As the FT has noted this morning:
A top Federal Reserve official has warned it is a “fantasy” to think the US central bank can bring inflation down sufficiently without raising interest rates to a level where they constrain the economy.
James Bullard, president of the St Louis branch of the Fed, said the central bank needed to be more aggressive in its efforts to root out the highest inflation in four decades as he called for rates to rise to a point where they actively curtail growth.
When people ask why makes me angry each morning in a way that motivates my work, comments like this provide an explanation.
Unlike many in the US , Bullard will be living in comfort, with healthcare and a pension. And he wants to crush the lifeblood out of an economy where insecurity is commonplace to supposedly beat inflation whose cause is utterly unrelated to the quantum of money supply or excess consumer demand.
Opposing callousness of this sort is what motivates me.
People with limited knowledge of macro and an absolute right not to be persecuted by those who claim they have such knowledge, but who actually don't, need protection from abuse. That's good enough reason to be angry for me.
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He is correct, a massive hike in rates will reduce inflation…. but only along the lines that “the operation was a success but the patient died”.
We need to take care looking at these data. The “headline” number was YoY inflation of 8.5% (up from 6.5% last month)… but the MoM data are what really matters here. It shows a 1.2% rise (yes, this is big) but “CPI ex food/energy” rose just 0.3% (the smallest increase since September).
This lower “ex food/energy” is no solace for folk struggling to pay bills but we are seeing nondiscretionary spending (like food/energy) take a larger share of household spending leaving less for everything else. So, the “inflationary spiral” that is oft spoken of is just not happening in the US.
My bet is that a year from now inflation in the western economies will be back at target levels….. without undue rate hikes.
I agree
But that will not solve the poverty crisis – because absolute prices will still be out of reach – resulting in recession
Correct.
Bullard knows that interest rates changes are inappropriate but they’re going to use them anyway.
The Fed don’t know what else to do and they want to make it look like they’re doing something.
And as the great punk poet John Lydon said:
‘Anger is an energy’
‘Awight my son?
Well said and done, Richard! It makes me equally angry and motivated to read your contributions and share them with friends and many others.
I am reminded of the quote (of unknown origin) from the Vietnam War “We Had to Destroy the Village in order to Save It”.
As Mr Bullard must be of an age to have served there as a young officer, I’m wondering if it was he who originated it?
According to Bloomberg, the short answer is that quote is a version of words in a piece written by Peter Arnett for the Associated Press, quoting an unnamed US major about the battle of Ben Tre in February 1968.
But the long version is more complicated than that, and they track back a similar phrase to the ruling of Justice Edward White in a 1908 US Supreme Court case, rejecting an approach that he said would be “to destroy in order to save, and to save in order to destroy” (that meant the court would not save a 1906 federal law on the liability of employers of railroad workers which was ruled unconstitutional, but a different version of FELA was enacted later in 1908 and survived).
See https://www.bloomberg.com/opinion/articles/2018-02-09/destroying-a-quote-s-history-in-order-to-save-it
I don’t understand why you think you know so much about economics..where is your track record? where is your credibility?
My peers have elected me a Fellow of the Academy of Social Science for my work on political economy
What’s your claim?
Phil Foden says –
“I don’t understand why…”
I bet you start a lot of sentences like that, Phil.
As you rightly point out, too often it is the rich doing this and it needs to be pointed out time and time again who the culprits are.
They are likely to be the beneficiaries of interests rates because they maintain the value of their wealth by investing it with returns linked to those rates they are advocating.
I know next to nothing about macroeconomics. I trust your judgment about interest rates.
That said, you criticise Bullard and the like for policies that will ‘actively curtail growth’.
I argue, below that GROWTH MUST BE CURTAILED.
Also, the Paris Agreement was achieved ‘ON THE BASIS OF EQUITY’.
As well as protecting the human biosphere as much as is still possible, policies are needed that intend to restore equity within nations, between nations and between generations – Ask the Greta Thunberg generation.
1 Prof Jim Skea – a co-chair of the group behind the IPCC’s latest review of climate science report said “IT’S NOW OR NEVER IF WE WANT TO LIMIT GLOBAL WARMING TO 1.5C. WITHOUT IMMEDIATE AND DEEP EMISSIONS REDUCTIONS ACROSS ALL SECTORS, IT WILL BE IMPOSSIBLE.” ‘Emissions must peak by 2025’.
https://www.theguardian.com/environment/2022/apr/04/ipcc-report-now-or-never-if-world-stave-off-climate-disaster?utm_campaign=Daily%20Briefing&utm_content=20220405&utm_medium=email&utm_source=Revue%20newsletter
2 The same Guardian article shows a graph of continuing increase in the concentration of carbon dioxide in the world’s atmosphere.
