20% of all dollars were created in 2020. The only thing preventing that from translating into the broader price level is that money velocity collapsed due to the Covid shutdowns. Instead most of that has channeled into financial and property asset prices.
Once velocity increases, as is the plan if you assume 2021 is the year we "recover" from Covid restrictions, the Fed will have a choice between inflation and deflating the money supply (eg by selling a huge portion of their accumulated financial assets). The latter implies a rise in interest rates that harms economic recovery and government borrowing costs, potentially reducing available fiscal stimulus.
I would like to read an analysis of how they plan on veeeery carefully extricating themselves from this situation but as far as I can tell the strategy is to wing it.
It's not velocity - that's a red herring (complete misunderstanding of monetary behaviour by Rothbard et. al.)
There are a few things going on simultaneously, one is that a lot of the new money is going into the finance sector, so there is inflation, but it's in share prices which doesn´t get captured by the CPI measurement. The other thing is that banking regulation no longer depends on the reserve requirement, but on the capital reserve requirement which controls how much lending the banks can do (and through that the amount of money creation.) So the inflationary spiral is now, banks increase capital, which increases lending, which increases the money supply, which increases the value of existing capital, etc. It is fortunately a lot slower than what would have happened if the old asset reserve requirement was still all that controlled the system. You can see it starting to affect M2, but it will take a while to feed through.
The FED strategy is to do enough to keep the recovery going, but not so much that it overheats. GDP growth will over time make the debt burden bearable as interest rates tick higher.
With 10 million unemployed and 44% of households being behind on mortgage/rent/bills the economy is not going to roar back to life. With demand depressed because the actual economy hurting badly inflation will be moderate and temporary and deflation will remain the top concern of the Fed.
Of course we do see prices in some areas going up. Houses for instance. But that makes sense when you think about it. Nobody wants to move to a smaller house/apartment during a pandemic, and millions are simply not paying their mortgage instead of downsizing. Meanwhile those with money are moving away from cities and buying bigger places. The implications for housing prices are obvious. But this asymmetry won't last because the relief programs are temporary.
Burry believes that rising prices and some inflation proves we are at the cusp of Weimar Germany style hyperinflation. That is, at least for now, not borne out by the data in the slightest.
And what happens when inflation rises and they need to control it with non-zero interest rates? Then stocks, real estate etc crash and we're back in another recession, which they try to solve with... more money and lower interest rates. We've already seen this story a few times.
Inflating away debt is fine if it is done slowly and has been done for centuries.
The extreme asset valuations we've seen after a decade of QE are unprecedented.
ZIRP and QE are not fine and are not working for the stated purpose, if anything they're making the economy more fragile. There's an interesting overview of the choices here from Lyn Alden, none are without complications but it does sound like they'll try to aim for moderate inflation and hope they can control it, but if they need to put the brakes on in a hurry the traditional methods of doing so could have extreme effects on overvalued assets:
Yeah I don't disagree with Lyn, low rates are underwriting our entire bubble ad not necc the monetary policy I'd prefer.
Rather than pushing up financial assets and then jamming everyone into more interest rate sensitive debt, why not print the money, give it to poor people, and create a bit of inflation.
> Run inflation higher than interest rates to push down the nominal value of debt.
MMT [with apologies to The Matrix]: “Do not try and inflate away the fiscal deficit. That's impossible. Instead only try to realise the Truth... There is no debt, and no ‘fisc’.”
While you can preprogram spending and call it “debt” in MMT, you can't understand MMT from within the metaphor of the fisc, the limited public purse which must be filled by revenue and/or borrowing to enable spending.
MMT isn't really about how you use blunt-instrument monetary policy like fed target rates, it's about not needing the separation between sharp-tool “fiscal” and blunt-instrument monetary policy, because “fiscal” policy actually lacks fiscal constraints and has only monetary constraints, and therefore can and should be used instead of blunt-instrument monetary policy. While conventional economists tend to criticize the US for being overreliant on monetary policy because of Congressional failure to deploy fiscal stimulus in recent downturns, MMT dial that up to 11, viewing the divide between fiscally-constrained but more targetable policy and monetary policy which has no fiscal constraints as artificial and unnecessary, as the constraints actually applicable to either are the same and purely monetary.
MMT does not depend on or imply the relation between debt and inflation, it addresses the metaphysics of "government debt" as such. In fact it suggests you should not "inflate away the debt", as if governments were subject to an actual fiscal constraint of spending = taxes + borrowing (the premise MMT rejects).
Under MMT, you can inflate away other debts (mortages, student debts, etc.) To do so, it separates taxes from spending. It does away with borrowing to simply create money out of thin air, and return any money collected the same way. Any difference between spending and taxation increases the money supply, causing inflation.
