The historic mistake is all the can-kicking that got us here. "The market can remain irrational longer than you can remain solvent", as the saying goes, but it sure does seem like the road the can has been kicked down is ending pretty darned soon.

They can kick the can for another 20-30 years at least before they're forced to change tactics.

In the Japan scenario that the US is following, the US is just now getting to where Japan was in the mid 1990s. And that's Japan without the global reserve currency and the numerous financing benefits that go with it.

The US has an enormous asset base to debase against, to eat, before it arrives at truly severe problems. It has plenty of spare taxing capacity across every income bracket.

And as the feds crush the income brackets with higher taxes over time, socialized healthcare will continue to creep up the income bracket, taking up more and more of the market (out of necessity due to cost; middle and low income brackets will lose more of their disposable income to taxation, healthcare will become that much more of a burden).

Interest rates will remain exceptionally low for decades to come. The average rate the US Govt pays on its debt will continue to sink lower over time, as the mountain of debt soars higher. That can continue until at least the range of $60-$90 trillion in public debt (1% - 1.5% on $60t-$90t is where they'll push it to over time). 1% on $60t is affordable right now. The skeptics will proclaim such low rates on such a giant pile of debt is impossible - it's not; they would have claimed (circa the mid 1990s) that what has already happened would be impossible too. Courtesy of Japan, we already know what can and will happen, and so does the Fed (even though they constantly lie about it).

The massive debt accumulation (in government and corporate) will take care of a lot of the inflationary pressure that would otherwise be present, courtesy of mediocre growth (the debt accumulation and maintenance robbing the economy of capital it needs to grow faster; the debt acting as a heat sink, which is exactly what it has done to Japan).

This inflation spike is transitory (the people saying that were too early on the duration aspect though and so they got mocked for it), the labor market is about to crack, growth is at recessionary levels, crypto has crashed, bubbly stocks have crashed. The housing market is going to get hit (although it won't be like the great recession) as the labor market gets rattled, people will shift that much more conservative, and blue chip stocks will get hit harder (blue chips like eg KO, which have largely avoided the damage in the market so far). With mediocre growth and a broken labor market, the inflation wave won't be sustainable over a longer time frame. It's better to think of the present inflation wave as a large one-off reset to higher prices (fallout from the various effects and choices during the pandemic), rather than a persistent ongoing event. That type of inflation burst event might happen from time to time over the coming decades as a consequence to various programs the US Govt and Fed run to try to spur the economy and manage high debt levels. For example, as the economy continues to weaken, the Biden Admin will start talking about trying to do another stimulus shot and or infrastructure.

Corporations have rapidly sapped their pricing power to counter inflation. Consumers can only take so much of that, and I believe we're clearly seeing weakening by the consumer in their willingness to keep absorbing huge price hikes on consumer goods. The corps will begin slashing the human cost soon (both delaying hiring and firing) and pushing automation more (eg if your local Walgreens or CVS doesn't have a self-checkout, it soon will; if your local McDonald's doesn't have digital kiosks, it soon will; they'll push labor cost onto the customer wherever they can).

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edit:

Someone (greyed out account) replied with this, and I thought it was worth touching on:

> there's no way you can convince me healthcare costs will go up if we kick the capitalists out of the industry

Well that's not what's going to happen and it certainly won't be a smooth event (the US wakes up one day with a shiny new socialized healthcare system where costs are tightly controlled with top-down pressure). Rather, socialized healthcare will gradually climb up the income ladder out of necessity, because more and more people will be unable to afford the cost of healthcare. The US healthcare market, simply put, will continue to bifurcate (public vs private). Private health coverage will continue to get more expensive, pushing more people onto government coverage / subsidy. The government side will see a lot more top-down pressure on cost/pricing (the government has a very strong incentive to control costs, given the fiscal condition of the US Government, and they'll act accordingly over time). Only the top 1/3 (give or take) income group will continue to be able to afford private healthcare coverage. Private coverage isn't going away and the healthcare market overall isn't going to be nationalized (ie the Capitalists are not getting kicked out wholly, their sandbox will get smaller and what they can charge will get more restricted).

