Janet Yellen admits she was wrong about inflation being transitory
cnbc.com
cnbc.com
We put a bunch of money into the economy as a response to Covid. More money means prices go up. But we put in a fixed amount of money, so there should have been a fixed amount of inflation.
The real explanation here is that there is less stuff! International trade is a hot mess right now and things are just literally more expensive because we have become materially poorer.
The question is why they kept rates so low for so long, and the answer provided here is they didn't plan for a trade retraction.
But if you add Real GDP to that chart, you can see the 2020 contraction was much larger than 2008, so the intervention was at least arguable.
> Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
> For more information on the H.6 release changes and the regulatory amendment that led to the creation of the other liquid deposits component and its inclusion in the M1 monetary aggregate, see the H.6 announcements and Technical Q&As posted on December 17, 2020.
Source for the additional information is the link in your post.
Once the discontinuity ages out (June 2021), M2 is still running 13% over a year prior. That's historically high, but not so much higher than the 10% back in 2003, 2008, and 2012.
Thank you. That makes much more sense.
We did not put a "fixed amount of money". Money is created by both the Fed and by commercial banks. Whenever banks advance new loans, they create money out of thin air. Whenever they refuse a borrower to renew a loan, they destroy money.
When the Fed pumps money in the system (by QE), the banks act as a multiplier. But the multiplier is not fixed. The banks extend loans, businesses load up on debt, then they swim in cash, they do stock buybacks, stock go through the roof, people who own stocks feel they get richer (at least on paper), they consume more, businesses profit, then they want to expand, they go to banks, and the banks seeing how profitable the businesses are are happy to extend new loans, which is the same as to create new money.
It's a "virtuous cycle", depending on your definition of "virtuous".
A different way to look at it is that the economy overheats. The cycle of money creation has gone out of hand, and the Fed has to apply the brakes.
Yellen knows very well all these things. She was the head of the Fed, she is supremely smart. She's just lying through her teeth saying she "didn't fully understand". Of course a statement about her own state of mind is not a falsifiable statement, so she has the luxury to say whatever she wants. But she knows perfectly well how the economy works, it's absolutely impossible she didn't anticipate the results of pumping trillions and trillions of dollars in the economy.
There are a lot of other factors at play here.
On items b-f Fed has zero power. By increasing interest rates hard, they are affecting (a) but due to inelasticity that means that the cure will certainly kill the patient. (g) might undo the actions of Fed and drive capital to real estate. Increasing rates might also actually increase housing prices and demand counterintuitively, as mortgages become harder to procure and recession forces people to sell, thus companies that buy houses in bulk in cash like Pretium get to gain a monopoly of the market and drive prices up.
Yellen has no idea what’s going on. Economist are constantly guessing and on the chance that they are right there heaped with praise, and when they’re wrong nothing happens. They keep their jobs to predict again.
Most economists, in my experience, are guessing about how the political system works when it's right there for you on Wikipedia
First and foremost, Price gouging across industries is self fullfilling the inflation fears, meanwhile record profits of 2x or more are being had (looking at you tyson).
For the same reason we wouldn't blame deflation on Memorial Day sales, we shouldn't really blame price increases for inflation. The price increases are the inflation.
If someone is charging $1M per bottle for water in the desert, then pretty quickly a dozen more water sellers are going to make tracks for the desert.
"Inflation isn't happening, you're just spreading misinformation! Everything is fine!"
"Inflation might be happening, but if it is, it'll only be transitory and not as bad as our detractors suppose it will be!"
"Inflation is happening, it's transitory, it'll be over soon!"
"Inflation is happening, it's not transitory, and we don't know how long it'll last."
"How do we start looking at fixing this inflation problem? Spend more money!"
The economic power of the individual in small, tighter-knit communities/countries vs the influence and economic power of conglomerates competing in the global market is a David vs Goliath-tier battle that was lost a long time ago. Countries/businesses who survived by running lean, trying to keep things local, etc - have been priced out by the power of the global conglomerates and governments trying to get a piece of the pie.
Inflation is such an insidious tax - it affects everything and just domino effects into absolute chaos if mismanaged.
Your bank account is worth x% less. Your wages are technically worth x% less. Companies trying to stay afloat or maintain/exceed profits year over year will raise prices of their goods (store cost/"shrinkflation" of packaging) to try and lessen the blow of higher transportation costs, etc.