That lets you tune the inflation rate more directly than the Fed's rather distant lever arm. The Fed has been trying to increase inflation, but doing so mostly by pumping it into the financial sector, in the hopes it would trickle down. It hasn't. So all of the inflation is confined to the financial sector, in the form of the stock market (and a few other investments, these days including crypto).
Under MMT you could give the same cash directly to people as stimulus checks or UBI, and know that it will go around at least once or twice before ending up in the financials. Then you can control inflation with taxation, removing as much money as you need to, and simply burning it.
The public debt doesn't matter. Inflation gradually eats away at private debt -- assuming it's distributed properly, which it may not be.
It's flexible and elegant. Whether it actually works is less clear, but its roots are a lot like conventional economic theory. In theory, theory and practice are the same...
> Under MMT, you can inflate away other debts (mortages, student debts, etc.) To do so, it separates taxes from spending.
Taxes are separated from spending, that's just an observable fact
MMT poses a (actually, quite conventional) explanation of the constraints that actually apply to that. It also tends to be adhered to by people with particular policy preferences, but that's not really all that tightly tied to the descriptive elements of the theory. (Though most argument against “MMT” is actually against the policy preferences, not the theory itself.)@
> It does away with borrowing to simply create money out of thin air, and return any money collected the same way.
Well, it doesn't do away with it so much as point out that it is an act of artifice. You can borrow or not, MMT doesn't care: government created money when it runs a deficit and destroys it when it runs a surplus, and reallocated it all the time. All borrowing does is preprogram in an allocation of certain spending in the future, it doesn't change the monetary effects of current “fiscal” balance. (“fiscal” in quotes because the central tenet of MMT is that the metaphor of the “fisc”, the finite government purse, is inapt for modern government finances denominated in fiat controlled by the government involved.)
It's already well above 3%, if you could include the stock market in the metric.
That's the problem facing Yellen: not just doing enough, but doing something that won't just end up inflating the kinds of assets owned by the wealthy. Consumer prices have been stable because despite the increase in money supply, consumers as a whole were treading water (at best) even before the pandemic.
She would be happy to do something that caused CPI to get above 3%. It would mean the Fed could finally take the punch bowl away. They've been refilling it for well north of a decade, and it drains as fast as they fill.
Why does it make a mockery? It’s included in CPI and for a large swath of America housing isn’t growing by 10% each year, so we’d expect housing inflation to be moderate on average.
Yes, they do. It's 8.833% of the index. Health insurance makes up 13% of that part, or about 1% of the overall CPI. So even a large increase in health care contributes only a tiny amount to inflation.
They account for health insurance in a different way than you might think just looking at those 13% / 1% numbers might suggest. The short version is that if you pay $10000 in insurance premiums, but get $8000 of health care costs covered, they call that $2000 of insurance cost (since youd be paying the $8000 out of pocket otherwise). Of course, with the state of insurance in the US, its more complicated that that in reality.
I think the overall 8.8% figure is probably reasonably accurate for total health care costs, on average.
> The only thing preventing that from translating into the broader price level is that money velocity collapsed due to the Covid shutdowns.
Hum... Money management 101 says that if velocity goes down, you must print more money to compensate. Otherwise you get a deflationary crisis added into your real world one. (And fiscal policy should intervene increasing the velocity, but fiscal policy is a fraud everywhere, so nothing new here.)
The real test on the seriousness of the US monetary policy is whether they will drain the market once the velocity increases. I do expect them to, but well, anything may happen.
Anyway, that part of the comment on the title is a case of "well, duh?!?" What else could we expect any central bank to do right now? But the data is still interesting.
MV=PQ is popular in some circles, but it doesn't describe casual links.
You can't reason about how those quantities behave from the equation, which is a mere accounting tautology.
Both recently and in QE post-global financial crisis, V went down because M increased without any reason for why the right-hand side of the equation should change.
> V went down because M increased without any reason
Wait, if we are talking about 2017-2019, that's a different story. But right now, V got to the floor (everywhere, not just the US) because of the pandemic.
You bring up an interesting point about the velocity of money. Two things come to mind:
1) If wealth distribution in the US is getting more top heavy, is a certain percentage of the currency slowing down in velocity as it is held by wealthier people who aren't spending it?
2) What is the rate of population change vs. the change in money supply? If the population is growing at 5% a year, the money supply growing at 5% a year should be net neutral for inflation. I think the US population is growing less than 1% per year so maybe this isn't really a hedge against inflation.
