Thanks so much for that link to the Treasury report explaining the boom in non-residential construction. I thought, whoaa--surely, that can't be commercial construction? Why would anyone be investing in construction with such high interest rates? And it turns out that the boom is in manufacturing construction, largely owing to the infrastructure jobs Act, the Chips Act, and the IRA.
What we can't know is the counterfactual of what would have happened if the Fed hadn't raised interest rates while all this Federal stimulus was kicking in. You seem to think inflation would have come down on its own; but maybe the economy would have run much hotter if the Fed had done nothing?
It is interesting that the shelter component of inflation is the big driver of the CPI now. This tends to reduce the construction of new housing (putting yet more upward pressure on this component); and apparently, the inventory of existing homes for sale remains very low. So, if Powell sticks to an inflation target of 2%, it looks like much higher interest rates are in store, because I suspect the shelter component will be hard to reverse otherwise.
The $64 million dollar question is: could/would the Fed raise interest rates enough to tip the economy into recession (i.e. cause a "hard landing"), and how much voter pain would be felt in the middle of the 2024 elections?
There are Executive actions that could alleviate inflation and interest rates rather quickly, if needed, e.g. if a recession does set in by early 2024, imperiling D's prospects. Things would get pretty desperate if Trump becomes the Republican nominee. Biden could, for example, unilaterally end the sanctions on Russian oil, gas, food and fertilizer as a peace gesture. The voters in the U.S. and everywhere else would then see immediate relief at the grocery store and at the pump, due to the speed of information transmission in the global markets. Is that a fantasy? Who knows. My fantasy is that, to save the day, Biden declares a "sanctions halt" the way LBJ declared a bombing halt in 1968 (to launch the Paris Peace talks with North Vietnam). Of course, LBJ also announced that he wouldn't seek re-election. Biden would have to do likewise, as the D base is imploring him to do anyway.
In your "counterfactual" argument you ignore the income channel and increased investment costs for business from the Feds increased interest rates. It was a supply side problem, and we always knew it was a supply problem for those of us who didn't dilute ourselves with monetarist bs. That "big government" spending is what brought the jobs back. The crying about inflation coming from the "Laissez Faire" crowd as their "base" "price gouges them" is truly a shocking display of hypocrisy! It's as if they have no shame!!!!
What you also ignore about the shelter component is the increased cost from interest to potential home ownership. Private home ownership is being driven out of reach for many people looking to buy homes as the result of interest rate increases and Wall Street speculation. This leaves Wall Street speculators with greater availability of homes to buy and home values remaining high. With more people unable to buy homes this increases demand for rentals driving up rental costs (inflation). With the increased income channel on wealth from the interest rates, investors have no shortage of money to invest. With the stock market down housing remains a good investment for investors setting on a pile of cash.
So apparently you (and the Fed) think the answer to the housing shortage is not to build more affordable housing and better regulations on wall Street (fiscal policy), rather, reduce demand for housing. The last thing we would want to do is reduce abusive market power!!.. classical monetarist view!!
Congress could do their job to bring down inflation, as they did during WW2!!! The problem is this monetarist "Laissez Faire" small government ideology standing in the way. The Fed is not concern with inflation, never was (excess corporate profits)! The Fed is doing the bidding of capital to reduce labor power!! That's all the use of interest rates to supposedly fight inflation was ever about.
During WW2 interest rates were reduced as an inflation control measure to reduce the amount of spending coming out of WW2. The interest paid on US bond sales as a result of high Fed Gov deficits being ran during WW2 was a concern as bonds would begin to be cashed in and supply of consumer products attempted to catch up. The bond sales themself was the primary tool used to control inflation during WW2 and fiscal policy was the control of inflation outside of "cutting interest rates."
Can anyone out there explain how higher interest rates can counterintuitively lead to HIGHER inflation? I understand that higher interest income increases spending power, but isn't the vast majority of this income accruing to the top 10%? They've already bought all the toothpaste and toilet paper they need, and I don't care if they spend it on a new yacht or a summer home on Martha's Vineyard. So why would this interest income put pressure on the prices of necessities?
A guess... it increases the cashflow of those benefitting from higher rates and they will speculate on stuff that inadvertantly benefits the upper 20%, which is where trickle-down ends. Why do folks believe trickle-down ends approx at the upper 20%? ... due to the covid K-shaped recovery where the top 20% increased their networth whereas the bottom 80% lost networth.
Key citation: 'Powell insisted that the only way to bring inflation down was to deliberately stifle growth and “soften the labor market” (i.e. push the unemployment rate higher)'. In his eyes, apparently, the only significant driver of inflation is raising wages and the only cure is increased unemployment. In other words, the major role of the central bank is to maintain or increase the level of inequality.
