conditions. The problem is that the economy got really close to the end of the road (as far as we understand it). And no, the US is unlikely to follow the Japanification scenario.
From the article:
>And indeed, higher interest rates may work in the short term, for indirect reasons. If money gets tight enough over a cyclical period, then it could indeed cause a recession and a temporary drop in inflation. The private sector gets squeezed with higher interest expenses and tighter credit standards, and asset prices drop or stagnate.
Fundamental solutions to this situation are incredibly painful and require strong political will accompanied by wide support in society. We do not see it today in the US.
The best solution would be to completely eliminate fiscal deficits (either by raising taxes, or by cutting spending) and simultaneously hike rates. Already issued debt will not be affected by the higher rate, thus resolving the article's dilemma. But good luck selling this solution in today's political environment, especially considering that it will cause a huge recession and painful restructuring of the economy in the short-to-medium term.
There is no evidence that USA would have unraveled by the end of 2024, 2025, 2026, 2027, 2028, 2029, or 2030. At worst, we were tracking no worse than the average EU country currently is performing.
So you need to clarify exactly what "got really close to the end of the road" means, because it sounds overly dramatic for no reason.
The economy can bear higher interest rates. Nothing bad has happened so far. I now think it is an acceptable choice but I still don't like the idea that the central bank is setting the interest rates. In my opinion the central bank should set a low rate but it shouldn't offer banks the ability to borrow at this rate and banks should be trying to get the highest rate possible through competition, not some subsidy by the central bank.
At the end of the day though, I can't help but feel like myself and my countrymen are getting a raw deal.
Are high interest rates lowering the cost of groceries, gas, or the cost of living in general? No. Are they blowing up everyone's mortgages one by one as they come up for renewal? Yes. Why am I, an individual, being punished for other's mistakes and mismanagement?
High interest rates are meant to lower inflation. That wouldn't reduce prices, but it would reduce the rate at which prices increase. It seems to be doing that. Also, the article is talking about the FED, so looking at the mortgages from a US perspective, they don't come up for renewal. If you planned on permanently low rates, then that sounds like you have mismanaged your mortgage decisions. Rates have been at historic lows, there isn't much room to go but up.
I don't live in the US but the country I do live in is closely integrated with the US and follows a very similar trajectory in terms of policy decisions.
"If you planned on permanently low rates, then that sounds like you have mismanaged your mortgage decisions" this is the kind of tone deaf, consumer blaming crap that is going to get our current government booted out and replaced with a regressive, populist conservative government. Hooray. But I guess they deserve it?
> this is the kind of tone deaf, consumer blaming crap that is going to get our current government booted out and replaced with a regressive, populist conservative government. Hooray. But I guess they deserve it?
But it’s also very true that they made the decisions that lead to this.
I’m Canadian so I’m in a similar boat to your country.
We’ve had a terrible government for thr past 10 years and they’ve made terrible spending decisions that have ruined Canada. I like your country, though, we’ll have to wait 3 more years to start to undo the damage the liberals have down to Canada so consider yourself lucky you aren’t from here:(
Rates were at historical lows while a normal Historical rate was around 5%.
If you planned your life around rates that were at levels never seen before then you did make a mistake and people should bear the brunt of that.
That was outright gambling I’d you managed your life around rates not returning to historical norms.
I feel that we should not treat people like helpless children and instead treat them like adults
USA does fixed rated mortgages to prevent issues like this. Variable rate mortgages are risky and the average customer isn't equipped to understand them.
I think it is response to 2008 crash, where consumers were blamed for buying houses.
"those stupid consumers, why did they buy houses with the home loans we gave them, it's their fault".
Since 2008, this has become a more common refrain from the right, that consumers are to blame.
Here's a contrarian opinion: Inflation isn't all that bad, if you have a fixed rate loan (i.e. mortgage) that is larger than all your savings put together, and as long as you don't need to sell or refinance, you will come out ahead.
Keep in mind inflation requires a wage/price spiral, which means your salaries are also increasing to keep pace with the rising prices, while the loan amount stays the same, so repaying it becomes easier.
Well, I have enough to buy a house, but it's in stocks. They have been beating the inflation recently, but that's because the high beta ones dropped like crazy during the rate hikes so I'm just making back my losses
I feel extremely fortunate that I was able to get a sub 3% fixed rate mortgage. I still can't believe that a lender was willing to bet that a 3% mortgage would be profitable over the course of the next 30 years. If I were a lender I wouldn't be happy with issuing fixed rate mortgages.
A lot of those mortgages got sold off into MBS and then got bought out by the Federal Reserve. So if you had a 3% mortgage, chances are, the FED partially subsidized your mortgage at the expense of the American taxpayer (which is what a lot of people are rightfully angry about).
Who is angry about that (rightfully or otherwise)? I hear a lot of complaints about various aspects of the mortgage industry, and the fact that the fed partially subsidizes some mortgages some of the time is not one that I hear a lot.