The US will see a process of gradual, ongoing expansion of socialized healthcare. It will not happen in a big one-off event, as has been dreamed of for decades by the Democrats (they've been making a horrific mistake for decades by pursuing that approach, which was obviously going to fail; a lot more progress could have been made by now via an aggressive piecemeal persistence). The one-off system change premise is a particularly naive fantasy and can be safely disregarded as a potential outcome.

The median American will see a decline in their real disposable income. It'll squeeze them in a lot of different ways as that occurs, including on healthcare, education, housing, rent, automobiles, etc.

The income classes will fail to keep up - as they largely have over the past two decades - with the damage to the USD from the national debt and the actions the Fed has to take to deal with that (the Fed playing the role of both enabler and fixer, when it comes to public & corporate debt levels). The asset classes will be fine, they'll largely keep pace (or better) with the loss of value in the USD, although their taxes are going to go up by quite a bit over time (and there will be many attempts at pursuing wealth tax plans). As the income classes lose ground over time, the government will step in and take over more of the financial context of the healthcare and education markets in particular.

The federal government alone already spends 920 billion on health care for people under 65 [1] plus 667 billion for people over 65. [2] That's 1.5 trillion for the federal government alone: the states all contribute to their Medicaid programs, and a lot of hospitals and hospital systems throughout the US are actually government-owned, usually at the county/city level. The problem with US health care costs is definitely not "the USG doesn't have a big enough stake." It's one of, if not the single biggest US government expenditure already.

I support single-payer, but it's not going to solve the US health care cost problem - and "solutions" to it are likely not going to be pleasant. Likely, in the practical world, whatever cost control ultimately ends up being imposed on whatever system we have 20 years from now is going to make health care worse. Indeed, what makes US health care so bad right now is in part ineffective cost control measures.

[1] https://www.cbo.gov/publication/56571 [2] https://www.pgpf.org/budget-basics/medicare#:~:text=Medicare....

That's correct, it won't solve the US healthcare cost problem, and I never suggested it would.

What it will do, is slow the expansion of cost vs what we'll see in the private sector coverage. That slowdown will be courtesy of the massive-scale, centralized, top-down pricing push-back capability that the government has (and has very strong incentive to use as the years go by, given the fiscal situation).

The cost per capita of the two systems will split apart more and more as time goes by.

Pricing push-back seems wholly non-existent. Not sure why you would anticipate any real control mechanism in that regard. The price of health care in the US, with largely subsidized medicine, is the most (or nearly if not) outrageous on earth.

The government might enact further measures which will likely have consequences not unlike the current policies

I think there is one factor you're neglecting, which is that you can no longer just pay attention to the United States and assume that you've described the entire world economy. China and Russia now both have the power and desire to stab the US economy, and more such powers are coming up behind them. It'll hurt them too, but they now both believe it may well be worth it because they can recover faster and better, and it isn't clear that it'll be any better than what the US will already do to them if they defy the US (e.g., taking Taiwan). It is a characteristic of our US elite that they are exceeding and extremely pain averse. It is not shared by everyone else in the world. At some point in the next few years, if not the next few months, someone is going to calculate that knocking down the house of cards that the US-driven economy represents will still net benefit them. The only way the US could stop that is to pull its industry back in and accept cost increases as a result... but see previous comment about the near-total inability of our elite to accept pain.

The US is absolutely not following Japan. Japan has almost no immigration while the US practically has no borders. Our birthrate is also much closer to replacement levels than Japan. Because there are more (and growing) people chasing fewer assets/production the US can easily end up in an inflationary spiral while this is nearly impossible for Japan.

The US is adding 1.x million people per year, on a decline. The addition is entirely meaningless against the context. The US is also aging persistently, as with most of its peers.

Exaggerated, your premise rests on: the US is not exactly like the Japan scenario, it's 98-99% like the Japan scenario. Point being, that tiny population expansion is trivial and will be mostly gone soon anyway.

