Monday, April 5, 2021

Booming prices


The Fed continues to expand its balance sheet, the federal government continues to send out Covid relief checks, and the Fed continues to effectively monetize most if not all of this monetary "stimulus." Although this "stimulus" hasn't yet resulted in a significant rise in the general price level, we do see increasing—and potentially troubling—signs of booming prices in certain areas of the economy. I've been arguing for some time now that the Fed's profligate monetary expansion has not been inflationary because it has simply accommodated a similar, robust increase in the demand for money. But the demand for money of late is surely declining (while the supply is not) thanks to 1) rapidly spreading vaccinations and a significant increase in the US population's natural immunity, 2) increasing consumer confidence, 3) the ongoing relaxation of lockdowns and mask mandates, and 4) impressive signs of economic recovery.

In my view, we are already seeing early signs of what will eventually prove to be a meaningful increase in inflation, and this process is likely to play out over the next few years. Inflation seems sure to rise, but we do not yet know by how much.

Chart #1

As Chart #1 shows, the Fed has allowed the M2 money supply to increase at an unprecedented pace since February '20. M2 has surged by $4.2 trillion (27%) in the past 13 months, and has been rising at a roughly 15% annualized pace in recent months; that is far and above the 6.5% annualized rate of M2 growth in previous decades. The vast majority of the outsized increase in M2 can be found in bank savings and deposit accounts at the retail level. The public, in other words, has been hoarding money like never before, likely as a response to all the uncertainties raised by the Covid crisis. I calculate that M2 currently is about $2.3 trillion above its long-term growth trend. That's an extra 12% increase in the amount of money than would be held in "normal" times. If the public decides to reduce its cash holdings relative to income, this "extra" M2 could fuel a 12% increase in inflation over the next few years.

Chart #2

Chart #2 shows the Manheim Used Vehicle Value Index in both nominal and inflation-adjusted terms. Since February 2020, used cars have jumped 22% in price! In real terms, they are almost back to where they were during the boom times of the late 1990s. 

Chart #3

Used cars appear to be in very short supply (relative to demand), and new car sales these days are about as strong as they have ever been, as Chart #3 shows. No matter how you look at it, the demand for new and used cars is robust. Strong demand could be due at least in part to all those stimulus checks, coupled with very low borrowing costs and the public's pent-up demand to get out and about following a year of being shut in. 

Chart #4

Chart #5

Charts #4 and #5 show the prices paid component of the ISM manufacturing and service sector surveys. The vast majority of businesses are paying higher prices for stuff these days. That last time we saw such high levels—in the late 2000s—we also saw elevated levels of the CPI, which averaged 4% per year from mid-2005 to mid-2008. 

Chart #6

Chart #7

Housing has also been the beneficiary of unusually strong demand, as Chart #6 shows. In real terms the average home price in the US is now just about as high as it was at the peak of the 2006-2007 housing boom. Prices rose by about 11% last year and continue to move higher (it's not uncommon to see Zillow and Redfin reporting asking price increases these days, at least in local neighborhoods I follow). I expect to see this continue, fueled by exceptionally low mortgage rates and lots of cash in people's pockets. Plus, the Fed has vowed to not interfere with any of this until late next year. 

As Chart #7 shows, it takes about 18 months for big moves in housing prices (blue line) to show up in the housing component of the CPI (red line). As Milton Friedman taught us, the lag between monetary policy and inflation can be long and variable.

Chart #8

The elephant in the rising-price room is the US equity market. The S&P 500 is up over 20% since it's pre-Covid high in February '20. According to Bloomberg, the market value of all US equities has increased over that same period by about $10 trillion.

Chart #9

Non-energy commodity prices (red line, Chart #9) are up over 20% from their January '20 highs. A good portion of that rise can be attributed to a weakened dollar (blue line), but a weaker dollar is symptomatic of easy money and a precursor to inflation (as we saw in the 1970s). Note also that the dollar weakened in the 2005-2008 period and commodity prices also rose—and inflation increased meaningfully, as noted above.

Chart #10

The price of copper has jumped over 40% since the highs of January '20. This undoubtedly reflects booming construction activity around the world, but also can be attributed in part to easy money conditions in the US. 

