Inflation Paranoia Threatens Recovery

Yves here. The Fed has committed itself to raising rates to tackle big bad inflation, despite the fact that this inflation is due to factors outside central bank control, like high energy prices, car production backlogs, poor harvests, and Covid-short-staffing-related supply chain issues. But common sense be damned! The omnipotent monetary authorities will burn the villages to save them.

By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Jomo Kwame Sundaram’s website

Inflation hawks are winning the day. The latest ‘beggar thyself’ race to raise interest rates has begun. This ostensibly responds to the spectre of runaway inflation, supposedly retarding economic growth and progress, and thus threatening central bank ‘credibility’.

Inflation Fetish

The ‘one size fits all’ policy of raising interest rates to contain inflation is being touted again, the world over. This will surely kill national efforts to revive economies reeling from COVID-19 pandemic slowdowns.

Central banks in many emerging market and developing economies (EMDEs) – such as BrazilRussia and Mexico – began raising policy interest rates right after inflation warning bells were set off after mid-2021. Indonesia and South Africa have since joined the bandwagon.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva has warned that US interest rate rises would “throw cold water” on global recovery, especially hurting struggling emerging markets.

An earlier IMF blog had urged EMDEs to prepare for earlier than expected US interest rate hikes. The Fund has lowered its growth projections as the inflation bogey induces monetary and fiscal tightening.

Inflation Paranoia

Inflation hawks denounce price increases, claiming – without evidence – that it impedes growth. Former World Bank chief economist Michael Bruno and William Easterly refuted these popular, but false prejudices.

Using 1962-1992 data for 127 countries, they found, “The ratio of fervent beliefs to tangible evidence seems unusually high”. They also found extremely high inflation – over 40% yearly – mainly due to very exceptional circumstances, e.g., Nicaragua after the Sandinista takeover.

Bruno and Easterly concluded that inflation under 40% did not tend to accelerate or worsen. They concluded, “countries can manage to live with moderate – around 15–30 percent – inflation for long periods”.

Bank economists Ross LevineSara Zervos and David Renelt confirmed a negative inflation-growth relationship to be exceptional, and due to a few extreme cases.

Rudiger Dornbusch and former IMF Deputy Managing Director Stanley Fischer came to similar conclusions. They too found moderate inflation of 15–30% did not harm growth, emphasizing “such inflations can be reduced only at a substantial short-term cost to growth”.

Citing IMF research, Harry Johnson also argued that while very high inflation could be harmful, there was no conclusive empirical evidence of the alleged inflation-stagnation causal nexus.

Even monetarist guru Milton Friedman acknowledged, “Historically, all possible combinations have occurred: inflation with and without development, no inflation with and without development”.

Thus, the Fund and the Bank have no sound bases for promoting draconian policies to eliminate inflation above, say 5%, by citing a few exceptional cases of very high, runaway inflation and low growth.

Inflation Misdiagnosed

Friedman’s sweeping generalization that “inflation is always and everywhere a monetary phenomenon” ignored other factors possibly contributing to inflation.

Without careful consideration of inflation’s causes, the same old policy prescriptions are likely to fail, but not without causing much harm. Prices tend to rise as demand outstrips supply. This can also happen when demand rises faster than supply, or if demand does not decline when supply falls.

The IMF attributes the current inflationary surge to supply chain woes, higher energy prices and local wage pressures. While demand has been boosted by pandemic relief and recovery measures, where existent, supply shortages remain vulnerable to disruptions.

Rising food costs are also pushing up consumer prices. Extreme weather events – droughts, fires, floods, etc. – have affected food output. More commodity price speculation – e.g., via indexed futures – has also raised food prices.

Although wages have risen in some sectors in some countries, economy-wide wage-price spirals are unlikely. Employment suffered during the pandemic while unionization is at historically low levels.

Labour’s collective bargaining powers have declined for decades, especially with technological change, casualization and globalization lowering the labour income share of GDP.

As the profit share of income continues to rise, rising mark-ups and executive remuneration also push up prices. With more market monopoly powers, price gouging has become more widespread with the pandemic.

Understanding what causes particular prices to rise is critical for planning appropriate policy responses. Although devoid of actual diagnoses, inflation hawks have no hesitation prescribing their standard inflation elixir – raising interest rates.

Raising interest rates may help if inflation is mainly due to easier credit fuelling demand. But tighter credit is unlikely to effectively address ‘supply-side’ inflation, which typically requires targeted measures to overcome bottlenecks.

Interest Rates Harm

Higher interest rates increase borrowing costs, squeezing investment and household spending. This hits businesses, hurting employment, incomes and spending, and can result in a vicious downward spiral.

