It looks like inflation is here

[RVonse]

What both of you are missing is that prices can never have any opportunity to re-establish back to a normal unless the government stops directly stimulating into our economy. So that is the real question going forward. Can government actually stop giving out stimulus checks now? Can government actually stop giving out $ trillion stimulus infrastructure bills going forward? Can government not help pay down student debt and continue with the other entitlements? I don't think they can stop doing any of this anymore. Not without major cratering of the economy and even more political upheaval. All of this amounts to more money in the system with less people actually producing goods and services.

Prices will not reestablish to "normal" because that causes more harm than benefit.

Then we agree that inflation is here to stay.

 

[RVonse]

What both of you are missing is that prices can never have any opportunity to re-establish back to a normal unless the government stops directly stimulating into our economy. So that is the real question going forward. Can government actually stop giving out stimulus checks now? Can government actually stop giving out $ trillion stimulus infrastructure bills going forward? Can government not help pay down student debt and continue with the other entitlements? I don't think they can stop doing any of this anymore. Not without major cratering of the economy and even more political upheaval. All of this amounts to more money in the system with less people actually producing goods and services.

And don't get me wrong, I am much more in favor of putting the liquidity into the middle class instead of the banksters like in 2008. I just don't see how you can keep doing a stimulus injection and NOT expect a huge amount of inflation! Because a stimulus check not only causes inflation by injecting more money for the same amount of goods...but it actually reduces supply of goods at the same time! Why would people want to work when they can sit home with a check? The answer is they don't and that is why McDonalds can not hire any help right now.

We are going to see inflation the only question is how much longer the government has to stimulate and otherwise inject liquidity directly into the consumer economy. I'm betting this keeps going on forever just like the lower interest and monetary easing did before this. And for all you folks who think inflation is some rare event that is only temporary I ask you this. How many penny's have you seen on the sidewalk NOT get picked up by someone? Our money is already become so worthless its not even worth the time for the typical middle class person to bend over. A millionaire used to be a term for rich people...but no longer is that true today.

The future you predict — with highish inflation of consumer prices, rising wages, and an economy depressed by people not working — is not dissimilar from conditions in the 1970's and early 80's where the Fed made drastic interest rate hikes to curtail inflation.

Totally different. During the 70's the US was still a net exporter with a manufacturing base.

The question is: Would today's Fed in the conjectured scenario raise interest rates vigorously as Volcker did? (Volcker raised overnight Fed money to 17% or thereabouts.

No. The repercusions are too serious without a real economy in place. No political will anyway.

Today's more enlightened Fed might kill the inflation before it progressed that far.) Note that

• As RVonse implies, a one-time $2 trillion infusion won't directly cause bad inflation: it's the threat of continued infusions and deficits that might worry us.
• The unprecedented(?) combination of a "seller's market" for unskilled labor and high voluntary unemployment is quite unlikely I should think.
• I think many regulators would be happyish to see a long-term 3% rate of inflation, rather than the nominal 2% target. Higher inflation gives more flexibility should negative real interest rates be needed. Frankly I think some regulators might prefer a 3% or 3.5% target over a 2% target, but find it impolitic to say so explicitly. But whether the target is 2% or 4%, the Fed WILL act to prevent dangerously high inflation. (Can we at least agree that persistent predictable inflation of 3.5% or 4% annually is NOT dangerous?)
• Yes, much USG debt is sold to foreign banks that need to hold dollars and to agencies of USG itself. However, low interest rates are not seen just in Treasury paper. Junk bond yields are quite low right now, IIUC. The market is betting that the Fed WILL step in to prevent serious levels of inflation, should they arise.
• Devaluation of the dollar on foreign exchange markets is unlikely, at least in the near to medium-term. Other countries are also running high deficits. If there is a shock in financial markets I think it will be another credit crisis, possibly brought on by Wall St excesses.
• Despite this sanguine view, wise investors are making hedging bets, e.g. on real estate, novel financial instruments, and cryptocurrency.

TL;DR: Maybe. Maybe not.

