The Dawn Of The Great Immoderation

19 thoughts on “The Dawn Of The Great Immoderation”

1. Excellent ! So good an analysis is only to be found here.

2. I am greatly appreciating this attempt to juggle the moving parts of the puzzle that will be debated for generations to come. I am certain a lot of Readers here at H……Report do exactly the same and mostly from the Right Side of the Bell shaped curve for IQ .
   The issue in topics as highly subjective as this one is the values one places on the competing moving parts are what drives the End Assessment . There is no help for anyone on that issue except Life experiences and Intuition as well as the omnipresent role of History . It is interesting to learn from Others and watch their struggle with this issue irregardless of whether or not one agrees with the thought process or not….. My personal attempts tend toward Simplification as opposed to Over Complication . Both are Risky !!

3. This sort of article is exactly why I subscribe. Thank you for emphasizing macro themes that challenge the prevailing narrative.

   There are also some micro developments which may raise inflation expectations in the near term. This burgeoning diesel shortage in the US could be a big deal, not just for commerce (which is rather dependent on the stuff) but also for heating costs in the northeast. Also, apparently the railroad contract agreement (that narrowly avoided a strike a month back) is at risk of falling apart (apparently 3 of the 12 unions voted against so far, with two big votes coming up). One wonders, with the polls increasingly showing GOP likely to control Congress, are union leaders more likely to push for a strike now while they still have a sympathetic ear in Washington ? Would love to hear others’ thoughts on this.

4. Central banks have been buying gold like crazy, once the fed hits the ceiling on rate hikes, inflation is still sky high, the economy is contracting…..
   Maybe my beleaguered gold stocks will once again shine!
   https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q3-2022/central-banks

5. I used to think that what was beginning to happen, in the modern era, 100 plus years ago could never be repeated; that a better educated and informed populace would eventually prevent maniacal tyrants from gaining the absolute power they desired. That somehow logic, diplomacy, and the abhorrence of extinction would slowly, but surely, lead to some type of relatively peaceful global coexistence.
   Boy, was I mistaken.

   1. These days it feels like even hope is “on the ropes.”

   2. I have had that exact same thought. We’re seeing things I always thought went out with the early decades of the 20th century.

6. Well done

7. I agree with your central thesis, that global economic forces have been more impactful on inflation than individual or collective central bankers. It’s interesting to pause here momentarily and reflect on why the Common Man (I expect the Common Woman isn’t so deceived) thinks otherwise.

   Reflecting deeply for 30 seconds, I think it may reflect the Great Man (it’s always Men, right?) of History fallacy. It’s simpler, lazier, and reflective of human biases to anthropomorphize history rather than to take the time and effort to understand the historical forces that puppeteered these Great Men. Likewise with inflation and central bankers.

   Parenthetically: the transition from fossil fuels is likely to be highly inflationary, assuming that Western voters are willing to pay the price and forgo the occasional steak and latte for the sake of future generations. This presumption is at the very least questionable given that the US electorate values steak and lattes more than Democracy. The 2022 MAGA slogan: “thou shalt not crucify Mankind upon a cross of solar panels”?

   Double parenthetically: ending beef consumption would be multiple orders more efficient than transitioning to fossil fuels, but the farming lobby and beef lovers would never permit it; it would also violate the right to eat beef, which is enshrined in the 28th Amendment to the Constitution.

   Returning to the Great Man of Economic History fallacy: if you are willing to concede that, as with political leaders, we get the central bankers that we deserve, we may well end up with raging inflation AND lower rates. Sacking Powell will be the first Presidential act of our next leader, regardless of political affiliation, because voters will demand it. After all, blessed with the patience and petulance of a toddler, they won’t want to sacrifice their steak and lattes for the sake of economic heterodoxy or some uncertain future benefit.

   1. Biden’s biggest blunder to date was not sacking Powell thereby losing the golden political opportunity to tie Powell both to inflation and Trump…and the dems may suffer enormously because of it…and of course the deer in headlights response to MBS reducing oil supplies last month hasn’t helped the cause or case…just saying…

      1. Correct on both counts. I had not considered that. Sacking Powell could have been helpful for sure, if only from the perspective of at least trying to deliver some form of messaging. Deer in the headlights clearly describes Biden’s fumble with MBS, whose actions lately seem to be openly hostile to the US. MBS and the Saudis will get a response, I expect. But it may surprise them when and how it comes.

