OT: Likelihood of High Inflation Environment
MgoEconomists: So it looks like the Fed is going to keep printing money and stuffing it into every gap it can find. Two weeks ago, the Fed drove 30 year mortgage rates under 2.9%, which I have never seen before. I have also seen estimates that the money supply has increased over 50% in the past 3 months.
in addition, while some of the items tracked on the CPI (oil, hotels, travel) are deflating, grocery inflation was 4.8%, which is crazy high. Anyone else out there thinking that we may be back to the future with inflation soon?
Understand your point - Econ 101 would say doing this may lead to inflation.
However, that would seem to be the least of our worries currently.
I’m sure Dr. Gerson would agree that this record stimulus would bring inflation down the road but it isn’t happening now or for several years. We’ve been languishing with inflation under 1.8% for so long now, even with other Fed stimulus programs that didn’t do anything to CPI. There are too many vital but deflated sectors right now to get any accurate readings. Most likely won’t see any reasonable data until things get back to “normal”.
Languishing with inflation under 1.8%??? Interesting use of the word languishing. Having lived through the stagflation of the late 70's (I had a 30 year mortgage at,,,wait for it...14%) languish and 1.8% inflation are a contradiction in terms.
Ignoring other multiple important factors, an economy is at its very best when inflation is closer to 3% than 1.8%. It doesn’t seem like much but it’s an enormous difference when considering asset prices.
Holy cracking numbers . 14% interest rate is a mind boggling number. I hope for us all that we never get back to that. Single digits, let lone 3% digits, is hard enough to grasp. My student loans were at ~8% in 2009 that seemed an impossible mount to summit. If interest rates go to shit, this generation of mentally weak individuals will continue to revolt.
Inflation is an interesting beast. If you look at things that matter, inflation seems to have gone through the roof - UofM out of state tuition is 180% more than what I paid 20 years ago. Health insurance has been on a tear of 10%+ a year since 2008. Rents, in my area, have doubled since 2012 and now we have 4%+ food inflation.
Considering education, housing, healthcare and food make up the "important" buckets for most people, hard to see how CPI is being shown as 1.8%. I know computing power has vastly improved relative to cost but who gives a shit about that when everything else is 10%+ a year off a MUCH bigger base price!
But universities have gotten expensive for reasons like less government funding, larger middle manager-type payrolls. Inflation isn't the only reason things get more expensive.
An important reason has been the increasing availability of student loans.
That's certainly one part of it. The philosophical over-adoption of the idea that "you can never have too much education" and the related public policy actions that poured gas on this fire have been a big part of the story.
And with all that "easy money" has come empire building on the part of many/most colleges' administrations. Bigger must equal better, no? Very rare to see true spending discipline accompanying that mindset. Most people in business (often self-referenced as 'the real world') scoff at the detachment from fiscal realities observed in the actions and ideals of those who've spent their adult lives in the ivory tower.
But so too is the reality of the arms race in providing amenities for students ... and that is as much on the students as it is the administrations. Many sports message boards (including this one) will occasionally point out the resort-like facilities certain football programs have built for their student-athletes. While it's way less over the top, a similar trend of upping the student life experience has existed in many/most colleges for the general student population as schools have competed to attract kids who view such things as a differentiator. Those amenities cost huge piles of money.
Each of those things contributes to the astronomical inflation of the real price of college education.
To your point...LSU has a lazy river on campus that spells out L S U. That really necessary? That improves the education you get? Nope, certainly increases the cost, though.
Other factor is the increasing number of foreign students. I sat on a plane with a USC board member the admission scandal was in full swing there. Asked what the hell was going on and he responded that 30% of student body is now from a foreign country, largely China, so competition is fierce. And foreign students usually pay full tuition, no discounts so that is why most Universities are targeting them more and more.
There are other reasons for the rise of grocery prices aside from pure inflation (especially the last few months), which is why it is only one factor of a wide number considered.
Besides, inflation was predicted to be rampant globally after all the QEs and other money printing done in response to the 2008 financial crisis (aka "Great Recession") - yet it didn't really materialize in force. In short, inflation is a problem that current financial systems can handle, which is why the Fed (and other similar parties, globally) are willing to risk it with this newest crisis.
How does the Fed “handle” inflation in a zero % interest environment? Fed has already said zero % rates for two years. Not trolling, just wondering.
The Fed (in conjunction with the Treasury) has many other tools at their disposal aside from simply interest rates - many of which already been activated in response to this crisis (such as buying mortgage-backed securities, corporate bonds, even ETFs). There are still a wide range that could be used (or even invented... some of these actions were never even conceived of as something the Fed could/would ever do until the 2008 happened - much of the framework used now was created then, but they might find other "new" ways of taking action now).
I'm not a professional financial policy expert, but just compare the range of actions available now to other financial crisis of the past (the Depression or one of the many other recessions the US has encountered). The current system has evolved (often begrudgingly) to react to these threats and can mitigate the damage better than ever (although there still is and will be damage, make no mistake about that).