The population addition in question is majority lower income, lower education oriented in numbers. The US has an inverted immigration system vs eg Canada or Australia (they focus on higher income, higher education, skill-based immigration). That fact further debases the potency / value of the population expansion. US education has been eroding for decades in terms of quality, so those lower income, lower education new immigrants are entering the US at a particularly mediocre time for their purposes (and they'll also simultaneously run into the automation, robotics, AI buzzsaw that is in the first or second inning; further devaluing what that population expansion brings to the table).

So I guess the 2/3rd foreigner STEM grad students are “lower education oriented”?

2/3 of the US immigration system isn't foreign STEM grads. Not even remotely close. What part of what I said are you actually trying to disagree with?

I was very clearly speaking about the overall US immigration system and how it's structured.

Foreign STEM grads quite obviously fall into the higher income, higher education, higher skill grouping that (per my prior reference) Canada and Australia prefer to focus the majority of their immigration on (whereas the US does not focus its immigration in such a manner).

> The population addition in question is majority lower income, lower education oriented in numbers.

That's absolutely not true, and it sounds like 101 xenophobia. Immigrants in the U.S. are significantly better educated than U.S. natives.

Ref: https://www.pewresearch.org/fact-tank/2020/08/20/key-finding...

> Immigrants in the U.S. _as a whole have lower levels of education than the U.S._-born population. In 2018, _immigrants were over three times as likely as the U.S. born to have not completed high school_ (27% vs. 8%). However, _immigrants were just as likely as the U.S. born to have a bachelor’s degree or more_ (32% and 33%, respectively).

> Educational attainment varies among the nation’s immigrant groups, particularly across immigrants from different regions of the world. Immigrants from Mexico and Central America are less likely to be high school graduates than the U.S. born (54% and 47%, respectively, do not have a high school diploma, vs. 8% of U.S. born). On the other hand, immigrants from every region except Mexico, the Caribbean and Central America were as likely as or more likely than U.S.-born residents to have a bachelor’s or advanced degree.

Not the OP you're responding to but your own source disagrees with your assertion. Relevant quotes above, emphasis mine. Also, I'm not against immigration but it gets old seeing accusations of xenophobia when someone is trying to have a reasonable conversation about the very real macro-level challenges involved in immigration. Stifling this sort of discourse also ends up being a disservice to people that have worked very hard to immigrate to the US as it can lead to people sweeping under the rug the challenges people will face when arriving.

Japan still managed to keep a lot of their culture and demographics intact. When the US enters the decline it's going to be much much more serious.

Well, yes, the birthrates and immigration can help the U.S. but that was not the point the OP was making -- and I am making too -- Japan has showcased boundaries one can reach on relation to debt and fiscal policy; and also that negative interest rates and meddling with rates does not work per se and out of the box.

If the same operator also jammed the valve open with a wrench, then ignored the flow meter as it rung up by saying “the leak is transitory”, then yea.

They also weren't really concerned about the leak as it destroyed the households below it, that is until the people on the floors under them started collecting the water for their own use (increased wages) and the pressure in the penthouse bathrooms started being the subject of complaints, then they had sudden urgency to resolve the situation.

I’m liking this dam analogy thread. If rain and rivers create more volume, would printing money be like placing large boulders to raise the dam level, without creating more actual value?

It took like 3 minutes before I got your point. I guess that is accurate? Or like, redefining kWh to kW58min when selling the dam electricity.

The fed worrying that regular workers are getting too large a pay increase was a secondary concern for them. I think it was much more important to consider the overall economy than to worry about salary changes for the little people. Five, no eight, now 10% inflation is a bigger thing than paying dishwashers $15 an hour and you still can't hire enough.

If we are worried people are paid $18 an hour and that is too much and that gets the gas prices up -- but mainly things that are not that volatile like rent and consumer stable products -- then we are in for a rude awakening and also we live in a "slavery" driven world still.