The fed can't get back a manufacturing base all by itself. And without said manufacturing base, all that happens when money is distributed to the consumer is that those dollars are traded for Chininese goods so that the Chinese government can use US dollars to purchase a silk road.

In the final analysis, inflation vs deflation does not even matter anyway. The middle class has to actually produce its own goods and export some of those goods or we will return to a feudalism with lords again. Our reserve currency is actually proving to hurt the middle class at this point and a financialized economy is the economy of extreme wealth disparity and less real goods for everyone.

 

[laughing dog]

The fed can't get back a manufacturing base all by itself. And without said manufacturing base, all that happens when money is distributed to the consumer is that those dollars are traded for Chininese goods so that the Chinese government can use US dollars to purchase a silk road.

Not true at all. Consumption does not require manufactured goods at all - it requires goods and services.

In the final analysis, inflation vs deflation does not even matter anyway. The middle class has to actually produce its own goods and export some of those goods or we will return to a feudalism with lords again. Our reserve currency is actually proving to hurt the middle class at this point and a financialized economy is the economy of extreme wealth disparity and less real goods for everyone.

Whether or not "feudalism" returns is a matter of policy not what is produced nor where it is produced nor by whom.

President Trump was and is the symbol for a return to feudalism. Yet you backed him.

 

[ZiprHead]

Having followed president's budgets for forty plus years, the Biden budget would, if enacted, do more to reduce inequality and poverty than any other budget in modern US history.

Bob Greenstein - Founder of the Non-Partisan Center On Budget And Policy Priorities

 

[Jason Harvestdancer]

What both of you are missing is that prices can never have any opportunity to re-establish back to a normal unless the government stops directly stimulating into our economy. So that is the real question going forward. Can government actually stop giving out stimulus checks now? Can government actually stop giving out $ trillion stimulus infrastructure bills going forward? Can government not help pay down student debt and continue with the other entitlements? I don't think they can stop doing any of this anymore. Not without major cratering of the economy and even more political upheaval. All of this amounts to more money in the system with less people actually producing goods and services.

Prices will not reestablish to "normal" because that causes more harm than benefit.

Then we agree that inflation is here to stay.

Inflation combined with a rather moribund economy recalls the situation in the 1970s. That will lead to comparisons between Biden and Carter, which is rather unfair to Carter.

 

[Loren Pechtel]

What both of you are missing is that prices can never have any opportunity to re-establish back to a normal unless the government stops directly stimulating into our economy. So that is the real question going forward. Can government actually stop giving out stimulus checks now? Can government actually stop giving out $ trillion stimulus infrastructure bills going forward? Can government not help pay down student debt and continue with the other entitlements? I don't think they can stop doing any of this anymore. Not without major cratering of the economy and even more political upheaval. All of this amounts to more money in the system with less people actually producing goods and services.

Prices will not reestablish to "normal" because that causes more harm than benefit.

Then we agree that inflation is here to stay.

You think it ever left?? The Fed doesn't even want to get rid of it.

In an ideal world the inflation rate is 0%, but our control lags considerably so we will weave around the objective. We want to minimize the harm caused by this weaving--and going below 0% causes more harm than going above it does. Thus we deliberately aim far enough above 0% that the normal variation won't cause it to dip below 0%.

 

[Loren Pechtel]

Totally different. During the 70's the US was still a net exporter with a manufacturing base.

...

The fed can't get back a manufacturing base all by itself. And without said manufacturing base, all that happens when money is distributed to the consumer is that those dollars are traded for Chininese goods so that the Chinese government can use US dollars to purchase a silk road.

In the final analysis, inflation vs deflation does not even matter anyway. The middle class has to actually produce its own goods and export some of those goods or we will return to a feudalism with lords again. Our reserve currency is actually proving to hurt the middle class at this point and a financialized economy is the economy of extreme wealth disparity and less real goods for everyone.

The US is still a net exporter--it's just that services have become a bigger part of the economy and we are net exporters of services and net importers of goods. The jobs are there, it's just they're jobs that need more education. Your factory jobs have to a considerable degree been replaced with machinery.