3 “Achievements in DECOUPLING in advanced economies are smaller than reported or even NONEXISTENT.” … “With every 10% increase in gross domestic product, the average national MF [Materials Footprint] increases by 6%.” ‘The material footprint of nations.’ https://www.pnas.org/content/112/20/6271 (19 May 2015)
4 It’s not decarbonisation that’s unaffordable; it’s climate breakdown. If climate systems tip, our money will be as worthless as Boris Johnson’s promises. It’s not decarbonisation that’s unaffordable. It’s climate breakdown. [George Monbiot, Guardian 23rd March 2022 https://www.monbiot.com/2022/03/24/payday/%5D
5 The truth is that we can’t afford not to transform our economies: ‘Why estimates of the ‘cost’ of climate action are overly pessimistic’ (https://www.carbonbrief.org/guest-post-why-estimates-cost-climate-action-are-overly-pessimistic-mitigation-expensive)
6 ‘Last week in Los Angeles, NASA scientist Peter Kalmus implored people to listen to the dire warnings of climate change experts. “We’re going to lose everything,” Kalmus said in a video of the moment. “And we’re not joking, we’re not lying, we’re not exaggerating.” ‘ https://www.independent.co.uk/climate-change/news/nasa-scientist-protest-extinction-rebellion-b2057563.html “On Wednesday, I was arrested for locking myself onto an entrance to the JP Morgan Chase building in downtown LA. I can’t stand by – and nor should you.” (6 Apr 2022). If everyone could see what I see coming, society would switch into climate emergency mode and end fossil fuels in just a few years.
7 In his book ‘Degrowth’, Giorgos Kallis argues that economic growth is no longer desirable – its costs exceed its benefits – and advocates a transformation of economies so that they produce and consume less, differently and better.
In an article ‘In defence of degrowth’, Kallis writes “If degrowth is inevitable, the question is how it can become socially sustainable, i.e. a prosperous and stable, rather than a catastrophic, descent.” https://www.sciencedirect.com/science/article/abs/pii/S0921800910005021
I agree we need to cut consumption
But if we do not protect incomes you will not succeed in that
The two have to go hand in hand
Estonian nails – https://consciousnessofsheep.co.uk/2022/04/13/for-want-of-a-nail/
There are a large the number of politicians on the left, some quite influential, who think they understand macroeconomics and who would agree, without much thought, that, of course, interest rates must be raised to control inflation. They might think that measures should be taken to protect those most affected and criticise the government for not taking such measures, but they would not argue with the idea itself.
If only these people could be educated about macroeconomics, even if only to the extent that they realised they did not really understand it, then perhaps they might be able bring themselves to challenge what central bankers say.
” inflation that is utterly unrelated to the quantum of money supply or excess consumer demand” I thought inflation WAS related to excess money supply. If it was matched by “excess consumer demand” that could actually be met by sufficient goods then I guess we wouldn’t have inflation…but..but you are saying inflation is not caused by either together or separately? (I agree that jacking up interest rates will hurt the most vulnerable, and that’s not a good thing)
Then you are wrong then
There are two main types of inflation – cost push and demand pull. Cost push has nothing to do with an “excess of money supply”.
In Britain the last two rounds of inflation have been cost push. The first was due to a Brexit-related fall in the value of the pound (that made imports more expensive). The 2nd was due to a massive (Covid related) disruption to supply chains worldwide.
Beyond those widely known facts we also know that spikes in demand pull inflation coincide with with significant wage rises, which is something that we haven’t seen.
https://www.investopedia.com/articles/05/012005.asp
But in this case I am not sure it is either
This is speculative inflation
Hmmm. yeah, true, in a way. Oil futures speculation has driven up oil prices and, by extension, the price of everything else BUT the speculation is a type of cost–push. It is most definitely not a demand–pull factor.
That leaves us with a chicken-or-egg question about what it was that drove the current rush into oil futures speculation.
The last big oil futures booms came (just before the crashes) in 2001 and 2008 which would lead some to think of those booms as an indicator (and partial cause) of the following recessions. More pertinent is the fact that oil futures speculation back then accompanied a flight of capital away from dot com and mortgage backed securities, respectively.
So what drives the speculation now? I think we can safely say that it was triggered by supply chain related shortages (hence my reply to liz) but it has now taken on a horrific algorithm-driven life of its own:
“The initial trigger for this can be blamed on economic fundamentals — the type of shortage of supply, relative to surging demand, that prompted Biden’s call to (Mohammed bin) Salman.
However, Verleger believes the imbalance has been dramatically increased by another less-discussed issue: A steep rise in automated trading by investors using algorithmic strategies, often based around artificial intelligence tools.”
https://www.channelnewsasia.com/commentary/inflation-higher-prices-oil-shocks-speculative-trading-2492651
For those who are interested, this a longer quote from that FT-sourced article:
“The initial trigger for this can be blamed on economic fundamentals — the type of shortage of supply, relative to surging demand, that prompted Biden’s call to Salman.
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However, Verleger believes the imbalance has been dramatically increased by another less-discussed issue: A steep rise in automated trading by investors using algorithmic strategies, often based around artificial intelligence tools.
This is almost certainly correct. The last time the CFTC studied this issue, in 2019, it found that some 80 per cent of energy trades were being executed by automated inputs — not manual transactions — up from 65 per cent six years earlier (and far less in previous decades). I would bet it is much higher now.
Since these automated strategies typically use artificial intelligence programs to analyse and react to market momentum, rather than economic fundamentals per se, this tends to exacerbate a herding effect, not just in commodity markets but in any asset class.
And since the institutions selling these derivatives bets need to hedge their own risks with other instruments, extreme robo-herding creates distortions across market niches that can suddenly unravel, causing wild volatility.”
https://www.channelnewsasia.com/commentary/inflation-higher-prices-oil-shocks-speculative-trading-2492651
This layman’s language piece from the quaintly named “how stuff works” site is also worth a look:
https://money.howstuffworks.com/oil-speculation-raise-gas-price.htm
btw. Happy Easter, everyone.