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‘If Not By Accident, By Design’: Why One Bank Sees US Recession
The Fed is on the brink of a policy error. You've probably heard that at least a half-dozen times in the past week.
Everyone's shouting about it, including former Fed officials, former Treasury Secretaries and, notwithstanding a few sessions of re-steepening, the yield curve.
The irony -- well, there are too many ironies to count right now, but one of the ironies -- is that the Fed's forthcoming policy mistake is a product of a policy mistake they already committed. Hindsight is 20/20, but QE
Hmmm…… no optimist here but it is premature to suggest the outcome will be ugly. Would three quarters of -1%-+1% real gdp growth count as a major setback? Roughly flat with slightly higher unemployment and a receding inflation is possible. It will still cause some suffering but probably less than high inflation. Right now, I am more concerned about folks being tortured and killed in Ukraine, democracies under fire worldwide and folks being shot on the NYC subway.
The Fed’s reluctance to act preemptively “has set in motion a wage-price spiral that will be very difficult to reverse without hiking the economy into recession,” Marey sighed.
H – do you agree with that assessment? In a world where inflation adjusted wage growth is negative, “wage price spiral” doesn’t seem like the correct descriptor or a mechanism for further inflation down the line…
I do agree with it, actually. What do you do if you’re labor and your inflation-adjusted wages are negative? You ask for more money. Capital is then forced to choose between losing labor and hiking wages/comp. Of course, when businesses hike wages/raise comp, they need to pass that cost along to consumers in the form of higher prices for goods and services. But workers are consumers when they’re not working. So, when a McDonald’s worker gets a 10% raise in the morning, she might find the cost of a Starbucks coffee is up 15% later that afternoon because, unbeknownst to her, Starbucks had to raise wages for its baristas last week just as coffee prices rose. Seeing that Starbucks is more expensive, the McDonald’s worker is then forced to ponder the possibility that the 10% raise she just received is insufficient. If she stops at the gas pump after leaving Starbucks, that assessment will seem even more true. So, the next day, she asks McDonald’s for another raise, which McDonald’s can either grant, or not. If they do grant it, the Starbucks barista might discover that McDonald’s fries are suddenly 15% more expensive. She then needs to ask Starbucks for another raise. And so on, and so forth. That’s the spiral.
Back in time, people had unions to negotiate for them. Things like COLAs which did provide a vector for wage inflation. Now?