Higher interest rates also increase governments’ debt burdens, forcing them to cut spending on public services including healthcare and education. Incredibly, elevated interest rates – harming investments, jobs, earnings and social protection – supposedly benefits the public!

The adverse spill-over impacts of rising interest rates are also considerable. Raising rates in major advanced economies weaken EMDE capital inflows, currencies, fiscal positions and financial stability, especially as sovereign debt has ballooned over the last two years.

Indeed, the interest rate is a blunt weapon against inflation. How can raising interest rates curb food or oil price increases? While supply blockages persist, essential consumer prices will rise, even with high interest rates.

Higher interest rates may even aggravate inflation as businesses cut investment spending. Thus, supply bottlenecks, especially of essential goods, are likely to be more severe, pushing up their prices.

Most people are indebted, with the poor often borrowing to smoothen consumption. Thus, the poor are hurt in many ways: losing jobs and earnings, coping with less social protection, and having to borrow at higher interest rates.

Hence, the standard medicine of higher interest rates has massive social costs. Meanwhile, the principal beneficiaries of using higher interest rates to lower inflation are rich net creditors and financial asset owners.

Toxic Prescription

Premature reversal of expansionary fiscal policy has been largely due to debt hawks’ successful fear mongering. Thus, debt paranoia nipped in the bud the ‘green shoots’ of robust recovery following the 2008-2009 global financial crisis.

In the early 1980s, inflation paranoia led to interest rate spikes, triggering debt crises, stagnation and lost decades in much of the world, especially developing countries. Now, inflation hawks are poised to derail global recovery, stop adequate climate action and otherwise undermine sustainable development.

Policymakers the world over, but especially in developing countries, must reject the inflation hawks’ paranoid screeches. Instead, they must identify and address the sources, causes and nature of the inflation actually faced. And then, take appropriate measures to prevent inflation accelerating to harmful levels.

There are a host of alternative policy measures available to policymakers. They must reject the lie that they have no choice but to raise interest rates – widely recognized as a blunt weapon, with deadly ‘externalities’.

While all available policy options may involve trade-offs, policymakers must seek and achieve socially optimal results. This requires robust, resilient, green and inclusive recoveries – not fighting quixotic windmills of the paranoid mind.

Print Friendly, PDF & Email


  1. griffen

    Robust recovery following the GFC. The NBER always pegged the recession caused by the GFC ended May 2009. Which is laughable, as job losses were still occurring as financial and FIRE related industries still had to reset their economic outlooks based on serious damage to investment portfolios (self induced or not, this reality was generally true). Anecdotal to my direct experience, the jobs lost from 2009 to 2012 were eventually replaced with lower salaried positions. Thankful those were full time and not short term or contract.

    They, meaning the FED in particular, risk a worse outcome to the US should the inflation hawks are proved to be true. And lastly, banks and financial services firms holding consumer and commercial deposits are in no absolute rush to increase their short term deposit rates. Your Mileage May Vary, as these things go.

  2. TheodoreBallgamePhD

    Inflation is always and everywhere a tax on savers generally, and older savers specifically. When I see things like “countries can manage to live with moderate – around 15–30 percent – inflation for long periods,” it makes me think you’ve generally misunderstanding the problem and the rationale for the solution.

    We do not have a monetary supply problem (why 2020 was different than 2008), but we’re trying to fix a (self imposed) 2020 problem with the solution to a 2008 credit crisis. Always will end poorly.

    1. Yves Smith Post author

      Your statement is false.

      Low or negative real interest rates are a tax on savers. We’ve had that in the super low interest rate regime since the crisis.

      Super low interest rates are also bad because they deprive savers of investments that offer non-pathetic income.

      If you are getting a positive real yield, you are fine.

      A relatively stable inflation rate (say 1-3% or 2-4%) allows investors to price bonds with an appropriate yield.

      1. Dave in Austin

        Yves is correct, but we quickly moved from no inflation to 6-8% in a 1-2% return environment.

        Expectations change and if this negative real return were to continue for ever 1-3 years we could be facing a 1979 moment. Taking away the punch bowl can stop folks from getting drunk but it can also lead to a bad case of the DTs, which is what this article is afraid of.

        1. Other JL

          I agree. The problem is that inflation increasing is painful for everyone. Savers get a temporary hit as interest rates decrease or go negative. Wage earners get a temporary hit until wages catch up to cost of goods. And this is macro terms so “temporary” can be years.

          If we had some better policies to ease out the transition, increases in inflation would be a lot more tolerable.

  3. Blue Duck

    We are a family of five, three school aged kids, good salary etc.

