The Fed Sets Out to Kill the Economy to Save It

In case you missed it, Mr. Market is in a funk about the Fed girding its loins to go out and wage war on inflation. The Financial Times gives a representative take:

European equities dropped on Thursday as a sell-off that began with highly valued technology shares gathered pace after the US central bank signalled a swift end to its pandemic-era monetary stimulus…

The moves came after minutes from the Federal Reserve’s latest meeting revealed that officials at the central bank, which has boosted financial markets since March 2020 with a massive bond-buying programme and record-low interest rates, broadly agreed it was time to accelerate the withdrawal of this support.

In fairness, as we’ve said for quite a while, the Fed has quietly recognized that its super low interest rate experiment was a mistake. I recall thinking when the Fed dropped interest rates below 1% in the runup to the crisis that that would prove to be a mistake. But the central bank then had fallen into the “75 is the new 25” pattern, of using big cuts to signal seriousness about saving the markets, when at very low interest rates, the impact of rate cuts and increases is magnified.

As as even casual market watchers will know, the Fed has wanted to back out of its super low interest rate corner since at the 2014 taper tantrum era, but the central bank has also been afraid of spooking the market. Now with investors fulminating about inflation, job markets nominally tight (even though due to workers exiting, when strong economies typically pull marginal laborers in) and markets overheated even by the standards of the past decade, the Fed sees itself as under pressure to act by hitting the brakes.

I really should say more, but the spectacle of the Fed having engaged in mission creep and becoming the self-assigned regulator of the economy is now coming to its logical and sorry conclusion. In a system where economists have long been the only social scientists with a seat at the policy table, those experts have done a poor job of devising policies that will create stability, to the extent that can be achieved in a dynamic environment, and a reasonable level of growth. Of course many will now question the legitimacy of growth as an aim given global warming and the need to marshal resources better, but we’ll put that to the side.

It has been convenient for politicians to fob responsibility for economic stewardship to a typically oracular Fed and no do simple-minded things like emphasize economic stabilizers, as in programs that are countercyclical, where payments (economic stimulus!) rises when times are bad and fall when activity rebounds. But the wee problem is the most effective programs will target citizens with a high marginal propensity to spend, as in the low income, and in America, we hate the poor. Congress has also hidden behind the skirts of the neoliberal propagandist masquerading as evenhanded CBO; we’ve written some scathing posts about how the agency not only often puts a finger on the scales when it is making its analyses but also invests a lot of energy in providing conservative talking points.

A final issue is that the Fed still lives under glow of the myth that Volcker driving interest rates to the moon is what broke the deeply entrenched 1970s stagflation. In fact, Warren Mosler has put together an analysis that shows that not only was that great inflation substantially due to oil price increases, which were outside the central bank’s influence, but more important, that oil prices were finally falling in 1979 and inflation has started receding too. So that inflation would have worked its way out of the system, albeit more slowly, had the Fed stood pat.

As we wrote in comments on a recent post:

The problem is that “inflation” has been acute in categories that matter: energy, food, cars.

Energy cost rises have absolutely nothing to do with the Fed. It’s demand being whipsawed by Covid and producers not being able to respond quickly enough and retailers gouging to a degree.

Food is considerably due to weather-related poor harvests and Covid impact on supply chains.

Cars are due to chip shortages and again a Covid whipsaw.

These are all totally out of the Fed’s purview and despite having considerable importance to inflation measures (fuel cost rises propagate through all other cost), they have squat to do with the monetary stories about inflation.

And on top of that, macroeconomic forecasts are about as good at the CDC’s of Covid. Plus speaking of Covid, if Omicron does not recede pronto, economic disruption will again become widespread and will dent growth. And unlike 2020, no one is in the mood to throw a ton of money or controls (like eviction freezes) at propping up demand should it unexpectedly sag.

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  1. vlade

    IMO, the financial policy can inflate/deflate assets.

    But the “marginal loan” idea is IMO pretty idiotic, and always was.

    A real-world company will not suddenly put in a new production line because a 20 year loan is 25bp cheaper (if that). It may help with that decision, but it will not, ever, drive it.

    The only people for whom it will make a difference are heavy users of financial leverage.

    But the Central Bankers got the celebrity status, and admitting that they actually can’t do much in an economic problem is… well, not going to do much for their next year’s invite list and the speaking circuit once they are out of the office, can it?

    1. Yves Smith Post author

      The Fed and monetary theorists have never come to grips with the fact that their power is asymmetrical. They can kill growth/activity by raising interest rates because near term, enough people/business are exposed (floating rate terms, loans rolling over) that the higher interest charges reduce cash on hand and also create worry about higher rates and future tougher access to credit. And high interest rates will put a brake on business expansion by raising the cost of capital and signaling a possible downturn.

      But cutting rates helps mainly leveraged speculators, which does include real estate developers.

      1. vlade

        Yes. Access to money is a necessary, but not a sufficient condition for a non-leveraged business.

      2. run5441


        Since Volcker and “probably earlier,” the Fed moves have been to slaughter the peasants in which case I am one of them. Kill demand by them and everything slows. If constituency does not buy due to a lack of credit, the economy slows.

        Supply chain issues will still exist until the lack of demand or demand equals production. You know the rest of the story.

        My apology for making comment.

        1. Yves Smith Post author

          Oh I am not disagreeing that high but starting to fall inflation served as a convenient excuse to discipline labor. You may recall from Bill Greider’s Secrets of the Temple that Volcker kept an index card in his pocket. It was a record of hourly construction wages on a weekly basis. That was his metric for whether his efforts were working. They needed to fall.

          As for supply chain issues v. Fed actions, I made the point in the headline: going after high inflation in a few sectors, particularly energy, that are not cost of money sensitive but the result of various Covid issues, will kill the economy. Of course, if we have continued Omicron disruption, we may get there independent of the Fed given the lack of interest in new stimulus.

          1. run75441


            “If we have continued Omicron disruption, we may get there independent of the Fed given the lack of interest in new stimulus.”

            Agreed . . .