Not sure what the solution is other than something similar to what the french did to their ruling class hundred of years ago - I don't condone violence at all, but it seems like it's getting to a tipping point where some bolt is going to finally shear or the last straw will land on the camel's back.
It doesn’t seem exclusively limited to the “very online” folks: anecdotally I’ve had it expressed to me irl from people on both the right and the left here in Portland. Primarily the right but, since the abortion SCOTUS leak, the frequency from the left has increased tremendously.
And if the federal government is truly facing actual questions of legitimacy from both sides, they seem to be doing all they can to make the problem worse.
We needed a Transparency Board and instead got a Disinformation Board.
The disinformation comes because its an effective way to coerce those populations into influencing elected representatives. You take away visibility of voting (secret ballots, like real elections) and now nobody holds power over how an individual representative votes. No more fixed party line votes. Reduced public backlash to minimize shitty discourse. Its the only way to allow representatives to really align their votes with the people because otherwise we cant afford a seat at the table.
Occupy Wall Street happened 10+ years ago. A large social movement that honestly didn't get very far or do much of anything to raise awareness about the wealth inequality of the united states/the western world. People were already frustrated 10+ years ago and it hasn't gotten any better. Rising inflation, rising housing prices making it harder for people to start their own family or participate in a system that's slowly getting more and more out of reach for the average individual.
Corporations/Governments have figured out (maliciously/intentionally or unexpectedly) that it's easier to placate and distract people from how hard they're getting screwed by integrating their corporate identity with social causes in countries they operate in like Pride (companies LOVE the LGBT community in June in the west, but they're somehow forgotton when they're operating in countries like China, Africa, etc.), co-opting country's identities ("You're not a TRUE citizen unless you buy Y Beer!"), or pretending that they "care" about tragedy and disasters that happen in our world. Corporations don't have emotions so they like to try and manipulate others' feelings for the corporations own benefit.
They're faceless monoliths (machines) ran by millions of people (cogs) that have had their jobs compartmentalized and trained to follow instructions without thinking for themselves - only to follow orders from authority figures because if you don't, you're going to be poor and it'll be all your fault - you should have done what they told you!
It was determined that race might be a sufficient proxy. Time will tell.
Before I say all this, please please please don't be the guy who replies with fed nihilism. You're not cool or edgy just because you think the fed is hopelessly corrupted and its only role in American is to keep an asset/everything bubble inflated. Take that mess back to the comments under Joe Rogan's YouTube videos.
Ok, so the key takehome for all of this, to me, is that by the end of this decade, we are going to be some serious Fed reform. The Biden team is trying to finesse something here that's unfinesseable.
Right now, this pageantry is about Biden trying to find his footing with respect to the economic packages his party expects him to push forward in the run up to the midterms. In 2020, his party pulled out a few surprise wins in states like Georgia to win a thin majority in the Senate by promising people $2,000 checks as a Covid-stimulus. Now, he has to do something that makes good on that promise, and the likely best move is to find a way to forgive consumer debt.
The thing is, if he does that and it pushes inflation in the wrong direction, he's going to come off like (even more of) a total klutz. So, he's trying to preempt the narrative out there that he's Jimmy Carter, Part 2: a one term, deeply religious but left-liberal president who was put into office after a menace was removed who fumbled his way into stagflation. He can't avoid that though. His op-ed in the WSJ this weekend illustrates the point: it's mid. Same with the milquetoast policies he's got Yellen up here selling: total mid. The concept is that policies his administration has already put into place are fighting inflation. As they say in D.C., that dog won't hunt. If Biden is already fighting inflation, why are there pictures of >$9 gas/gallon popping up in L.A.? Why is the price of chicken so high?
What's worse for his political prospects is what's coming: he's going to keep pushing for stimulative spending/consumer debt relief. If he doesn't give economic benefits to his base to make good on that $2k promise, they will not show up for the midterm. That's the 2022 political reality.