The other thing that's missing is any consideration for environmental issues (e.g, global warming) - which should be hard to ignore these days. Unfortunately, for economists, money seems to be the only resource that counts. Realistically, economics is (or should be) a biological science.
Excellent point. That's why stochastic versions of the Nordhaus DICE model imply (depending on assumptions, particularly discount rate) a "social cost of carbon" of at least ~$100/mtCOE or around $1/gallon gasoline (Stiglitz and Stern 2020 and IPPC 2023) to $190 (EPA 2022) or even higher (other groups). Big problem: economists don't know how to set a 50-year discount rate!! As the discount rate approaches zero, the Social Cost of Carbon approaches infinity, i.e. an infinite cost per gallon of gasoline.
The implication of economics being a subset of biology seems to be a mandate to phase-out, within a decade or so, ICE cars (burning gasoline) for transportation. This is happening in Europe, and increasingly the U.S. (California). Will these mandates work?
Californians love their cars. Can they be made to love EVs? Right now, EVs are for the rich. GM has discontinued the only affordable EV (the Bolt). So, this means that cheap imports (KIA, etc.) must carry the day. A huge political train wreck between Enviros and the UAW is in the offing, it seems. GM shareholders won't care. They make megatons of EVs abroad, and cancellation of the Bolt throws down this political gauntlet. Cheap EVs for the U.S. market will probably end up being made in Asia and Mexico, like so many ICE cars today.
John, thanks for commenting. I suppose the argument can be made that the uber wealthy play a game of "Whover dies with the most toys wins." So the rich are buying lots of stuff that aren't necessities, but those "toys" are being built by working people who do need the money to make ends meet. So it's not the excessive spending of interest income by the wealthy that directly causes inflation, it's the spending of the workers receiving that interest income in the form of wages that can eventually put pressure on prices.
That argument completely misses the point (what the number show). Inflation has dropped like a rock, except in housing and energy. Wall Street speculation and the war in Ukraine are the primary drivers, increases interest rates adds to housing cost and increase in energy cost increases the cost of everything (nothing to do with excess demand/ real costs). Meaning the primary driver of inflation was a supply problem not a spending problem (transitory). Despite the Feds attempts to reduce demand, demand remains high as demonstrated by low unemployment numbers. This tells us the feds tools are just changing who has money to spend and it's the resumption of supply lost to COVID that has stamped out the inflation.
I'm perplexed and disappointed why the MMT team ,which I understand lists a Government Guaranteed Jobs Program as your no# 1 policy to right so much of what is wrong with our economic/fiscal/social/political systems ,rarely if ever is mentioned in the Lens or other MMT
offerings--the general public needs broadly educated/awakened to GGJP and would quickly
understand it's potential to help close the destructive inequality deep in the wealthiest country
:)
Thanks so much for that link to the Treasury report explaining the boom in non-residential construction. I thought, whoaa--surely, that can't be commercial construction? Why would anyone be investing in construction with such high interest rates? And it turns out that the boom is in manufacturing construction, largely owing to the infrastructure jobs Act, the Chips Act, and the IRA.
What we can't know is the counterfactual of what would have happened if the Fed hadn't raised interest rates while all this Federal stimulus was kicking in. You seem to think inflation would have come down on its own; but maybe the economy would have run much hotter if the Fed had done nothing?
It is interesting that the shelter component of inflation is the big driver of the CPI now. This tends to reduce the construction of new housing (putting yet more upward pressure on this component); and apparently, the inventory of existing homes for sale remains very low. So, if Powell sticks to an inflation target of 2%, it looks like much higher interest rates are in store, because I suspect the shelter component will be hard to reverse otherwise.
The $64 million dollar question is: could/would the Fed raise interest rates enough to tip the economy into recession (i.e. cause a "hard landing"), and how much voter pain would be felt in the middle of the 2024 elections?
There are Executive actions that could alleviate inflation and interest rates rather quickly, if needed, e.g. if a recession does set in by early 2024, imperiling D's prospects. Things would get pretty desperate if Trump becomes the Republican nominee. Biden could, for example, unilaterally end the sanctions on Russian oil, gas, food and fertilizer as a peace gesture. The voters in the U.S. and everywhere else would then see immediate relief at the grocery store and at the pump, due to the speed of information transmission in the global markets. Is that a fantasy? Who knows. My fantasy is that, to save the day, Biden declares a "sanctions halt" the way LBJ declared a bombing halt in 1968 (to launch the Paris Peace talks with North Vietnam). Of course, LBJ also announced that he wouldn't seek re-election. Biden would have to do likewise, as the D base is imploring him to do anyway.