  2. Bellatrix

    I would tweak that a little and say “those experts” have tried to maintain stability too hard for too long. Hyman Minsky summed it up with the maxim “stability leads to instability”. It has made the economy increasingly unstable and fragile, to the point that the Fed is now totally reactive and caught between a rock and a hard place.

    Every problem has been “solved” by printing money and reducing interest rates, which works fine until you strike a problem that neither can solve: inflation. That’s the rock and the likely impact of rising interest rates on our ever so fragile economy is the hard place.

    There is nothing else in the tool kit and I am not so sanguine about inflation. However you define it and wherever and however it starts, it grows and spreads and feeds on itself and becomes cyclical and self perpetuating. It goes from prices to wages to prices to wages… as expectations evolve.

    As interest rates rise we will rediscover that debt does in fact matter.

  3. griffen

    My humble two cents, from recall. The rate of the increases became problematic for Federal Reserve policy going back to when Greenspan was still in place, and rate increases after the dot com bubble and post 9/11 were essentially never, not ever, be anything but a 0.25% bump higher. It was systematic over the course of maybe three years, beginning to end. Market participants are inclined to just build that assumption out.

    The golden goose maybe cooked to a crispy brown. Or it could look like the turkey from Christmas Vacation; golden brown outside, hollowed inside. There are just a small number of things the Federal Reserve can’t really control the outcome. Reducing or removing the supportive policies in place is a big hurdle.

  4. Cocomaan

    If the fed doesn’t really influence the inflation factors we are facing (chip shortage), or faced in the past (geopolitics around oil), why not just keep the rate low?

    Low rates are a matter of trust in the productivity of the country. Seems we have been plenty productive despite Covid.

    1. JTMcPhee

      Ask the mopes how “productive” those low rates have been. Where do you get the idea that low rates “are a measure of the productivity of the country”? Seems to me, low rates have mostly been a means to loot the losers and transfer wealth to the 0.1% and a very few favored sectors that are not in any way “productive.”

  5. Gregory Etchason

    The last word on “money from thin air”. A stock market collapse is when stocks return to their rightful owners” Sir John Templeton

  6. Rodger Mitchell

    The problem is that most economists think inflation is caused by money “printing,” and is cured by austerity.

    They are wrong. Money printing never has caused inflation. On the contrary, inflation has caused money printing by ignorant governments.

    Inflation is, and always has been caused by scarcities, and always will be cured by curing the scarcities — which actually can be done by money “printing.”

    To cure inflation you must cure the scarcity. Period.

    Interest rates are a relatively tiny player in the inflation game. And contrary to popular wisdom, increased interest rates are stimulative because they force the federal government to pump more interest (i.e. stimulus) dollars into the economy.

    To cure today’s inflation, the federal government should fund:
    1. Oil drilling
    2. Development of renewable substitutes for oil.
    3. More efficient farming
    4. Higher-yielding, more nutritious crops (golden rice, et al).
    5. Computer chip production.

    The government also should end FICA, which is a huge and unnecessary labor cost.
    The government also should cut federal taxes, which are an unnecessary economic cost.
    The government also should fund medical R&D and Medicare for All to cure the vast economic and human costs of disease.

    Do these things and inflation will become a sad memory while the populace is enriched.

    1. Bellatrix

      The problem is that money printing can cause scarcity – more dollars chasing the same goods = scarcity

      So if money printing can cause scarcity

      And scarcity causes inflation

      Then money printing can cause inflation.

      That said, you can get away with a bit of money printing (and artificially low interest rates) for a while if there is insufficient demand – for example if the share of income that goes to labor has been in decline for decades – as has been the case.

      However, the combination of pandemic payments (basically printed money largely spent on goods rather than services during the lockdowns) and supply issues have brought us back to a position of scarcity and price inflation. Once started, inflation can become cyclical.

      The bigger problem is that this is happening at a time when the accumulated printed money and artificially low interest rates have financialized the economy and delivered historically overpriced stocks and real estate. Basically a giant bubble looking for a pin.

      1. Susan the other

        The lack of constructive investments, especially socially-constructive investments (which most Americans consider to be “handouts” but which are actually better thought of as social investments), is also what creates inflation. In a capitalist country if everybody decides there are no more good ideas to build, then goodbye capitalism and hello inflation of every existing asset within reach, and all their derivatives and rehypothecations. Really capitalism assumes inflation almost as if it were the can opener. (I think maybe it is.) Interesting your “money printing causes inflation” – seems to put this in a nutshell. But to borrow this from you, if the Fed, as the agency that disburses money, thought of socially constructive investments as one of the obvious solutions it would fall directly into the Fed’s wheelhouse and Congress might be willing to let the Fed have it. That could eliminate the perennial log jam. It’s like if we tweak the definition of an investment everything’s OK. I’d like that.

      2. R

        You are not engaging with Rodger’s post.

        Money printing in the absence of supply will be inflationary. We can agree that. You don’t even need to print money. If the government told everybody to pay their taxes in rat tails, NYC would not have a rat problem other than keeping rat prices down!

        His point is that money printing per se is not inflationary. It depends what you do with it. If we gave Warren Buffet three trillion dollars, not much would change. He might bid up the price of a few assets but he would probably stick most of it in Treasuries. If you gave every American 100,000 dollars, a lot would change!

        Rodger’s point is that government investment in the supply side would cure some price rises.

        However, we also need supply side reform. Real competition in markets. Look at agricultural with four big players in soft commodities and two or three meatpacking companies….

        And we also need better policy. Europe is suffering a self imposed energy. Spike because of simultaneous decarbonisation and denuclearisation plans and a refusal to purchase Russian gas.

        1. jimmy cc

          does the government not already subsidize the energy market?

          Christ, bitcoin and internet ‘real estate’ sells for 10s of thousands of dollars. It would seem investors have plenty of money to invest, but the question seems to be “who are they going to sell it to?’

          Debt level is as high as its ever been, as is the stock market. Supply side constraints doesn’t seem to be the problem.

          1. Rodger Mitchell

            The so-called “debt” isn’t debt, It’s the total of deposits into T-security accounts, which are similar to safe deposit boxes.