Chart #11

Finally, as Chart #11 shows, one driver of higher prices is simply a decline in the market's level of uncertainty, as reflected in the declining Vix "fear" index. The uncertainty that prevailed throughout most of 2020 undoubtedly contributed to the public's hoarding of cash, and now this dynamic is unwinding. 

Unless and until the Fed reverses its Quantitative Easing efforts and/or raises short-term interest rates, declining fear, rising confidence, and strong economic growth are likely to fuel a palpable rise in inflation for the foreseeable future. 

Unfortunately, that in turn will give way—as has always been the case after periods of rising inflation—to tighter money, higher interest rates, and eventually (2023?) to sharply weaker economic growth.

28 comments:

Benjamin Cole said...

The Reserve Bank of Australia just announced they will keep interest rates at historically low levels through 2023, at a minimum, and keep on with quantitative easing. They have a 2% to 3% inflation target band, which strikes me as more reasonable than the Federal Reserve's 2% ceiling. Just like the US, they have housing inflation but little other inflation.

You know the Japan story, easy money, big quantitative easing, big national deficits and no inflation for 33 years.

The ECB and Europe is such a mess I really don't understand what's going on, except that Greece is in deflation. The SXXP 600 just set an all-time record high. But then, so did the S&P 500. Japan at 30-year highs.

If ruinous inflation is on the horizon, the markets haven't sniffed it out yet.

S&P just said that the aggregate wages paid in the US will not be enough to set off inflation. The demand is simply not there.

Well, we can just sit and wait.



K T Cat said...

I saw this on Twitter, so take it for what it's worth: "Credit card nonperforming loans are at 35-year lows. Consumers are cashed up and the stimulus wave has no end in sight."

I feel like previous models are obsolete. The real estate madness in San Diego is palpable. It feels like the SP500 is priced way out of whack. Is it possible that the way money can flow in torrents these days makes the old warning signs of small value?

Scott Grannis said...

Benjamin: inflation is not caused by wages.

Andrew said...

I bought a 2021 vehicle back in October after visiting numerous dealers...

The inventory of new vehicles was generally low and dealers told me that production and shipments were down compared to typical years. So, while new vehicle sales may have been near normal, it was not a typical environment.

I will speculate that the reason why used car prices jumped so much is that dealers were not cutting great deals on new cars because their inventory was relatively low and they were not expecting many shipments. Finance costs were generally good and 0% financing was offered on select models.

Benjamin Cole said...

Scott Grannis:

Actually, I erred; it was Moody's John Lonski who recently penned the thought that wage growth, in aggregate, is too feeble to set off or sustain inflation.

Here is what Lonski wrote:

"Recurring Climb by Price Inflation Requires Recurring Acceleration by Employment Income

Apparently, few currently worry about a recurring climb by consumer price inflation that would eventually drive the 10-year Treasury yield well above the 2010-2019 recovery’s month-long average high of 3.15%. Yes, consumer price inflation may rise, but its ascent is expected to be short-lived. In turn, the long-term average of
the 10-year Treasury yield may not differ much from its 2010-2019 mean of 2.41%.

A return of the runaway price inflation that was common to the 1970s requires a rate of wage and salary growth that is rapid enough to allow consumers to readily absorb price hikes. Affordability is critical to sustaining an ever-increasing rise by price inflation.

Otherwise, widespread price hikes lead to an unwanted accumulation of inventories that ultimately trigger price discounting. The way for the 1970s escalation of price inflation was cleared earlier by an increase in the average annualized three-year rate of growth for employment income from the 4.2% of the span-ended 1960 to the 9.0% of the span-ended 1969. In response, the annual rate of core PCE price index inflation rose from 1960’s 1.8% (which wasn’t much different from 2010-2019’s 1.6% average) to 1969’s 4.7%, where the latter would be intolerable by today’s standards.

When the annual rate of core PCE price index inflation peaked at 1980’s 9.2%,
employment income had soared higher at an average annualized rate of 11.4% during the three years ended 1980."

---30---

I understand many consider "inflation everywhere and always is a monetary phenomenon." Others define inflation as an increase in the money supply, regardless of what happens with the CPI.

Man, I am just a wag. But an old wag.

