The Fiscal Theory of the Price Level and Inflation Episodes
blogs.cfainstitute.org
blogs.cfainstitute.org
What is this? It's not like inflation was in the market for an explanation. It's already pretty well understood. We literally have a giant gaping deficit in supply for three very obvious reasons, 1. the pandemic ramp down-up, 2. the war which took out a very large part of energy, grain and other essential commodities, 3. tight labor market ("Great Resignation" anyone?). If anything, this situation vindicates MMT and other theories because over decade of free money and varying debt had no impact yet inflation started as soon as we got a perfect storm of pandemic, war and tight labor market. It sure took a lot to cause a crisis if QE and the pandemic alone weren't enough, we had to add a war and a labor market so tight that it allowed for a renaissance in unions and the Great Resignation.
> That’s actually a little more troublesome because there was a big deficit. And that one did not send inflation up. Everything’s hard to read in real time, but we can at least point to a couple of things. First, that was an economy with depressed demand. Whether extra aggregate demand spills into inflation depends on how the economy is doing. So, in 2008, there was arguably room to stoke aggregate demand to increase output.
Hmm gee, it's almost like it's an independent variable and your hypothesis was falsified over a very long period of time. Also they ignored every other country? There's a huge variety in debt-to-GDB ratios globally[1], yet somehow everyone is experiencing the exact same rates of inflation... almost as if it was for some common material reasons.
I think we can see inflation as a direct result of excess globalism, especially lean supply chains, and changes in underlying customer demand, i.e., the basket of products consumers are wanting was different than pre-pandemic. All of these are supply side problems, but it seems to reason that at least part of the pent up demand is a result of new consumer cash. I'd argue it's a political scapegoat though.
This inflation episode coincides with millennials nearing the end of the typical income growth phase of their careers without substantial asset buying power. Eventually people will simply drop out of the race, or demand vastly higher wages to compensate.
Asset inflation doesn't matter in that, as long as the assets don't later deflate.
> or demand vastly higher wages to compensate.
People can demand all they want, but won't get them until there's a labour shortage. Which is what actually caused wages to grow.
For most productive assets (including housing) there is a a limit to the degree of fractional ownership one can reasonably have. While I could buy into REITs, it only closes my short position on housing to own. It's in my interest to own an appreciating/inflating asset that I'm short on - particularly when I will go bust otherwise. If Rent captures all of my purchasing power, I may no longer be able to reasonably close this short position in a reasonable time frame.
Interesting. Do you have any links that quantify this?
> Eventually people will simply drop out of the race, or demand vastly higher wages to compensate
Maybe in some places. But this doesn't line up with what we know about American nature. Their frustration will most likely be expressed via violent outburst, blaming other groups, believing in conspiracies, and who knows what other exciting new antisocial behaviors they'll cook up on the internet.
In the decade from 2010 to 2020 the money supply increased by 7 trillion (from 8 to 15). It increased by another 7 trillion since (standing now at 22).
Nothing on the supply side comes close to a sudden injection of 7 trillion dollars in the economy.
As for everyone else experiencing inflation, guess what, they blame it on us. Money printed in the US has an inflationary effect in the whole world, not only in the US. Smaller countries cannot simply ring-fence their economy and live in a vacuum. And the EU was not shy about printing money either.
I think you should look into commodity prices. I'm surprised at how many people aren't paying attention to the global game on this. We're literally going to starve out other countries by outbidding them. That's what's going on here.
> As for everyone else experiencing inflation, guess what, they blame it on us.
No we don't because we know it's a material problem. That's "common knowledge" in Europe. The story here, and as far as I can see, everywhere is "producer costs."
There's also much willful ignorance and motivated reasoning. I've seen people in the US blame it on Build Back Better spending, seemingly unaware that BBB didn't pass.
> I've seen people in the US blame it on Build Back Better spending, seemingly unaware that BBB didn't pass.
Ouch.
Let's look then at that.