The lender likely sold it off. There is a good chance a Freddie Mac or Fannie Mae owns the mortgage, otherwise it may have been sold to investors. It isn't a wholly free market decision to think your loan would be profitable over 30 years.
I don't think restricting commentary in that way is reasonable. The "Do high interest rates fix inflation?" question is relevant to many countries other than the US, the top-voted comment on the the post is a link to the NPR podcast about how it relates to Turkey, and this particular comment thread is in general applicable to many countries, given how, e.g. the Bank of Canada effectively mirrors the US Fed in monetary policy.
If you want to restrict your commentary to the US, you should make that clear in your post, e.g. "This is the risk of getting an adjustable rate mortgage in the US, which is a decision."
Yes, it's anecdotal data. That is to say, it's a single, arbitrary cherry picked data point that one cannot draw meaningful conclusions from, since it's not statistically significant. Gas prices are very volatile, and anything short of a long trend analysis will tell you absolutely nothing.
Gas is more than 25% higher than it was for all of 2018, 2019, and 2020. It is trending higher, in spite of the pull back from recent highs in the wake of the Ukraine war.
The supposed big brains at the Fed get it wrong over and over and over and over and over again, and yet somehow people give them immense credit.
All you have to do is reference Greenspan or Bernanke and what they were saying before the nasty economic events of their time. Those clowns were saying things were largely fine shortly before everything went to shit. They could hardly have been more wrong.
Fed does this via monetary policy because the the Overton window in the USA doesn’t allow Congress to do what its job is: to raise taxes via fiscal policy.
What really takes money out of circulation in a targeted way is taxes. This could be a golden opportunity for Congress to tax negative externalities like:
Nonbiodegradeable plastic
Factory farms
Traffic Congestion
Pollution
Fossil fuels at point of
Extraction
Emission
Whatever the market system can’t reduce by itself. That woukd be a much more sustainable system. In fact, I’d recommend giving out a UBI (“stimulus checks”) on a regular basis, paid for by these taxes. That avoids the “Yellow Vests” problem of the taxes falling disproportionately on the working class.
But instead, Congress only knows how to cut taxes, and therefore the Fed steps up to raise interest rates.
In my opinion, it is the very raising of interest rates that causes the recessions and depressions we want to avoid. They can be far worse than any normal inflation, because in many pockets of the country, there isn’t enough money to di basic things.
For an extreme example, look at Sri Lanka. Then they have to take loans from the IMF/World Bank or from China.
The real solution is not to wait for these global hegemons to solve your problem (they won’t) and develop your own currency, to circulate in your own polity. THEN you have enough control for your OWN fiscal and monetary policy.
That is why we started intercoin.org — kind of an outlier in the world of crypto LOL, because instead of get-rich-quick ponzi schemes and coins backed by nothing, it is the extreme opposite.
I closed your website instantly as soon as it played a sound, it's pretty bad it does that. When I try to click on the whitepaper button, the click actually goes to the globe. I am sorry but it's very amateurish.
Anyways, what do you offer that bitcoin doesn't and what do you don't offer that bitcoin does?
> For the private sector, many homeowners and corporations have longer-term fixed debt, and only some portion of it matures each quarter and gets refinanced at higher rates. As more private debt matures and gets refinanced at higher rates, this will continue to serve as a disinflationary and recessionary force on the economy, especially for sectors that are more sensitive to interest rates.
The one thing I don't get and could have been missing in the past... a lot of the corporations and private things, like farms operate on debt. Now maybe it's a bit reductionist, but if you're a farmer operating on debt, if interest rates go up you need to increase prices to cover operating expenses. And this get compounded all the way up to the end consumer as every step in the supply chain marks up by a fixed percent, and because everything is getting more expensive decided lets mark up by a larger percent. So higher interest rates really could be contributing to inflation. And it's just creating a cycle. And with the current levels of debt never seen before in history, it's unlike other periods.
This is very similar in thought to the messy knock on effects of adjusting the federal minimum wage or poverty level. Inflation has a significant effect on the poverty level, adding in a strong labor market and cost of living crisis is making the limits of current social programs ever more apparent. That junkie you pass everyday on your way to work since the pandemic “ended” is one human sacrifice for bad policy. If tomorrow minimum wage goes to a rational and dignified one, say, $25/hr, the federal poverty line will have to adjust. When the poverty line goes up their budgets reach goes down. Knock on effects could make quite the mess and cause a lot of needless suffering.
If I was dictator for a decade I’d scrap the whole system and have piles of cash ready to throw at the problems as they pile up, mostly pulled from and staffed by the existing budgets and programs with a fix the problem, document it thoroughly, but be diligent or go to jail policy. Like PPP loans but with accountability and prison for fraudsters. Once the big fires are out and local teams are on top of their communities problems the real work rebuilding a sane, efficient, and equitable system could start.