Honest answer - inflation is not driven solely by the supply of currency and interest rates, of course. It's also driven by consumer demand and prices. High CPI in the case of grocery stores was driven by increased consumer demand and panic buying, not by printing money. We saw deflation in almost every other sector. In many of those sectors (e.g. gas, airlines, travel, etc.), consumer demand could remain low for months or even years, keeping prices in those sectors - and overall CPI - relatively low. Plus, inflation has been low in absolute historical terms over the past 25+ years, so a little spike wouldn't be an economic death knell.
there were also significant problems with meat processing plants contributing to less beef and poultry hitting the shelves.
Don't tell me stuff like this, I just refinanced at 3.5%. Through Matt Demorest and Homesure lending, very easy company to work with.
I just bought a new home and have. Slightly higher rate than you (should've used Matt).
Not sure how people are getting 2.9%. I have excellent credit and the only way I could get anything that low would be by buying it down.
2.57 APR 30 year fixed no lender costs. Loan amount matters too since lenders make more on the secondary market with higher loans.
I have always thought the Fed should not try to prop up the market with stimulus and this type of stuff. The market should be left to sort itself out. This “recessions aren’t allowed” type of intervention is counterproductive. I could see 30 yr mortgage rates getting down to 2% at some point.
Can't blame the Fed too much since their actions are forced by the dual mandate from Congress: they must simultaneously keep inflation in check while maximizing national employment. The two objectives are often in conflict and the Fed just tries to find a happy medium.
That's a common view, but not one that's supported by data from recent recessions. Comparing across countries, those that engaged in more aggressive expansionary monetary and fiscal policies tended to do better in terms of both the length and depth of their downturns (relative to other countries).
Japan says "Hold my sake"
I think Japan has other structural issues at play (aging population, low birth rates, lack of immigration to fill the void, etc.)
Look at all the reactionaries downvoting DonBrownsMustache for respectfully expressing a simple and non-controversial opinion (as it has been the opinion of the whole Austrian school of economics for a very long time).
It's a bit of a stretch to say the Austrian school is non-controversial.
Keynsians and monetarists certainly think the Austrian school and the Chicago school are controversial.
Very good chance we see inflation but it would happen after demand returns to normal levels.
Demand is the driver of increased grocery prices (tiny supply side impact on meat) and decreased oil, hospitality, etc.
But yes, with all the money we're printing right now, can't imagine we wouldn't see some inflation if "normal" demand returns soon.
Oil prices and cheap overseas labor for hard goods are the primary drivers of deflation. The second isn't going away any time soon. If China sees upward growth in wages there is India and the other half of the world where $1 an hour is good money. That overseas labor force has essentially decoupled US economic wage growth from inflation for the most part.
Oil prices could see a rebound at some point. Although between electric/hybrid cars and city density making public transport tenable, maybe demand never comes back. Only way I could see that trend reverse is if the anti-fracking crew gets going and if urban unrest and crime re-hollow out the cities like they did last time the police were public enemy number one.
Good stuff. I'm more concerned about deflation and the severe disruption in the energy market caused by the rise (return?) of US oil and alternative energy sources, particularly solar. What is the middle east & russia going to do if oil can't crack $20/barrel? Bad things, that's what.
That's a good point. I'm not sure how tenable Russia's position as a power is without all their energy dollars. They are already a fading power, if they can't afford to keep meddling in everyone's business, they could implode without someone like Putin in charge.
Middle eastern nation's like Iran and Iraq, who have large populations could be in real trouble long term.
Solar is still very far away from being sufficiently cost-competitive so as to be significant enough to be able to impact the broader energy markets (absent forced adoption via public policy).
I wouldn't be against forced adoption of solar in the geographies it makes sense in.. like the US SW, SoCal, etc. Unless the technology is such that you'd never recover the initial cost of purchase and install, it just seems to make sense to harness "free" energy? I'm sure there are posters with a much better insight than I as to why solar hasn't been embraced in those areas.
General response to this conversation (to multiple posters):
1) Solar is not a direct competitor to oil - those two energy sources are used very differently with solar almost exclusively being grid electricity and oil (via its majority distillate products) primarily for transportation (with the rest predominantly used as raw materials).
2) Solar electricity price is already comparable to most other conventional sources (coal, NG, wind, hydro) is most localities - some areas it is higher, some lower, but rarely a dramatic (as in order of magnitude difference). Also, the cost of solar will only continue to decline over time - partially due to improvements in efficiency (although it is already near practical upper limits), but more from decreasing production costs, regulatory and other "soft costs". If anyone really wants to see the momentum behind this, look how much money the Chinese govt (and it's SOEs) have invested over the past 10-20 years (both by internal industry and by purchasing companies and IP from the West). They are literally trying to wrest this market dominance from the rest of the world because it will be so critical going forward.
3) As important as solar-generated electricity will be going forward, it is not a panacea. It cannot be applied equally everywhere and there are still major challenges to greater adoption (most critical will be economic storage of electricity such that it can be used on demand rather than immediately when generated - also not a fundamental technological barrier but economic at this point). In any case, there will only be increases in solar energy penetration over the next few decades, not declines or even stagnation.
