“The world doesn’t work like that.”
That’s what Zoltan Pozsar told Bloomberg earlier this month about the idea that containing inflation is as simple as central banks hiking rates and shrinking their balance sheets.
His remarks amounted to a recap of missives penned over the past eight months, and although I most assuredly don’t agree with Pozsar all, or even most, of the time, I’m glad he’s adamant about the risk of inflation becoming stochastic going forward.
“In a stochastic world — where the price of everything is thrown around randomly by a pandemic and an unrestricted economic war — inflation is impossible to forecast,” he wrote in early August.
We’re all reluctant to admit that. At the least, we all pretend that in an absolute worst-case scenario, central banks can still control inflation by destroying every last vestige of demand. But that simply isn’t true. There will always be some demand. But there needn’t always be some supply. Sometimes, there may be no supply at all. Just ask the Nord Stream. As such, there’s no guarantee that central banks, no matter how hawkish, can vanquish inflation.
We may well be on the cusp of discovering just how true that is. The European Central Bank and the Bank of England are destined to exacerbate economic slowdowns in their respective jurisdictions, and my guess is, any material relief on the inflation front in the UK and the eurozone will come as a result not of incremental demand destruction engineered by monetary policy tinkering, but rather as a result of demand destruction that would’ve happened anyway and sweeping initiatives aimed at capping energy prices.
Bloomberg’s Vincent Cignarella (who’s been fighting an uphill battle against his MLIV terminal blogger colleagues, virtually all of whom are wedded to some version of the orthodox narrative that says rate hikes are the medicine), underscored the above late last week. “The Fed has had loose monetary policy since the financial crisis and there was no inflation,” he said, flatly. “The policy mistakes in hiking from 2016 through 2018 did nothing to alter the course of CPI [and] the current hiking cycle, which was at least a year after CPI popped, will do little on inflation, but it will choke off growth and will have to be reversed.” (Emphasis mine.)
Cignarella puts the blame for inflation on fiscal policy, whereas I’m more inclined to cite what, try as I might, I can’t avoid describing as the self-evident notion that when, as Pozsar put it, “the price of everything is thrown around randomly,” inflation is just a kite without a string — condemned to whipping around wildly, and notwithstanding episodic downward spirals, always at risk of being carried away into the wild blue yonder.
Consumers, at least, realize this, even if economists and central bankers don’t. Inflation uncertainty was the highest since 1982 in the preliminary version of the September University of Michigan sentiment survey (figure below).
In that context it’s becoming more and more difficult for me to countenance boilerplate financial media copy, even as I readily acknowledge that i) virtually no one writing it cares about veracity (they’re just doing a job to get a paycheck) and ii) the mainstream narrative is itself just a recitation of economists’ talking points.
Do note: This isn’t a belabored (i.e., feigned) lament for “the mainstream.” Or at least not where “the mainstream” is a derogatory nod to some purported conspiracy between the media and sundry fringe portal antagonists, from the nebulous “establishment” to the nefarious “deep state.” There’s no conspiracy afoot. Nobody is trying to mislead anyone. We should be so lucky. If economists (and the financial media outlets who dutifully parrot them) were engaged in a deliberate effort to cover up the fact that, contrary to what we’ve been telling undergrads, MBAs and doctoral students for four decades, inflation isn’t actually something anyone can control, at least that’d suggest the cabal of Davos villains who haunt the dreams of anyone silly enough to frequent popular libertarian doomsday blogs, is internally aware of the problem.
Instead, what we have is a hapless collection of PhDs spanning the political continuum, a community of market participants in whose minds the onset of “The Great Moderation” was contemporaneous with The Book of Genesis, a mail-it-in mentality at mainstream financial media portals and, irony of ironies, a cottage industry of doomsday financial bloggers who, in their zeal to lionize “sound money” by advocating for draconian monetary policy and fiscal austerity, remain blissfully ignorant of the real doomsday narrative which says inflation is a mostly independent phenomenon that, depending on the circumstances, can’t be checked by any Jays, Janets or even any “Tall Pauls.”
“The US Federal Reserve and a number of its global counterparts will launch a rapid-fire attack on inflation in the coming week as their commitment to bringing consumer prices under control gets ever more resolute,” Bloomberg wrote, in the opening line of their week ahead global econ preview.
Sorry, but “the world doesn’t work like that.”
Read more: The Charge Fed Critics Miss Is The Most Terrifying Of All
That’s right monetary policy is maybe 25% of the equation or maybe lower right now.