> This is very similar in thought to the messy knock on effects of adjusting the federal minimum
maybe "sounds like" increasing minimum wages goes directly into consumer pockets. Increased costs due to interest rates do no go directly into consumers pockets. For example you look at the avg farmer, mortgage on the fields, loans on the equipment, and often lines of credit from suppliers for seeds, fertiliser and pesticides. All of a sudden the cost of all of those have increased directly related to interest, even if they raise the sale price of their crop or livestock, they won't make more income. And that money isn't going back into the system like wage increases.
And this compounds up the chain, the company moving the grain from the fields has loans on their trucks, so they raise costs. The middle men are marking it up by a percentage, so that compounds the costs. Than the distributors, and processors, also likely running on lines of credit, now with increased cost directly due to interest, but also marking up by a percentage, that's compounding. Every step that interest rates compounds with every markup and causes an increase all the way to the shelves.
Food and housing, are the two largest drivers of inflation, and also the cost is most directly effected by increasing interest rates. Building now costs more, and builders are also building less supply, because they build with lines of credit.
Everything is much more dependant on debt than ever before.
I don’t think we’re disagreeing. I’m pointing out similarities and was trying to infer in you the interconnectedness of these parts of the economy. The knock on effects of increased interest rates cascade, just like the effects of increasing minimum wage, which necessarily demand an increase of the poverty line. To put this all together with a bow:
Interest rates increase
Cost of living increases
Wages increase
Minimum wage increases
Poverty line increases
Off of each line above are costs dependent on them that will react higher, with risk and premium margin, to account for them.
The fed is trying to get ahead of an inflationary spiral by causing just enough pain in markets to arrest price increases long enough to establish a semblance of price stability at which point they should hold to cement stability before gradually easing rates, if nothing else necessitates holds or hikes. excess profit taxes would’ve been a far less damaging tool to arrest inflation but American politicians are so thoroughly captured by the capital class that this was not even considered. Shame on Congress for this. It is important to note that EPT would not stop inflation, but would stop price gouging in its tracks so Congress could use fiscal policy to address pockets of inflation. Classic example of using the wrong tool. Once again the most vulnerable are suffering to prevent even a plateauing of profit to the capital class.
I also think it’s important to note that I’m arguing against my class interests in saying all this. I benefit greatly from policies like these and will continue to both profit off of these policies while advocating for their sunset.
Right now, inflation is caused by rising wages. So if you "fix" it, you stop wages rising. Given we have not had real wage growth for about 30 years, exactly because we always "fix" it, is that what people actually want? This is why we have seen all the benefits of economic growth accumulate with the top .1%, the landlords, capital owners etc over the same period FYI.
Certainly in the UK, wages have lagged inflation since the 1970s and the gap is currently about three percentage points. So even if wages were causal there must be some other factor too.
What is interesting to me is that many here cling to complication. Straight from the horses mouth in front of Congress, Powell minced no words on whether The Fed's interest rate hikes would tackle CPI inflation for consumers[1].
Powell made it clear that the interest rates may have an effect on durable goods (cars) and asset prices (stocks/real estate). Cars and real estate seem to be complicated, lots of other factors playing into prices right now. But clearly for many asset classes, especially startups, the haircut from higher interest rates has landed.
But outside of that, the price of eggs, gas, coffee, basically no change (and none was suggested to ever occur!).
Right...but the talk of this thread, and the article, is whether the Fed interest rate can be relevant to "consumer felt" inflation. Nobody over the last couple of years has been complaining that the cost per share of Twilio is too high, people have been complaining about their grocery bills, their heating bills etc.
The answer, directly from the Fed is, "No, our interest rate hikes will not change the price of gas at the pump or the cost of eggs."
As I mentioned, things like houses are complicated, clearly there has been a _bit_ of downward pressure, but there are a ton of supply side complications preventing a big change (building has slowed, people with low interest rates are holding etc).
Not directly. High interest rates are actually directly inflationary because they increase the public sector’s deficit and every penny of that deficit is someone in the private sector’s income.
However the larger economy is a complex dynamic system. In order for an interest rate reduce price inflation or induce price deflation, it would have to reduce the ratio of money-looking-to-buy:goods-services-looking-to-sell. While higher interest rates might indeed reduce the number of potential buyers and the amounts they are willing to pay, those higher interest rates will also increase the cost of production for any producer or service provider that employs any sort of debt financing and thus probably reduce that side of the ratio too. My guess is that overall it's a wash, modulo animal spirits or whatever you want to call the human element of the markets.
Incidentally, hysteresis is hugely important, and often confounding for figuring out these kinds of effects.
Jon Stewart's journalistic integrity used to better on his comedy show, where he didn't talk over guests.
I find it funny that he thinks it's perfectly fine to squeeze as much profit out of your customers as possible if you're providing a non-essential service like he does. However, if you're an egg producer and go through the trouble of protecting your hens from bird flu, you shouldn't be allowed to profit from the increased demand for your eggs when your competitor's hens die out. That's a great way encourage people to pursue exclusively non-essential lines of work.