Maybe we will see inflation, maybe not. I think there is room to be skeptical of predictions of inflation that rest upon the same premises as various "inflation-is-coming" predictions of the last 40 years.

I think we will see housing inflation, and the reasons for that are multiple, but most prominently property zoning and other restrictions.

We can have inflation, as measured by the CPI, and a tight monetary policy, if chronic housing shortages are amplified by ever-tightening housing restrictions.

In conclusion, let me say the nice thing about macroeconomic debates is no one is ever wrong.

K T Cat said...

Benjamin - "Maybe we will see inflation" - it sure seems to be happening right now in the real estate market and the SP500. Yeah, I know, those don't count towards the official numbers, but those price increases aren't phantasms and eventually that money is going to go somewhere else.

Unknown said...

"The vast majority of the outsized increase in M2 can be found in bank savings and deposit accounts at the retail level. The public, in other words, has been hoarding money like never before, likely as a response to all the uncertainties raised by the Covid crisis. I calculate that M2 currently is about $2.3 trillion above its long-term growth trend. That's an extra 12% increase in the amount of money than would be held in "normal" times. If the public decides to reduce its cash holdings relative to income, this "extra" M2 could fuel a 12% increase in inflation over the next few years."
Here's another dimension:
It appears that in 2020, US people, at large, have accumulated 1.6T of excess savings. However, all of this excess savings has accrued to the top 40% and 85% of total excess savings has accrued to the top 20%. The bottom 60% have not accumulated excess savings, have borne the brunt of job losses and have come to rely on various transfers. i think this is potentially (very) deflationary.
On the housing front, there are supply issues but the elephant in the room are abnormally low interest rates and (now insane) sentimental factors. In my area (Canada, FWIW), the norm is that houses sell within hours of being listed at prices above initial listed prices (listed prices way above long term trends to start with). This is also potentially deflationary and the housing market could not endure any material increase in interest rates. The CPI and housing price divergence is also seen in the imputed rent data that is being reported (so far the imputed rent has followed the CPI). Divergent trends need to reconcile and i think the housing prices will reconcile with the CPI and imputed rent data, not the opposite and this is also deflationary.

MCKibbinUSA said...

Inflation will happen similar to what happened in the 1970's. The question is where to park wealth in the mean time...

Frozen in the North said...

Scott, Yes I agree the growth of M2 is something to watch but is that the most accurate and predictive of inflation "money" growth. I'm not sure the correlation is there. As for Copper, I don't think that US policy is the culprit here, I think that is putting too much responsibility on the US as to the price of commodities.

What companies have learned during the Trump years is that you should not trust the supply chain, and that excess inventories are being re-built after years of being run down. Look at companies across the world and you see inventory buildups. Now that could be due to the anticipation that covid is going away, but that perception is an AMERICAN one. Deployment of vaccines in Europe has been terrible as it has in Canada and Mexico.

Also, I have a friend building a house in the US, and he's replaced 2x4 for international partitions with metal studs. Who's price has not changed. Moreover, even if it's a global building boom, the price of timber is a PURE American phenomenon. No one else in the world builds with wood.

Aside from that what the Feds are doing is criminal, but hey when you have a country that wants to buy everything on the credit card, including two 20-year-old wars in AFganistan and Iraq...

HDX said...

Arguing with academics (see above comments) is a pointless activity. They see the world through their little models and theories, and they are convinced that its reality that is wrong, not their models.

Holden Caulfield, each and every one of them.

For those living in the real world, college tuition has climbed double digits for decades, despite the academics love of CPI. These free loaders pay zero taxes on their endowments, zero property taxes, zero taxes on their NCAA TV revenue -- and then their professors go on TV to say other entities aren't paying our share.

Energy costs are way up too. Oil futures prices are sort of flat, but gasoline prices at the pump reflect transportation bottlenecks and massive federal and state taxes. So yeah, real world energy prices are up. Federal employees, like academics, are exempt from the taxes they impose on others.

If you live in the USA and haven't noticed health care costs are skyrocketing many many multiples of CPI -- then you are stupid, a college professor or a federal freeloader (public servant my @ss).