Russia produces about 4 billion barrels of oil per year. The various sanctions reduced that, but not by much. I've seen estimates of 10% to 20% decline, although I have also seen lower estimates. The war has been going on for about 4 months, so at a very conservative 20% output decline it follows that they produced 270 million barrels less than last year. At $100 a barrel, that's a shock of less than $30 billion on the supply side. It's much less than that though, since other producers have increased their output.
$30 billion shock on the supply side vs $7 trillion on the demand side...
> yet somehow everyone is experiencing the exact same rates of inflation... almost as if it was for some common material reasons.
Western nations mostly took the same monetary action, likely with some level of coordination so that exchange rates don't wildly change and also because they all had a common problem.
Countries like Japan, Switzerland, China and Taiwan all have much lower inflation than the US, UK, Canada and the Eurozone for example.
It's the reason that it's at the rate that it is rather than the rate that it was before the war, which is covered by the other two points.
I could be wrong but is China not getting discounted Russian, Iranian and Venezuelan energy right now or do they participate fully in the sanctions? That's a question.
Japan is an odd duck of an economy, I wouldn't use it in such an argument. Switzerland refutes your/their point as a counterexample since they mirrored EU/US policy. I don't know anything about Taiwan's economy. The further up the supply chain and those that can't sustain themselves are going to be the biggest hit though.
They are but they also had much tighter monetary policy throughout the whole pandemic. Higher interest rates, money supply increase has been constant over the last decade.
Switzerland's money supply increased at a near constant rate the last few decades, there wasn't a massive change during COVID. No they didn't mirror US or EU policy, dunno why you think that. And they've had zero or negative interest rates for the better part of a decade, no change during COVID. Japan same deal.
Check these same indicators for the higher inflation countries and there's clear policy differences...
Late edit - also oil prices are high but not at all-time highs. Last time oil prices were this high the inflation rate wasn't this high. There's other obvious differences.
We can't have the "nice" things because our money system doesn't support it, we are running an outdated version. So instead we expand the money supply in the hope that inflation results in real negative interest rates.
In my opinion raising interest rates isn't the best answer. If inflation has to be unrolled then according to MMT the government should run a budget surplus and as unintuitive that may sound, it actually requires an interest rate cut while simultaneously reducing the quantity of central bank reserves available to commercial banks i.e. quantitative tightening.
It is almost as if Friedman was right with his monetarism, but he never even once considered that negative interest rates are necessary to maintain a constant velocity of money.
Always remember that quantitative easing is an attempt to emulate negative interest rates with inflation. If you can cut the interest rate you don't need QE.
> Right now, the Fed has no control over the main drivers of rising prices but the Fed can slow demand by getting a lot of people fired and making families poorer.
This is the tip of the iceberg, I say. The global effects will be catastrophic.
Edit: Yep, it's already hitting [2]. And there's your reason for lower inflation in Asia, subsidies and other state spending, so basically the opposite of what you were saying.
1. https://stephaniekelton.substack.com/p/inflation
2. https://www.bloomberg.com/news/newsletters/2022-06-27/asia-s...
Um, what? It did start last year. Calling it the "Putin price hike" is pure propaganda.
Saying this requires you to have followed absolutely no commodities news. Please, open Bloomberg or something.
You're right! It started in 2020, not 2021. It only accelerated in 2022 - months before the invasion of Ukraine.
We've got this inflation bomb and yet the market thinks we are going into a recession soon. One would have expected a renewable and EV boom with the high energy prices and what not but nope.
Because politicians are loath to take away the punch bowl just when things are getting good, central banks usually have to do so via interest rates and money supply.
And because politicians are unlikely to increase taxes or reduce spending to mop up the extra cash, it’s likely that sustained, harsh monetary policy will be required. This policy will put the economy into recession for a time, will reset asset values, and will lead to higher unemployment.
And central banks will inevitably overshoot, because it’s nigh impossible to predict the path of the macroeconomy with much accuracy.