    We are getting CRUSHED by inflation. Despite no new recurring or unexpected expenses we are having to cut back on our spending. Each time we go to the grocery store the bill comes in $50-$80 more than it used too. The cost of gas has been particularly brutal.

    Our belt tightening basically means no more discretionary spending outside essentials. Further more there is no discussion of CoL increases in our salaries. At this stage I have to wonder what happens if inflation keeps going up. Where are we going to get more income? Where am I supposed to cut more expenses? At this stage, if inflation continues unchecked we are looking at a significant downgrade to our standard of living over the next 12-18 months…

    1. Kurtismayfield

      Gas prices are still below their nominal peak in 2011-2014 (that means in real dollars they are definitely lower)

      My families grocery bill has gone up ten percent since March 2020.

      Meanwhile my house has supposably doubled in value in the past four years. My family health insurance costs go up about 8 percent a year. Oh and education costs are good Ng to restrict my family’s choices a great deal when college time comes.

      That is the inflation that is killing people.

      1. Nino

        Mr. Kurtis,

        ¿Ten percent?? Are you eating only rice and beans?
        Meat is up almost 40%, canned goods 15-20%, and what you forget is the cost of energy to cook food is up at least 20% with natural gas wholesale prices headed to the moon. The bidenflation is killing family economics. Movies, eating out, vacations, don’t make me laugh!

        Salvation Army is the only place we can afford to buy kids clothes. Must buy new shiny Disney backpacks for our children’s self image however.

        1. Kurtismayfield

          We eat a lot of chicken and vegetables.. breasts, thighs, drumsticks. We also eat rice and pastas. Chicken is not up as much as beef. The dairy is up a lot though, so I feel it when we buy milk products. We also make sure to have a leftovers night to not waste anything.

          The gas prices trope is really sad, consider seeing how much nominal prices were 7 years ago. I usually pay $3.30 a gallon, and gas is maybe 4% of our monthly budget.

        2. juanholio

          Exactly what do you think Biden did, or did not do, to cause this bidenflation?

          The only thing I can think of is that he didn’t suck up to the murderous leader of Saudi Arabia enough.

    2. Susan the other

      Price controls are in order. Iirc – Jamie Galbraith just recommended them. They are precision tools to be used for containing costs in essentials like groceries and gasoline. These prices are already subsidized – it’s not too much to impose further controls to maintain social equity. In fact, it is clearly required. It would also be a very good idea to strictly enforce them on most medical procedures and drugs because the MIC is getting away with murder. And etc.

      1. Blue Duck

        That all makes sense to me. Unfortunately, as John Dolan (aka The War Nerd) says “always bet against the American elite”.

      2. lance ringquist

        i just do not see how galbraith figures that will work. hudson said this, and i agree, i have said it for years,

        The U.S. consumer price inflation reflects its dependence on other countries. Import prices are up, and cannot go down. i added, but wages are going down:)

        to even entertain price controls with most production offshore, is sure to fail.

        nafta billy clinton was a feverish believer in shock therapy. unfortunately for price controls to work, shock therapy must be instituted against free trade.

        the only way out is to reverse nafta billy clintons disastrous policies. no easy feat!

  4. doug

    ‘ Meanwhile, the principal beneficiaries of using higher interest rates to lower inflation are rich net creditors and financial asset owners.’
    I have also read many places: Low rates favor wealthy financial asset owners and low rates have increased the disparity between wealthy and poor.
    I am guessing the poor are then not going to win either way?
    Personally I am seeing so much price increases I want that to slow down. The seed catalog last night had me muttering at this years prices, as did the recent battery for automobile, as does my savings account statement, making less than a percent. Rates are lower than historical norms, I believe.

      1. flora

        ( Are Wall St’s finances so fragile that even a 1% interest rate rise will topple their finances, like some mother-of-all subprime implosion? Asking for a friend. ) / ;)

      2. Susan the other

        Maybe price controls to help the 99% and speculation controls to protect the economy from the 1%. Not sure how that would look. I can almost see why interest rates were once relied on because higher interest rates make it less profitable for the 1% to invest in real estate which always drives inflation. But it has never really worked, as stated above. So if inflation is the problem and asset inflation is a big driver of it then why did the Fed spend multiple trillions to keep asset prices high only to have no control over them when they take off exponentially at some point? That seems pretty irresponsible. I’d assume that real estate is now beyond the benign 15-30% inflation marker. So maybe one big price control tactic should be a limit on how much one investor can put into real estate or a fund that does real estate. Or some obscenely rich limited partner like CalPERS. CalPERS is so big it could cause a new wobble in the Earth’s rotation. Or much higher capital gains on the excess short term appreciation with no loopholes allowed. Where did all those loopholes slip under the fence in the first place? There must be several ways to get control of this iso we don’t raise interest rates and cause harm to the rest of the economy. The most obvious being good long-term investments in the environment – also subsidized by the government. How stupid are we? I’m beginning to think it is terminal.