The production of oil and supply chains is not even close to 2019 levels. Electronic manufacturing and tooling needs 1-2 years to catch up to 2019 (current) demand. Scaring investment does not help.

Let's beat the metaphor to death. They opened the valve because there was a fire below that needed to be put out. Better to deal with flood damage than lose the whole enchilada.

Playing with 0 interest rates as if that were in the least rational was the greatest mistake.

Nobody should have the power to subvert the meaning of time.

We take the ministry of truth seriously (“the past can be changed”) and get scared by that. Saying thay time is worthless is more or less as grave.

Fiat is an artificial construct, as are asset values and prices, and the cost of capital/money. No one is guaranteed a rate of return. The whole point of monetary policy is to juggle the imaginary to realize a certain reality, ZIRP, NIRP, rapidly increasing PIRP, etc.

> No one is guaranteed a rate if return.

While true, I think it is fair that people broadly share an expectation that time value of money has a positive value and that central banks shouldn’t be subverting market forces to eliminate all opportunity costs of capital.

I think it’s crucial that this expectation should not be thought of as some sort of natural law. There is no requirement investment capital have value. On the contrary, one would expect the value of capital to continue to decline over time, especially due to structural demographic shifts.

It’s also the job of central banks to manipulate capital markets (“rows in a database”) to meet their mandates and desired outcomes.

https://www.visualcapitalist.com/700-year-decline-of-interes...

> Nobody should have the power to subvert the meaning of time.

Interesting take, but isn't setting an interest rate doing exactly that, whatever that rate is?

This is why, the Islamic approach is the most superior one: no lending money with interest, period. This means at least two things:

(1) Lending money becomes an act of charity, since you cannot profit off of it.

(2) You want to tap into time value of money? Invest it in a proper risk sharing manner that is fair to all parties engaged.

It would be a very different world had we implemented this approach.

Islamic banks still lend money for profit,they just charge a fixed fee. It's arguably less predatory, but also reduces availability of credit.

Time is valuable; holding money for a time has value. Interest is just recognizing that.

Imagining that folks will ignore that is futile.

The natural rate of interest is zero. Any positive interest rate results, in aggregate, in unserviceable household debts[1]. This is elementary for anyone with even a simple and accurate understanding of the US monetary system.

Usury is bad and there are other ways to finance underwriting and the other socially useful activities banks perform.

[1] Currency issuers can always service debts in the currency they issue of course. Those liabilities are so operationally different from household debts though that they probably ought to be called by a different name altogether.

Are you also proposing to get rid of rents of all kinds? If I buy a house/ship/combine with my $100k and rent it out rather than lend the cash to someone is that somehow better and now allowed?

If tangible assets have rental fees, then why doesn't money?

See Aquinas for details[1]. But in short usury is selling the same thing twice, which is immoral.

As an example, rent to own is a reasonable and moral way to structure a real estate transaction without interest. It’s all about sustainability. Lending at interest requires borrowers, in aggregate, to acquire more funds than the monetary system can provide. It’s clearly immoral to impose conditions that are impossible to meet.

[1] https://www.newadvent.org/summa/3078.htm

Isn’t this a self-created problem? They had no real excuse to carry on QE past 2010 when the economy had started recovering.

It 100% is. And what’s more crazy is that Alan Greenspan admitted that his biggest career failure was to leave rates too low for too long just prior to the Great Recession. And then… his successors did exactly the same thing.

It is almost like the system should have automated rules in place to prevent this from being possible.

Note that there are probably just as many economists that said rates were too high. After all the target inflation rate was 2-3% yet the inflation was under 2%. That translates into hundreds of people unnecessarily out of work.

Yeah, I think there are a lot of problems with the current system and you’ve nailed it. They set a target using metrics that have radically changed over time and don’t reflect major components of inflation that real people experience (cost of homes) or asset price inflation. Anyone with eyes can look at charts of pretty much everything but a basket of consumer goods and see the massive inflation, and this was fine because it wasn’t in CPI figures… until now. And so that target range based on limited metrics led to exacerbating a massive problem that was evident for at least 5-6 years.