Anyone trying to save up for a home in the US could probably tell you inflation has been around since interest rates plummeted and then more-so since QE. It isnt an uncommon scenario that families would save more money each year to buy a home with a decent down-payment...only to have homes go up in price more than they saved.
Housing as an investment is problematic, because it disincentivizes new builds, people want to keep seeing their asset value go up, never down, and constraining supply is an easy way to do that. Renting out can also be more lucrative than selling if you have the capital. Also the ability for markets to offer housing at commodity prices seems like it would require a drastic oversupply of a very resource intensive asset. How sustainable is that really in the long run?
You're right that the issue is multi-factor, but i'd argue that the factor at play in the past two decades specifically was ZIRP+QE. That is the new factor at play.
Houses being seen as an investment has been an issue for a long time, I remember even in the 80s this was a big topic of discussion. Same for NIMBYism -- that has been an issue ever since forever (step into any home owner's shoes -- once you've put all your life savings into a house, most people dont want to dilute value.) I'll agree that the more leveraged you are to finally purchase a home, the more vehement the NIMBYism is...because now more housing is ruinous to existing owners' giant investment. The whole system is @#%!@#%
I think ZIRP/QE made things worse because houses started going up in value faster than incomes. This encouraged yet more leverage and lesser house. And now we're all left with a shell of the dreams our grandparents enjoyed with normal jobs.
https://www.cnbc.com/2021/11/10/home-prices-are-now-rising-m....
In the long arcs of monetary policy, government debt might play an outsize role along the lines of what the FTPL predicts but in the shorter term, because businesses and people often move faster than governments when it comes to borrowing and spending decisions, there remains important monetary policy work to be done to smooth out the potentially costly monetary transients.
In times when governments are acting somewhat responsibly and not spending too much beyond their means, FTPL might be much less relevant and there would still be monetary policy concerns stemming from fluctuations in the private movement of money or from other supply or demand shocks.
> Inflation breaks out when there is more overall government debt than people think the government will repay by its future excess of taxes over spending.
No government with a sovereign currency need default. Anyone dealing in government debt knows that.
Great. What was the faceless government's motivation?
Because clearly it wasn't the government that profited. But the people who did profit seem to own them some government.
Let's blame the government instead! That's worked since Reagan, right?
Keeping people from starving and employers from closing during a global pandemic where most of them couldn't work.
That's just wildly wrong, FWIW. Per capita covid fatalities are 50% higher in Florida than California[1]. Sweden is even more of an outlier, fully three times more (per capita) Swedes are dead from covid than Norwegians.
[1] And only matches NY if you try to cook books by including the initial wave of fatalities from the initial outbreak that were contracted before lockdown.
I double checked your numbers and indeed I got that we had 3.09x deaths per capita compared to Norway. Also, we did have partial lockdown and many voluntary measures that were followed. Bars we closed down, restaurants were pretty restricted, there were measures on public transportation, many people used masks, very many people worked from home and there was mass testing and stay-at-home orders and such. So, I'm saying, it could have been even worse.
Age adjusted deaths are basically equal for California and Florida, and vastly higher in NY.
Florida was essentially an open air party with no mask mandates way back in summer 2021. No one wants to look at reality.
But given the actual measured impact? Yes, that seems undeniably tolerable to me. It's the right call.
To stabilize society during a time when millions of people were unable to work due to a pandemic, obviously? I don’t think this is the gotcha you think it is.
It's not a stretch to question if there were additional motivations.
Unless this people catalogue their specific predictions over time, and list their success rate, these articles will continue being adverts rather than demonstration what their doing is science as opposed to astrology.
...a big, whopping outlier in the data set?
I mean, really? Who anywhere genuinely believes that the economic events of 2020-22 could be reliably predicted from first principles?
It's not hard to guess at an answer: the covid recovery led to a loosening of purse strings that were kept tight during lockdowns out of general social anxiety. Makes enough sense to me. But it's still a special-case answer to a special case thing. First principles economics, in fact, would have done extremely badly.