Fed Chair Powell, like the criminals in Congress, gets driven everywhere in an armored SUV that gets filled up at a federal station-- no taxes, but doesn't matter since he doesn't pay any part of it. The Fed stocks his refrigerator, the man hasn't seen a grocery store in years. The Fed also pays 100% of his health care costs, tax free to him. No deductible, no limits. Obamacare is for suckers.

The people telling us about CPI have absolutely no connection to the real world. They don't pay market prices, they don't do their own shopping. They live a privileged existence not unlike a monarch or a dictator.

Inflation isn't "coming", its already here. Given Biden is spending other people's money like a 3rd world dictator, inflation is going to accelerate.

All the people running the USA -- Biden, Pelosi, Schumer, McConnel, Yellen, Fauci -- there isn't a one of them under age 70 (many are over 80). They aren't going to be around to repay the debts they are incurring.

When academia starts paying **ANY** taxes like everyone else, then perhaps they can start talking about tax rates and CPI. Until these free loaders start contributing, they should keep quiet.

Unknown said...

The net inflation number that is being reported has become the net result of diverging trends: many categories (healthcare, education, child care etc) going up way above average rates for decades now and this has been balanced by other categories with much lower inflation rates, some even deflating (various consumer products) and this has been going on for decades too.
The former category is related to human work kept domestically and the latter category is related to outsourced work and work done in emerging economies.
You may point fingers all day long but the above secular forces are central to what will happen to inflation rates in the next few years. The underlying causes are multiple and explain our low growth-low productivity world and it seems to me that various outcomes come with deflationary transitions but monetary authorities could become reckless to a point of significant trust destruction in the currency.
One aspect which is clear though is that asset inflation has decoupled from consumer inflation. There are various ways to reconcile that but, historically, it's the asset inflation part which typically "adjusts" in the "real world" LOL.

Salmo Truttra said...

In 1987 the FED discontinued targeting the money stock. This caused a lot more volatility.

The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves (which have been discontinued March 26, 2020).

Salmo Truttra said...

Parse date; real-output; inflation

2/1/2020 ,,,,, 0.05 ,,,,, 0.03
3/1/2020 ,,,,, 0.2 ,,,,, 0.21
4/1/2020 ,,,,, 0.33 ,,,,, 0.4
5/1/2020 ,,,,, 0.4 ,,,,, 0.45
6/1/2020 ,,,,, 0.44 ,,,,, 0.5
7/1/2020 ,,,,, 0.44 ,,,,, 0.53
8/1/2020 ,,,,, 0.45 ,,,,, 0.56
9/1/2020 ,,,,, 0.45 ,,,,, 0.61
10/1/2020 ,,,,, 0.53 ,,,,, 0.68
11/1/2020 ,,,,, 0.77 ,,,,, 0.79
12/1/2020 ,,,,, 0.84 ,,,,, 1.26
1/1/2021 ,,,,, 0.64 ,,,,, 1.31
2/1/2021 ,,,,, 0.66 ,,,,, 1.41
3/1/2021 ,,,,, 0.7 ,,,,, 1.51
4/1/2021 ,,,,, 0.66 ,,,,, 1.54
5/1/2021 ,,,,, 0.66 ,,,,, 1.47
6/1/2021 ,,,,, 0.58 ,,,,, 1.44
7/1/2021 ,,,,, 0.55 ,,,,, 1.47
8/1/2021 ,,,,, 0.37 ,,,,, 1.45
9/1/2021 ,,,,, 0.12 ,,,,, 1.4
10/1/2021 ,,,,, 0.12 ,,,,, 1.4
11/1/2021 ,,,,, 0.07 ,,,,, 1.28

So we know that inflation will prove transitory as it declines rapidly after Nov. 2021

HDX said...

Unknown Canadian -- did you see the Bloomberg article (which cited a Canadian source) that 53% of Canadian citizens are now technically insolvent? Over 60% of Canadian citizenry cannot afford a sudden CAD$ 200 expense?

The Canadian government wasn't mentioned, but it isn't solvent either (and will soon be less so, given its failed tax base!).

The most productive Canadians -- from Wayne Gretsky to Pamela Anderson to Tom Brokaw to Kevin O'Leary -- all moved to the USA. Those are just the famous Canadian ex-pats living in capitalism, the complete list is much longer.

