Americans have such a hatred of inflation they'd rather have a recession(fortune.com)
fortune.com
Americans have such a hatred of inflation they'd rather have a recession
https://fortune.com/2024/06/03/fed-president-neel-kashkari-amercians-prefer-recession-inflation/
9 comments
I'm pretty sure it's actually a hatred of a decrease in real purchasing power, and... why would anyone not hate that?
Personally I'd rather not get a raise at 2% inflation than a 3% raise at 6% inflation, and I don't think that's unreasonably irrational?
Personally I'd rather not get a raise at 2% inflation than a 3% raise at 6% inflation, and I don't think that's unreasonably irrational?
The problem is current price levels from recent rapid inflation. What would it take to deflate prices without a recession? Without deflation, it will be hard for the electorate to regain the purchasing power they lost. And there will be no recession due to structural demographics in the labor market (10k Boomers retiring per day, ~3.6M per year), regardless of how hard the Fed beats on the economy with the benchmark rate.
> problem is price levels. What would it take to deflate prices without a recession?
In an economy with borrowing, nothing. Deflation increases the real debt burden.
More pointedly: price levels are imaginary. The focus should be on real wages.
In an economy with borrowing, nothing. Deflation increases the real debt burden.
More pointedly: price levels are imaginary. The focus should be on real wages.
> In an economy with borrowing, nothing.
As long as you're a net borrower, sure. For net savers, it's a bit less pleasant.
As long as you're a net borrower, sure. For net savers, it's a bit less pleasant.
Corporations keep cutting labor costs to attempt to maintain profit levels obtained during ZIRP. Only through organizing will workers have enough collective power to obtain material real wage gains, unless their is a macro lever I am missing (which is entirely possible).
Note that this statement about Americans’ preferences is not based on any measurement of Americans’ preferences, but is just the opinion of the president of a federal bank.
They will have to cut rates, because they can’t keep paying the high interest on the government’s debt[0][1]. There’s no political will to raise taxes and cut government spending (one or the other may happen, but not both)[2]. Keeping rates high on the government’s debt may increase inflation[3].
It’s also part of the Fed’s mandate to maintain employment[4].
Between these factors, it’s more likely rates will be cut.
EDIT: Sources
0. https://fred.stlouisfed.org/series/GFDEGDQ188S
1. https://www.cbo.gov/publication/59014
2. This is part of the conjecture that MMT makes, but never pans out in real life. See http://www.thomaspalley.com/docs/articles/macro_theory/mmt_r...
3. https://www.lynalden.com/inflation-vs-interest-rates/
4. https://www.investopedia.com/articles/investing/100715/break...
It’s also part of the Fed’s mandate to maintain employment[4].
Between these factors, it’s more likely rates will be cut.
EDIT: Sources
0. https://fred.stlouisfed.org/series/GFDEGDQ188S
1. https://www.cbo.gov/publication/59014
2. This is part of the conjecture that MMT makes, but never pans out in real life. See http://www.thomaspalley.com/docs/articles/macro_theory/mmt_r...
3. https://www.lynalden.com/inflation-vs-interest-rates/
4. https://www.investopedia.com/articles/investing/100715/break...
> will have to cut rates, because they can’t keep paying the high interest on the government’s debt
Not how the Fed works. (And given recent deficits, the Congress isn’t worried.)
> Keeping rates high on the government’s debt may increase inflation
Nope. This is Erdoganomics.
The multiplier effect from credit contraction more than outweighs the new money of marginally-higher rates.
> it’s more likely rates will be cut
This has been Silicon Valley’s hot take since rates rose. Like yes, eventually they’ll have to come down. (There isn’t much room for them to go up.) But the Fed is far from constrained.
Not how the Fed works. (And given recent deficits, the Congress isn’t worried.)
> Keeping rates high on the government’s debt may increase inflation
Nope. This is Erdoganomics.
The multiplier effect from credit contraction more than outweighs the new money of marginally-higher rates.
> it’s more likely rates will be cut
This has been Silicon Valley’s hot take since rates rose. Like yes, eventually they’ll have to come down. (There isn’t much room for them to go up.) But the Fed is far from constrained.
> Not how the Fed works. (And given recent deficits, the Congress isn’t worried.)
Yes I’m aware. It’s the battle between monetary and fiscal policy. So far fiscal policy is winning.
> The multiplier effect from credit contraction more than outweighs the new money of marginally-higher rates.
Feel free to back that up with a source. I’ve updated my comment with mine.