This is such a simple answer: NO. Not sure why we need to overcomplicate. The Fed's dual mandate is maximum employment and price stability. The best monetary policy lever to affect this is by adjusting the federal funds rate. This only has a limited effect on price stability. The basket of goods which makes up the Consumer Price Index includes many items which are inelastic. If prices of shelter, transportation and food go up, people still need to consume them to survive. These prices are influenced by many other geopolitical factors (war in Ukraine, housing policy, labor supply, etc) and thus interest rates only have a limited ability to "fix" inflation.
I don't see how 'hidden' inflation could be fixed by higher interest. A favorite example (a widespread tactic, don't mean to single out the industry) is keeping the price of groceries down by putting less product in a nearly identical package, with the 'new' weight nearly invisible ... or slowly substituting cheaper ingredients (hence quality) which the long-time customer is less unlikely to notice. I'd bet most of us could name names.
Indeed, we have to let the price level adjust to the new higher baseline given the increase in money supply. However, raising interest rates has decreased it modestly, about 5% in the past year. So that's something.
How much of inflation can be attributed to rent seeking and profit maximisation?
Economic theory suggests competition facilitates optimal pricing in the market. Given our landscape of mega-corps this factor is only going to become larger. In fact higher interest rates might even accelerate it by making it harder for startup’s and small businesses to compete.
Please, read the article instead of commenting based solely on the title. The author specifically explores conditions when the answer is "no", namely: persistent fiscal deficits with high public debt levels.
When you issue too much debt and don't have the income to pay it back (you're running a deficit) you either pay the borrowers back less money than they are due (default) or you pay them back the same amount of money but that money is worth less (you 'inflate the debt away').
Meh. I'm thoroughly unimpressed by this article. It seems to follow a pattern of acknowledging effects of lowering rates, handwaving away the relevance of raising rates to reversing them, and then dropping a hyperbolic analogy to emotionally drive the point home. (gunshot wound! Kobayashi Maru! capital controls!)
I know it's edgy to be contrarian, arguments for restarting the VC/bankster party are going to play real well with the VC/bankster crowd and their beneficiaries (eg Surveillance Valley). And the argument dovetails right in to the political chant that government spending is too high (that magically happens whenever the President is a Democrat). But it's just utterly disingenuous to ignore all of the monetary inflation through the 00's and 10's (both lending based and the deficit from the fraudulent Iraq war), and then point to the straw breaking the camel's back (Covid supply/demand shocks plus stimulus) as the cause.
Main Street has certainly seen plenty of financial devastation on the way down as rates marched to zero, as Wall Street got handed a continual influx of cheap money. Now we're just supposed to accept that damage as inevitably permanent, and believe raising rates won't contain or even reverse the trends? I don't buy it. How about we just leave rates at the moderate [0] level that they are currently at for a decade+, so all that medium term debt can come due, and then see the results?
Right now the markets are still betting that the current existence of interest rates is just a hiccup, and on an eventual return to the ZIRP party. When housing prices have an actual correction and the everything bubble starts deleveraging, then we can start to talk about how much is enough.
[0] describing 5% interest as being "high" is basically broadcasting your limited perspective. Tell me you're still in your IPA phase without telling me you're in your IPA phase.
The actual interest rate isn't really that important: Its stability and predictability is. In practice, every loan and long term contract that is made is implicitly a bet on expected future interest rates. We could write contracts expecting a federal reserve aiming at 2% NGDP growth year to year, or we could do it at 5%, or 10%. There's an effect due to Money Illusion, but if the rate really is predictable, the difference isn't that big.
Now, when people make long term bets, like buying a house on investing in a business, and the expected inflation rate changes significantly, instead of their economic behavior being the key part of the success of the loan for both sides, it's the change in rates. We've seen banks in trouble not because 7% is too much, but because the borrowing decisions they made, expecting 2% inflation, proved to be major losers. Similar things happen in the real estate market: Ordinary borrowers are basically paying double, month-to-month, on the same house bought today than with a mortgage bought 2 years ago. So anyone that built new housing, doing the math to people buying the house for X price, is either seeing less demand, as only people that don't need a loan can afford it, or just a lower sale price, as the same salary can now pay less for a house. Either way, the builder loses on the bet, and houses either don't get built, or become less profitable.
So really, there's devastation either way when inflation or NGDP predictions are far off. And that's how the fed fails: Just not meeting targets in either direction.
It's even worse than that. The market didn't just price in low interest rates - rather it priced in continually decreasing interest rates.
But no, interest rates are not value neutral. That sounds like an invocation of efficient market fallacy. For one, interest rates form a lower bound on the amount of yield that is required for a business to be considered viable.
I am all for higher interest rates now. Higher interest rates mean my primary competitor is intentionally resigning/withdrawing and there is more room for my business idea.
You want to fix inflation? Break up all the cartels, duopolies and monopolies that are everywhere in America. Actual market competition is the only thing that really drives down prices.
Number one, HOUSING. The places where jobs exist have like half or less the housing they should. I see two ways out. Either build more houses, or let all the jobs that can be 100% work from home and allow people to buy in smaller towns.