No, I think we completely disagree, you're just misreading my statement.

I say that inflation was too low 1990-2020 not because they mismeasured it, but because the Fed kept the rates too high.

The CPI basket undermeasures volatility, but it's not bad at measuring inflation. Not great, but every alternative basket I've seen proposed has been worse.

Yeah, this is an odd take. 8% inflation is not great, but it's hardly a historic disaster. Especially given the even odder take that they think the corresponding rise in wages somehow makes it worse. The fiscal stimulus of the pandemic was perhaps too large, but it was extremely effective at forestalling catastrophe in the wake of a black swan event. The mistake was probably tightening too slowly from the 2007-era stimulus that left us without a lot of room to maneuver.

If you want to point a finger, maybe point it at the politician who threatened the Fed chair for not setting negative rates 2 years ago.

Agreed. The Fed is racing to raise rates so they have something to cut when the economy turns south.

We can also blame the politicians who cut taxes in the longest, largest bull market for financial assets in history.

At the time, every commentator not in Congress or the Republican party said it was a bad choice to stimulate the economy with a sugar-high unneeded stimulus. But once that's in the system, correcting it hurts the next guy in charge, thus we don't get anywhere till we hit a crisis point.

It is a single month of single year over year inflation measurement that is comparing to a year with a global pandemic in full swing. Inflation and gas prices are Republican talking points to "own the libs". Give it the proper context.

Is inflation really 8 % though? Real number is probably closer to 20 %.

Inflation as measured by CPI or Core CPI are objective measures. You are comparing that against a subjective measure but pretending like it is objective.

There are reasonable arguments to make that CPI is insufficient for measuring everything that we spend on (it underweights healthcare, gas, college costs, and lots of luxury investments like stocks and artwork). There are also reasonable arguments that cost of living in some regions is growing faster than 8% (the actual CPI number obviously isn’t homogeneous across the entire country).

Also important to note that there is no “intrinsic value” in dollar terms for any good. Everything is a negotiation of how much we want a thing. If you insist on Quaker Oats oatmeal instead of generic oatmeal (a personal preference), you might experience a higher rate of inflation than others who are more amenable to substitutes.

No. There is no "real" number. 8% is the indicator we use. When it hits 8% we know it's higher than when it's at 3%. You can't ever take that number and extrapolate what things are actually going to cost you day to day. Some things are way more than 8%. Some prices are going down.

What do you mean by 'real number'?

CPI is well defined and has a clear construction, as does PPI and GDP deflator. The 'real number' is something people seem to bring up as a signal that the beaurocrats an politicians are lying to us, but it is not well defined or defined at all, so it's impossible to disagree with.

Yes, most likely. By the definition in use, unquestionably. Cost of living feels like it is up 20% (albeit location dependent), which may be what you are thinking of, but inflation and cost of living are decidedly not the same thing.

Location-dependent variance is normal.

IIRC, CPI inflation metrics do tricky things with rents versus mortgages, so cost of living can appear very different for renters versus homeowners, even in the same neighborhood.

Inflation seems really spotty to me. Like, dunno, some brands got very expansive while some not. Some restaurants raise prices alot while others lag. It is strange.

That is 100% normal. Inflation isn't a magic force that is applied evenly to the economy. It is an emergent property characterized by decreased purchasing power of money. There is a misconception that inflation is caused by a policy or by some other hidden force. It is actually caused by the same laws of supply and demand that govern every other economic calculation. Right now, demand for almost everything (including labor) is very high and supply is very low. Conversely, the supply of money is high. So prices and wages all go up. Currently at different speeds. Energy and food supplies are being pinched by the war in Ukraine which is causing them to inflate faster than other products. Supply chains are affecting imported goods in a lot of places more than domestically produced. Things like food and energy are largely "inelastic" which means that demand can't go down even when price goes up. You can slow down your purchases of new phones or shoes or other stuff, but you can't eat less or stop heating your house. Things where demand is more elastic, you may just see people buy less in response to high prices until it hits equilibrium.

to an outsider (me) it looks like the Fed thought that if enough people believed the lie ("it's transitory") that things could go on despite fundamentals being out of whack (and we had quite a few people (economists, financially literate people, etc.,) go along for the ride of the ruse... but as always, the chickens eventually come home to roost in their own nest. and so it has and now we're here.