To expand on "money velocity": Inflation reaches high-priced assets and those which are largely bought by institutional investors first - Real estate and equity.
After following Peter Schiff for over a decade, and him being thoroughly wrong about inflation after 2008, I can't help but think "this time is different".
Before 2020 all money printing went to banks, which increased the wealth of the 1% and increased asset prices, but it didn't create inflation. But now, we have actual helicopter money. And this time I believe Peter when he says, once you start with stimulus cheques, you can't stop. This will go on and on. And it will create inflation.
I also think the fact that everyone is locked up right now has mitigated the effect a bit. But once everyone suddenly starts spending after a year and a half of lockups, suddenly there won't be enough product to go around.
I listened to what Schiff had to say in 2008, but the same talking point of how he was right became tiring quick. Eventually years later I realized he basically always has the same forecast of impending doom, that just happened to be correct once. So he's a bit of a broken clock is correct twice a day person.
> To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[20]
I highly recommend analysis by Lyn Alden. She looks at the situation with an engineer's approach without pushing any political agenda. She looks at several options and provides the justification that "this time is different"; also lists other potential scenarios that could happen and things to look for to determine which one is developing.
https://www.lynalden.com/money-printing/ is a recent public article. She has a couple of more recent updates in her premium research section, but the main thesis stayed the same.
> Before 2020 all money printing went to banks, which increased the wealth of the 1% and increased asset prices, but it didn't create inflation
No inflation in housing costs? Health care? Education? Fine art and collector car prices?
I don't think "reasonable billion dollar interest free loans to billionaires" turns into "actual helicopter money" the moment it's given to a non-billionaire.
In my opinion, this is yet another retelling of the same Weimar Republic ghost story trying to convince you that giving poor people money will lead to hyper inflation. It's total bullshit, just like trickle-down economics. The Weimar Republic collapsed because it couldn't afford to pay its war debt to other countries, or (as some scholars believe) it was done intentionally by the Weimar government so they wouldn't have to pay it back.
One hundred years later, there are dozens of other countries that have more debt to GDP ratio, where the minimum wage is a living wage, there is a strong safety net of housing/food/healthcare, and a #3 at McDonalds is not much more expensive. If you have recently seen your wage double, it's actually cheaper.
The street is always looking for the next big bet. Let's make it on every day citizens instead of the obscenely wealthy.
Why are you implying I want aid for billionaires not the poor? I was making a pretty objective point about Peter Schiff's opinions, without adding any opinions of my own.
So please don't turn me into the billionaire bailout supporter. I'm not and I never said such a thing.
If I gift money to an extremely over leveraged banks to save them and, with puckered sphincters (they just saw the abyss), they hold onto it then we won’t “see inflation”. It’s there, but it’s latent inflation.
If I demolish wages by exporting jobs overseas, that will have a deflationary effect to counter the effect of inflation.
If I replace cocoa butter with food wax, I hide inflation.
If I don’t include price of housing in the CPI [1], I manipulate inflation.
Schiff’s theory is sound. But, like the GME debacle proved, it’s like shoring a doomed company. Can you stay solvent long enough to prove your point?
[1] I know and understand the argument why houses it arent included. I just reject the argument completely as flawed.
I agree with you, but that doesn't take away from the fact that now we might see actual inflation at the level of "everyone". Which is different to the asset price inflation we've seen in the last 12 years.
The argument is that a house is an investment. I.e you sell it in the end. Investments aren’t included in the CPI.
I think that’s BS because investments increase in value due to inflation (and not just because of their inherent growth).
I get the difficulty of extracting the natural growth of the asset from the inflationary growth, but I also believe most of the 2008 monetary mass increase was shoveled into financial assets and this has to be considered.
I haven't crunched the numbers but so much of people's income goes to housing and housing prices vary so much that I think that would likely result in the outliers trashing any utility the index has.
> ... and him being thoroughly wrong about inflation after 2008
Yes, but I've listened to a lot of Peter Schiff, so I'll offer a defence of his position that he might agree with (although it isn't one he'd make) by breaking inflation into 2 parts:
Assumption (wildly radical) - inflation is exactly equal to the change in monetary supply.
Say there is 100% inflation of the monetary base (and, by assumption, cost of everything doubles) and people become twice as productive from technological improvement (cost of everything halves). The BLS would say inflation is 0%, because the net availability of goods and services to people hasn't changed. Schiff would say there has been 100% inflation because in a counterfactual everyone could have had twice as much stuff.
I'm not sure what word the economic mainstream would use to describe what Schiff is talking about. I would call it Gross inflation, I suppose.
Inflation is only a problem if it doesn’t reflect actual economic activity.
