Always And Everywhere
You Might Be Fueling Inflation Just By Reading This Story
Nobel Prize Winning economist Milton Friedman famously taught us that “Inflation is always and everywhere a monetary phenomenon.”. However true that may have been in the twentieth century, twenty first century economics has rewritten financial physics. If Oxford Economics is right, we need no longer concern ourselves with monetary policy or government spending, and can send central banks to the dustbin of history. Instead, the key is simply to manage the news flow to the public.
The Austrian and Monetarist schools of economics are outmoded … inflation is not caused by too much money chasing too few goods, but by tariffs and supply chain disruptions. And now, by our psychological state. Governments and central banks can now rest easy and spend and print to their heart’s content knowing that the financial media will not hold them accountable. The trillions that the Fed printed just a few short years ago are all but forgotten and completely irrelevant to the affordability crisis that has coincidentally emerged just since one Donald J Trump took office.
Ironically enough, today the dollar is on another deflationary jag, rising against virtually every other asset except energy. We expect this to be temporary, though just how temporary is an open question.
The bond market is already hiking rates as Kevin Warsh takes over as Fed’s new chair
As James Carville and Bill Clinton discovered way back in the nineties, the bond market calls the shots.
As a corollary to this, bonds are not a safe counterweight to stocks in this environment. Stocks aren’t declining because of a weakening profit outlook, but because the bond market is recording a decline in the time value of money. When stocks are going down because bonds are, correlations are high. Bonds are a helpful hedge in recessionary times, though, and that may come later.
Even gold is not serving as a respite, because increasing bond yields are driving strength in dollar. It’s basic algebra … the dollar is the numerator in dollars per ounce. When the dollar rises, it takes fewer of them to buy the same stuff, including the same ounce of gold.
For the time being, the strongest assets are USD, short term UST, and non-elementary commodities.
In a challenging macro environment, as an employee would one demand more wages at the risk of losing their job, even if they read a lot about inflation?
I think the research is an extrapolation of the current economics mainstream that is well captured by the reporter: “Economists generally believe people’s expectations about inflation affect how they spend their money and make business decisions, which influences actual prices.”
Now the research is assigning numbers for an incremental effect of reading more about inflation in the news.
Superpeal has a point………..am told that Computer neds are getting killed by AI. All that “Learn to code” might be better as “Lean to weld”………….BTW will “They” stop offering credit to dumb ass to buy a $100,000 trucks
Mike
For sure … the trades are begging for workers … it’s hard to get a carpenter, mason, plumber or electrician and they can name their price.
While it’s more than plausible that people’s behavior is influenced by their expectations, I don’t know of anyone who isn’t already trying to maximize their wages. Reading about rising prices in the news isn’t going move the needle much.
The bigger point here is about the media. It seems to be aware that there is some vague link between the Federal Reserve and inflation, yet whenever inflation becomes a problem, it’s anybody’s fault but the Fed’s. Especially if the anybody happens to be the financial establishment’s most hated nemesis, one Donald J Trump. Last year “inflation” was blamed on tariffs (Trump’s fault) and this year it’s the war with Iran (Trump’s fault). When Biden was president it was Putin’s fault. No mention of the trillions the Fed printed or the interest rate cuts just so far this decade. It’s almost as if the mainstream media were on a mission to exculpate the Fed from all responsibility.
Is it possible that it is acting as a mouthpiece for Wall Street and Silicon Valley? That the trillions being showered upon them might have something to do with the trillions the Fed has been printing? What happened last time the Fed tightened monetary policy? Stock prices lost 20%, Wall Street bonuses shrank. It’s no mere coincidence that we soon began to hear scary stories about unemployment and pleas (disguised as predictions) for the Fed to pull back on its inflation fighting campaign. Which it obediently did, well before reaching even its own inflated inflation target.
Given the structural incentives, it would be surprising if any crackpot theory about the origins of inflation that weren’t the Fed didn’t get a much more than fair hearing in the corporate media.