         I’m concerned Biden is over his head. He (and the staff who assist him) are terribly lame in messaging about most everything. In addition to opening himself up to a figurative slap from MBS, Biden’s staff has been remiss in using its messaging capacity in support of Biden’s goals and accomplishments. When useful and appropriate, they should also use the presidential platform to meaningfully and directly respond to the right by directly endorsing and promoting candidates to positively impact policy.

8. I’m going to respectfully disagree and say that until it’s proven that CBs can’t control inflation with rate hikes, the jury is out. That said, for the reasons you’ve outlined, it may take 2-3 years for the Fed and other CBs to get this inflationary episode under control.

   1. If Europe has insufficient gas to meet people’s power generation needs, and they reach the absolute lower limit in terms of rationing (i.e., the lower bound beyond which people will risk literally freezing if they ration more or the point beyond which German industry literally can’t function), and no additional supply comes online, how many ECB rate hikes will it take to bring down gas prices? There’s no reducing demand beyond that level, because that’s the level beyond which people and industries die. So that level of demand will always be there. If supply can’t meet it, and the shortfall persists, so will inflation, irrespective of what monetary policy does. Germans need gas to keep warm and the German economy needs gas to keep functioning. The ECB can hike rates to 10,000% and it won’t “fix” that basic reality. There’s only so low demand can go for certain goods and services. Once rate hikes “succeed” in taking demand down to that level, that’s the end. Absent additional supply, inflation will spiral to infinity. Or people and businesses will die. Or both.

9. Did demographics change? Seems most of developed world keeps getting older and having fewer babies … we were told that ala Japan, demographics bigly drive inflation, growth. Nothing in the demographics have changed materially that I’ve read. So the other forces are stronger and demographics aren’t that important, or … maybe it was a straw person narrative that wilted after it no longer work. Seems that in all the inflation talk aging humanity has fallen away.

   1. Seems to me what’s changed is the mobility/globalization of human capital, which contributed to the disinflationary forces. Separately, earlier this year i read a view which stated that demographics is actually an inflationary factor now, through reduction of labor supply (while the retirees continue to consume)…

10. Good idea to have a watchlist of asset classes, sectors, industries, etc that you think will work in an environment of sustained high inflation. If investors increasingly doubt CB’s ability to control inflation, those names will start to outperform. And conversely, if those names start to outperform, that will be a clue that investors are increasingly doubting.

11. Let’s also not discount the role a changing climate will play. When there’s less water in the Mississippi River, transportation costs increase. When hurricanes level whole regions, construction costs and insurance premiums rise. When climate change impacts species survival, as appears to have happened to the snow crab, prices may rise to infinity because the species we consume for sustenance no longer exists and can’t be bought at any price.

12. Outstanding effort, H…you want influence from a small group how bout 19 men on 9/11/2001 (15 Saudi nationals) who forever influenced history armed only with the element of surprise and a willingness to die for their cause. 20+ years later, two endless and unwinnable wars, trillions dollars, more human good will wasted, and here we are…

    …as for the inflation issue given the current environment Central Bankers actually stating and believing a return to a stable 2% level is preposterous to me as I see food, energy, and commodity prices staying higher for longer…GLTA…

13. Great point, Heisenberg. Pax Americana rings true. I wasn’t thinking along that line. But it’s a realistic description of the current state of the world.

    You’re also correct about the “what if” scenarios going forward. The invasion of Ukraine is the most obvious and immediate area of challenge to the Pax Americana. Beyond Europe, Eastern Europe and certain far-east destinations reveal broader ongoing risks.

    Globalization lingers but has certainly been tempered by recent changes in the balance of world economic and military power. A couple of facts worth noting:

    China has the world’s largest navy (355 naval vessels and counting).
    Australia is adopting American nuclear submarine designs for its navy,
    which will greatly enhance its strategic value as a check on China.
    The island nation of Japan has quietly over the years built one of the
    strongest navies in the world.

    The preparations by the navies of Japan, Australia, and the US in the Pacific match numbers and strength to meet any challenge the Chinese might present. It’s a costly exercise that requires only simple math. But the world never remains the same. I cannot help wondering to what extent foresight about the end of globalization, and the inevitability of political power rebalancing in the world may have played in the calculations.