Yes I’m aware. It’s the battle between monetary and fiscal policy. So far fiscal policy is winning.
> The multiplier effect from credit contraction more than outweighs the new money of marginally-higher rates.
Feel free to back that up with a source. I’ve updated my comment with mine.
> Like yes, eventually they’ll have to come down. (There isn’t much room for them to go up.)
Yup, the economy is cyclical, so they'll come down of course. But they can go way higher, too.
Consider this: From 1978 to 1985 (7 years), the federal funds rate was never below 8%, and from 1969 to 1991 (that's 22 years), it only dropped below 6% during the recoveries from recessions.
I think the last 20 years of ZIRP have hoodwinked a lot of people into believing that sub-5% rates are normal. All the people saying rates "have" to come down and that they will therefore have the option to refinance their mortgages are smoking a whole pipe full of copium.
There are structural reasons to think that inflation is baked in for the next decade, and it would be not at all surprising if a mortgage opened today is paid off before rates again drop below 5%.
Yup, the economy is cyclical, so they'll come down of course. But they can go way higher, too.
Consider this: From 1978 to 1985 (7 years), the federal funds rate was never below 8%, and from 1969 to 1991 (that's 22 years), it only dropped below 6% during the recoveries from recessions.
I think the last 20 years of ZIRP have hoodwinked a lot of people into believing that sub-5% rates are normal. All the people saying rates "have" to come down and that they will therefore have the option to refinance their mortgages are smoking a whole pipe full of copium.
There are structural reasons to think that inflation is baked in for the next decade, and it would be not at all surprising if a mortgage opened today is paid off before rates again drop below 5%.
> Consider this: From 1978 to 1985 (7 years), the federal funds rate was never below 8%, and from 1969 to 1991 (that's 22 years), it only dropped below 6% during the recoveries from recessions.
The difference then was that the government debt to GDP rate was much lower and relatively flat: https://fred.stlouisfed.org/series/GFDEGDQ188S
Today public debt has ballooned enormously and it has a substantial effect on government interest payments: https://fred.stlouisfed.org/series/A091RC1Q027SBEA
That $1T and counting is pumped right back into the economy (M2 currently sits at $21T). CBO projects cumulative fiscal outlays of $20T over the next decade, and that's assuming no other recessions or wars. Not very sustainable at high rates.
The difference then was that the government debt to GDP rate was much lower and relatively flat: https://fred.stlouisfed.org/series/GFDEGDQ188S
Today public debt has ballooned enormously and it has a substantial effect on government interest payments: https://fred.stlouisfed.org/series/A091RC1Q027SBEA
That $1T and counting is pumped right back into the economy (M2 currently sits at $21T). CBO projects cumulative fiscal outlays of $20T over the next decade, and that's assuming no other recessions or wars. Not very sustainable at high rates.
> All the people saying rates "have" to come down
It’s a very Silicon Valley specific view. Which makes sense when you consider what lower rates mean for tech valuations. (Or for a laggard VC trying to make their low-double or even single-digit returns look palatable.)
It’s a very Silicon Valley specific view. Which makes sense when you consider what lower rates mean for tech valuations. (Or for a laggard VC trying to make their low-double or even single-digit returns look palatable.)
I think the causes are misunderstood, people understand inflation less than the general concept behind a recession? So naturally inflation seems bad because it’s less understood and it makes prices of nearly everything go up.
Well, Kashkari should know better, given he's the president of the Minneapolis Fed. The Fed has a dual mandate (low inflation and low unemployment). Recession avoidance is not part of that mandate.
Inflation feels disconnected from daily choices and even regulation to such a high degree t feels engineered to do so. Of course the commoners with no say in its implementation would reject it.
It’s not that surprising. Inflation destroys your savings
Only 21% of Americans have more than $5000 in savings. So their employment prospects should matter much more to them on any reasonable analysis.
https://www.cnbc.com/2024/01/24/how-much-money-americans-hav...
https://www.cnbc.com/2024/01/24/how-much-money-americans-hav...
The Americans that don’t have any savings don’t necessarily have wages that keep up with inflation either. But also
https://www.usatoday.com/story/money/2024/01/14/average-net-...
https://www.usatoday.com/story/money/2024/01/14/average-net-...
Also, as we have recently seen, a larger than normal inflation rate apparently gives corporations PR cover for raising profit margins across the board.
Unemployment can be rough on the savings too.
I know I would.
Why not roll the die?