The core of the matter? Inflation doesn’t exist as some random exogenous phenomenon, and the Fed was invented to fight it. We have inflation because powerful constituencies benefit from it and the Fed was invented to create it.
That’s a fair point, it’s in one’s interest to maximize earnings potential.
On the topic of inflation, I was reminded of Martin Hutchinson’s post from 2019, advocating for investing in gold as “a store of reality in an increasingly unreal world”, dare I say, a classic British understatement. What’s happened since then to the global economy has strengthened his position.
In the same article he had the following to say about the Fed’s role: “The immediate reason for increased attention on gold is the Fed’s statement this week that they are considering regarding their informal 2% inflation target as a goal to be aimed at rigorously. Thus, if inflation falls short of the goal over a period, monetary stimulus should be used to create artificially a period of higher inflation to ensure an overall average of 2%.
This is madness on several different levels. Since money is primarily a measuring rod that should preserve its value over the long term, why on earth are central banks setting the inflation target at 2% per annum instead of zero? 2% per annum halves the value of your money in 35 years, only just over a generation.”
He uses money as a unit of measure that must be stable over an extended period of time. From an investor’s perspective, I find the Financology treatment of it as a security within a portfolio whose value can change over time much more useful.
It’s the way everybody does it, and it is madness.
Hutchinson is excellent. Highly recommended reading.
True Blue Will Never Stain
BTW thank you for the acknowledgement of how we view the currency as a security much like any other. Sometimes I feel like I’m shouting into the void … nice to know it’s registering.
You’re welcome. It’s a really important insight that I’ve picked up from your writings, among others, over the years!
I recall reading a book by Schiff some years ago when he pointed out that America had no inflation for a period of around 80 years………….Just as the British empire began to fold ALL these new things happened in America.
Mike
In broad strokes, there were two periods of high inflation. Both wars … Revolutionary and Civil … wars are typically paid for with inflation. But aside from those exceptions, there was virtually no inflation in the US from its founding to the creation of the Fed.
Another example of media propaganda about the Fed and inflation … the so called statutory “dual mandate”. It’s cited all the time, but virtually never is the actual statute cited. The why is simple … it’s not there. It’s a distortion and fabrication. Here’s the actual statute:
12 U.S. Code § 225a – Maintenance of long run growth of monetary and credit aggregates
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
Where is the “dual mandate”???
All I can find is one mandate, followed by three ancillary goals.
How about you?
How is it that the Fed and the almost the entire financial media don’t?
The sole mandate here – the part about monetary and credit aggregates – is never mentioned likely for the simple reason that the Fed has massively violated it … in pursuit of its real mandate of creating inflation. It should be no stretch at all to appreciate that most of the other lore about inflation – like using consumer prices to measure it – is likewise distortion and fabrication.
It’s clear that there’s no dual mandate per se.
In a broad sense the objective seems covering the two bases of labour and capital – preserving jobs and maintaining stable prices.
We can only guess at the reasons for fabricating a “dual mandate”. One is that it embodies the Keynesian – Phillips Curve theory of a tradeoff between inflation and unemployment. That in turn always gives the Fed an excuse to inflate … in order to fight unemployment, realized or projected.
The fact that the theory has faulty mechanistic grounds and has been discredited by decades of experience (the seventies had both high inflation and high unemployment, while both were much lower in the nineties) seems not to matter. The important thing is it sends the message that some inflation is good for you. We wouldn’t want to have zero inflation … because … unemployment. Our financial system would never survive if the public understood how it works. The dual mandate disinformation campaign helps ensure it doesn’t.
See the part about Lacy Hunt’s assessment of recent Fed policy. “I Felt the Earth Move under My Feet” I couldn’t have said it better myself:
Shootout at the Inflation Corral
““In essence, what the Fed did starting in mid-December is they actually were reversing the elements that had been previously pushing the inflation rate generally downward. So now we have the issue of not only solving the oil shock, but we have to unwind the Fed balance sheet as well.””
Nothing merely psychological about that.