I have spent basically my entire career programming for the cabinet manufacturing industry. When I started it took about one factory worker to produce one box per day, I did not have a count for the number of people not working in the factory. I just checked our current system, I see almost exactly three boxes per day per worker in the entire system, not just the factory workers.

That's where your manufacturing jobs actually went.

 

[steve_bank]

Months back somebody argued with me that the govt can just print money without any consequences.

 

[Canard DuJour]

The US is still a net exporter

The US hasn't been a net exporter since the 1970s.

 

[Canard DuJour]

Another big difference beteween now and the 1970s is that workers, for the most part, cannot demand higher wages. 40+ years of neoliberalism put paid to that. Wage-price spirals (the supposed transmission mechanism between inflation expectations and actual inflation) just aren't a thing anymore.

 

[SLD]

Inflation isn’t back. This is just temporary. This isn’t the 70’s where there were several demographic trends coupled with oil shocks. Demographics are what count, not these bullshit economic theories.

 

[Loren Pechtel]

The US is still a net exporter

The US hasn't been a net exporter since the 1970s.

You didn't look at my whole post.

We import goods. We export services.

 

[funinspace]

The US is still a net exporter

The US hasn't been a net exporter since the 1970s.

You didn't look at my whole post.

We import goods. We export services.

Say what? Maybe you could provide sourced data...cuz I don't get you, but I do get Canard....

 

[Jason Harvestdancer]

Months back somebody argued with me that the govt can just print money without any consequences.

Ah yes, MMT. A theory so bad even Keynesians don't like it.

Every time I hear the argument that we're in a new paradigm and a new theory explains everything from this point forward, I work hard to protect my family from the upcoming economic troubles. It is one of the most reliable indicators of an economic downturn.

 

[Loren Pechtel]

Months back somebody argued with me that the govt can just print money without any consequences.

Ah yes, MMT. A theory so bad even Keynesians don't like it.

Every time I hear the argument that we're in a new paradigm and a new theory explains everything from this point forward, I work hard to protect my family from the upcoming economic troubles. It is one of the most reliable indicators of an economic downturn.

Yeah, it's not a new paradigm. It's people proclaiming the wonders of the Emperor's clothes.

There has been something of a market change--lower inflation rates mean you would expect higher P/E ratios, but that doesn't justify the insanity we keep seeing.

 

[Axulus]

On the non-inflationary side of the fence, seems to be John Mauldlin and Lacy Hunt, with a quote from a regular email I get John Mauldin:

Lacy also explained why he isn’t worried about the increased money supply. It gets back to his point on debt. The amount of money is less important than the speed with which it circulates, or “velocity,” which is at the lowest level ever.
<snip>
At least 10 years ago Lacy and I were talking about what it would take to get the velocity of money lower than during the Great Depression or post-World War II. We were both watching velocity slow significantly and I was curious as to when that would end.

Lacy explained at the SIC:

We have to take into account what's happening to the speed at which money turns over and the velocity of money hitting an all-time low. And what is causing velocity to decline is that we're taking on too much debt, it's triggering diminishing returns and non-linear relationship and this pulls the marginal revenue product of debt down and it also takes the banks out of the process and that pulls velocity lower.

Another problem, Lacy believes, is that debt reduces savings.
Associated chart:

View attachment 33832

The issue, however, is that velocity can pick up very quickly. Wouldn't it also be expected to rise back toward more normal levels?

 

[Swammerdami]

There's an important difference between the laws of physics or chemistry, and the "laws" of economics. Maxwell's equations of electricity and magnetism are still in use more than a century and a half later; even Newton's law of gravitation is still good enough for many purposes.

Laws of economics, on the other hand, come and go! Friedman deserves his reputation as one of the greats, but his Law of Monetarism has fallen into disfavor. This is due in part to changes in the behavior of governments and banks. (Imagine how confusing chemistry would be if atoms changed their behavior in response to chemists' beliefs! But such changes are routine in monetary theory.)

The relationship between money velocity and price levels is defined to be a tautology. What those graphs show is just that M2 is very high right now. One reason M2 is high is that checking accounts (included in M2) pay interest now and so attract funds that would otherwise be invested in non-M2 vehicles. (Longer-term deposits do not pay particularly high interest anymore.) And part of the M2 surge is transitory.