Canada's socialist government was all in support of the Kyoto Accord... until they realized it would mean shutting down the oil fields and tar sands who's royalties keep Canada afloat. "Free" low quality health care would be canceled if Canada stayed in the Kyoto accord. Yes, its low quality health care, which is why Canada's health minister travels to the USA for care (he says he doesn't want to wait months to see a doctor, but later he admitted that the quality wasn't as good either). All wealthy Canadians travel abroad for health care (not always to the USA).

Canada's populace would have torn Quebec apart if they didn't keep welfare going. You will keep selling oil and timber to the USA (and to China) because your socialist government would collapse without the subsidies. That's just how socialism works. Steal other people's wealth, use it to bribe the populace (welfare), and pray that the supply of other people's wealth doesn't dry up.

Canada is a third world sh!t hole that gets subsidized by the USA into being a second world sh~t hole. Don't ever forget that. If Biden and his pals manage to socialize the USA, your free other people's money will dry up and you will be even more screwed than you are now.

For those of us in the USA, we need to wake up and stop dementia Joe from destroying the USA. Its no wonder Biden is afraid of Putin -- Russia already knows socialism is stupid and he knows how to defeat it. People who know how to defeat socialism scare Biden.

Unknown said...

@HDX
You are quite funny.
Yes, Canada is dependent on the US but it's not as if you don't have your own challenges!
For your information, Pamela Anderson (a productive Canadian LOL!) has moved back to Canada and wants to feed prisoners with vegan food.
Disclosure: i'm long CoreCivic.
BTW the topîc is inflation and money supply.

HDX said...

Unknown Canadian -
For your information, even a blonde bimbo knew she had to go to the USA to make money. She is depleting that savings now, I guess in Canada but doesn't matter where she spends the money, she earned it in the USA not Canada.

Thanks for noticing that the topic Scott wrote about is inflation. Since you are Canadian, I'll try to explain this in hockey, in hopes it might sink in.

If you want to learn to play hockey, you don't take advice from someone who can't even skate and needs to be pulled around the rink/lake by someone else.

If you want to understand economics, you don't take advice from socialists who need to live off the work of others.

Unknown said...

@HDX
To focus on perceived ideological differences is not constructive.
It's interesting that you initiate the discussion from a country (compared to Canada) that is now promoting the Green New Deal, the equivalent of UBI etc etc and that spent, by far, the largest amount of funds (all government debt) per GDP for Covid-19 side effects, a virus that people recover from more than 99% of the time. Your country also spends about the same amount of dollars per capita for your 'public' options for healthcare as Canada.
The relevant question is what all this money infusion (and central planning) will do to inflation. The US still has amazing economic potential (and future taxing power) and it's unlikely that inflation takes off based on a currency (international reserve currency) devaluation. Reaching higher inflation has been defined as the new promised land and it would be useful to get construction discussions going as to how 'we' will get there. Opinion: presently, i see deflationary forces as larger.

Benjamin Cole said...

More talk from John Lonki at Moody's:

"Market-Based Metrics of Default Risk Are the Lowest since 2007

The market’s assessment of high-yield default risk now resides at its lowest level since the early summer of 2007. As mentioned earlier, the Bloomberg/Barclays high-yield bond spread trails each of its prior month-long averages going back to June 2007. In addition, the 1.84% April-to-date average of Moody’s Analytics expected
default frequency metric for U.S./Canadian high-yield issuers is less than each of its prior month-long averages going back to the 1.59% of June 2007, or when the high-yield bond spread averaged 256 bp."

---30---

Well, who knows. If you believe the market, 2021-2 is setting up for solid growth and low inflation, and not much in the way of bond defaults.

If we do not see much inflation this go 'round....well, I think that dog don't hunt anymore.

I hope the COVID-19 overlords crawl back under their rocks soon.

But you know how it is: any expansion of turf or power by a federal or state agency---whether Defense, surveillance, USDA, HUD, Education or public health---will not be given up.

Ugly thought: What if COVID-19 is an escaped Wuhan bioweapon designed to mutate quickly? Are we going to live like this forever?



Unknown said...