            You put your money in, and the government never touches it. Then to pay you back, the government merely returns the dollars that are in your account. This is no burden on the government or on taxpayers.

            Being Monetarily Sovereign, the federal government has no need for your dollars. It creates all the dollars it needs, ad hoc, every time it pays a creditor.

            In fact, the government actually destroys the tax dollars you send to the Treasury. You send dollars from your checking account (aka M1 money supply dollars), and when they reach the Treasury, they cease to be part of any money supply measure. They effectively are destroyed.

            So why does the federal government levy taxes? To control the economy by taxing what it wishes to discourages and by giving tax breaks to what it wishes to encourages.

            That is why FICA should be eliminated. Those FICA dollars pay for nothing, not for Medicare and not for Social Security. They just represent billions taken out of the economy and destroyed.

            The $25 trillion debt merely means the federal government has pumped a net of $25 trillion growth dollars into the economy.

            1. lance ringquist

              i think back in the 1930’s the conservatives in hopes of destroying s.s., got a clause in the act that forbids s.s. from adding to the budget deficit.

              they most likely thought s.s would implode, not knowing its a insurance scheme, like any private sector insurance scheme, policicy prices have to be adjusted in the private sector to reflect economic conditions, same with s.s..

              that is why they keep barking its going bankrupt, whilst at the same time never allowing s.s. to adjust its policy price.

              so if this is the case, s.s. is stuck with f.i.c.a. till you find a way around the clause.

              could be wrong, i read up on it 50 years ago in arguments with the its going bankrupt hysteria that is always circulating.

        2. Rodger Mitchell

          You are on target.

          When money “printing” encourages the production and distribution of scarce items, it will cure inflation.

          Sadly, we tend to remember photos of people pushing wheelbarrows of currency, and we think this caused inflation. But it was the shortages of key goods and services that caused the inflation, and the government’s wrong response was just to print currency, which did nothing to cure the shortages.

          In this regard, one of the shortages that contributed to today’s inflation was a shortage of labor. People refuse to work for low wages. But businesses don’t want to pay more, lest profits decline

          That is why I recommend eliminating FICA, while implementing Medicare and Social Security for all.

          Eliminating FICA would provide an instant financial stimulus to businesses and raises to employees, at no cost to businesses.

          1. tegnost

            Eliminating FICA would provide an instant financial stimulus to businesses and raises to employees, at no cost to businesses.

            but at a cost to the employee
            It’s actually not a raise.

            1. jimmy cc

              no harm to the employee.

              ss benefits are based on earnings, not contributions so it wouldnt affect retirement benefits

        3. jimmy cc

          Supply side reform i can get behind.

          any government money that is used to invest in a project would necessitate direct government control.

        4. Bellatrix

          If Rodger’s point is that money printing per se is not inflationary, then I am engaging with it directly.

          Money printing is insidious and once printed it does not go away. Your example of giving Warren Buffet 3 trillion dollars is illustrative of the problem because you only considered the first use of the money. If WB buys new bonds from Treasury, then they have an extra 3T and you can be absolutely sure they will spend it. However they spend it, that 3T goes into the pockets and bank accounts of individuals and businesses. If WB buys stocks or bonds in the market the vendor gets the 3T and what will they do with it? Buy other assets or put it in the bank, from where it can be lent and spent on whatever. And so on and so on and so on.

          Bottom line there is now more money in the same economy, which is inflationary. The inflation can show up anywhere, from goods and services to assets like stocks and real estate, and even cryptocurrencies and nft’s. Cantillon postulated that it starts at the money spigot, so it’s no surprise we have outrageous stock multiples and real estate values. Print too much and it can create scarcity of goods and services too, the more traditional measure of inflation. Add supply issues caused by covid and geopolitics (globalization has peaked and is now in reverse) and it can get out of control and become cyclical, entrenched and systemic.

          Even worse, pretty soon you have so much money sloshing around that the banks can’t use the stuff and threaten to stop taking deposits or impose a negative rate on deposits. So the Fed steps in and offers reverse repos so that the banks get a minimum few pips and keep accepting deposits to hold the system together. The overnight reverse repo tally, is now > 1.5T and trending higher, although it is volatile!

          Parking the funds with the Fed through reverse repos fails to properly sterilize the freshly minted money, which can be pulled out at call and spent (see above). As the proportion of cash in the economy rises relative to goods and hard assets its value falls. Eventually it doesn’t make sense to hold it and hyperinflation is the result.

          As I said, money printing is insidious, and it is what governments and central banks do when they exhaust their capacity to borrow. It is a wolf in sheep’s clothing and I only have one small thing to support my argument: the entire history of money.

          As to the second point, that government investment in the supply side with printed money would cure some price rises, well, pardon me for being dubious about that. Given the exceptionally low opinion of all aspects of government that pervades NC, much of which I agree with, the idea that the government can do anything at all within a meaningful time frame that is even barely effective or efficient to resolve short term supply issues is just pie in the sky stuff.

        5. Yves Smith Post author

          No, your money printing argument is false. It assumes the same velocity of spending.

          The US and UK conducted monetary experiments under Reagan and Thatcher. They demonstrated conclusively that there is no relationship between money supply and any important macroeconomic variable.

          1. Bellatrix

            The velocity of money is very important and very underappreciated and it is true that pumping printed money into the system can and has led to a slowing of the VoM, which lowers and can cancel out its impact. Some describe it as “pushing on a string”.

            My main concern is the buildup of cash in the system. As noted in my previous post, it is now a very substantial amount and is evidenced by the incredibly rapid buildup of outstanding reverse repos, now in excess of 1.5T. This is a clear sign of excess and fragility. As long as all the surplus money remains dormant in bank accounts or parked with the Fed to maintain stability and prevent negative deposit rates, then it can continue. Unfortunately, the system becomes more and more unstable as the proportion of cash increases relative to the hard assets like stocks, real estate and precious metals that it represents.