Was it totally preventable? Not likely. Did it have to be so precipitous and ruinous? Nope. They could have come correct and could have adjusted rates and have encouraged people back to work but dialing back the stimulus sooner --slowing the money printer.

As a Fed watcher I can dispel a few of these notions. The Fed was never going to tell people inflation was taking hold. The Fed tells people what they would like the market to be… not what it is. They set the “framing” used by many market participants, this framing is one of its key tools.

The Fed can’t control government spending. Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that. If anything Powell consistently advocated for a more balanced federal budget precovid.

I don't the this cause of inflation is settled. Right now it's higher energy prices, in large part caused by the Ukraine war. Then covid recovery caused a big demand increase, and the shipping industry building ever larger ships that can only go to the LA ports on the west coast led to a delivery shortage, which led to a squeeze, then a worldwide shortage of ICs caused auto manufacturers to have a shortage, the Ukraine war even caused wiring harness shortages. It's one thing after another, those were not caused by the Fed or stimulating spending from the government. I'm sure the government giving people money so they wouldn't lose their lives during covid unemployment was a stimulus. But there were all these other things going too.

Yes I agree. There are many causes of inflation. The two principal ones IMO are (1) Supply / demand imbalances (2) Government expansion of the money supply working through the economy.

Canceling Keystone his first day in office doesn't help.

I don't see what that has to do with the current shortage as the main bottleneck is with refining oil, not extracting/transporting it

That obviously did not make a difference now because it wouldn't be in use and the issue seems to be refining more than oil supply.

I think you mean they Keystone XL pipeline. The Keystone pipeline has been running and Biden didn’t cancel it.

Keystone XL is a zombie project which abandoned by the development/infrastructure company. It had been stuck in regulatory review and litigation for a decade.

Environmental reviews by both the Obama Admin and Trump admin state that Keystone XL would not have lowered gasoline prices. You are pretending like all oil/gas products are fungible, when in reality most refineries in the US are not capable of refining all raw product. Hence “Energy Independence” is purely a marketing term and we still need to export lots of raw material and import other kinds of raw material to match what we are capable of refining.

a pipeline that wouldnt even be operational yet?

> Massive government spending, funded by new money, caused inflation.

How is US government spending causing 8% inflation in Germany?

It's almost like this is a global phenomenon caused by supply shocks and price gouging of essential commodities.

It's quite likely that energy prices are the common denominator. Energy inflation is off the charts and is an input to pretty much every other good.

Inflation can be caused by more than one factor…

But that's not really what you wrote, which is what people are pointing out.

>Massive government spending, funded by new money, caused inflation.

Germany deficit spends, too.

France deficit spent more than germany, and have lower inflation figure.

Someday, people will understand that central banks issue less than 8 percent of the circulating money, and that government debt is just another way of financing retirement pension funds.

France is looking pretty smart for going so hard into nuclear power. Conversely, Germany stepped on an energy policy rake.

The US did not have inflation when it did not have fiat money. There's well over a century of monetary history in the US without fiat money.

That's true in exactly the way that disproves your point. Prior to the Federal Reserve era, there were so-called non-fiat currencies, that is, those convertible to silver or gold. Except when they weren't. There were many notable periods of inflation and deflation, and many periods during which convertibility was suspended.

So only in the most narrow sense is it even possibly true that "the US did not have inflation when it did not have fiat money": if you ignore the times when convertibility was suspended, it becomes a slightly more accurate statement, but still not true as it ignores inflation soon after the founding, large deflationary periods in the early and late 1800s, and subsequent inflationary periods prior to WW I. So you have to ignore convertibility suspension and the inflation and deflation in order to argue that there was no inflation or deflation.