It's fascinating how periods of high demand and scarcity can lead to inflation, while technological improvements and abundant resources contribute to disinflation.
Many Russian (or ex-USSR in general) economists would firmly answer 'No'. But again, USA economy is not post-USSR countries economy.
In fact I was surprised when Canada announced that they are rising rates to combat inflation. But then again, is Canadian economy behaves like USA? I think the answer again 'No'.
This is true. The problem is inflation is desired/needed to enable/sustain the debt based leverage that allows our modern world to tick. So the game becomes create at least a little bit of inflation and try to not let it boil out of control.
Private debt is backed by collateral and is not inflationary. Government debt, however, has no collateral and so is inflationary. This debt does not make the world tick.
Not true. Private debt (i.e. banks loans) are created out of thin air, indeed this is the primary mechanism for inflating the money supply. They may be backed by collateral, but that is not a limiting factor.
They are backed by collateral, which limits the growth in the money supply to the value of goods and services in the economy. And, when the loan is paid back, the money is destroyed. Hence, no inflation.
Now, when the government issues debt, there is no collateral, and hence no constraint on the debt. When the debt notes are paid, they are paid by simply issuing more debt. Hence, inflation.
Plenty of loans, likely the vast majority, are not backed by collateral. Loans are created based on supposed ability to pay (from future income streams), not from swapping the value of an asset for cash.
Banks issuing debt is exactly how the supply of money grows. Central banks influence this process by setting the rate at which banks can borrow from them and various regulations and market operations, QE etc.
If someone has told you that inflation is caused only by government excess spending it is because they are pushing the agenda that government is 'bad'.
> Banks issuing debt is exactly how the supply of money grows.
You're overlooking the fact that private debt gets paid back, which reduces the supply of money.
> If someone has told you that inflation is caused only by government excess spending it is because they are pushing the agenda that government is 'bad'.
Or read books like Friedman's "Monetary History of the United States".
Feel free to take a shot at explaining why the US has had zero net inflation from 1800 to 1914 and endemic inflation after 1914? What happened in 1914?
Indeed private debt does (usually) get paid back - but even more is being created, and so the money supply expands!
The US came off the gold standard in 1914 - so money did not have to be backed by gold (or silver or whatever) - it became fiat. Thereafter private banks were free to create as much money as they liked! (within 'reason') and so inflation (of the money supply) was born.
If the amount of money (modulo velocity) grows in line with the real size of the economy, then prices will remain stable. If the money supply outpaces the real economy, then prices will rise (what we commonly call inflation). If the money supply doesn't keep up, then prices will fall (deflation - this is considered bad because people stop spending). On the gold standard, the only way to grow the economy without causing deflation was to dig up ever more gold. Not really feasible in the modern age, hence fiat currency.
No, only the Fed was able to create debt without limit after 1914.
Other banks are and were limited by their reserve requirement. Bank lending has always been limited by the reserve requirement. The reason is because if the bank lends out too much money, there'll be a run on the bank and it will collapse.
> On the gold standard, the only way to grow the economy without causing deflation was to dig up ever more gold.
That's not how it works. The collateral for the loans is the backing. Doesn't need to be gold.
> Not really feasible in the modern age, hence fiat currency.
That's not why the Fed was created. It was created to finance government spending.
"The fractional reserve banking process creates money that is inserted into the economy. When you deposit that $2,000, your bank might lend 90% of it to other customers, along with 90% from five other customers' accounts. This creates enough capital to finance $9,000 in loans."
"The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold."
I was talking about how fiat came to be, not the Fed
And once we started cutting back on those imports (or threatening to), all of a sudden inflation returned home.
Inflation was my guess as to what would happen when Trump come into office, I just didn’t expect a continued period of low interest rates due to political meddling.
This idea that high interest rates coupled with high levels of public debt are likely to exacerbate inflationary pressures is one I've heard before and one I tend to agree with.
My overall view is that we're now in a situation where there is no longer any good options. Not that this needs to be said it's worth remembering that to reduce debt/GDP a nation must grow its GDP component relative to the growth of its debt. Typically this can be done my limiting the growth of public spending relative to the growth of the economy, but today I think there's reason to suspect we can't do that.
The issue is that in recent years trend economic growth even with the expansion of public debt has been anemic in developed economies. People like to just attribute the growth in public spending to stupid politicians, but the reason every developed country has been doing the same thing isn't simply because all politicians have suddenly became fiscally irresponsible, but that the trend rate of growth in developed nations has dropped significantly.
To prevent stagnation (and in some cases out-right deflation) central banks have become ultra accommodative and governments have spent more money. Despite this increase in public spending it's only just about allowed developed countries maintain a slightly positive inflation rate (around 1-2%).
But this trend can not longer continue now we have higher rates, and at the same time governments also can't afford to spend less. To spend less would lower trend economic growth and this only makes it harder for us to service our debt since we can no longer grow GDP relative to the debt level.