@Benjamin Cole
"Well, who knows. If you believe the market, 2021-2 is setting up for solid growth and low inflation, and not much in the way of bond defaults."
An interesting thought is that, for the typical "saver", in order to obtain similar yields offered by CDs about 10 to 15 years ago, one has to invest in high-yield (junk) bonds now.
Whatever thoughts on inflation or deflation, one of the most depressing jobs now IMO is to be a pension fund portfolio manager.
Since the 30s, the government's share of the economy has, overall, been increasing and 'we' will eventually figure it out. Opinion: Covid will be a forgotten topic in a few short months but the central banks will keep on being ready to do whatever it takes.

Benjamin Cole said...

Unknown:

The world is enduring a pandemic (and a very restrictive government response) yet the economy is doing okay. We did not sink into a global Great Depression.

One viewpoint might be that central banks and fiscal authorities finally get it.

Wide-scale liquidations could have had a Snowball Effect---all downhill.

My reservation is that debt peonage is not the answer. Governments must learn judicious use of money-financed fiscal programs.

But hey, that's my opinion. And as I say, the nice thing about macroeconomic debates is that no one is ever wrong.

Unknown said...

Mr. Cole:
Fair enough.
What we are finding out is the fiscal space available. How can you know you've gone too far if you haven't gone too far? This question was irrelevant at the time the 1913 Federal Reserve Act was enacted. We may eventually find out and then macro experts will explain how obvious it was all along. :)

Benjamin Cole said...

Unknown:

I am beginning to think the right response is mostly fiscal, mostly money-financed fiscal programs (aka helicopter drops) and mostly executed through tax cuts, not more spending.

As in, a holiday on Social Security taxes, offset by the Fed buying Treasuries and stuffing them into the SS trust fund.

Right now, the Fed wants commercial banks to lend more, and so lowers rates, and hopes the fractional-reserve commercial banking system extends more loans (the vast bulk of money creation is endogenous).

Side note: People rant and rave about central banks, without knowing commercial banks "print money" every time they extend a loan. That is where the lion's share of money creation takes place.

Or, conventional wisdom is the US must borrow money and not engage in money-financed fiscal programs. Either way, the economy only grows through debt peonage.

I say, send in the helicopters.

I do not know what is the "right" level of interest rates. Germans sovereigns sell at negative interest rates. No one is forced to buy German bonds, and they are denominated in euros.

The German bond situation suggest interest rates are artificially high on US bonds.

You tell me.

Unknown said...

Mr. Cole:
i've been mostly a surgeon in real life and thank you for this 'macro' discussion.
Endogenous money creation from the modern fractional banking era has been an amazing proposition, with inevitable booms and busts along the way. The government though has also become a major money creator through the issuance of debt (double entry accounting of bond and cash in the system). Just look at the evolution of loans and deposits in commercial banks over GDP over time (US and global).
As always, there are more questions then there are answers. The other day, Dr. Kelton's argument about MMT was that it was already here and i think she has a point. i used to think of MMT as a clear threshold but have come to appreciate how gradual the process can be. Even if the cash printed has been balanced, at least so far, by a debt instrument held by somebody (domestic or not), the ultra low interest rates (near zero) have removed the constraint on fiscal debt.
To use Canada as an example, 95% of federal bonds and bills were "absorbed" by the central bank last year (comparable situation in the US). Recently, our vice Prime Minister said: "“Our fiscally expansive approach to fighting the coronavirus cannot and will not be infinite. It is limited and temporary,” Ms. Freeland is a nice person with noble intents (and a 'liberal', whatever that means these days) but she is spending other people's money. It's also the type of comment that drug addicts say, periodically.
i've come to believe that waiting for inflation to occur may prove to be a tragic mistake. The restraint should be intrinsic. The alternative is to position yourself accordingly.
CF

Salmo Truttra said...

re: "Endogenous money creation from the modern fractional banking era has been an amazing proposition, with inevitable booms and busts along the way"

Lending/investing by the Reserve and commercial banks is inflationary, whereas lending/investing by the nonbanks is noninflationary. Disintermediation is made in Washington.

randy said...

Unknown:

"The other day, Dr. Kelton's argument about MMT was that it was already here and i think she has a point. i used to think of MMT as a clear threshold but have come to appreciate how gradual the process can be."