I'm sure there will be some correction but at least with stuff like groceries we have a good reason why they are so high and, most likely, it'll be temporary. I also wonder if oil and travel will tick up as the summer kicks in and people get more stir-crazy. But yeah, it's going to be a weird rest of the year at least.
There are also many big deflationary forces at play too. Globalization and automation are deflationary both lower the cost of production. The US is the global reserve currency and what did Hong Kong people run to recently? US cash; Hong Kong banks couldn't get their hands on enough US cash. Many entities globally have sucked up physical US cash as it is seen as "safe," which is deflationary. Debt in and of itself can put deflationary forces out there too as it sucks up resources that can't be committed elsewhere. Hertz is selling thousands upon thousands of cars, this will be a deflationary force on used car prices. Some reports also seem to show that Americans are starting to save a little more as they are worried about the future, this can initially be deflationary as people spend less and producers lower costs to entice people in.
Most of the money creation at the start of the Great Financial Crisis in 2008 to today is being used to buy assets and one could argue that we have had asset inflation since then as it has allowed these assets to be bid up higher. The stock market and housing market fundamentals seem to be off and overvalued from historic norms. Is this not a form of inflation from the money creation by the Fed? The UK's central bank actually just admitted that a primary purpose of QE is to keep asset prices propped up. I think a lot of restaurants are struggling a bit and need to raise prices.
I don't know what will happen as much of this has never been done before. We have interest rate data going back something like 4,000 years and it wasn't until like 2014 that the world saw negative interest rates.
well, we just refi'd at 2.75% for a 20 year mortgage. I can't imagine it getting much lower, but then again, I said the same 3 years ago when we got 4.25% and 15 years ago when we got 6.75% for 30 yrs.
even if neg interest comes to the US, I'm not sure if mortgages can go less than 2%, but I'm not in the industry and not an economist.
Rates have been negative in Europe for quite a while and you can get a mortgage of 80% LTV at 0.80% which is a floating rate loan based on Euribor + 1.50 the last time I checked. Fixed rates were in the mid 2.00% range for 20 years.
With the disclaimer that I'm a health economist and not a macroeconomist, given the massive COVID-induced demand shock, it is extremely unlikely that policy initiatives that inject money into the economy produce serious levels of inflation. There will be long-lasting economic downsides of COVID-19. Easy access to money at low interest rates is necessary for any type of recovery.
I would echo the above comment that inflation is not even on the radar of what we should be worrying about with respect to policymaking or economic stimulus.
I would think a health economist would have a great understanding of uncontrollable rises in pricing, no?
They are controllable. In fact, moreso than other industries. There have been a lot of articles about how wildly procedures can vary at different hospitals. They can basically charge whatever they want a lot of the time because demand is invariant.
No -- inflation occurs when consumer demand exceeds industrial supply and that won't happen because we can supply enough stuff for 10 times our population. Media content is produce with zero marginal cost, and food and goods is also in near infinite supply in the medium term. Yes webcams and beef went up in priceoprice because of the Coronavirus supply shock, but it's already rebalancing.
Unless we go to war with China, we won't see any meaningful inflation for the foreseeable future.
Why am I paying taxes if the Fed is just going to buy all public debt?
It's been happening for most of US history - and growing fastest over the last hundred years or so. There is not much fundamentally different to it now - just changing (some) recipients.
It will be political fears that could drive mass inflation, not econ 101.
Anyone else see Vivek Ranadive, Sacramento Kings Owner and founder of Bow Capital, on 'Power Lunch' today discussed the return and future of the NBA. and where tech is headed ( good stuff).
https://www.youtube.com/watch?v=MIqgCyEWtsw
This morning I notice that my right rear tire seemed low on air, the solution...... yup
inflation
Recent stimulus efforts have highlighted the problem with the Federal Reserve system...it's all about the big banks and their best customers, the big corporations. Look who took stimulus money from the Fed system - the L.A. Lakers, Shake Shack, etc. Stimulus money (money printing always goes to those at the top). Money needs to go to main street DIRECTLY.
Oh, how timely...corporations rule!
Main street is getting awfully exclusive nowadays. Maybe we should say "the townships" instead?
Ford School Grad here: You *do* need a high money supply to have inflation, but that is not the only thing. The response of demand (velocity of money) is also important. In recessionary times, the Fed likes to keep the money supply high, so interest rates will be low, and business ventures will be formed. If/when things pick up, the Fed watches inflation in this situation very closely, and will typically shut it off via open market operations once they see it start to go up. Once inflation starts moving, it is difficult to stop. You have to nip it in the bud, as Barney Fife used to say. I think that is right, anyway. It's been 25 years since I graduated. Corrections welcome.
I respect the humility to ask for corrections at the end of your post. But with all due respect, I think your response is very academic and not particularly useful/relevant to the situation being discussed. You say that "when things pick up, the Fed watches inflation...very closely, and will typically shut [the low interest rate environment] off." Which anyone who has been paying attention over the last few years would laugh at - interest rates barely went up as the economy was soaring. Inflation never started moving in any significant way. There's more to it than can be explained by Monetary Policy 202.