Worst yet would be a scenario where this drop in public spending doesn't just cause stagnant growth, but deflation or recession since in both scenarios the real cost of servicing public debt will increase relative to GDP.
So given demographics and slower trend growth this decade the government probably both has to both increase debt levels to keeping the economy growing while reducing debt levels relative to growth to be confident in its continued ability to service its debt. In my opinion this is probably an unworkable situation.
While I agree with Lyn that we're going to see waves of stagnation and deflation, followed by growth and inflation the only realistic way this ends is with developed nations defaulting on their debt or hyper-inflating it away (assuming they have that option).
This of course assumes that public debt growth is in fact needed to prevent economic from stagnating. If you believe things have changed since the pandemic and we can now grow GDP without increasing debt levels then perhaps we'll be fine, but I suspect the trends in place prior to the pandemic are only likely to accelerate in the coming years.
In my opinion if you want to remain relatively unaffected by what's coming it will become increasingly important to reduce your personal debt levels and avoid saving large sums of money in sovereign currencies.
I think this is a good outlook, but I disagree on a few points:
1) The US could easily lower its debt load significantly, probably without over-impacting GDP. It's just that doing so would be unpopular with certain groups. [1] is a great high-level summary of where the budget goes. Does defense spending really need to be that high? No. Should we really be contributing to runaway college tuition inflation by issuing federal student loans? I don't think so. Could we not massively reduce healthcare costs by revamping the US medical system into something sensible? Etc.
2) If you think high-inflation times are coming, it's actually advantageous to load up on long-term debt and assets in the local currency. For example, if you think we're destined for high inflation and interest rates, locking in a fat mortgage early on is a great thing to do since your interest payment load will shrink relative to your income when inflation kicks in.
3) It's important to think of this scenario in game theory terms instead of singly-player terms. As the article points out, most of the developed countries are all in the same boat now so it's hard to predict how it will play out. It's a bit of an "If everyone looks bad, no one looks bad" situation. The question is whose economy will shit the bed first and how will the other economies on the verge of the same respond?
The article goes into quite a lot of depth about all the sources of inflation and how to fix it without actually mentioning the predominant cause of the latest inflation: Corporate Profits [1]
In Capitalism, we scorn at "price controls", and then go through a tortuous and roundabout mechanism by raising interest rates, so that the increased cost of borrowing causes corporations to cut expenditure which then pushes higher unemployment, reducing purchasing power and consequently reduces demand, all in the hopes that reduced demand would then cause prices to drop. But if the price increase wasn't triggered by higher purchasing power, then this whole rigmarole is meaningless, inflation remains "sticky"
No but they’re going to make us poorer trying. As if in the UK we didn’t have enough issues, our mortgages are going up. It’s just feels like a cash grab, theft for greed’s sake
Corporate profits last quarter were around 10% of GDP, which is roughly the same as in 2006.
Anyway, corporations ultimately distribution profits to individuals either directly (dividends, share buybacks) or indirectly (investment). It's silly to think that corporate profits are somehow "evil", they are a key part of a successful economy.
Also, unlike quarterly profits of a business inflation is calculated relative to the same month in the previous year, so that adds up to a year of lag instead of only a quarter of lag for quarterly profits.
So the range of quarterly profits between approximately Q2 2021 and Q2 2022 would be the best time range to compare with the June 2022 inflation. Lo and behold, peak inflation coincides with the highest quarterly profits ever recorded. [Edit: Well, not highest "ever recorded" but rather highest recorded in the 70 years of data from the chart you provided.]
That doesn't prove causation but it is completely consistent with GP's contention.
I don’t disagree with your view that profits are a key part of our economy, but I find it interesting to reflect on whether the movement of wealth (especially “excessive” wealth for some definitions) from consumers to capital holders (from a broader class to a more narrow and privileged one) is a necessary feature of any stable and productive economy, and/or if there are other ways to achieve the same features.
The common narrative seems to be our modern capital and corporate system encourages risky investment through the promise of upside return (and limited downside liability) for those who take the risk, then encourages competition that will eventually erode away that profitability for the ultimate end benefit of lower cost and higher quality for consumers.
However I’m not convinced that’s working as intended in the recent era where capital returns seem to be made as much by financial manipulation, “optimisation” of costs/quality, and market capture/lock-in as they do innovation. Meanwhile we have prisoner dilemmas of competition in which the big players innovate just enough to build a moat from disruptive competitors and enable customers to rationalise away planned obsolescence while keeping a stable peace of two or three major players to maintain the pretence of the free market and maximise return without overcompeting or facing regulatory backlash.
It feels like we still pretend the customer is king and the children of the enlightenment are in charge - narratives that once served us, now being used to protect a new and quite different system they’ve given birth to - while the evidence tends to suggest increasing ossification and rent-seeking as reflected by corporate strategy being lure, capture, then turn up the dials.