That seems 100% correct. There now is no constraint on spending related to deficit concerns. GOP has no credibility in this regard to be taken seriously. Your point about getting to MMT without a real debate is right - and should teach a lesson. Similarly the "debate" about Green New Deal is over since the new "infrastructure" legislation is basically just the GND repackaged. In the last few years the Dems have become *experts* using language - changing the meaning of words and pressing narratives primed by empathy - to overcome any rational debates about policy.

This is what happens when the other party (GOP) no longer offers viable policies that appeal to people as positive governance addressing the obvious issues - health care, immigration, and income inequality. Tax cuts and a wall are not enough to win enough voter hearts to push back on the craziness of the Dems.

K T Cat said...

"There now is no constraint on spending related to deficit concerns. "

I see the same thing. In fact, I can't figure out the rationale for tax increases at all. Is there even a rationale for taxes any more?

In any case, this time isn't different and it will end in tears. No, you can't drop endless cataracts of money from helicopters here any more than you can do it in Haiti.

I'll add this: I think the fiscal issues are simply shadows of cultural ones. Debasement of the currency is just a symptom of the debasement of the culture. Check out standardized test scores vs. graduation rates. They're effectively uncoupled. There isn't the necessary human capital in the pipeline to cover the $30T, err $40T, err elebenty bazillion dollar debt.

Benjamin Cole said...

Unfortunately, in the US, MMT gets conflated with social liberal programs. In fact, Japan sidestepped the entire Great Depression through MMT policies but unfortunately they spent their money on military buildup and occupations.

My favorite way to stimulate the economy is to cut taxes.

By the way, some very strict and rigorous Libertarians actually call for the illegalization of fractional reserve commercial banking. So does the very thoughtful John Cochrane, for that matter.

Fractional reserve commercial banks actually preceded central banking, and they borrowed short to lend long, and were heavily leveraged. What could go wrong?

The business of central banking grew up around pre-existing fractional reserve banking systems---- in fact commercial bankers were prominent in the development of every central bank.

Not surprisingly, given the environment, the idea of money financed fiscal programs has been held in very low regard.

Commercial banks want to make sure they are the only ones printing money.

Unknown said...

"Japan sidestepped the entire Great Depression through MMT policies..."
i don't think this is correct.

There were many factors involved, including abandoning the gold standard (currency devaluation) and 'investments' in productive purposes (productive public works, productive industrial policy and 'productive' investments in the military {productive used here in the sense that investing in the military and 'winning' will bring economic spoils and making abstraction of the horrors of war}).

Also, Takahashi Korekiyo's central bank scheme was more in line with QE than MMT, simply with a reverse of the intermediation order. Under QE, debt is bought by dealers which then sell the debt to the CB in exchange for created money (digitally printed). In Japan, the central bank underwrote the bonds from government treasury but then sold those bonds to the market.

Perhaps we should all remember the distinction between liquidity and solvency operations. With or without fractional reserves (or the extent of), the primary role of central banks is to supply liquidity in times of temporary constraints (Bagehot long ago described the 'rules' of the game for this).

Most of participating people here seem to be supply-siders to various degrees and it should make sense to think using a productive function curves for inputs ie optimal results are reached between the not-enough and too-much parts, whether one is talking about levels of taxes, fiscal spending, fractional reserve levels, money in circulation to real economic activity levels or debt levels.

These days developed economies (US included), are pushing the accelerator on fiscal spending and total debt at a point on productive curves where diminishing returns are already subtantially going down and, in fact, reaching negative multiplier levels. And Have you looked at where the money is going? Towards productive purposes?
https://www.pgpf.org/blog/2021/03/heres-everything-congress-has-done-to-respond-to-the-coronavirus-so-far

Japan did al lot of right things to avert their own version of a Great Depression but their 'macro' context was wildly different and, in their own special case, when things started to sour, authoritarian governments became the answer. The US is still very far from a short-term solvency instability period and i hope we figure it out differently. i like the idea of cutting taxes but reducing expenditures (especially the unproductive ones) has to be number one priority. Yes reducing expenditures and keeping taxes low means going through some kind of austerity. It sounds impossible at this point but my bet is that the US will figure it out.

BTW, what 'we' are going through (trying to spend our way to further prosperity) has been done before and, even if history does not repeat, transition periods tend to give rise to a bunch of bag holders.