The economy has also grown drastically since then. The dollar has also become much stronger relative to nearly every other currency since then.

It doesn't appear that the Fed needs to wind down much, if any, of that liquidity at all, since it seems it's been absorbed perfectly by the global economy.

What we are seeing is the Fed deliberately causing the economy to contract below its capabilities in an attempt to slow down the growth of prices, which is NOT caused by monetary reasons, but since the Fed only has control over monetary levers that's what they're using. Classic case of everything looking like a nail if all you have is a hammer.

If energy prices go back down to more "normal" levels, I suspect the Fed will be forced to inject more money into the system again, to rev up the US economy, and weaken the hyper strong dollar to protect people in developing countries from starving.

> The economy has also grown drastically since then.

No it hasn't.

Real GDP:

Q4 2019 19.20 Trillion

Q2 2022 19.69 Trillion

> It doesn't appear that the Fed needs to wind down much, if any, of that liquidity at all, since it seems it's been absorbed perfectly by the global economy.

This comment is extremely misleading. For starters, I don't know how you can say that. It's obvious it wasn't absorbed perfectly because we experienced bubbles in many markets. And those bubbles have caused harm to large groups of people. For example; crypto, equities, housing, etc.

Let's just dive into housing. We have a system that has disproportionately enriched incumbent homeowners at the expense of new entrants. 2 years ago: 30-yr mortgage rate was 2.87% & median existing home price in the US was $310k. Today: 30-yr mortgage rate is 6.02% & median home price is $390k. Increase in monthly payments from $1,029 to $1,872. This is regressive and has exacerbated inequality. The magnitude of this will be lasting. Real wages have not kept pace.

I also suspect the fed will reverse course but that's because the American (and the rest of the American led global) system now expect it. Our markets are dysfunctional and depend on this centralized control. It would take too much time and pain to return markets to their natural pricing.

What would it take to have "natural pricing"? Short of radical proposals like going back to the gold standard or switching to crypto, what way could the Fed operate that would allow "natural pricing"? What if the Fed targeted 0% inflation, instead of 2%? I realize that inflation has many definitions, but I got the impression that they're reasonably correlated over long periods of time. With a zero-percent inflation target, what consequences would we expect? I think we would need higher interest rates on average, for starters. This would temper the housing problem. It would also reduce total debt, and total debt increases are associated with financial instability.

I dont think parent was making a confused point.

Natural pricing simply means whatever the market was prior to COVID , with all its imperfection, including the central banks' 2% inflation target

Your GDP figures are misleading also. Your comparison of Q4 2019 GDP and Q2 2022 GDP doesn't reflect the fact that the measuring stick, the USD, has grown considerably in that timeframe. The USD has been increasing in value and the GDP has increased as measured in USD in that timeframe.

The OP's point was the inflation being experienced today isn't primarily due to monetary policy issues but actual supply contraction and the Fed's response of using monetary policy to resolve a supply issue is having several negative consequences, such as making the housing crisis worse as you point out.

> since it seems it's been absorbed perfectly by the global economy.

So that's why we're getting 8-9% inflation rates? Because of the perfect absorption?

Part of it is oil and gas supply going down because of war and since producing anything requires energy, prices are going to go up regardless of the money supply.

Inflation was 8.5% before the war started, it's now at 8.3%. I don't think your premise holds.

Yeah but it does not look like the war is going away anytime soon. In case you missed it, russia partly mobilised today.

So parent seems right refuting this claim:

> since it seems it's been absorbed perfectly by the global economy.

Uh no. Oil and gas supply went down due to presidential mandates. Biden's “pause” on federal oil and gas leasing and drilling permits. And any new permits that might be approved on public lands had royalties increased from 12.5% to 18.75%. A 6.25% increase on production.

You can look at oil prices when the war started and see the jump. There was no such jump at any announcement of Biden. The evidence is clear and easily checked.

Inflation is not the change in size of the money supply.

Inflation the broad-based change of purchasing power of the dollar by proxy of a basket of goods and services. This is a function of many, many things - cultural norms, commodity prices, labor supply, fiscal policy, supply chain efficiency, interest rates and yes, to a degree, monetary base.

It’s complicated, therefore supply doesn’t matter for money, only demand?

I think you’ll need to do a better job convincing me than that.

I'm not convincing you of anything, I'm sharing that your definition of inflation is not the definition generally accepted.

Money supply growth is not inflation. Inflation is a broad-based reduction in purchasing power caused by any number of things. By definition.

Here's why. A 50% sales tax would be inflationary without changing the money supply. Conversely, a trillion dollar coin minted and put into a vault wouldn't have any inflationary effect whatsoever because placing it into the vault has a commensurate reduction in velocity.

