The Charge Fed Critics Miss Is The Most Terrifying Of All
The Fed and its many critics have at least one thing in common: They both believe monetary policy can be an effective check on inflation.
Critics rarely charge that central banks are incapable of reining in runaway price growth in developed economies. Rather, the derision over the last 18 months centered on the contention that policymakers were, at best, hopelessly behind the curve and, at worst, deliberately behind the curve by virtue of various "shadow mandates." Either way, policy was dereli
In our time, one man’s serendipitous biography is always counter balanced by another’s biography written by Steven King.
We are not actually in a post COVID world yet, particularly as regards China, the supplier of so many of the goods that we were used to receiving in an efficient manner.
If high interest rates crush, truly crush, demand for everything outside of the most inelastic of items would that not free up cheap capital and labor for the expansion of supply for those ‘most inelastic’ items?
Hence the idiocy of monetarist theory. No one policy lever works all the time for all cases – fiscal, monetary and anything else. The ECB cannot make more natural gas available no matter what their policy, in just the latest instance.
If the worst should come to pass vis-a-vis inflation in the U.S. but especially the UK and Europe, than we should consider it a wartime situation and mount nothing less than a full-on wartime response. That would mean temporary nationalization of certain industries, rationing, tighter regulation of certain derivatives., etc. Just sayin’.
I’m currently living in a country where the economy is mostly cash based. Changes in interest rates do not affect the vast majority of the population. Seems that Central Banks should be even less capable of doing anything, including demand destruction, when that is the case.
Great article, great responses: This is why staring in stead of just looking at what economics say is not recommended. At least Paul Krugman calls himself a political economist and does not pretend he is a physicist practicing hard science. Technical analysis may well be voodoo, but a lot of economic writing and fundamental research is worthless. Sometimes the only way to discover the truth is to be wrong and take a beating….
Cue up Two Princes (spin doctors) for our species descent into the abyss. 🙂
Hi – I’d love to hear the author’s take on Jeremy Siegel’s recent inflation comments. I can’t recall if they’ve featured in any recent articles.
I mentioned some of his remarks in one of last week’s week-ahead previews: https://heisenbergreport.com/2022/08/28/poring-pouring-and-poor-ing/
“Theoretically, central banks can solve such problems by engineering a drop in demand commensurate with constrained supply, thereby balancing the equation. In practice, that’s a questionable proposition in the presence of persistent and severe supply disruptions.” Absolutely correct … they think!
In econ 101, I was immediately initiated into the mysteries of supply and demand and how they must balance or bad things will happen (the horror of disequilibrium, nearly as bad as crepey skin). I have taken four macro econ courses all the way up to the doctoral level and for the life of me I still can’t figure out how these guys can differentiate between a change in either supply or demand on one of the curves and levels that change by a movement of the curve. Always seemed like voodoo to me.
The trouble with these guys is that they don’t generally don’t understand how business actually works. Micro economists can tell you about the change in marginal revenue or the change in marginal costs but never once in my memory of micro econ did I hear an economist talk about profits, or the differences in effects that result from changing the types of costs in a firm (fixed or variable), or about the effects of operating leverage. All of these factors are important drivers of the supply of goods and services. It’s not enough to kill demand to seemingly make it balance with supply to “clear the market” and with luck, stabilize prices. What is going to happen as the Fed does its mighty squeeze is that millions of people will lose their homes, lose food security, and lose medical care. And companies will lose profits. They just hate that so at some point, companies will be forced to make strategic adjustments which will negate some or all of what the Fed is doing. What I see as initial adjustments is for firms with inelastic demand to raise prices as high as the market will allow. Other firms are changing their product mix to eliminate unprofitable variety and reinforcing supply chains where needed to protect what remains on the shelves. What the Fed can’t see in their models is what all will happen as firms do this.
Very insightful observation that seems to have been missed by Wall Street strategists. Maybe instead of lionizing Volcker they should be reviewing the history of the failed attempts to bring inflation under control from 1978-1980. Monetary largesse accompanied by fiscal austerity didn’t solve the structural problems of Europe, but doubling down on Q/E was always the outcome. Now we have monetary tightness accompanied by fiscal expansion to fight supply-side inflation. Why does the Wall Street punditry blindly assume its success?