            Imagine if we have a cozy equilibrium where the value of all the hard assets is X and the amount of cash is Y. As you increase Y, each dollar is represented by less and less X, which means the value of each dollar falls in terms of X. As the process continues, the rationale for holding dollars diminishes and people start to exchange it for X because they want something tangible. But as I’ve noted, all those dollars just change hands, they don’t go away. They become a hot potato and VoM increases accordingly. That is how hyperinflations are born.

            If you want to see a real world example of this process in action, you need go no further than Bretton Woods and Nixon’s eventual closing of the gold window. The USD was backed by gold, but the supply of USD was increasing much faster than the supply of gold. So what did people do? They were not comfortable with the growing pile of paper relative to the pile of gold, so they started to redeem. The more they redeemed the smaller the pile of gold and the greater the disparity, so it quickly got out of control (ie the VoM increased rapidly) and Nixon was forced to close the gold window in 1971. It’s similar now, except there is no window to close.

            As to the monetary experiments you mentioned, these things can take decades or generations to manifest, so short term “experiments” are far from conclusive. It’s like that famous Hemingway quote from The Sun Also Rises: “How did you go bankrupt?”
            Two ways. Gradually, then suddenly.”

            1. jim truti

              In the words of Bill White, “…Abba Lerner, a known chartalist (MMT ancestor) was trying to promote his ideas during a meeting in Washington, and Keynes was there. As he listened to Lerner he said something to the effect of, no, that’s just humbug. The government debt can’t rise forever…”
              I found that arguing with MMT promoters is no different than debating crypto investors.
              We know that governments can print as much money as they want, that is not rocket science, the issue is how to deal with the consequences of that. How does MMT deal with the inflation? Raise taxes? Good luck with that.
              Their job guarantee prescription is beyond totalitarian and straight from the soviet playbook. I cant believe any one would take that seriously.
              Imagine Fauci 2 telling people what to do, because that’s what it boils down to in the end.
              “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Friedman is right. If you use a narrow definition of inflation iit is easy to support any narrative, yes we printed a ton of money since 2008 and CPI didnt go up but look at asset prices, money always goes somewhere, Friedman’s is the simplest direct relation that will always prove to be true over time.

              1. Yves Smith Post author

                Keynes was fiscally orthodox. And he lived entirely in the gold gtandard era. That went out the door in the 1971 Nixon Shock when he took the US off the gold standard. Gold standard thinking and models are irrelevant and dangerously misleading under fiat currencies. Lerner is correct, Keynes is wrong on the matter of fiat currency issuers needing to balance budgets. State and local governments (and countries in the Eurozone) are completely different, they are currency users, not issuers.

                1. skippy

                  It never ceases to amaze me how some that have taken the time to study this stuff and then make the most basic of errors in conflating one monetary system, plus the environmental history of said era, with a completely different monetary system and environmental conditions.

                  Especially the military/war aspect that seems always in the picture e.g. its all out of context. In my wanderings it always ends up a moral plea [austerity et al] argument dressed up as economics because humans – are = “I”x – and everything is reversed engineered from that axiom. Doubly when one has spent enough time with various sorts and can identify this via the dialectal alone, hence your not talking to the person but the environmental biases as a badge of moralistic honor.

                  Geez South America went from the jade standard to the gold standard without any influence from anyone and did not skip a beat and collapse was in no way related to its monetary system.

                  Yet it was the same sorts that pushed Plaza EMH and now the chickens have come home to roost are all over the shop … rather society take a dump and regard the doctrine than bend a wee bit for the common good.

                  Sorry rambling again my lady …

              2. skippy

                “I found that arguing with MMT promoters is no different than debating crypto investors.”

                Non sequitur. MMT is a description of the currant monetary system which frames policy debate. Crypto is an attempt to use the digital platform in having a second go at the free banking period under the guise the markets reward the virtuous and penalize the un-virtuous so equilibrium will sort it all out with no government agency aka force.

                Now if you’re going to take the commodity empty warehouse approach to the debate, it should be noted, because that has ramifications in defining a broader sociopolitical agenda that has its own history.

              3. Basil Pesto

                I found that arguing with MMT promoters is no different than debating crypto investors.

                He says, after continually refusing to meaningfully engage with MMT and its quite vast body of work, preferring to trivially knock down strawmen as though MMT scholars have not even considered the issues raised.

                I repudiated the Bill White quote you excerpted what, last month, and you’ve dragged it out again – only to see it rebutted again. Who, exactly, is the stubborn Crypto-esque ideologue here?

                1. skippy

                  How does one support an anti trade system based on monetary dominance and military force as free trade something other … gag ..

                  Next big question is what underpins all the antics …

                2. Bellatrix

                  My view is that government debt can indeed rise forever, but only at a rate equal to or less than the nominal rate of growth of the economy. Anything in excess of that rate is unsustainable in anything but the short run and will make the economy increasingly fragile and will eventually lead to stagnation and then collapse.

                  I haven’t seen a rebuttal of this idea, so perhaps you could explain to me, in simple terms, how proponents of MMT conclude this upper limit does not apply. While you’re at it, please also explain how proponents of MMT propose to deal with the medium to long term consequences of printing money. Recent events have given us a driver’s seat view of what happens, and it’s not good.

                  1. skippy

                    “Money printing” is a meme in like of Rothbard social ideological views and not functional reality, hence the term sound money shtick.

                    1. Bellatrix

                      skippy, it may just be that your contributions are so brilliant that they don’t make much sense to a lesser mortal like me, so perhaps you could dumb them down a bit, you know, by adding a bit of substance and connecting the dots, so I at least have a chance of understanding them.

                    2. skippy

                      Money printing = empty warehouse receipts optics as Murray Rothbard et al think which is a post hoc ergo propter hoc fallacy.

                      This is an ex ante proposition which is then used to flesh out the rest of the moralistic plea in constructing a social narrative e.g. it is not reflective of functional reality i.e. its a reality they wish impose on everyone else.

                      Put it this way … if we were on a hard currency standard then I would not use MMT as a descriptive of it, so why would one use a hard currency standard as descriptive of a sovereign fiat standard. Even then any system has it pros and cons and can be gamed politically, but whats the point of distracting from the accurate description when evaluating hows its being administered and for who.