Thanks to COVID there is so much slack built into the real world economy right now that there is probably a ton of capacity to absorb any additional “created” dollars.
I suspect the real problem will be if for whatever reason the vaccines start failing and COVID comes raging back and worse for at least another year.
I don’t think OP argued to bail out the rich. They only argued that UBI doesn’t make sense.
Maybe UBI makes sense. Maybe it doesn’t. I’m on the fence, personally. But bailing out the way we did in 2008-2009, where CEOs and other saboteurs got massive bonuses instead of jail time, was highly immoral. Some of believe that that caused latent inflation.
Bailing out the rich has nothing to do with UBI.
I’ll welcome an UBI scheme that doesn’t wreck personal agency and responsibility. But the onus is on the proponents to prove that it isn’t a terminal civilization’s 21st century version of the Roman “bread and circus”
Btw, a great implicit UBI is to
- reduce the work week to 30 hours. Shares existing jobs with more people
- change the “part time” rules to discourage hiring “part time” employees to avoid benefits
- increase minimum pay. Yes, that too. But it has to be local government in a manner that makes sense to their local economy. Alternatively the federal imposed min. wage should depend on geography
- Bring back weekends to low wage earners (my wife’s entire family works at Walmart or similar places. I see how weekend instability wrecks their ability to enjoy being together). Either close on weekend, or have workers choose a week day they always get off. Mandate 50% overtime for work on weekends.
- Put a 15% tariffs on all goods (no exceptions!). This acts like a sales tax (counter cyclical to the economy. Big plus one) that isn’t as regressive as a sales tax since it encourages local jobs for cheap things and for fancy things the rich pay).
Didn't want to imply or criticize OP in any way, just make an observation.
I think your arguments against UBI make sense, I also know a lot of good pro arguments.
But ultimately, whatever the arguments, as long as we bail out the rich, I don't care about potential downsides of UBI. Nobody cares about the downsides of bailing out the rich, so why should I care about the downsides of bailing out the poor?
In short, if: "UBI wrecks personal agency and responsibility", than so does QE, bailouts etc. for the rich. So these points aren't the real reason why the one thing happens and the other doesn't.
Fully agree with all your points, a better labour market is better than UBI.
The poor would soon learn their one shot out of poverty is keeping their job and throwing their UBI income straight into the stock market. This would propel the prices of equities to even greater stratospheric heights, and as the investor class gets richer eventually the prices of all commodities rise to capture this easy money flowing around. So now the poor have more money but it still buys less or equal to what it did before, so it’s a wash.
Meanwhile anyone who isn’t putting all their UBI into stocks and is instead using it to live and pay bills will fall behind and be comparatively poorer to everyone else. It will happen.
Any UBI is not going to be "in addition to" whatever other money you might earn, but is more likely to look something like a minimum income, below which you cannot drop (even if you stop working).
That drops the U in UBI, most it’s merits, and creates a poverty gap.
UBI only makes sense when it’s universal. It makes most sense when it replaces other entitlement programs.
I don’t think UBI is necessarily doomed to an inflationary spiral, but the onus is on its proponents to prove otherwise.
Come up with a scheme that won’t become a bread and circus, and wont cause inflation, and I’m all for it!
But I’d rather just smash the machines (that’s ultimately what UBI aims to solve) and solve the automation problem by giving ppl the dignity [1] of work.
[1] my local grocer employees a few folks with Down syndrome at the cash register. They’re super slow, but otherwise good at their job. I love them. They value their job so much, and they have by far the best attitude. Their job gives them the dignity of knowing that they aren’t mere consumers, but also (in their limited way) contributors. That’s very powerful for the soul.
I don't see why inflation is necessary. UBI doesn't have to change the amount of money flowing through the economy; one option is heavy taxes. Wealth redistribution, effectively. That does beg the question of whether incentives will remain high enough to maintain the technological forward momentum we have been making, and whether that slowing down is even necessarily a bad thing.
> [1] my local grocer employees a few folks with Down syndrome at the cash register. They’re super slow, but otherwise good at their job. I love them. They value their job so much, and they have by far the best attitude. Their job gives them the dignity of knowing that they aren’t mere consumers, but also (in their limited way) contributors. That’s very powerful for the soul.
That's very different from smashing the machines to me. They really and truly are contributing something to the world; we need people to check people out and bag their groceries. If we built a machine that could check people out and bag their groceries, smashing that machine so people can get the "sense of pride and accomplishment" of having needlessly manually bagged the groceries seems a little... patronizing? I mean, at that point why don't we just keep using the machines and send everyone to school for the rest of their lives to keep them busy like we do with children?