The one iron-clad law of "non-fiat" currencies: eventually they will become fiat currencies.

And when they weren't convertible to gold or silver, they were inflated.

This amply proves my point.

The inflation was a net zero from 1800 to 1914.

The ECB printed money too.

> The Fed tells people what they would like the market to be… not what it is.

Fundamentally, you can try to control expectations by feeding biased projections, but you have to maintain a certain signal-to-noise ratio in doing so, or else the market will learn to ignore you. You can feed the market inaccurate projections only by spending down your accumulated credibility, which has to be bought back later with accurate projections.

(This applies in real life, too. It takes trust to be believed, and it costs trust to mislead).

"If a new inflation target is too ambitious, and the central bank fails to attain it, the central bank may lose its credibility, which may render less effective any other policies it pursues." [https://www.federalreserve.gov/econres/notes/feds-notes/rais...]

If the market has learned to ignore the Fed, then it becomes very costly for the Fed to achieve accurate projections and earn back its credibility, because it can't rely solely on influencing expectations to achieve its results. It is left only with backing up its bark with a real bite.

Is that really the case though? I thought inflation is just when stuff gets more expensive, and how it’s caused is complicated. So, it can be increase in demand, decrease in supply, both on the buy and sell side (ie supply/demand of things, including dollars).

I think it’s reasonable to say that the majority of the planet shutting down during the pandemic has at least as much to do with inflation as the fed’s monetary policy, if not much more.

I generally agree with your sentiment.

Resuming economic activity after shut downs (and the habits the shut downs changed) is taking time. There is no obvious natural experiment to tease out how much is caused by CB interest rates and how much is fiscal policy. Most of the countries that did one also did the other.

Also, data points on these issues are gathered monthly (if that often), so current analysis will miss a lot in the “fog of war” until there is more data to analyze.

> The Fed can’t control government spending.

True.

> Massive government spending, funded by new money, caused inflation. The Fed can’t do much about that.

False. The Fed controls the money supply - that is, the creation of new money. (Congress doesn't, thank God.) If the Fed didn't increase the money supply, the government would have to borrow more on the open market, or else tax more. The first might cause visible issues earlier; the second would be politically expensive.

Traditional economics teaches us what you said, but the low inflation environment from 2009-2019 suggests it’s more complicated. The Fed was struggling to even achieve the target +2.0% inflation rate for that entire decade, even as Congress passed gargantuan spending bills every year.

I tend to agree with your sentiment, but wanted to point out there are obvious issues with our analysis.

What are some of the better fed news aggregators?

Most central bank news is terrible. Follow Joseph Wang- @Fedguy12 on Twitter. He’s a former Fed trader with good insights, lots of podcasts. His book, central banking 101 is fantastic, very readable.

Is this the same HK-based fellow on Quora?

Honest question: how can you prove the current inflation is not “transitory”?

I have heard pretty good arguments for the idea that supply and demand are still trying to find a new equilibrium in the post COVID demand shock.

What is the specific criteria that was used to reject transitory?

I tend to be skeptical of anyone who accuses others of lying when there are obviously simpler reasonable explanations: it’s hard to predict how the entire economy will react to turning off the spigot.

I don't need to prove it. The administration itself is admitting there is inflation, but now are pinning it on external factors rather than Federal spending as well as policy by the Fed reserve bank. Indicators were indication inflation before Feb 24. Inflation numbers for Jan and Feb has inflation at way above normal. So not just indicators but actual inflation was measured.

> The administration itself is admitting there is inflation

That proves that the administration knows it has an optics issue, not that inflation isn’t transitory. Inflation is currently the number one issue on most voters minds.

I don’t doubt that inflation exists. I doubt that a substantial portion of it is related to issues that won’t resolve themselves as the economy renormalizes post-COVID and buying habits return to something like pre-COVID.

So you're saying they'd prefer to lie to the people?