                      The whole monetarist angle was built on a attempt to find a A-Political solution to a Political problem, it failed.

                  2. ChrisRUEcon

                    I purposely resisted responding to this thread last night, because of how annoying the persistence of peddling VoM fallacy was. Additionally, neither you nor the other “$ printer go brr” person here seem to give any deference to having this Family Blog’s founder respond with the opposite and correct understanding. To answer the various pedantic offerings here:

                    1. “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Friedman is right.

                    Anyone who still believes this needs to find a DeLorean with a flux capacitor and get back to the future. Even the Fed – the monetarists! – have pretty much abandoned this.

                    Inflation Is Not Always and Everywhere a Monetary Phenomenon (via the Dallas Federal Reserve, 2014)

                    1. Bellatrix

                      Given that the Fed has pretty much the worst track record of any organization on the planet, when it abandons a proposition it really is time to take it seriously!

                  3. ChrisRUEcon

                    2. My main concern is the buildup of cash in the system.

                    Emphasis mine …

                    Cash is a special form of reserves, and the fact that you feel free in discourse to use cash when you actually mean reserves is a tell of sorts about your understanding of money or lack thereof.

                    Your entire bloviated response to Yves can be summed up by a well known joke about Economists:

                    “That works very well in practice, but how does it work in theory?”

                    Your theory doesn’t fit the reality; which is another thing that’s infuriating about the sudden resurgence of “money supply inflation” zealots: where were you all in the aftermath of the global financial crisis (GFC)?! Where were you all when central banks all around the world were pumping banks full of QE, but could not get inflation over 2%? There was another thread about this recently on #NC, and I posted this link in support of my comment:

                    Why central banks are not hitting their 2% inflation target (via The Guardian, 2017)

                    This was after almost a decade of various quantitative easing efforts – the GFC started late-2008/2009.

                    1. Bellatrix

                      “Cash”, “reserves”, I mean money, plain and simple.

                      You don’t seem to have understood my post at all.

                      The first paragraph answers the question you ask here about why QE could not get inflation over 2%. Falling VoM cancelled out the QE. Pushing on a string. No magic there, pretty straight forward. What exactly is the “VoM fallacy” to which you referred above?

                      You have not dealt with the following paragraphs in my post at all, which relate to the inflation of asset prices, not goods and services prices. You may not have noticed, but stock and real estate valuations are at historically unprecedented levels. That is inflation too (spare me the semantics) and it is an even greater cause of inequality than goods and services price inflation. It adds generational inequality to the list of inequalities and that is tragic.

                  4. ChrisRUEcon

                    3. My view is that government debt can indeed rise forever, but […] I haven’t seen a rebuttal of this idea, so perhaps you could explain to me, in simple terms, how proponents of MMT conclude this upper limit does not apply.

                    Yes, yet another slight #MMT adherents have to endure is this: when people who critique #MMT don’t even bother studying the immense body of work – a fair amount of it posted here on #NC for good measure – that explains in excruciating detail what the tenets are.

                    For the record, none of the architects and academic proponents of #MMT say that just because a government is not revenue constrained in its ability to spend, that it should just spend infinitely. From Randy Wray, one of the primary architects of #MMT, who authored its first textbook:

                    MMP Blog #36 What Government Ought to Do: An Introduction (via

                    Just Because Government Can Afford to Spend, Does Not MeanGovernment Ought to Spend.
                    Understanding how government spends leads to the conclusion that affordability is not really the issue—government can always afford the “keystrokes” necessary to make expenditures as desired. But that does notmean it should. We can list several legitimate reasons for constraining government spending:
                    – too much spending can cause inflation
                    – too much spending could pressure the exchange rate
                    – too much spending by government might leave too few resources for private interests
                    – government should not do everything—impact son incentives could be perverse
                    – budgeting provides a lever to manage and evaluate government projects

                    1. Bellatrix

                      I’m very relieved to hear that core MMT incorporates so much OMT. Unfortunately, most of those sensible ideas and limitations don’t seem to find their way into day to day discourse. The now often heard cry that “deficits don’t matter” seems to be at odds with the above constraints. The danger, of course, is that initial idealism will give way to the usual malarkey and we will all eventually suffer for it. There is an immense body of work out there about this process: Animal Farm is one of my favorites.

                  5. ChrisRUEcon

                    4. … please also explain how proponents of MMT propose to deal with the medium to long term consequences of printing money. Recent events have given us a driver’s seat view of what happens, and it’s not good.

                    Again, emphasis mine …

                    Recent events have nothing to do with “printing money” … that belief is fallacy, as in not supported by reality. Do yourself a favor and read this article (via Time) which was posted here on #NC recently. Inflation during this pandemic is largely the result of the ability of producers to increase prices based their interpretations of supply, demand, and in response to cost increases passed on among intermediate suppliers. The graphic from that article shows what is happening:
                    – ocean shipping costs increased (passed on to consumer)
                    – local delivery costs increased (passed onto consumer)
                    – sales tax and Amazon commission increased (passed onto consumer)
                    – and finally, the producer of the toy increased the mark up (profit) per toy because they expected to sell less

                    So tell us … how were any of the actions outlined above triggered by the trillions of USD sitting on the Fed’s balance sheet? In other words, describe what economists call the transmission mechanism – describe how the extra trillions parked in US banks reserves caused the shipping costs from China to increase?

                    Spare yourself – there is no transmission mechanism.

                    1. skippy

                      – and finally, the producer of the toy increased the mark up (profit) per toy because they expected to sell less

                      This is a big one that the most don’t understand because its counter intuitive, especially if paired with Austrian et al views, covid has just triggered a broad sweeping industry event.

                      Previous to covid the same was happening albeit in specific instances i.e. Roof top solar hit the balance sheet of energy suppliers which diminished their customer base and required them to increase prices over the smaller customer base to make up the difference. This became a doom loop as it incentivized more customers to go solar. The same can be said of the meat industry here in Oz after the Swift consolidation, huge sums were borrowed to facilitate new processing plants, establish contracts with the major retail suppliers, prime the pump with low cost pricing to secure market share and then start jacking up the price to cover the debt incurred and hit the profit sweet spot.