I think people will gravitate towards work on their own, it just won't look like what you're accustomed to. With that amount of automation, we can support a lot more work that isn't strictly industrial. Arts and culture, artisanal goods, baskets woven underwater, etc. Is it going to propel us forward? Probably not, but I think it will make people a lot happier than pointlessly bagging groceries. If we accept that the value of the work is intrinsic (i.e. the value is in doing the work, not in the product of the work), we might as well let people work on what makes them happy.
Wait what? Isn't that the whole point? It's UNIVERSAL.
So we don't have to have bureaucracy to run it bla bla.
How is it UBI if I stop getting it if I'm working? Then it literally is just another form of government help to the unemployed and a massive disincentive to work.
And you don’t think people getting UBI with a bunch of free time aren’t going to occupy that time by taking unofficial jobs and getting paid under the table to earn more income? Get real.
You’re right, of course, that if the UBI is giving any meaningful amount of money, then ceribus paribus, (massive) inflation is the result. It’s a basic argument too.
Of course you don’t have to keep the “ceribus paribus” condition, Although I’m skeptical any leader in the USA will break the ceribus paribus.
Not really. It's a mechanism by which UBI could turn out to be futile, but it's only a qualitative mechanism. Whether UBI actually becomes self-defeating via inflation is a quantitative question which nobody can honestly answer today because (a) a lot hinges on what the tax regime is like and (b) nobody has ever done the experiment, and we need the experiment to gather quantitative data. (Yes, there have been UBI experiments. None of them were large enough for macroeconomic effects.)
UBI is really a strange beast. I wish I had more time or fitting frameworks / mental models to understand better the consequences.
UBI...
- might be the only solution out of the crazy money printing and MMT
- seemed to me initially (!) strangely similar to communism/socialism, but actually is very different (for example there is something to be gained from being innovative or creating stuff (instead of doing the minimum you can), which was not (!) the case in communism
- might be the only solution when most (current) jobs will be replaced by robots (if all agriculture gets 99% automated, can we not have basic (!) free food for everyone? And additionally just a simple roof... both would cover most of your basic needs)
I am not sure about UBI, I also see problems with it too, but could solve more of those than it creates... maybe?
> But once everyone suddenly starts spending after a year and a half of lockups, suddenly there won't be enough product to go around.
People in need are already spending it to survive or to pay up debts they had to take on due to dysfunctional / non-existing social security networks. And even when the lockups eventually expire, many won't immediately splurge - because the next lockdown is only one mutation away.
For what it's worth I'd guess most of the helicopter money ends up at banks eventually by mortgage payments and student loan repayments.
Inflation is already happening, that is why housing and equities are so high.
It isn’t happening equally amongst the basket of commodities that one can purchase, but it is happening in aggregate.
This is actually a feature of our currency system. If inflation didn’t happen, everyone would hold back spending until the next year; this is what caused the great depression.
Inflation should be sky high. You cant inject that much money into the economy and not expect inflation. Inflation must come eventually.
The reality is that people in lockdown arent spending. Adjusting inflation numbers for this, the economy is tremendously deflationary. Not to mention officially in recession. Worse yet, the 'v shaped recovery' also only exists because of the debt taken on by the governments. Adjusting for debt there has not been a recovery.
Why are assets like housing, equities, bitcoin, gold, etc so high? I think it isn't inflation/deflation. It has more to do with expected collapse of the economy. Possibly great-depression levels of bad, but that won't happen for North america. The USA will declare a new war this year to counteract that concern.
> If inflation didn’t happen, everyone would hold back spending until the next year; this is what caused the great depression.
This is the Keynesian explanation for the Depression, and here "spending" includes government spending. In this view, the duration of the depression was exacerbated by FDR's unwillingness to run a deficit to inject cash into the economy.
The other mainstream view (Friedman and Schwartz) argues that the reason a recession became The Great Depression was the Fed allowing ~1/3 of extant banks to collapse (not bailing them out) via cascading failure. There was major asset deflation (35%) and interest rates remained high. The Fed could not issue credit because it was still restricted by the gold standard. (Amusingly: Fractionally limited: 40% of note value backed by gold. A run on redeeming notes for gold caused disproportionate impact on the Fed's ability to issue credit and lead to Executive Order 6102, criminalizing private gold ownership.)
> Inflation is already happening, that is why housing and equities are so high.
"Inflation" is the cost of a basket of goods and services. Is you wish to talk about rising asset prices please do not use "inflation" as it just confuses the issue, especially since we already have a term for that:
Look at the 2008 crash and countries in Europe with large cash savings and low spending. Germany would be a good start. If I recall correctly Germany had a longer recovery time and it was hard to get Germans to spend stimulus money.