I’d agree we probably don’t get the iPhone and MacBook Air without the investment incentive so I’m not opposed to free market fundamentals. But when I read, for example, that the average US household generates $2700 annually in revenue for banks after risk costs, I do wonder whether a different model could achieve the same outcomes and maybe leave $300bn in the economy for consumers to allocate elsewhere. Then again maybe it’d just end up in the pockets of whichever other utilities have the most leverage over consumer budgets.
If you had the online data of what was being ordered of Amazon, Walmart, Target, Costco, and a handful of grocers, you'd know exactly how much to produce. .
The myth that a planned economy is inefficient comes from a time when not everything was computerized.
The Soviet Union had armies of mathematicians and surveyors to try to predict manufacturing needs. That is like saying "just use surveys"! Equating retailers with the entirety of the chain is massive willful ignorance. It is like equating knowing how to repair a car with knowing the entire manufacturing process of the car down not just to the ore but to the "production" of the individual workers themselves!
There’s been a lot of technological progress since the Soviet Union’s demise.
There’s probably some point where running a full command economy becomes feasible with modeling, oppressive surveillance and repression, etc. Not sure I’d want to live in it, but “the Soviets failed” is a weak argument.
A command economy gets a lot easier if you can force people to work certain jobs and produce certain things. The Soviets had trouble with this because measurement and enforcement were challenging; they'd have loved Amazon's warehouse worker surveillance systems.
What we have under "capitalism" is essentially the Soviet wet dream: being able to force workers into work, "willingly", and they work so hard they piss into bottles to stay on target.
We've got all the repression right now, just for a slice of the population that everyone considers effectively disposable.
You're talking about food production, which is already centrally planned with subsidies to not grow certain foods. This has been in place since the dust bowl. It seems to be working pretty well. Probably wouldn't work in anything that isn't a historical staple though. Think of how much the congress is knowledgeable in tech for the last 20+ years. Could you imagine if congress centrally planned how the tech revolution and how it would pan out? We'd still be using whatever the first viable tech was (ENIAC?).
Every computer advancement we take for granted today is due to industrial policy, and a time when the top marginal tax rate was over 70%. The idea that government is not effective and should not participate in industrial developments is all relatively new.
Every year that goes by without a reset in industrial policy, the web gets worse and there are fewer companies doing actual hardware. It turns out when you let the people who focus solely on finance and efficiency run things, it goes well for a while and then your foundational companies become like Boeing.
Government should participate more strongly, not less - including by breaking up big tech.
Apart from going back to agrarian communism central planning by ill-informed bureaucrats, the issue is an absolute lack of systems and personnel in government to meter and observe corporate transactions in a localized, specialized, distributed manner who know the terrain up close whether degrees of gouging or catastrophic imbalances are happening or not.
Can't let farmers empty water tables, let prices of eggs go insane, or corporations up prices just to take advantage of customers to the point it causes a price spiral.
The Fed is ill-equipped, the FTC doesn't do much, and the CFPB was neutered.
> the issue is an absolute lack of systems and personnel in government to meter and observe
Ah yes, a bloated bureaucracy has always been the recipe for a flourishing economy. The US is still probably the most solid, wealthy and - compared to its peers - fast growing economy in the world. The lack of administrative meddling is what made the US the dream destination for all the most ambitious people around the world. A radical shift to jeopardize that is a terrible idea.
I'm not from the US, but I'm glad different systems with different strengths exist. Even if only so we can compare how differences in e.g. amount of regulation etc affect a country overall.
disclaimer: other people would likely call me an invisible hand traditionalist
I'm curious how corporate profits could be regulated? Its unclear to me how we could distinguish increased profits from increased value creation vs increased profits from increased corporate greed
More antitrust regulation - have to increase competition. Of course this won’t happen immediately. If I were the president I’d have direly warned the deployment of the defense production act to commandeer basic supply companies and curb their profits. Just a warning would have set them straight.
Update antitrust regulation for modern times and close loopholes; actually break up effective monopolies. Especially in the essential services sectors.
Probably actually _do_ what most people think of antitrust, which probably means undoing the Bork-influenced "immediate consumer welfare only" interpretation of the law. Cory Doctorow has a lot to say about this in Chokepoint Capitalism. That book mainly talks about the big tech aspect of it, but it explains things like chickenization, which is total vertical and horizontal integration of a business, and how it's basically oligopolies all around in the US.
It's easy to essentially collude without directly contacting your competitors if there are only 3 companies in a particular industry. You raise prices, and the other two raise in sync, because consumers have no other place to go.
> direly warned the deployment of the defense production act to commandeer basic supply companies
there'd be no grounds for which this could be reasonable. Usurping private assets is not a thing, and should never be a thing that is allowed in a democratic society with rule of law, except in circumstances such as national defence, or some other emergency. High inflation (which, compared to the 1970s' isn't actually that high) is not such an emergency situation where this form of usurping of private assets would be justifiable.
