I remember learning some basic economics in 2019 about how the U.S. learned a valuable lesson from 2008. How they will never make the same mistakes of letting inflation go unchecked because they have tools to work against it. Yet inflation has rapidly scaled to 6.8% (reported). Also, I am keeping supply chain demand in mind but I don't think it excuses the fed's decision to not immediately start curbing high inflation rates. My guess is that people with money are profiting and want to continue profiting until it is no longer sustainable.
2008 was a very different scenario, the money that was printed then was forced into a narrow loop within the financial system and just used to sanitise a lot of bad debt away from the banking system.
In some sense, the eventual logic of the last 20 years of massive increases in the total amount of debt circulating, due to loan securitisation, was that that debt would have to be devalued to make it repayable. And here we are.
The problem is we can't raise rates without blowing up the economy, not that it wouldn't stop inflation. It doesn't matter how much money is in the system if you nuke velocity back to near zero.
I'm talking in the medium term here. Because the response to this is in my mind literally a 10-20 trillion dollar stimulus package. THEN we will see inflation.
* Aggregate demands isn't too much different from before the pandemic. * Demand for services has fallen into the toilet. * Demand for goods has gone through the roof.
This massive reallocation of resources from one portion of the economy to another has created a situation where demand for goods far outstrips supply. Therefore we have inflation. (Increases in food prices are caused congestion in the labor market.)
This is not about US economic policy. You can see this by looking at inflation rates in Europe (and specifically Germany). These countries have very different economic policies than the US, but their inflation rates pretty much track what's happening in US. Therefore it is a common effect driving inflation in both places.
Source? This doesn’t seem right to me at all.
Basically they can only control inflation in the future, and they believe the inflation we've just seen is a result of the one-off of the pandemic response. Given that the interest rate mechanism affects inflation by increasing unemployment and harming the economy, they don't want to do that until it's necessary.
(I should note that it's theoretically possible to do inflation control by fiscal policy, i.e. mop up some of the spare money by taxation, but that's obviously not going to happen)
Collapse of the underlying assets that they hold. Bailing out the housing market during the pandemic means the fed holds lots of housing market. The theory is that they will let the assets mature and then pull the money back out to come back to a balance. I'll tell you now, if you believe that's about to happen I've got a bridge to sell you. The US still hadn't done this the day before covid started. Covid is far worse.
>I remember learning some basic economics in 2019 about how the U.S. learned a valuable lesson from 2008.
The irony is that the financial crisis at least help the USA today. Compare this to other countries like Canada and we are far worse off than the USA during the financial crisis.
>How they will never make the same mistakes of letting inflation go unchecked because they have tools to work against it.
Those tools are maxed out.
> Yet inflation has rapidly scaled to 6.8% (reported).
The fed made the claim that they would run inflation hotter because they didnt hit target of 2% during covid. The problem? They had to act by now. They've past that threshold of coming to parity.
>Also, I am keeping supply chain demand in mind but I don't think it excuses the fed's decision to not immediately start curbing high inflation rates. My guess is that people with money are profiting and want to continue profiting until it is no longer sustainable.
The metric to look at was GDP. When GDP was 6.7%, inflation was at 5.4% or so. The big problem is that gdp dropped to 2.1% and recession metrics spiked.
If the fed increases rates while gdp is dropping. recession is certain. It's too late for them to undo what they did bailing out the housing market. It would seem counterproductive to spend all this money to prevent housing from crashing just to let it crash anyway.
So we're stuck. Inflation is going sky high. It looks to be about 40% locked in right now over the next few years.
You thought minimum wage wasnt keeping up? This is literally everyone except the rich getting much poorer soon.
- Wages in the US increased 9.8% in October of 2021 over the same month in the previous year. https://tradingeconomics.com/united-states/wage-growth
- The Estimate for Q4 GDP growth is 8.7%. https://www.atlantafed.org/cqer/research/gdpnow
Our entire system would quickly be insolvent at a rate that would have seemed low 20 years ago.
The US can't afford it.
With a national debt of 30 trillion dollars, a 1% increase in the interest rate would cost the US an extra 0.3 trillion dollars per year. In other words, an extra 300 billion dollars per year. Looked at in other terms, that's nearly half of the Defense Budget in money 'down the drain'.
The interest rate will never go up to any usable extent until the either the US Dollar or the US Economy (or both) crashes.
One reason is that they are still purchasing assets in order to goose the economy. It doesn't make any sense to be revving the economy with one hand while tamping it down with the other plus the point of the buying is to artificially depress interest rates. IIRC at the last meeting they announced that they would accelerate the tapering down of asset purchases so that they would be done in March.
They also like to move slowly which is why they don't just halt the asset purchases and start raising rates. They treat the economy with kid gloves so they don't break it (right or wrong, for better or for worse, that's how it goes).
Will increased interest rates unclog ports and reduce transportation costs? Will it reduce gas prices? Will it shift spending from goods to services?
It is necessary to look at the components of the CPI to see where the increases came from instead of looking at just the headlines.