  5. TimD

    Good points. Nobody worries about inflation when it is housing or stock prices, but when it is driven by wages – then it is evil. Volker mentioned that one of the reasons he bumped interest rates so high was to put workers and unions in their place.

    I have always found the money quantity theorists curious as they hold V constant in MV=PQ – to create a self-fulfilling prophecy. I wonder how they would explain the explosion in the US money supply since 2008?

    I agree that this current inflation is due to supply chain problems and inelasticity of supply for some raw materials and consumption goods. Once the pandemic is behind us it will be back to 2% real GDP growth, trillion+ dollar deficits, growing trade deficits and low interest rates.

    1. John k

      Absolutely, higher stock and house prices good bc they benefit the rich, higher wages bad bc it that hurts corps and the rich holding the shares.
      Imo the fed is well aware higher rates won’t produce more cars, beef or lumber, but it will put people out of work and that will persuade some to accept lower wages. Full employment is not, and has never been, of much importance to the fed… in fact a negative bc they value a surplus pool of labor that resists any increase in wages.
      Granted a recession will not benefit the dems.

  6. Alar

    And what would the common sense be? If there was no spike in energy, food etc prices, the real interest rates would still be deeply negative – should they stay negative forever or should some kind of normalization be allowed? What if there was no inflation spike and central banks started normalizing – would people still object to that? It seems to me the current spike gave the central banks an excuse to do something – even if the reasoning is incorrect, then the action itself is correct (I prefer non-interfering central banks to those currently existing).

    1. eg

      What is interest rate “normalization”? The natural rate of interest for a fiat currency is zero — any rate higher than zero requires central bank intervention either via “open market operations” (the old fashioned way) or by paying interest on reserves (the current arrangement).

  7. flora

    paranoia? Been to the grocery store or the gas station recently? Checked out the price rise in the farm inputs like fertilizer recently? I could go on.

    an aside: Wages are not the driver here, imo. Blaming wages in the late ’70’s then let Volker crush labor in exchange for double-digit interest rates, unleashing the FIRE sector to do whatever it wanted to do. Michael Milken is now “hailed” as an “innovator”. OK, I’ll stop.

    1. Watt4Bob

      Funny you should mention MM, a friend once chastised me for being critical of Milken.

      He said; “Some day you’re going to realize he was a genius.”

      1. John k

        My recollection is his op had 2 major elements – one was borrowing money from investors to loan money to smaller businesses poorly served by banks, and the other helping those wanting to take over a company hide their purchases of shares. The former was afaik legal and imo laudable, the latter illegal, and for which he was punished.

  8. Howard

    Not only is the Fed about to ramp up interest rates but the US government has implemented a mini structural adjustment program on the populace. The elimination of the child care credit, ending the unemployment insurance enhancement, restarting college loan payments, and commencing evictions will probably , along with higher inflation for basic goods, lead to a recession in short order.

    1. Blue Duck

      What you’ve identified is a comprehensive disciplining of the working class. This is the punishment we will receive for exercising our rights within the laissez fair labor market

    1. flora

      Thanks for this link. Very readable, and an important explanation for us non-economists. Hope this is in tomorrows Links.

    2. ChrisPacific

      That was very good, thanks (and explains a lot of things I normally see in these situations that are either out of step with the monetarist explanation or flat-out contradict it). Adding to bookmarks.

    3. Left in Wisconsin

      Yes, highly recommend that piece. Although Fix does repeat one misnomer: the term “stagflation” applied to the 1970s. The stagflation claim, endlessly repeated, is that the 1970s experienced an extended period of high inflation and slow growth. This is simply not true. There were two bad recessions in the 1970s, caused as noted by many others, by oil embargoes and high oil prices, and there was modestly higher inflation during much of the 1970s compared to the 1960s (though it should be noted that the entire business community had basically been doom-screaming about inflation for pretty much the entire post-WW2 period).

      But if you look at the actual data, economic growth in the 1970s was comparable to, perhaps slightly slower than in, the 60s, and substantially higher than it has been most of the time since. The period when growth cratered and inflation exploded was AFTER Volker took over and started raising interest rates to the moon. So, in other words, the whole argument that stagflation LED to monetarism, Reagan, Volker-shock, et al, is completely wrong.