It's number one because the admin tried to bury the issue by cliaming it was transitory while many outside DC and the Whitehouse were saying, you can't print money, do the BBB to the tune of trillions (where even Yellen balked) send out stimulus cheques, press for a $15 minimum wage (this should have been gradual), keep rates low AND expect there not to be inflation. But they said, nah, you're being chicken little, relax.

Covid did stress the economy, but it would do the opposite of inflation, if they had not stepped on the gas. It dampened demand. It also put some people out of work and also encouraged some to leave the workforce early.

The admin isn’t necessarily lying. They are trying to be responsive to peoples’ concerns by admitting there is inflation, which there is. Admitting there is inflation and they are taking steps is optics 101.

I agree that many outside of DC jumped on Larry Summers’ bandwagon and are screaming that it was never transitory. But that still isn’t proven. And lots of those people happen to be political adversaries of Democrats, so they have additional reason to try and pin another problem on this president, whether it is his fault or not (which is what your Democrat wish list of things that never happened/passed so can’t affect inflation looks like). I would also note that you are mixing fiscal and monetary policy as if the White House admin had control over either.

Printing money (expanding the M1 money supply at least 4x) and a near zero interest rate environment happened for a decade after 2008 with stubbornly low inflation. That doesn’t necessarily lead to inflation.

COVID didn’t dampen demand for more than a month. It changed where demand was aimed. Money that pre-COVID went to restaurants, concerts, and travel was aimed at different goods like home improvements, in-home entertainment, and crypto/stonks. Inflation didn’t show up when households were thrown $1600, unemployment insurance claims saw richer payouts, and PPP was issued. It happened after buying and spending habits changed when people came out of hibernation and were spite spending.

Again, I’m not saying inflation isn’t transitory. I’m saying I don’t think we can know for sure until the supply-demand mismatches created by COVID lockdowns and behavioral changes have returned to some equilibrium. Only then might we have enough info to be sure, especially because transitory opponents will not set goal posts for the definition.

The only one solid piece of evidence I see for some kind of sustained inflation was the Great Resignation, where people were changing their desires and expectations for work and life. Combined with very little immigration since Trump’s inauguration, and we have not enough supply of low paid labor.

Their only option is to act against inflation, it's a choice of when not if. And the more they wait, the more painful for the economy as a whole.

The historic mistake was the whistling past the graveyard.

'Transient' was the word used not long ago.

Then came the half-hearted small rate raises.

Now the piper must be paid.

Here's my take: inflation sucks, but they should just let it run its course. For several reasons, but also, my understanding is that the US debt is denominated in USD, so they would effectively be reducing their debt.

My suspicion is that the FED will mostly be choosing to inflation to run its course rather than raising rates too aggressively, and they are trying to pull off a balancing act. Once the current panic subsides, probably things will stabilize.

You can't do that though because at a certain point inflation expectations become inbuilt and then people want to get paid more, spend more now rather than save (expecting higher prices next year) etc etc. This makes those inflation expectations self-fulfilling. The fed really needs to be aggressive enough to affect those expectations.

Once inflation gets out of the bottle, it's very difficult to get back in.

Why is that? The FED obviously has levers that it can push to lower inflation. Currently, the levers are kind in a tricky place. But if they let inflation run its course now, and then push the levers later, wouldn't it be effective?

> if they let inflation run its course

What other posters are telling you is that there's no such thing as letting inflation "run its course." What actually happens is that high inflation becomes baked into the normal operation of the economy, at which point it is extremely difficult to get rid of (i.e. not just raising interest rates above the inflation rate).

This isn't true at all. Look at french inflation figure during the post-war boom. We have lower inflation right now than back then.

Inflation doesn't "run its course". It picks up speed until it is stopped. Eventually you end up in hyperinflation, when nobody wants to hold cash for any longer than necessary.

As a side effect, the government loses the ability to issue bonds, as there will be no new buyers.

The only way to prevent this is to make sure interest rates do not stay too low below inflation for too long, and in the end, iterest rates may have to go above inflation to actually get it back down.

It's "the Fed" not "the FED".