                      Yet I’m seeing an increase in this QTM narrative popping up the Itubes, Kingsley over at Lars is getting shrill, MSM saying we have to get back to normal or the magic market faeries narrative might die thingy. Just wow … the FIRE sector [predictability] was supposed to just sail on forever on the financial seas whilst the precariat [existing without predictability] would supply them with the goods and services they wanted for lifestyle enjoyment.

                      With that in mind how about our [Oz] Harvey Norman taking government money to retain employees only to use it for stock buybacks and buy bulk priced PCR tests and sell them at huge markups … seems the LNP are more concerned about their donor class than public health … but yeah printer goes brrrrrrrrrr …

                    2. Bellatrix

                      I should have been clearer on this. As noted in my earlier post to which you have responded, my main concern is the effect of money printing on asset prices, not goods and services prices.

                      I agree completely that shipping costs and a multitude of other supply issues have caused much of the current goods and services price inflation. This was however exacerbated by large payments (of printed money) to idle people (often more than they were getting previously) which boosted demand for goods in particular and contributed to scarcity and price inflation.

                      However, what is very clear is that the QE after the GFC and the additional QE during covid has dramatically inflated asset prices, particularly stocks and real estate and this has greatly exacerbated inequality – both class and generational. That is what the bulk of my post is about and (as in one of your other responses above) you have rather selectively chosen not to address it. If you open your other eye, you may see that there is an elephant perched on your shoulder.

                  6. ChrisRUEcon

                    5. And finally, while I won’t dignify the #MMT/Crypto insult with a response, I will say this: I’m honored to be consider myself part of the #MMT community. There is no other confraternity that has done as much to advance a proper understanding of money and the political economy. #MMT as a lens to interpret and assess the ability of sovereign states to use their monetary monopoly to improve the lives of people all over the world is worth immensely more than any reproach can be be hurled towards us. I am also thankful to Yves, Lambert and the rest of the NC command for providing a place where heterodox economic views can be shared, discussed and allowed to thrive as a counterweight to mainstream economic theories.

                    1. Bellatrix

                      Economics is a river that multitudes have contributed to and if MMT can make a positive contribution, then well and good.

                      But calling yourselves a “confraternity” is deeply, deeply troubling.

                      And if saying any of this gets me banned, then all the more so.

    2. jim truti

      Posts like this make me question my sanity.
      Then this morning my wife tells me that love and hate are the same thing, because you only love or hate people you care about.
      Sometimes I think logic is not so sound after all; its a human creation too.
      “T’is not against reason to prefer the destruction of the world rather than the scratch of my finger” said the great Hume.

    3. T_Reg

      Fund even more oil drilling? That’s a good way to exacerbate scarcity; a scarcity of arable land, a scarcity of livable environments, a scarcity of biodiversity and life overall, and a scarcity of societal cohesion.

    4. jimmy cc

      We have all gone in debt trying to buy what is already being produced.

      How is producing more going to help?

      1. Bellatrix

        I think that’s a very relevant comment. Before covid, the problem was not supply at all, it was insufficiency of demand. The reason for that is that the share of income going to labor has been falling for decades, so interest rates were reduced to incentivize people to borrow more to goose up demand. In other words, GDP went up, but real wages did not keep pace. This is a problem, as Marx would have noted. Covid supply issues will be sorted out in the short term, but I think other supply issues will hang around for a bit longer because of the geopolitical reality that we have passed peak globalization. Real wages also need to go back to historical norms, which will of course be inflationary.

    5. c_heale

      All these are technological solutions of the kind that got us into the situation we are in now. We’re in a hole and we need to stop digging, not dig deeper. We do need more efficient agriculture and that means agroecology not industrialized agriculture which is anything but efficient. We’re already drilling for as much oil as we can. Golden rice is a waste of time since it doesn’t produce as much yield as current varieties so farmers won’t plant it. Increasing the capacity of chip production is a long process which is already being worked on, as is renewable energy. I can’t see anything new in these proposals, just the same old reliance on technology and progress. We need better ideas as we move into a lower energy world and economy of scarcity.

    1. ambrit

      Why are there so many of us?
      Perhaps because “Hippy punching,” “punching down,” “demonizing the deplorables,” et cetera are very popular ‘Elite’ social games. The ‘Elites,’ (for some definition of Elite,) gain undeserved self-gratification and perceived status from engaging in the aforementioned ‘Virtuous Pursuits.’ Like any other ritual based on Magical Thinking, these ‘Elite’ behaviours are symbols of inclusivity in the desired Class.
      Hmmm. Furthermore, as wealth inequality grows, the “high worth” persons need ever larger pools of peons to plunder and performatively master. It could be argued that as wealth grows, so does the need for perceived “right” to be wealthy. Nothing says “I’m alright Jack” like being driven past a big homeless camp in your Tesla Ares limo. (For extra credit, throw handfulls of dollar bills out of the window as you drive by.)

      1. Christopher Horne

        That’s about right. But I’ve always thought that Money is the most
        addictive drug ever invented. Increases in wealth really kick in the endorphins like nothing else. A drug like cocaine will enhance one’s
        self -esteem temporarily, but money increases your self-esteem
        and that of everyone else in society, at least the ‘society’ worth impressing in a wealthy person’s estimation.

        1. redleg

          Time to revisit Hudson’s NC guest post “Plato, Aristophanes and Aristotle on Money-Lust, 399-380 BC”.
          April 23, 2021.
          I don’t think his book is out yet.

    2. Larry

      Who would cut the grass and pick up the kids? They hate their servants, but do need them ever so much.

    3. Blue Duck

      Because the current ROI for the production and distribution of Soylent Green is too low to incentivize mushing poor people into paste. For now.