    4. John k

      Thanks, very informative.
      Friedman said inflation is ‘everywhere and always a monetary phenomenon’. This is clearly false, the 70’s oil embargo was not a monetary event.
      Adam smith said prices vary by supply and demand, which imo has stood the test of time.
      My very limited understanding of mmt is that money continuously leaks out of the real economy, upwards to those that will mostly save it (rents etc), outward (trade deficit) and inward (taxes and savings). So gov must deficit spend sufficient to compensate for the leaks to avoid a collapse of demand. (As an aside, during the gold standard gov could not deficit spend, resulting in very frequent deep recessions. This greatly benefitted those holding investable cash when assets were liquidated in the fire sales. The ‘great depression’ was neither the deepest or longest of these deep recessions, but it was the last one bc Roosevelt, aided by the fact England had abandoned the gold standard in 1932, followed suit in 1933.)
      Certainly imo gov can create inflation by demanding more goods and/or services than the economy can produce. I was a beneficiary of this in the 60’s/ 70’s; the space program created a huge demand for engineers while gov sent many new grads as cannon fodder to Vietnam.

  9. Pavel

    Can an expert here (I am certainly not one!) confirm or counter the theory promoted by Peter Schiff and those of his mindset that if inflation rates were calculated as they were back in the Carter 1980s they would actually be around 14%?

    My understanding is that food and energy prices are now omitted from the CPI calculation. This baffles me but no doubt they have a good excuse. “They” being typically members of the financial elite who needn’t worry about the price of petrol or food for the kids. As flora notes.

    1. Mike

      Visit the website shadow stats where they calculate inflation from 1980s and 1990s formulas. It is referenced by a lot of bloggers. That said I cant find any other source to say either they are calculating it wrong or right. Would be nice to have another source to do that, though I cant imagine that is an easy undertaking I am still really surprised I cant find that. Anyone else know of one?

      1. farragut

        The BLS’ methodology for calculating the CPI has changed over the years and I’ve never seen an easily digestible description of those changes in one place to which I could point you (certainly not at the BLS website). But, having read bits n pieces here n there, these seem to be the ‘red flags’ giving most people trouble with the accuracy of the CPI (hopefully the NC commentariat includes an expert on these issues who can weigh in):

        Fuel & food are excluded from core CPI, because the BLS says they’re too volatile. They routinely smooth other metrics with seasonal adjustments, but they don’t (or can’t) do that here. Not sure why not.

        Instead of using actual changes in home rental prices, the BLS uses something called Owner’s Equivalent Rent (OER). They ask homeowners what they think their house would rent for if they put it on the rental market (as if most homeowners would have the slightest idea).

        For some items (eg, cars, TVs), the newest iterations contain vast improvements over older models. For example, modern cars have anti-lock brakes, airbags galore, fancy electronics, etc., which makes it hard to compare prices 1:1 with older cars. So the BLS uses what they call ‘hedonic’ adjustments to try to estimate how much of the price increase is due to inflation vs due to improvements (I know this is a rough description, but hedonics is the adjustment I understand the least).

        The BLS believes if prices rise sufficiently for one item (say, steak) to make it unattractive to buyers, they substitute it with something of lesser price (say, pork or chicken). They buyer is still getting animal protein, but just a different (some would say lesser) kind.

        Lastly, the various weightings of items are a constant source of debate. How much weighting should categories have within the CPI (eg, healthcare, or home prices, or college tuition, or food, or clothing)?

      2. Left in Wisconsin

        There have been major battles on Twitter about the Shadow stats methodology. I don’t have a link at hand but it has been argued that Shadow Stats is not actually computing its price index using the old methodology. It simply applies a fudge factor to the current methodology that it argues, and others disagree, approximates what inflation would be under the old formula.

      3. George

        Try the Chapman Index, and they are calculating it pre Fed Chair Arthur Burns circa ’70-’78.
        If you care enough to see where this started and why, study this era / person.

      4. Yves Smith Post author

        Shadowstats is Making Shit Up. It has good detail on how various metrics have changed over time but it is a flat out lie that it is “calculating” anything. They add 4% to CPI. Period.

        And it is NOT referenced by a lot of bloggers. It fell out of favor over ten years ago when more sites realized how its alternative figures were a joke.

  10. DGL

    I find it curious that just as labor reawakens to some of their power – inflation raises its ugly head. In 1877 there was the Great Railroad Strike. The elites quickly united – Jim Crow in the South and wage slaves in the North. Jay Gould said he could hire half the workers to kill the other half. In our modern times we have seen wealth transfer and asset stripping for 45 years.
    I find it curious that other countries have oligarchs but none in the USE. Instead, we have kindly “Mr. Rogers” Gates and eccentric Elon Musk.
    The Disney movie ‘Pinocchio’ accurately, I believe, portrayed three of our oligarchs: Buffet, Bezos and Gates: The Coachman, J. Worthington Foulfellow, and Gideon. They are busily escorting us to Pleasure Island.
    The British thought it opportune to starve the Irish three times: 1582-83, 1602-03, and 1845-52,
    Covid is a useful tool in the good old USA. As said many times in these pages: “All according to plan.”