The idea that 'more money' necessarily immediately means each unit is worth less doesn't stand up to any scrutiny and many counterexamples exist all over the world - and at home. Just look at Japan's monetary base expansion since the 90s [1], while inflation was dead flat zero [2].

Your model is too simplistic which is why it is not generally accepted.

[1] https://fred.stlouisfed.org/series/MYAGM2JPM189S

[2] https://fred.stlouisfed.org/series/JPNCPIALLMINMEI

Nobody is claiming that inflation is only caused by printing money. You’re straw-manning.

What we’re saying is that everybody knows supply and demand affects money, also.

And if you’d like examples of hyperinflation from over-supply of money, you can just look around.

I was replying to this.

> It’s complicated, therefore supply doesn’t matter for money, only demand?

I never said supply doesn't matter. Re-read my initial reply. ("... and yes, to a degree, monetary base").

Money in a modern centrally banked economy enters the system on a pull model - not push. Banks don't push money into the system. Borrowers create money when they take out loans and that money obtains its value from the obligation to repay the debt that created it. Once repaid, that money evaporates. Money is always being created and destroyed, which is how interest rates control supply of money through demand of loans. This means supply follows demand so it's harder to devalue due to supply increases as a supply increase inherently follows a demand increase. In ordinary course, when not subject to interventions.

> And if you’d like examples of hyperinflation from over-supply of money, you can just look around.

Hyperinflation isn't what happens when the money supply increases a lot, it's what happens when the population rejects the currency and is usually tied to an exogenous event like a war, corruption, regime change or onerous foreign-denominated debt. Most often a combination - it's a completely different beast. [1] Folks conflate the two because "hyperinflation" sounds like "inflation but more!" - the increase in money supply is a symptom, but it's not the cause. It's effectively an economic and monetary collapse.

I'm not sure you'll be able to actually find an example where oversupply of currency in isolation led to hyperinflation, but if you can find an article demonstrating a causal relationship I'd love to read it.

[1] https://www.businessinsider.com/the-truth-about-hyperinflati...

> So that's why we're getting 8-9% inflation rates? Because of the perfect absorption?

Not to mention the massive asset price inflation.

Greed seems to explain it easily enough.

The macro-economy is solely for the wealthy and when they need a billion or more to see a return on a billion or more, shrinkflation and price increases go up; hard to make a billion back on long time scales at 2010 prices.

I’m not saying they intentionally operate on that philosophy. I’m saying reliance on data trends means they prioritize responding to data regardless of the externalities to the masses.

Only the rich can afford assets so assets are priced for the rich.

Are periods of low inflation thus caused by elites being less greedy?

Yes. Powell is on record saying he wants the public to save and not trade on the market. He wants bonds to go up. He wants salaries to stop going up. If everyone is flush in assets from having cash to spend it fucks up the game for establishment elites.

He’s keeping the public out of the way of elites. Banks are raising savings account rates to keep cash stashed. VCs are scaling back. Prices on say, homes will crash, rates will be too high for average people, elites build property management portfolios and expand their rent seeking.

The recent era of spread the wealth has been put on pause while the asset class shores up public agency that was getting away from it by creating too many elites. If everyone is an elite the current elites have no power. That’s the simple game they’re playing, leveraging technical indirection to obfuscate.

That's not how any of this works. Yes, the fed sometimes wants the economy to slow. This is not because of some global conspiracy to make poor people poor, it's because if they don't now they are putting it off to be much, much worse in the future. It's letting off steam so you don't explode. Interest rates rise to try and combat inflation because if you don't it leaves people starving.

Rates should have gone up years ago, but a stubborn fed kept putting it off (and COVID didn't help either). The Fed does not benefit from everyone being poor. And I'm someone who thinks cynically all the time, check my post history, but this is just uninformed.

Even Powell has said they are realizing how little they know about how inflation “works”.

Claiming I am uninformed because I don’t recite the spoken traditions that even the expert in charge admits to not fully understanding is just regurgitating memes from memory; you don’t come off well informed, but like a skipping record.

They don’t have an incentive to NOT keep people poor either. They don’t really care since they’re going ahead anyway with policy they admit will hurt households; deny it again, please. I need a laugh.

The outcome will be one of making cars and homes harder for poorer people to buy; Powell admitted that today and at every other rate hike. He’s testing “what the market will bear”.

Human biology rules us, not social principles hashed out on paper. See my comment history. The result will be clear; haves will be able to afford buying up assets as prices come down. Have nots will be priced out.

Don’t forget too our Congress refuses to deviate from our social history. The Senate was described by Madison as a firewall to protect the opulent minority from the majority. You can carry on that’s “not how it works” all you want. But “on the ground” the result is clear.