  7. TimD

    The national debt as increased by $24 trillion since 2000, so the average deficit has been just over $1 trillion per year – closer to $2 trillion per year for the last 4 years. That is a huge amount of fiscal stimulus. Instead of taking away the punch bowl, the Fed has been buying low-performing assets from financial institutions and doing its best to keep interest rates low. This should have led to a great party, but has only resulted in annual real growth of about 2%. The Fed can talk about toning it down, but what is going to happen if they do? I think they will just make noise for a while and go back to what they have been doing since the Great Recession.

  8. ChrisRUEcon

    RE: Energy cost rises have absolutely nothing to do with the Fed

    Can we get this (via #NC, October 5, 2015): Is Russia Plotting To Bring Down OPEC?

    Russia also could cooperate with Iran and Iraq to take market share from Saudi Arabia in the vital Chinese market. As a recent Bloomberg article pointed out, Saudi Arabia, Iran, Russia, Iraq and other countries are vying intensely for sales to China, the second largest import market and the major source of demand growth in coming years. Coordinating their pricing and consistently offering the Chinese prices below the Saudi price, they could seek to win market share. Such a price war would pressure the competitors’ currencies.

    As long as the Saudis have cartel power, they have outsized control over the price. OPEC needs to get broken up, after which prices should fall and exhibit more elastic behaviors based on actual supply, proven reserves and exploration. Is there any real chance of this happening in our lifetimes?

  9. eg

    The neoclassical economic orthodoxy’s “solution” (and thus the Fed’s, since they are in thrall to its priesthood) to inflation brings to mind the possibly apocryphal explanation for the bombing of Ben Tre, Vietnam — “they were willing to destroy the village in order to save it.”

    We are subjects of an oligarchy in the grip of madness.

  10. p fitzsimon

    I read somewhere that the 1970s inflation was broken by the invocation of the “Credit Control Act”, something normally used in war times. This was done through executive action (The Treasury) not the FED. A few years later Congress negated the act. If needed again congress would need to take action. I’m curious if anyone knows more about this option

    1. Blue Duck

      1970’s inflation was broken by the destruction of the American working class. The Volcker shock destroyed the economy, and all those good Union jobs disappeared. Everyone then had to take lower paying jobs with significantly less protections. This pushed down wage growth to the levels sufficient to tame inflation.

      1. jimmy CC

        By making the US dollar stronger relative to foreign currency, Volcker reduced the cost (in dollars) of foreign labor.

        Reagan raised the FICA tax, hitting both business and personal spending, and that made sure inflation stayed low after the Volcker shock.

        The answer still seems to be to lower payroll tax rate and increase the capital gain tax rate, but what do I know.

        1. jimmy cc

          and of course ‘the answer’ isn’t for consumer inflation, but I think the inflation is being drive by increased shipping costs…

  11. Socal Rhino

    I suspect that austerity measures are intended to correct the only inflation of concern to central banks: labor costs.

    1. Amfortas the hippie

      that’s the only inflation the boss class is ever really concerned about.
      it’s there in the subtext, at least, of every article in forbes, bloomberg, et alia i’ve seen that whinged about how terrible inflation is.

      part of me agrees with TimD’s assessment, that this is all mostly performative, and the zirp and QE and all the rest is well known by the priesthood to now be essential to the functioning of “The Economy”(holy, holy), and that if they screw around too much, the whole edifice will collapse.
      on the other hand, the biggest fear haunting the nighmares of the power elite is that of labor power…and more, the widespread awareness of labor power.
      the last 2 years have taught the whole underclass how much more necessary they are to the functioning of society than their wages and benefits would indicate…and if the fed goes too far with the austerity, the sort of de facto general strike we’ve seen abornin’ will just get worse.
      boss class is in a pickle, and they know it.
      eavesdropping on the owner of feedstore while he’s muttering with one of his buddies(another owner of everything around here*), even that level of boss class is pissed to be in this situation…having to give meaningful raises, and to be nice to the workers…it just rubs them the wrong way.

      (* these guys own it all around here…there’s maybe 50 of them in this county(pop. 4500)…and they bought up everything in the aftermath of 08.
      Lambert’s Landed Gentry….they’re also the ones who engage in the gentrification and land speculation…are implicated in the local meth trade(while b*tching incessantly about the dope fiends and high crime and all) and are, to a man, unpleasant characters, to say the least: the most entitled people i know, reckoning that they deserve to own it all and to lord it over. I look forward to eating them one day)

      1. Jeremy Grimm

        How could you cook them to make them tender enough to chew? And if you could verify their meat is not poisonous — imagine the heartburn!

        1. Amfortas the hippie

          one reason to keep a few pigs.
          or, i suppose, mitigation technics similar to what i’m attempting with the herbicidal manure/hay problem…add lots and lots of charcoal.
          carrots suck up heavy metals, btw, and can be used to clean such soil.

          a year ago, one of the hunters back on the mountain cleaned his deer at my place.
          asked what to do with the bones and head.
          we buried the head in one place, for to retrieve the skull and antlers later…and the rest in the large raised bed behind the house.
          fallow all year since.
          i’ll plant tomatoes there this year.
          bones=phosphorus/magnesium/etc…skin guts and blood= nitrogen and numerous trace minerals.
          i’ll let yall know,lol.

          what i will not be doing is pledging fealty to those bastids.

        2. jimmy cc

          you could feed the rich to amfortas pigs and then eat the pigs.

          swine have the stomach for it

    2. Blue Duck

      Ding ding ding. You’ve just hit the nail on the head. Paul Volcker, Jimmy Carter and Ronald Reagan understood this very well.

  12. Pate

    “part of me agrees with TimD’s assessment, that this is all mostly performative, and the zirp and QE and all the rest is well known by the priesthood to now be essential to the functioning of “The Economy”(holy, holy), and that if they screw around too much, the whole edifice will collapse”

    The home used to be the great repository of American wealth. Now it is the stock market*. In other words, as I think you suggest, a large part of “The (holy, holy) Economy” and thus part of the Fed calculus.

    *fully one-third of all wealth?

    Very little doubt in my mind that it really is about the destruction of labor. From Reagan’s air traffic controllers to self-checkout (robotics). Capital versus labor. We all get the essential contradiction. It’s political.