    1. Blue Duck

      Check out Howard’s comment above. The fix is already in and the plan includes more than just interest rates. There are a whole host of economic whips about to be used to discipline the restive working class.

    2. Kurtismayfield

      The Fed has admitted for a very long time that one of their jobs is to control abor costs, as they think it leads to inflation:

      The Fed chief zeroed in on the tight labor market as a source of concern, saying that the gap between a limited supply of workers and the very strong hiring demand “must eventually be closed if inflationary imbalances are to continue to be contained.”

      This was in 1999. They will pull the same tricks now to tank the job market.

  11. shoeless

    While interest rate policy is important, I believe that QE has been the game changer. While this exercise has been sterilized, the sheer size of the program has really moved the needle. Combined with twin deficits, an $11 trln program had to eventually warp the landscape in unintended ways.

  12. Watt4Bob

    Why isn’t it clear that giving the 1% unlimited free money means that eventually they’ll drive the price of everything through the roof?

    All that money, looking for opportunity?

    Am I missing something?

    1. flora

      One ‘theory’ says (and this might be a joke, I’m not an economist), the fed hands out billions to the banks and Wall St and then lets inflation go wild on the working classes and middle classes must-buy items in order to ‘mop up’ all that excess money out of the system, so QE can run forever, or something….
      Hmmm, probably a joke. I hope.

    2. run75441


      It has been a while. I hope all is well by you.

      In the seventies, I received a 15% salary increase at an electronics company. A portion of it was due to my cutting safety stock and improving delivery. The rest of it was inflation. About the same time, I had a 12% mortgage or what I called a credit card mortgage. We suffered from high inflation. Others may disagree with me. I do not see this occurring now.

      In 2009, I was sitting at another electronics company working for the Germans making automotive electronics requiring chips. Infineon, NXP, Panasonic, etc. I was the head of Purchasing for all of North and South America (nice title, multiple $billion company). When automotive closed shop in 2008, they did not maintain their contracts with the Chip making companies. Everything slowed down. When everything started up again, the orders flowed into the chip manufacturers and the exceeded capacity. Chips take a while to manufacture in a two-part process.

      The results were weeks of backlogs and periodically increasing prices for chips and the cars they went into. The supply chain was overwhelmed. I was on the phone with Panasonic with Chrysler and we were talking to their Japanese team in the Philippines. The head of those 7-plants told the Chrysler VP, he should allocate a monthly quantity of his parts to us if he needed the product so bad. First time I had seen or heard that come from the supply base to a major automotive manufacturer.

      I suspect companies are piling on with more orders and increased quantities in the hope of improving their priority. I also suspect manufacturers have increased lead times under a false ideology this will improve delivery. Neither works as capacity is what it is. If companies maxed out capacity, we will have to let the lump move through the process or bring on more new/temporary capacity.

      Direct Labor cost is a small part of the Cost of Manufacturing. Overhead and Materials are the larger costs. Whacking Labor by higher interest rates does nothing to improve throughput. Whacking Labor has been the favorite tool of the Fed and Volcker made good use of it as did Greenspan and others. We still have slack in employment as Participation Rate has not returned to what it was pre-pandemic. Layoff will kill the small Direct Labor part and a little Overhead.

      Companies are increasing prices because they can do so. I am also not sure why it took someone to tell the companies at Long Beach and Los Angeles to add more shifts to off load ships. There is still a backlog of containers. Most of our containers came by rail to Detroit and slowed getting around Chicago. Containers to our Mexico plants were trucked.

      It is a supply chain issue aggravated by unnecessary price increases.

      An economic slow down may be on the horizon. The loss of government subsidies to Labor will hit demand. The one-percenters will manage. Etc. Again, others may disagree with me.

      1. Watt4Bob

        Good to hear from you Run, Hope all is well with you also.

        I was just reading a quote from some sort of big investment guy saying “Commodities are an opportunity to hedge against inflation.”

        Doesn’t that imply the rich hedging their bets has an inflationary impact on commodities?

        I understand the impact caused by supply chain issues you describe, but I’m wondering how much the inflation hitting the 99% is caused by big money chasing “opportunities”?

        1. run75441


          You know, there was an earlier rescue which was skewed to the uppers in 2020. Matt Tabbi wrote about the impact of it in Rolling Stone. “While much of the discussion of the legislation (Cares) focused on the $1,200 payout to workers, the $4 trillion of credit in it will go to big business and Wall Street. The magnitude of which is equivalent to a $13,000 loan to every single man, woman, and child in America.