I’m sorry, I don’t follow this argument. So unbridled fiscal policy in response to the pandemic (and collapsing demand) was intended to stoke demand and put a floor under asset prices — and, by all accounts, succeeded, better than anyone could’ve hoped. As an example, the shift to remote work juiced the demand for second homes and homes in secondary markets and juiced the demand for new cars and, by extension, used cars. The demand for new cars was responsible, in part, for increased demand for the kinds of chips that go into new cars, raising the prices for those chips and new cars. Now, if you put the process in reverse, using monetary policy to make home and car loans more expensive and reduce support for elevated asset prices, we’re saying that demand for homes and cars (and the chips that go into them) may not fall? Or only that prices for those things (homes, new cars, chips) may not fall, or even could go higher, regardless of whether demand dries up. Possible, I suppose, but this isn’t what we see happening, as the demand for overpriced homes in formerly too-hot-to touch markets begins to fall, and the demand for cars and chops begins to soften. What am I missing?
You’re missing the entire argument and thereby the entire point. You can hike rates to 1,000% and raise taxes to 95% and it won’t reduce inflation for necessary goods and services where supply is effectively nonexistent. In the event the European winter turns into a new Ice Age and Russia cuts off all gas flows, how many ECB hikes will it take to control natural gas prices? Spoiler alert: No amount of rate hikes will help. If fortune were to frown on Europe and this turned into a record-cold winter, ECB policy is totally irrelevant when it comes to energy prices. Brussels can try to cap prices using strong arm tactics and market intervention, and maybe that’ll work, but the ECB has nothing to do with it. The same goes for food. If there isn’t enough food, or we lack the logistical capacity to get the food we have where it needs to go, food inflation will be sky-high, irrespective of what some panel of technocrats decides about the price of money.
Go back and read all the Zoltan posts. And the linked post at the bottom of this article. And so on, and so forth.
Relatedly, to use your chip example, how many Fed hikes would it take to bring down the price of chips and electronics, etc., if the PLA set up a blockade around Taiwan and declared the entire region their sole purview and said “Nothing is coming in or going out of here from now on unless we say it’s ok”? How much would the Fed need to hike to tamp down prices for the impacted goods? Or is it more accurate to say that in such a scenario, the Fed is totally irrelevant for the price of those goods?
As you have said over and over again in this blog, inflation can be stoked by putting money into the hands of the people with the greatest propensity to spend (increases demand) and can be moderated by removing money from the people with the greatest propensity to spend (decrease demand). Monetary policy just seems like the least capable tool for accomplishing that. On the other hand, fiscal policy is much more capable of doing that. So Congress, that group of people who can’t come to consensus on anything, should be leading the fight but instead they pass the buck and make it a mandate for the Fed.
I stand by this-Our economic problems are political, and our political problems are psychiatric. America has shitty government- corrupt and incompetent. This makes room for intellectually deficient , evil and ridiculously corrupt politicians. We should be focusing on our future- not embracing a fight about whether our problems actually exist. Don’t forget- if you’re not in the top 20% you don’t own squat…..
‘ “The Fed has had loose monetary policy since the financial crisis and there was no inflation …”’
This is absolutely the best single statement about inflation you have posted here. Everyone wants to make this about money because there seem to be tools for that. The budget hawks want our current situation to be about over spending during the Financial Crisis and the Covid crisis. Not it. The Fed hawks want this to be about easy money but through the decade of the easiest money ever, the Fed couldn’t get inflation to their 2% goal. This is mostly about what WCS says above and the fact that the US has no coherent industrial policy except companies should make as much money as possible, buy back huge amounts of their stock and reward their C-suite managers with huge stock profits. The latest numbers show there are only 3200, or so, billionaires world wide — not very many. Yet someone just priced a condo in Manhattan at a quarter of a billion. Come on, man! Every rock star, big time athlete, and crooked politician seems to have a house they want to sell for $20 mil. When 800 sq’, 50 year-old houses sell for $1 mil or more, something is wrong. Inflation is currently mostly about what Malthus predicted. although a bit later than he thought, resource scarcity and population growth. We slim-lined our supply chains to JIT minimums and when disrupted by Covid and war, they no longer worked. This problem will not be fixed by three more months of rate hikes. People still need water, food, energy, shelter and medical care. The Fed cannot fix any of those, especially if they throw millions of people out of work.
+1