Former Fed official: The Fed’s biggest mistake wasn’t rate cuts. It was keeping them low too long.
This may sound familiar to long time Financology readers. It’s been one of our repeated refrains for years, cited again as recently as Saturday.
Same thing goes for both the post-GFC and the post-Covid eras. The Fed was justified in emergency easing, but not in maintaining it for long after the crisis had passed. A favorite analogy … it’s as if the doctor diagnosed you with appendicitis and removed your appendix every week for years.
Now we at last have even a Fed insider admitting it.
“”It isn’t the crisis. It’s the post-crisis when you don’t adjust your policy back to normal.””
“Cheap money is rocket fuel for that dynamic. The biggest balance sheets borrow the most cheaply, buy back the most stock, and acquire the most competitors.”
And you get a market dominated by a small group of hypercaps and an economy run by a small cadre of oligarchs while the masses struggle.
“Mistake” is such a polite word because it implies that an accident has occurred and not a calculated, erroneous course of actions. It is essentially impossible for a purportedly highly educated, highly experienced, highly intelligent panel of experts to commit errors accidentally non-stop for nearly two decades and that’s ignoring all the other dreadful errors committed before 2009! Hoenig is far too polite to state the real truth which is probably why he managed to be a member of the FOMC. Express any more honesty and he would have been banished to academic Siberia or the uncertain, scary world of…the private sector.
No, the Federal Reserve moved heaven and earth (adding about $8T to its balance sheet) to reflate the housing bubble (and its bond market), reflate the stock market bubble (we have revisited the technology bubble of the 1990s), and create new bubbles that have never before been seen in history with cryptocurrencies and their associated companies. Incompetent Extraordinaire Ben Bernanke himself admitted, albeit somewhat obliquely, that this is all garbage when he stated that quantitative easing would create a wealth *effect*; he did not say that it would create wealth. In other words, it is all a mirage and mirages always disappear to be replaced by reality.
I have been thinking about what kind of chairman Kevin Warsh will be. It seems most people assume he’ll be Trump’s puppet and continue to run outrageously loose monetary policy. However, there are some who believe that Warsh will be a stern chairman on the order of a Paul Volcker. I don’t know if he’ll be that tough but getting tough and causing an incredibly nasty recession seems politically possible since it can be blamed on his hawkish leanings and a policy “mistake.”
“Oops! We made an error and caused everybody to lose his job, get his car repossessed, and get his home foreclosed. Sorry about that. After all, nobody’s perfect and we all make mistakes.”
It could well be overly kind. As you likely already realize, my belief is that the Fed is captive to that aforementioned “small cadre of oligarchs”, to which I’ve otherwise referred to as “Wall Street and Silicon Valley”. We could also roll in the military industrial complex, big pharma, big globalization, etc. Just about anything big. Anything that’s not … families, retirees. small business … is the cadre whose pockets are being raided to support the big.
The evidence is circumstantial … concluded based on the results observed. If it were true it would account for a lot of what we see. It could as well be incompetence … if what passes for economics in the media and even much of academia is any indication, most of the field is clueless. I lean towards a combination of both incompetence and malevolence, but try not to belabor the point.
My bigger beef is with the media. The supposed fourth estate whose job it is to question authority appears to be little more then an extension of it. The article cited here is one of the few mainstream instances of challenging orthodoxy.
Far as Warsh is concerned, I’m taking a wait and see attitude. He has plenty of incentive not to tick off Trump but also plenty to fend off the Fed independence chicken littles. He’s seems pretty conventional in his affinity for interest rate targeting (not good), hasn’t disavowed Bernanke’s artificial 2% “inflation” target (not good), his theory that AI will be deflationary bespeaks a misunderstanding of inflation (Greenspan used “productivity” as an excuse to inflate, with disastrous results), but has criticized the Fed’s “forward guidance” obsession (a clear step in the right direction).
Trump gives blasé response to rate hike possibility
Maybe there will be at least a brief reprieve?
The bond market is in charge.
Bond markets are not so subtly telling the Fed that rates aren’t high enough