My impression is a bit of inflation won’t be the worst thing for Americans and the world.
It will boost our manufacturing as imports become less desirable and exports become more attractive.
It also tends to boost economic activity in the rest of the world whose businesses deal with the dollar a lot.
When we became the world’s primary reserve currency by exchanging military protection for dollar based markets with OPEC after WWII, the US economy was a whopping 40% of global GDP.
However, now we’re about 15%. This means we constantly have to buy imports in order to keep the markets running which really hurts our manufacturing base.
I used to think having a strong dollar and being the reserve currency was an unquestionably good thing for America, but now I’m less sure.
It probably is for me as a white collar worker who likes to travel, but for many Americans it may mean the loss of stable blue collar manufacturing jobs.
If that inflation also occurs by pumping greenbacks into middle and lower class Americans hands, I think I’m all for it.
Although certainly I’d be wary of promoting an inflation rate higher than five or six percent. Not because of any underlying fundamental understanding, but because things are _relatively_ stable (coup attempts withstanding) and I don’t want to necessarily live through the moment we decide to turn the cruise ship too fast.
I'm a software engineer, so not an expert in macroeconomics obviously, but here are some highlights that I think we are missing to consider when we think inflation is coming:
- The USD is the reserve currency of the world, printing money does not only affect the USA but the entire world to some degree.
- Money printing is not just happening in the USD, but rather, the pandemic was a world event and many nations are "printing money".
- The USA Federal Reserve is not, strictly speaking, printing money. It is way more complex than just money printing. From what I understand, is more efficient to "print money" by increasing the money multiplier, meaning, the Fed ask banks to lend more since lending money multiplies the money faster than printing. Therefore, with QE (Quantitative Easing), the Fed buys debt from banks giving them liquidity for them to lend more money into the system. However, given that we are in an economic recession (temporary perhaps but recession nonetheless), banks are not really lending at the rates the Fed wants. In order to fix this, the usual approach is to lower even further the rates, but we are already at near zero so there is not much to do there either; which is what I understand is referred to as a Liquidity Trap.
- A weak dollar (and strong Yuan, etc) is bad for the exports of other countries, so they will be incentivized to devalue their currencies.
Anyways, this is not to say that inflation won't happen, but rather than a simplistic point of view "printer goes brrrr, inflation will happen" is probably not correct.
I personally find it hard to believe that hyper-inflation will happen, but I also recognize that I'm not certain of this.
Right, but actually deflation (the opposite of inflation) could be so much more worse than inflation. Inflation we know how to fix, the Fed increases the interest rates.
However, a Deflationary Spiral, is way worse in the sense that it makes everyone scared of spending money, prices next year will go down so why buy anything this year? Getting out of deflation is way harder from what I understand.
So yes, I agree with you that I just described a perfect storm (credit to people like Steven Van Metre, etc), but the argument here is that the storm might not be inflation but rather deflation.
What I can agree on is that the end is not pretty either way.
Don't forget Weimar Germany was under the thumb of the truly punitive economic features of the Treaty of Versailles. French PM Clemenceau insisted on punishing Germany for starting WW1. The Marshall Plan after WW2 was a largely successful effort to avoid repeating that, for the west anyway.
Since Weimar the western world has developed various negative-feedback loops (using the lingo of control theory) to interrupt hyperinflation. Some of that comes from Keynes's own work. Those loops are big and clunky, but so far they work. The US Federal Reserve manages many of those loops, and has the dual mission of keeping inflation low and employment high.
It might be a good idea to learn more about all this before investing your kids' college money according to this hyperinflation fear.
While I"m sympathetic to his worries, I can't help but wonder if Michael Burry is actually just a one hit wonder. Granted, I'm not even a one hit wonder so he's still one up on me. But still. I'm not sure his conclusions should be taken any more seriously than anyone else.
Shorting a company that’s «looking pretty suspect» right before it appreciates by 2200% is pertty much the definition of being very, very wrong.
Burry probably didn’t do that badly, but any successful Tesla short in the last 2 years has happened at times when the company did not look particularly dangerous. Excluding the macro crash at the start of the pandemic.
We heard the same thing after the post 2008 stimulus too.
It seems some of the very obvious predictions aren't so easy anymore.
I understand where folks are coming from generally with these predictions, and I don't necessarily disagree with a lot of their ideas..... but the outcomes just don't seem to follow.
Do you believe that the consequences of 2008 have been fully borne out? I think it's possible that one day we or someone else will look back on 2008-20?? and judge the consequences of "quantitative easing" which hasn't really stopped during this entire period. It seems to me that we've just been kicking the can further and further down the road.