> I suspect the Fed will be forced to inject more money into the system again, to rev up the US economy, and weaken the hyper strong dollar to protect people in developing countries from starving.

Although a noble cause, the Fed's goal isn't to protect people in developing countries from starving. I don't see why this would impact their decisions at all.

Foreign countries defaulting because of the difference in currency valuations could cause the US economy to go into a recession - which is something the Fed does care about...

You say "relative to nearly every other currency since then", I say "race to the bottom". To each their own.

Having a strong currency isn't necessarily a good thing. It makes it much harder to export goods and services.

What does america export? Agricultural products. People have to eat. Agricultural products have pricing power, especially in the current global environment.

Food, beverage and feed: $133 billion. ... Crude oil, fuel and other petroleum products: $109 billion. ... Civilian aircraft and aircraft engines: $99 billion. ... Auto parts, engines and car tires: $86 billion. ... Industrial machines: $57 billion.

Services: ~$700 billion.

yeah services are gonna take a hit.

I think you are conflating a stronger dollar against the wrong cause. The strong dollar is here because of the interest rate hikes and global market insecurities -- it is lower risk and higher base interest to plant yourself on USD right now. Its the side effect for trying to temper inflation but not directly related to the buydown of Fed monies in market nor is it related to GDP growth at all (we are flat).

> which is NOT caused by monetary reasons

You simply cannot say that with any certainty. A rise in price level is always precipitated by too much money chasing too few goods. No one would argue that global energy and wheat prices are a supply side shock, but to say that a stimulus package of unprecedented size injected into a largely healthy economy has no effect on prices is ludicrous.

> they keep going at this rate

The run-down rate more than doubled in August [1]. Current estimates to optimal balance sheet are about 4 to 5 years [2].

[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...

[2] https://advisors.vanguard.com/insights/article/thefedsplanto...

The balance sheet shrunk from $8,874,620 million on August 3 to $8,822,401 million on September 7, a rate of about $50 billion per month or $600 billion per year. If continued, this rate of decrease would bring the balance sheet from $8.5 trillion down to $5.5 trillion by 2027, within range of the “optimal balance sheet” described in the Vanguard report.

A lot of that injection ends up in the Eurodollar system, a reference to US dollars outside of the control of the U.S. They estimate up to 70 percent of U.S. dollar volume is in Eurodollars.

There's a fascinating PDF from 2020 from Rabobank research desk on the topic. I have it on my system but they took down the link to it.

Money's never printed anyway, it's all accounting - it starts with treasuries, and then those become collateral on which the highly complicated financial system on the world chains one debt instrument to another.

Money can get funnier, but it can never get less funny.

The 140B you cite is mainly the Fed buying bonds from Treasury (indirectly)? Other than the other large buyers/sellers (e.g. other countries), what else materially creates up or down pressure on the rates (I know they are headed back up but they are still on the low side, historically)?

Added (indirectly) to reflect comments below - tks.

> 140B you cite is mainly the Fed buying bonds from Treasury?

The Fed isn't allowed to buy bonds from the Treasury [1]. The $140bn refers to bonds the Fed is letting mature without reinvesting the proceeds. That leads to fewer dollars chasing Treasuries, which reduces their price, which raises rates.

[1] https://www.federalreserve.gov/faqs/money_12851.htm

The Treasury auctions the bonds off to the primary dealers.

The primary dealers sell the bonds to the Fed.

At the end, the Fed has bought boatloads of Treasury bonds, but not from the Treasury!

The Fed isn't allowed to buy bonds from the Treasury [1] … directly.

You forgot the word “directly”.

Feds can buy back in “open-market”.

As a rule, the economy should react to the rate of change of the money supply, not to any absolute value.

I do believe the US is in one of those moments where this isn't true, there is a mountain of money moving from a small niche into the main market, and the rate of this movement will determine what happens, not the change in total money supply. But even then, the size of the 2020 supply is irrelevant.

It’s not a linear drop, the removed 20B from mid April to mid June. Then another 120B in under 3 months.

Wasn't the 120B during a time when the FED was in a battle against inflation and making aggressive moves to raise rates? Are we to expect that it's the new normal for many years?

and the ECB seems to be re-growing its balance sheet:

https://tradingeconomics.com/euro-area/central-bank-balance-...

What was the 2009 crisis though? was that your run-of-the-mill recession (all business cycles have crests and valleys!) or was 2009 something different?

Does anyone operate under the assumption another recession (maybe even two or three) will occur in the next 10-20 years with 100% certainty and like, prepare for those rainy days?

> anyone

Yes, it's almost certain that someone does. From your comment, it seems like you do.