- “underlying supply chain will go back normal” well the way I see it the container owners and everyone downstream have no incentives for doing so. [1]
- China is facing water crisis among many other issues from energy crisis as well. If the main supplier of US faces crisis it will likely affect US as well. [2]
- and many actually don’t understand this, Fed actually has incentives to get inflation. For many years they spent time to get inflation and recently even accepted they will let it run beyond the benchmark 2%. Part of the argument is Fed currently has no leverage or tools left in an economic downturn given the amount of debt in the balance sheet. A mere 5% raise in interest rate would require interest payment equivalent of another US army. So rate hikes of any substantial measure is out of question without bankrupting US. The easiest way is to inflate the 40 trillion debt away like they did post war in the 40s. [3]
[1] https://medium.com/@ryan79z28/im-a-twenty-year-truck-driver-...
[2] https://thehill.com/opinion/energy-environment/584266-americ...
The article I linked does a fairly good job explaining it. Basically if you are a container owner, you can charge 10x the price for containers from Shanghai to Long Island, while the other way it’s almost a loss since it’s returning empty.
The decline in ships waiting just offshore of Los Angeles/Long Beach continues to be touted as a sign that port congestion is easing — despite the fact that the true number of waiting ships has not actually declined.
Not true in general. The port of Long Beach is down 5% year-on-year (the third month in a row that is down compared with 2020) [0].
[0] https://gcaptain.com/amid-record-breaking-year-port-of-long-...
From inception, container shipping has been plagued by oversupply because of the economies of bigger and bigger boats. That was still true 3 years ago. Shipping businesses were going bankrupt left and right. It is a commodity good with a relatively low cost of entry. If the existing companies don't feel like lowering prices, others will step in and happily take their market share.
Time's too valuable to get into a meaningless discussion about this, but they've had the same incentive for decades. Take a look at the inflation rate for the 30 years 1991-2020: https://fred.stlouisfed.org/series/CPIAUCSL#0
1000 GWatts... Now that would make a dent.
China is only 14% of US trade (third place after mexico and Canada) - still a lot but not as big of a player as that sounds
One can hope at least de globalization is a partial outcome of this post covid realignment if ever one.
This doesn't make today's inflation acceptable, it just lets you know how much importance has been put on handling inflation up until now.
The entire 19th century would take issue with that statement.
We've had about as much inflation since 1990, not including current pandemic related shenanigans, as they had in that entire century.
Inflation is different things to different people, just like unemployment numbers are different things to different people and communities. Unemployment may be low, but if you don't have a job, that doesn't matter.
Yes, the top line inflation number can be very misleading for individual experiences.
Anyone taking a deeper dive into the Fed, global markets, QE, China, etc
Btw, this was an interesting read:
https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-...
> Unlike in past recoveries, strong demand for goods such as autos, furniture and appliances has driven much of the inflation surge. Prices for services—such as for travel and recreation—have generally climbed much less with softer demand. The holiday season is likely exacerbating these dynamics, said Aneta Markowska, chief financial economist at Jefferies LLC.
We're seeing crazy price growth without a rise in demand for services. But that'll likely change and fuel inflation further as covid restrictions are lifted.
I still believe it is due to the large money printing by the Fed, a total of around 10 trillion disbursed for various programs. We saw inflation in nearly every asset class in our economy, blowing past pre-covid numbers, and now its coming to consumer prices. I just hope we have the political will to do something about it. Unemployment is very low and the Fed is still dragging their feet about maybe 1 or 2 potential raises next year and a slow unwinding of the trillions in assets its built up over the last year
If the Fed's policy was responsible, then we'd see a divergence between inflation rates in European countries and the US. We don't though. European inflation rates (across the board) closely track what's happening in the US.
What we do see is a similar demand reallocation in both portions of the world. Demand has shifted from services to goods, and that increased demand drives inflation.
https://fredblog.stlouisfed.org/2021/05/savings-are-now-more...
Still a lot of money being printed, but not 10s of Trillions.
This is exactly what is happening. The motivations may be partly^ different, but the result is one of the wealth inequality gap growing.
^I'm not sure how it could be incidental, given the obvious consequences.
> Stripping out food and energy, the prices of which tend to be more volatile, inflation rose 4.9% over the same period — the highest level since June 1991.
This is high by recent standards but not too bad by 20th century standards. And at least this time wage inflation is happening as well.
> Several categories saw significant price increases. Gas prices jumped 58.1% over the year ending in November, the biggest jump since April 1980.
.. ah. Yeah, this is much more significant. Oil is up too: WTI about $40 at the end of last year to $70-80. As lots of places have found out, fossil fuels are cheap until they aren't.
High oil prices are quite capable of causing inflation on their own.
It was at 59.22 on this day in 2019, and now it's at 69.62. That's a significant increase, but it's not the eye-popping 2x jump that the YoY number suggests.
Gas prices, on the other hand, are surprisingly divergent[2].
Am I missing something in the article? Which key measure?
The only other time 1982 is measured in this article is the following:
> Food prices in restaurants jumped 5.8%, the biggest rise since January 1982.