The federal funds interest rate never rising above 1% between 08 and 17, and being now back at essentially 0 again pretty much says to me that we've been stimulated this whole time.
Hyper-inflation has been just around the corner since at least 2008, and yet looking back we've been falling toward zero, and in parts of the world interest rates have gone negative.
It's possible that applying a 1970s filter to the 2020s isn't helpful. Starting conditions are radically different.
That doesn't mean inflation is no longer a thing, but there is evidence that we're a very, very long way away from hitting any kind of inflection point. Many trillions of USD away still.
After decades of hearing about trickle-down economics, and seeing lower inflation than ever, it's only taken a couple stimulus checks for people to start becoming inflation hawks. People need to set the bar a bit higher I think. There might be an equity bubble, or a housing bubble, but I'll believe CPI inflation when I actually see it. The Fed has printed money before (helicopter money+buying debt), and it didn't cause CPI inflation.
I've been in the US for 25 years, and I've yet to see savings interest rates above 2% in all of that time, and CD rates of more than 4%. There are other factors of inequality and productivity at work as far as mid-long term inflation is concerned. You want to see short-term inflation? Buy everyone a house.
On the surface this seems nonsensical. The main tool the fed has for inflation fighting is interest rates. Interest rates are essentially at zero, so the fed has lots of scope to prevent inflation from getting out of hand if/when it does. Raising rates will hurt a lot of people, but I don't doubt the will of the fed to do so if necessary. Unlike past feds, they won't do so unless it is necessary.
This is just so weird, I'm having trouble wrapping my brain around it. Last year the US issued two rounds of economic stimulus, with $2T and $2.3T price tags. Our inflation rate for 2020 was 1.23%, below the Fed target of 25. In fact, it's been 1.51% on average since 2008[0].
So why is there now suddenly a huge risk of inflation, even hyper-inflation? What has changed? The current proposal is for $1.9T stimulus bill, less than half of last year's bills, but now we're at risk of inflation running out of control overnight?
The hardest part navigating this is you simultaneously hear that equities are absurdly overvalued and will soon crash, and that the dollar is about to hyper-inflate. These two tales seem at odds with each other unless there's something I'm missing.
For a community that tries to pride itself on good discussion I can't help but notice how awful the HN discourse is for anything related to economic policy. You have a thread where the original source is a twitter post talking about higher than average inflation and in that thread you have a whole bunch of people talking about hyperinflation. These are very different things.
But, first let's talk about monetary policy. The Federal Reserve has 2 mandates, full employment and price stability. When the Fed adds a massive amount of money into circulation during a massive economic downturn it's not because they're disregarding that second mandate. In fact, it's the exact opposite. Inflation is demand driven, if demand goes up and supply stays the same then prices have to go up. The literal number of dollars in circulation is meaningless if no one is willing to spend them. Adding more money to circulation increases demand which increases prices because people have more money to spend, this is how printing money can cause inflation. However, just as an increase in demand decreases the value of a dollar, decreases in demand increase the value of a dollar. This is deflation, it happens when demand falls off a cliff and it's very bad. The reason it's very bad is because it encourages people to stuff money into a mattress instead of spending it, further decreasing demand, further worsening whatever economic collapse got you into this mess to begin with, further increasing deflation. "Price stability" is a mandate that applies in both directions. Most of the money printing recently has specifically been aimed at maintaining price stability, not destroying it.
Since 2008 the average rate of core PCE inflation has averaged at 1.5%, below the 2% inflation target of the Federal Reserve. It will likely take until 2023 until we reach a point where core CPE exceeds 2%[1] at which point it will be up the the Fed how much they want to raise interest rates to control additional inflation. Please note that a 2.5% rate of core PCE inflation is hardly the end of the world and is close to what we saw during the mid 2000s. The 1980s averaged about 4%. Here's a historical graph[2].
Just a note on your opening concern: the twitter thread may have opened with the mild statement, "The US government is inviting inflation", but the rest of the thread was quotations from the book 'Dying of Money'[0], about the period of hyperinflation in Weimar Germany.
The thread culminated in a tweet that directly suggested our past decade is similar to Germany's gestation period prior to hyperinflation, and that we are on a similar course. The discussion of hyperinflation is absolutely on topic.
Take a long position in real return (inflation-adjusted) bonds like TIPS, and go short in nominal bonds. You will profit from an increase in inflation / expected inflation.
Burry's premise is unproven. The US government's policies are not "MMT-tinged" (i.e. unchecked money printing, in the financial shorthand) unless there's a serious question about the Fed's lack of independence or lack of commitment to its inflation target.