This is a bit devil’s advocate, but if you accept higher profiteering has been happening, and that this has fuelled inflation data (higher prices effectively devaluing the purchasing power of the $), and that this has led to increased interest rates, has the decision to not intervene (and I’m not saying the GP’s comment is the only way, nor my preferred way) effectively led to “the financial and monetary system” taking more of people’s private assets across the board either by devaluing the worth of their existing dollars and/or, for those with lines of credit, actively “taxing” new dollars they get through higher rates. Not to mention the likely resulting impact on small businesses as investment and consumer $ tighten up, and people who will presumably start losing jobs as the intended impact of these monetary levers hit.
I know the US system is a little different with long-term fixed mortgages, but for much of the world on variable interest rates, central bank decisions have an almost next day impact on income (and a fairly near term impact for those able to lock-in rates for a couple years).
It’s not quite as active as the government seizing assets, and I agree from a liberty perspective in governments not doing that, but from a purely rational perspective if I was presented the option of “once off wealth tax to erode the savings everyone accumulated during Covid (or even better put them into a long-term bond that will be released during a future deflationary period)” and the situation we have right now where they’re netting the same outcome slowly, in the process enabling privileged parties along the way to benefit through siphoning off as the policy levers squeeze, I’m given some pause.
> I know the US system is a little different with long-term fixed mortgages, but for much of the world on variable interest rates, central bank decisions have an almost next day impact on income (and a fairly near term impact for those able to lock-in rates for a couple years).
in the UK: an interest rate change has an immediate effect on demand for new mortgages but a lag of several years on existing borrowers as nearly everyone fixes their mortgage for 2-5 years
In AU some fix all or part for 2-5 years (typically 3 years or less, with discouraging rates for the longer term relative to current rates at the time to factor for risk) but it’s not universal. For example, as of mid 2022 only 5% of loans were taken as fixed.
As a result most who did fix recently did so during Covid low rates for 3 years and are coming off now facing hikes from maybe 1.89-2% if they got the best fixed rates (at a time when the cash rate was 0.1% and variable was around 1%) to around 6% variable and 7.8% if they want to fix again.
Despite this idea being popular, it is not true in the sleightest. From Land being taken over for infrastructure proyects like highways, to peoples priavte property being taken by the police doing arrests, the idea that usurping pirvate assests should never happen only extends to corporations.
Having Amazon as a store front, and a manufacturer that can steal products and sell and promote them under amazon basics brand is one of the most overt cases for regulation to cut their company up into tiny little pieces. And yet the same goverment that will steal your farm to make a highway now thinks that taking up shareholder value is an afront agianst democracy itself
With reference to historic input costs. If a firm is not paying new, increased input costs, nor demonstrated some remarkable new efficiency, than they’re most likely gouging.
I wonder if we are in a different situation now than in the 70s/80s when the Fed last fought rampant inflation because of globalization. Like maybe before raising rates more directly affected costs because American companies had a large proportion of their customers in America. Now if the Fed raises our rates Apple can still sell tons of phones in countries that didn't raise rates and whose consumers didn't lose that buying power.
At least they can't have any effect on today's situation. The high inflation (it is coming down - it was 8%% - its down to 4%) was caused by worker shortages after the pandemic.
Fewer able-bodied workers after covid commanded higher prices, just as the serfs who survived the Black Death in the middle ages commanded better working conditions subsequently. The shortages in goods as fewer factory workers could make them and fewer truckers could move them also raised prices.
None of these causes for higher prices is impacted by higher interest rates.
Just my opinion, but macroeconomics seems to be good for understanding what's happened, but not so great for predicting what's going to happen. Take the Federal Reserve's policy on interest rates. Lower rates are supposed to get the economy going and increase inflation.
But after the 2008 financial crisis, the Fed cut rates almost to zero, and the big inflation everyone expected just didn't happen. This makes me think about the idea of a "liquidity trap," where people would rather keep their money than invest it, even when interest rates are super low.
This wasn't just a U.S. thing either. The same happened in Japan in the 90s and in Europe after 2008. Even with rock-bottom rates, inflation stayed low.
I know it's not popular wisdom, but maybe we don't know what the fuck is actually going on. And we should just accept that.
Educated people in most scientific fields can look at data and predict the likely outcome.
Economics is undoubtedly harder, because people are very non-deterministic.
However, economists frequently advocate for what we can see would have been a more appropriate path, had we not been hamstrung by ridiculous political tribal warfare led by people who do not understand the underlying economics.
People in America buy things they do not need. Take for instance the obesity crisis here. Americans buy more food because they don’t go by “serving size.” Hence more money is spent to buy that food. They don’t think about do I really need that food? Am I eating because I am hungry or because it’s good? Do they stop? The high interest rates are supposed to act as a “punishment “ I think. But as you see debt keep climbing as does the weight of Americans because of no self control.
The results have been grim for the lira, to say the least.
The episode finishes with a note that they've appointed a new finance minister who has said "the country has to return to a rational basis for its economic policy". So we'll see what changes are made - or whether this person lasts in this role for very long.
1. https://www.npr.org/transcripts/1180819327 [transcript]