Here, to make way for more inflation-spurring policies, I imagine Yellen has to fall on the sword for the current state of inflation, even though she was the former Fed Chair, not the current one, and the current Fed Chair (Trump-appointed/Biden-Reappointed), whose independence Biden is supposedly respecting, Jerome Powell, is the one publicly branded with the "transitory" remark. I think that's Biden trying to give space to Powell to make it that much easier for his Fed to continue their 180-degree flip on whether to use their tools to fight inflation by cooling the economy. So far, Powell is publicly declaring that he's channeling the Carter-appointed Fed Chair Paul Volcker, who raised interest rates dramatically and beat back inflation in the early 80s. Biden is giving Powell room to Volckerize, and my bet is Biden hopes Powell will take his final form a month or two after the midterms, but not before. But all of this is just absurd theatre that's attempting to thread an unthreadable needle: the Fed helped to cause this bubble, and it needs to be reformed.
If you've been following Powell's remarks over the last few months, he has moved from inflation is transitory TO it's time to increase the fed funds rate to hem in the economy through a "soft" landing TO it may not be a soft landing, but the landing will be "soft-ish." Why is Yellen the one to take the blame for that? She shouldn't. But what Biden needs Powell's Fed to do is continue to increase that rate by 50 basis point at each of the upcoming meetings, clear the Mortgage Backed Securities off its balance sheet, and then after the midterms amp the rate up ASAP by 75 basis points at a click or more, so that we can start that recession quickly then hopefully find our way toward something Biden can call a "recovery" by the time 2024 elections roll around. And the Fed isn't going to do that if there's overt pressure from the administration.
I'm listening to Bernanke's latest book on audible (read by the same guy who reads WaPo David Ignatius's thriller novels), and he goes out of his way to decry any political pressure that elected officials apply to the Fed. But that doesn't mean the Fed isn't mindful that if it fails to exercise its "policy tools" in a way that seems reasonable to elect officials, those officials can yank that independence away. Between abolishing the filibuster, packing the Supreme Court, and rendering the Fed less independent, my money (ha) would be on the third option being the most palatable to the most amount of Americans as a way for Biden to make a bold mark on American institutions toward the end of his first term.
Right now, there's a very careful dance. Biden will try to survive the midterms by arming the Ukranians, emphasizing background checks for guns, and forgiving debt. But after this is all over, and the way the federal government has twisted itself into knots to avoid reforming the fed all for naught, the fed is going to have to be reformed.
>If you've been following Powell's remarks over the last few months, he has moved from inflation is transitory TO it's time to increase the fed funds rate to hem in the economy through a "soft" landing TO it may not be a soft landing, but the landing will be "soft-ish." Why is Yellen the one to take the blame for that? She shouldn't. But what Biden needs Powell's Fed to do is continue to increase that rate by 50 basis point at each of the upcoming meetings, clear the Mortgage Backed Securities off its balance sheet, and then after the midterms amp the rate up ASAP by 75 basis points at a click or more, so that we can start that recession quickly then hopefully find our way toward something Biden can call a "recovery" by the time 2024 elections roll around. And the Fed isn't going to do that if there's overt pressure from the administration.
This is an excellent possible observation of a strategy we may be watching.
To add to your point, without some Volcker-level hikes we won't be able to escape this inflation. I'm a broken record about this (if you check my comment history haha), but the aging demographics of advanced economies (china is also an advanced economy!) guarantee that we will have less hands able to feed the hungry mouths out in the world. Prices are guaranteed to rise. Perhaps we'll have so many wealthy retired people chasing so few goods that we'll need hikes so large that they will have to crush asset values altogether to keep prices as they are today.
No matter what, similar to you, I don't see the fed's independence surviving the decade.
Really? That would be a paradigm shift. For the most part we've had no problem producing as much stuff as people can consume.
It's possible that resource exhaustion and declining population will challenge that.
But what we see now is economic shock in the wake of covid, and the usual/predictable energy price spikes as a result of war.
Why wouldn't we recover now?
Even if population decline is happening, it's not happening now -- it'll happen slowly.
I think that the changes in price from the lack of labor will be fairly wild, even though the change in laboring population will be fairly predictable.
Please compare these graphs, unfortunately they are USA only but similar trends can be found in most Advanced Economies:
25-54 year olds in workforce - https://fred.stlouisfed.org/series/LNS11300060
All ages in workforce - https://fred.stlouisfed.org/series/CIVPART (note the peak in the 2000's).
Their difference is not caused by a surplus of children, but by a surplus of old. We are in for a very very bumpy ride.
But yeah, that's "Joe Rogan" material :p
If a nuclear war ever sets us back technologically 300 years, then I'll start to take the founding fathers ideas seriously again.