Hyperinflation, which Burry warns about through imagery of interwar Germany, doesn't just happen. It requires that the money-printing authority keep the presses rolling despite extant and increasing inflation. We have neither of those today.
Theoretically, inflation results from an increasing amount of money chasing the same amount of goods. But, as long as supply can rise with demand, inflation should not occur.
The Fed manages inflation. If it gets too high, they can decrease bond prices and raise interest rates. It’s actually hard for them to increase inflation, as they can’t increase government expenditures or give people money. Lowering rates doesn’t do much when rates are zero and banks aren’t lending.
Inflation is the most cruel, invisible tax - cruel, because it is regressive, and so affects the poor much more than the rich.
That the government, elected by the people, is actively - and pretty openly- diminishing the purchasing power of working people it was elected by - is just breathtaking.
And yes, the purchasing power will diminish, because price inflation will not be matched by income inflation, due to a lot of slack in the labor market.
Except inflation is by no means guaranteed. We've been fighting deflation for years now.
For the decade following 2008, the last time there was a big warning about how stimulus spending would lead to Weimar-style hyper-inflation, our inflation rate has averaged 1.47%. The Fed is trying to raise that to 2%, worried that it's too low!
Not sure any of those will protect you. US equities should perform ok — IMO they’re already inflated because that’s where most of the “extra” money supply is sitting on the sidelines. Commodities futures (namely food) are probably your best play.
This has happened before — 90s Japan is what the US has in store for the 20s. The same collection of factors (high valuations after decades of rapid growth, a declining birth rate and an aging population) are present in the US. The main difference being there is no “safe haven” currency; the US is still a superpower and a declining US economy will hurt the global economy and set the stage for China to take over as the sole global superpower.
Coping with inflation creates extra taxes. There is no perfect mitigation.
Use your existing dollars to buy non-volatile assets like real estate or gold requires you to pay long term capital gains. Gold mostly keeps a constant value, but the dollar value goes down, and the gold price goes up. That looks like a "profit" and you need to pay 15%, soon to be 20%. Effectively, the effect of inflation decreases by 4/5.
For example. suppose you have $100. Holding it over two years of 2% inflation effectively makes the money worth 96$ = 100/(1.02^2). Instead, if you bought $100 of gold, hold for two years, and sell it for $104, you are taxes on 20% of $4. Your loss is $0.8 instead of $4.
Your need to ask for a raise proportional to inflation, but that puts you in higher tax brackets. Your new dollars over 85k are taxes at 24% instead of 10%. Asking for a raise is very difficult for some people...
Consensus is foreign equities (but not China), commodities, smaller high growth tech stocks, plenty of cash (with some gold, silver, btc if you're so inclined).
If you aren't already: yes, you should be diversified across US and foreign equities. In a word: VXUS (or as a mutual fund: VTIAX).
If you just want to preserve value of cash, you can buy I-series bonds from TreasuryDirect, to the tune of $10k/year. They have 20 year duration and track inflation. You can buy an unlimited amount of TIPS, although they aren't better than I-series bonds.
Just watch wealth being transferred upwards, as always.
I'm considering real estate, but don't have enough money for the downpayment, and in a crash, I will lose my job like everyone else and not be able to make my payments.
Buy TIPS, which are inflation-protected bonds, and sell (go short) nominal bonds. The difference between the two is almost exactly proportional to inflation expectations, and you are not inviting cross-contamination by other market moves.
hoard what you care about in the long run: family, friends, your business / career, health, education, home, bitcoin, your favorite company stocks. In other words, carry on as usual, nothing to see here.
It's at least 10 years too late for this conversation, probably 40 or 50. What's going to happen can't be stopped and the decisions were made long ago.
I was thinking about this topic the other day. US COVID numbers are dropping precipitously, more vaccine supply is coming online, so what happens if things continue to improve at a brisk pace and the economy heats back up faster than anyone expected...and we get some inflation?
I am thinking specifically about how higher and unanticipated inflation affects corporate debt, and the companies which will not be able to survive rolling their debt when the market demands a higher interest rates to cover the inflation.
Policy makers would be in quite the predicament of either raising rates or letting it run it's course and hoping it doesn't get too high.
Once velocity increases, as is the plan if you assume 2021 is the year we "recover" from Covid restrictions, the Fed will have a choice between inflation and deflating the money supply (eg by selling a huge portion of their accumulated financial assets). The latter implies a rise in interest rates that harms economic recovery and government borrowing costs, potentially reducing available fiscal stimulus.
I would like to read an analysis of how they plan on veeeery carefully extricating themselves from this situation but as far as I can tell the strategy is to wing it.