  13. jimmy cc

    If I recall from the book ‘Secrets of the Temple’ when Volcker raised interest rates, did it not just create a flood of dollars into the US banking systems from international banks?

    and didn’t he eventually switch to increasing a banks reserve instead of focusing on interest rates?

  14. T_Reg

    All this talk about inflation makes me wonder what the inflation rate would be if the DJI were included in the calculations.

  15. Synoia

    Some well informed comments.

    Overall there is NO model of the economy,,with all factors clearly defined. That’s why we have boom and busts in our economy, it is in control theory terms ad ungoverned system, with positive feedback.

    Because there is no complete model of the economy, and a single point of governance , we will continue to have the booms and busts to I recall over my life.

    A rile of thumb in feedback system, of which the economy is an practical application of controls close to every input, and a short event chain for controls.

    The best practice for controls is probably the Rocket Industry.

  16. Anonsf

    Lower interest rates increase housing prices, a total disaster for the young and not rich. If it were just the stock market nobody would care.

    If you want to raise real wages, print money and give it to people, break up the monopolies, stop federal backing of student debt and bring down education prices, raise taxes on rich people and lower them on everyone else, build more housing, provide more and better public services. We don’t need zero interest rates.

    1. Christopher Horne

      Ha! Keynes ‘helicopter money’ returns. Yes, it’s proven to work,
      but won’t it lower the nation’s moral standards?

      1. Yves Smith Post author

        Wash your mouth out. Helicopter money was Bernankem and that was to fight deflation. Keynes held the reverse, if you tried monetary measures when businessmen were freaked out, it wouldn’t make any difference, aka “pushing on a string”.

        1. lance ringquist

          correct, also pumping all of that extra stimulus into a free trade economy, is like trying to fill a bottomless bucket.

  17. Roquentin

    I don’t think the cause of inflation can be traced back to any one particular thing. I do think open market operations and zero or near zero interest rate of the Fed play a large role, but the certainly aren’t the only facto. There was the massive shift when COVID hit away from spending on services and towards spending on goods, coupled with COVID also causing too many problems with production and supply chains to list. Fiscal policy coming out of the fed makes a difference but it’s not a magic bullet either. You can’t have intermittent lockdowns for two years and not suffer ill effects as a result. I’m not saying it wasn’t justified, just that it had consequences. I even think at least some of the recent housing boom was just due to people being forced to spend a lot more time at home, living, working, and teaching their kids there and small urban apartments no longer really cut the mustard. And if you could work from anywhere, why rent a tiny place in the center of the city in the first place? Half the things that made it worth it were shuttered anyway.

    I see it as a kind of “pick your poison” scenario in that we can either deal with it via correction/recession or inflation. Neither is good, both apply economic pain differently, but there’s no way out of this where everyone wins. A more left leaning government could tamp down inflation via increased taxes, which would more carefully target how the money supply in the private sector was lessened in a less blunt manner than raising rates, but this is not something the US political system is presently capable of.

  18. Sound of the Suburbs

    The neoliberals were always going to be in trouble with neoclassical economics.
    They don’t know what real wealth creation is, and associate it with things like making money, rising asset prices and trade.
    They don’t know how the monetary or banking systems actually work.
    They don’t look at private debt.
    They don’t actually understand free markets or free trade.

    What goes wrong with neoclassical economics?
    1) It makes you think you are creating wealth with rising asset prices
    2) Bank credit flows into inflating asset prices.
    3) No one notices the private debt building up in the economy as neoclassical economics doesn’t consider debt.
    4) The banking system and the markets become closely coupled, and as soon as asset prices fall it feeds back into the banking system
    5) The money creation of unproductive bank lending makes the economy boom as you head towards a financial crisis and are left facing a Great Depression.

    This is why the FED panics when asset prices fall.
    Any significant fall in asset prices will feed back into the banking system.
    This is what happened in 1929.

    Why did the US financial system to collapse in 1929?
    Bankers get to create money out of nothing, through bank loans, and get to charge interest on it.
    Bankers do need to ensure that money gets paid back, and this is where they get into serious trouble.
    Banking requires prudent lending.

    If someone can’t repay a loan, they need to repossess that asset and sell it to recoup that money.
    If they use bank loans to inflate asset prices they get into a world of trouble when those asset prices collapse.
    As asset prices collapsed, the banks became insolvent as their assets didn’t cover their liabilities.
    The banks become insolvent and collapsed, along with the US economy.

    When banks have been lending to inflate asset prices the financial system is in a precarious state and can easily collapse.

    Private banks create the money supply.
    Money and debt come into existence together and disappear together like matter and anti-matter.
    Bank loans create money and debt repayments to banks destroy money.
    Bank loans create 97% of the money supply
    The money supply ≈ public debt + private debt
    Money and debt are like opposite sides of the same coin.

    It’s a debt based monetary system.
    It’s always a delicate balance between the money being destroyed by debt repayments to banks, and the money being created by new bank loans being taken out.
    You don’t want the money supply to shrink; this is called “debt deflation”.

    This is a monetary system that needs to be carefully managed.
    The neoliberals didn’t know that and embarked on financial liberalisation.
    It was a dreadful policy decision, but a great learning opportunity as everything would go haywire.

    Things have been a bad way since 2008 as there is too much debt in our economies.
    The only to stop the money destruction of debt repayments to banks overtaking the money creation of new bank loans has been to keep interest rates on the floor.

    The FED are in a very difficult situation with no easy way out.

  19. Mak

    Widespread inflation because of supply side challenges is EXACTLY why the demand side should be tempered with higher short term interest rates. That is of course the natural economic response to a temporary structural reduction in productivity. But we have long since removed any sense of natural economic behaviour regarding our fiat money supplies in exchange for reserve banks driving things on their whim.

    The question shouldn’t be why the FED has taken so long to look to raise rates, but why rates have been reduced so much and held so low for so low. Beyond the initial first 3-6months of the pandemic demand has been healthy and strong. Rates should have been increased 12 months ago.

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