Another reason M2 is high is that the Fed is gifting billions of dollars to banks every month as interest on their "excess reserves" — this discourages those banks from moving their excess reserves to non-M2 instruments. (Opinions differ on whether this policy is pro-inflation or anti-inflation! ) IIUC, the Fed no longer publishes its EXCSRESNS (Excess Reserves) data series. (Why did they discontinue that dataseries? Some trivial technical reason? Or because it was too embarrassing?)

I'll repeat my earlier (questionable?) claim that experts are more worried about asset price deflation (i.e. higher interest rates) than about consumer price inflation. Inflation, if any, may come as part of stagflation but, as TFTers have argued in this thread, stagflation might be unlikely.

 

[funinspace]

On the non-inflationary side of the fence, seems to be John Mauldlin and Lacy Hunt, with a quote from a regular email I get John Mauldin:

Lacy also explained why he isn’t worried about the increased money supply. It gets back to his point on debt. The amount of money is less important than the speed with which it circulates, or “velocity,” which is at the lowest level ever.
<snip>
At least 10 years ago Lacy and I were talking about what it would take to get the velocity of money lower than during the Great Depression or post-World War II. We were both watching velocity slow significantly and I was curious as to when that would end.

Lacy explained at the SIC:

We have to take into account what's happening to the speed at which money turns over and the velocity of money hitting an all-time low. And what is causing velocity to decline is that we're taking on too much debt, it's triggering diminishing returns and non-linear relationship and this pulls the marginal revenue product of debt down and it also takes the banks out of the process and that pulls velocity lower.

Another problem, Lacy believes, is that debt reduces savings.
Associated chart:

View attachment 33832

The issue, however, is that velocity can pick up very quickly. Wouldn't it also be expected to rise back toward more normal levels?

I guess it could pick up quickly. But if it did, I'd expect it to also be transitory. The velocity of money didn't turn around after the 2008-9 event much at all. Either way, I don't think any one indicator will define what will happen next, as inflation prediction is very complicated, much like economic prediction. I know I don't know enough to make strong claims either way...

 

[Canard DuJour]

On the non-inflationary side of the fence, seems to be John Mauldlin and Lacy Hunt, with a quote from a regular email I get John Mauldin:

Lacy also explained why he isn’t worried about the increased money supply. It gets back to his point on debt. The amount of money is less important than the speed with which it circulates, or “velocity,” which is at the lowest level ever.
<snip>
At least 10 years ago Lacy and I were talking about what it would take to get the velocity of money lower than during the Great Depression or post-World War II. We were both watching velocity slow significantly and I was curious as to when that would end.

Lacy explained at the SIC:

We have to take into account what's happening to the speed at which money turns over and the velocity of money hitting an all-time low. And what is causing velocity to decline is that we're taking on too much debt, it's triggering diminishing returns and non-linear relationship and this pulls the marginal revenue product of debt down and it also takes the banks out of the process and that pulls velocity lower.

Another problem, Lacy believes, is that debt reduces savings.
Associated chart:

View attachment 33832

The issue, however, is that velocity can pick up very quickly. Wouldn't it also be expected to rise back toward more normal levels?

Let's hope so. The quantity of goods and services produced would likely increase, and the quantity of money in circulation decrease as each transaction is taxed as income and/or sales. Given a substantial output gap, the result would be growth rather than inflation.

Some wage-led inflation would be no bad thing for most folks anyway. Inflation isn't simply a loss of purchasing power, but a redistribution of it. If someone pays more, someone gets more. There are winners and losers ..and reasons the powers that be are obsessed with inflation.

 

[Swammerdami]

Some wage-led inflation would be no bad thing for most folks anyway. Inflation isn't simply a loss of purchasing power, but a redistribution of it. If someone pays more, someone gets more. There are winners and losers ..and reasons the powers that be are obsessed with inflation.

Debtors (e.g. students, and middle-class homeowners) are the beneficiaries of inflation. Banks would be the big losers. That's why it's unlikely to happen.