          Step back a bit further and we can examine the tax break passed by Congress through reconciliation. Twenty-seven there will be a reckoning on whether it improved receipts. If it does not, business tax breaks will remain. Everyone under $75,000 will see tax increases. One hundred thousand on up will see tax cuts.

          Pretty much those two pieces of legislation were inflationary. Both went to individuals, businesses, and schools which did not need the help.

          To answer your question on hedging, I have never seen a company successfully pull such off. An investor would have to be pretty savvy on knowing inventory growth and when to get out. When the bottom, drops out (and it will), leads times will be back to normal quickly. People like myself will be thanking them for their phone calls.

          Big investment companies blew up the market once before in 2008. CDS were a form of hedging. MainStreet paid the price for their gambling. Born warned them. Mack warned Harvard and Summers fired her. Summers could not the chain leading up to LTCM’s failure.

          The safe guards are still not in place and the tests put in place have been loosened for banks.

          1. Watt4Bob


            When the first shock of the pandemic hit, we all took a 20% pay-cut, and shook our heads and were thankful we had jobs.

            A week or two later, our parent organization had secured a PPP loan.

            We all got our pay back.

            I later learned that the loans, being administered by banks, meant the folks with strong ties to a local bank were first in line.

            There was a rush, and the big guys with strong accounting firms at arms length, to produce the paperwork, were first, and last in line.

            But, we all got our pay back.

            1. run75441


              Size matters and the big boys are always served first.

              You should be “thrifty,” more disciplined, and save money. People with means today wonder why anyone would take out something as awful as a payday loan or be dependent on a government subsidy (Potter).

              The bulk of the programs went to bigger entities. Small companies waited and many were included in the 2nd wave.

              You were fortunate. Many were not so fortunate. The process was skewed and many companies who received money should not have received them.

              Thank you Yves for allowing me to talk with a friend from our days at Moneybox on Slate when Gross was there.

  13. Mason

    I mean, this runs against everything I believe in.

    The government failed to reform land use, construction, or anything that impacts actual cost of construction. They leaned on monetary policy only. So… they stoked inflation of housing. They allowed the wealthy to borrow ludicrous amounts of money who then turn around and stuff their money into other assets like property and housing.

    In an inflationary environment, now there’s an incentive to continue hording land and housing as physical assets that are at least some-what more reliable stores of wealth. It’s a destructive cycle that ends with tear-downs and McMansions with skyrocketing land costs.

    It’s too late to save the village, it’s already on fire.

    1. George

      That inflation is a decline in the value of the unit, in our case, the dollar. Simple to understand the hoarding then, huh?

  14. juno mas

    Re: Price Inflation

    Price inflation creates problems and advantages. For the wealthy with nimble financial advisors it’s a nuisance. To the working class it is a “no win” situation: prices can rise faster than wages. The middle class can borrow (credit cards) to meet inflated prices; but it is still debt to be repaid. Fixed income folks get hammered with inflation, but some can find ways to “cut back” without detriment.

    While interest rates will not impact the current supply chain issues, it is important to send a signal that buying into the Wall Street casino is a bad long-term choice. Nominal interest rates rarely keep up with actual inflation and banks/finance firms are adroit at extracting lucre from regular folks no matter the rate.

  15. Adam Eran

    Quoted by Mike Norman:

    Bill Mitchell — RBA rejects theory that interest rate rises cure Covid and make trucks go faster

    It’s Wednesday and a ‘blog lite’ day but there was an important speech delivered by the Governor of Australia’s central bank today that reveals the reasons that the RBA is once again refusing to be bullied into increasing interest rates rises by the ‘markets’. It is almost comical to observe the ludicrous self-importance that the ‘markets’ are exhibiting at the moment. Every day there is a new article or segment on the finance reports about how the ‘markets’ are going to win the battle against the RBA, who will buckle soon on interest rates. Well, yesterday the RBA didn’t buckle and they made fools of the ‘markets’. Remember the ‘markets’ is just a collection of economists who work for financial institutions that make more profits when interest rates are higher. It is no wonder they are always demanding higher rates. That is what vested interests are about. And for the media to just continually give them a platform, especially the national broadcaster, is a disgrace. Anyway, the ‘markets’ lost out yesterday and the RBA clearly doesn’t think that interest rate rises cure Covid and make trucks go faster….

    Remember, that when the ‘market’ says it is ‘pricing in’ rate rises, what they are actually doing is placing bets on the central bank increasing rates and then running a propaganda campaign that says rate rises are inevitable.

    At present, the economics of the situation do not justify increasing interest rates..…

  16. chuck roast

    This is second piece o’ crap article I have read by this woman at NC. She won a prize named after Wassily Leontief? The old lefty must be rolling in his grave.

    The idea, my dear, is to raise interest rates to crush workers. Try to wrap your brain around that. The Plutocrat Boutique bank will continue to run its back door re-po financing of hedge funds and investment banks. QT will just be a run-off of maturing mortgage based securities, and the plunge protection team will be ready to step in at a moments notice. No problem getting a four-some for Sunday morning. Let the maid worry about the $15.95 for a 1 1/2 lbs. of fatty chicken tenders at Shaw’s Supermarket this afternoon. But, anyway, thank you so much for displaying for us all your orthodox genius. Breathtaking in its breadth!

    1. Yves Smith Post author

      You need to get that knee treated.

      This post is written by two prominent economists, about the Global South. All of your rantings are irrelevant to their focus. Lordie, talk about parochial as well as reading comprehension fail.

      You just accumulated a ton of troll points, as well as putting your foot in mouth and chewing.

      If you think you are going to tangle with me about what gets published here and come out the winner, dream on.

  17. lance ringquist

    trump for all of his problems understands MMT.

    U.S. Markets
    June 26, 20198:01 AMUpdated 3 years ago
    Trump says he can fire Fed’s Powell; it’s not that simple

    By Trevor Hunnicutt, Ann Saphir, Howard Schneider

    “Trump’s renewed criticism of Powell for not lowering interest rates to help the United States compete against China, delivered in an interview on Fox Business Network, was the latest in a series of attacks that started only months after Trump made him Fed chief in early 2018.”
    didn’t nafta joe biden just renominate powell for the fed. just like empty suit hollowman obama did with bernanke?

    studebaker warned nafta joe biden will embrace austerity.

    Trump for all his faults poses no existential threat to the republic. What’s more Sanders and Robinson are deeply underestimating the damage a Biden presidency will cause.

    “Joe Biden solidifies all of this all over again. He is the embodiment of keeping things exactly the way they’ve always been. The American people have been bludgeoned for forty years by oligarchs. They can’t take it anymore. They’ll vote for anyone who promises to make it stop. If the Democrats won’t stop it, they’ll vote for someone who will. The next Republican will be worse than Trump, and Joe Biden will make it happen if given the chance.”

  18. c_heale

    I think we are moving toward a structural change in economies which follow the current neo-classical paradigm. Imo we are about to move from an age of (illusory) abundance, to one of scarcity – to a medieval economy. So in many countries (such as my own, the UK) we are going to have neo-feudalism. Most economic theories have been written concerning an industrialized world. If there is a scarcity, or effective scarcity (due to climate change) of both fossil fuels, agricultural land, and other resources, all these theories (except for maybe those of the Physiocrats, and green economists), are not only wrong, but are concerned with the wrong problems. In an age of scarcity, inflation is a problem, but a minor one, getting hold of any resources at any price is the major one. We may be at the beginning of this age.

  19. George

    Well what I get after reading this is how exceedingly difficult it is going to be stopping a nation once in the full tide of a depreciating currency especially after being swayed by the arguments of a stronger economy. And by the sounds of some of the commenter’s here, they are okay with a Fed running hot inflation while paying negative returns on their savings. Some even worry raising rates would actually hurt an economy in which price discovery has become non-existent. Maybe the sight of everyone running around like blind squirrels grabbing any nut they can before this grift of an economy consumes us has a semblance of normalcy to them?

    Inflation is a decline in the value of the unit, in our case, the dollar. When most realize the currency debasement taking place, they rush all at once to spend those soon to be worth fewer dollars now before prices rise even more. This subtracts from an already weak supply chain creating shortages and scarcity of some items, not unlike the origins of past hyperinflations.

  20. John

    What i find interesting in all this discussion is:
    1. Lack of mention of crippled US fiscal policy because we have an ideological deadlocked government that can only spend money in certain limited ways.
    2. Lack of mention that the supply chain and energy problems set off by covid are a foretaste of what’s to come once climate chaos really gets going. Think what taking out several of the planetary bread baskets in one growing season will do to food pricing. You just need a week long heat wave to or cold spell to take out a regions food crop. The market has no good way to deal with that.
    There are all sorts of ways that climate chaos can take down fossil fuel production and with it the US transportation system. Same for the electric grid. Same for the food supply. A trifecta could take them all together. Think about that and our current price fluctuations are nothing. We are being warned.

  21. jt

    Me thinks the problem is already too big than most of us realize and the Fed is going to realize soon it spit the bit. The rent increase I’m looking at currently and anecdotal reports I’m reading about suggest the peasants will be impaling theorists soon.

Comments are closed.