Aren't the acts you discussed loaded with corp socialism, aka subsidies?
In your "counterfactual" argument you ignore the income channel and increased investment costs for business from the Feds increased interest rates. It was a supply side problem, and we always knew it was a supply problem for those of us who didn't dilute ourselves with monetarist bs. That "big government" spending is what brought the jobs back. The crying about inflation coming from the "Laissez Faire" crowd as their "base" "price gouges them" is truly a shocking display of hypocrisy! It's as if they have no shame!!!!
What you also ignore about the shelter component is the increased cost from interest to potential home ownership. Private home ownership is being driven out of reach for many people looking to buy homes as the result of interest rate increases and Wall Street speculation. This leaves Wall Street speculators with greater availability of homes to buy and home values remaining high. With more people unable to buy homes this increases demand for rentals driving up rental costs (inflation). With the increased income channel on wealth from the interest rates, investors have no shortage of money to invest. With the stock market down housing remains a good investment for investors setting on a pile of cash.
So apparently you (and the Fed) think the answer to the housing shortage is not to build more affordable housing and better regulations on wall Street (fiscal policy), rather, reduce demand for housing. The last thing we would want to do is reduce abusive market power!!.. classical monetarist view!!
Congress could do their job to bring down inflation, as they did during WW2!!! The problem is this monetarist "Laissez Faire" small government ideology standing in the way. The Fed is not concern with inflation, never was (excess corporate profits)! The Fed is doing the bidding of capital to reduce labor power!! That's all the use of interest rates to supposedly fight inflation was ever about.
During WW2 interest rates were reduced as an inflation control measure to reduce the amount of spending coming out of WW2. The interest paid on US bond sales as a result of high Fed Gov deficits being ran during WW2 was a concern as bonds would begin to be cashed in and supply of consumer products attempted to catch up. The bond sales themself was the primary tool used to control inflation during WW2 and fiscal policy was the control of inflation outside of "cutting interest rates."
Can anyone out there explain how higher interest rates can counterintuitively lead to HIGHER inflation? I understand that higher interest income increases spending power, but isn't the vast majority of this income accruing to the top 10%? They've already bought all the toothpaste and toilet paper they need, and I don't care if they spend it on a new yacht or a summer home on Martha's Vineyard. So why would this interest income put pressure on the prices of necessities?
A guess... it increases the cashflow of those benefitting from higher rates and they will speculate on stuff that inadvertantly benefits the upper 20%, which is where trickle-down ends. Why do folks believe trickle-down ends approx at the upper 20%? ... due to the covid K-shaped recovery where the top 20% increased their networth whereas the bottom 80% lost networth.
Key citation: 'Powell insisted that the only way to bring inflation down was to deliberately stifle growth and “soften the labor market” (i.e. push the unemployment rate higher)'. In his eyes, apparently, the only significant driver of inflation is raising wages and the only cure is increased unemployment. In other words, the major role of the central bank is to maintain or increase the level of inequality.
The major role of central banks is to maintain and increase the networth and power of the ruling elite via inflating asset prices.
The other thing that's missing is any consideration for environmental issues (e.g, global warming) - which should be hard to ignore these days. Unfortunately, for economists, money seems to be the only resource that counts. Realistically, economics is (or should be) a biological science.
Excellent point. That's why stochastic versions of the Nordhaus DICE model imply (depending on assumptions, particularly discount rate) a "social cost of carbon" of at least ~$100/mtCOE or around $1/gallon gasoline (Stiglitz and Stern 2020 and IPPC 2023) to $190 (EPA 2022) or even higher (other groups). Big problem: economists don't know how to set a 50-year discount rate!! As the discount rate approaches zero, the Social Cost of Carbon approaches infinity, i.e. an infinite cost per gallon of gasoline.
The implication of economics being a subset of biology seems to be a mandate to phase-out, within a decade or so, ICE cars (burning gasoline) for transportation. This is happening in Europe, and increasingly the U.S. (California). Will these mandates work?
Californians love their cars. Can they be made to love EVs? Right now, EVs are for the rich. GM has discontinued the only affordable EV (the Bolt). So, this means that cheap imports (KIA, etc.) must carry the day. A huge political train wreck between Enviros and the UAW is in the offing, it seems. GM shareholders won't care. They make megatons of EVs abroad, and cancellation of the Bolt throws down this political gauntlet. Cheap EVs for the U.S. market will probably end up being made in Asia and Mexico, like so many ICE cars today.
John, thanks for commenting. I suppose the argument can be made that the uber wealthy play a game of "Whover dies with the most toys wins." So the rich are buying lots of stuff that aren't necessities, but those "toys" are being built by working people who do need the money to make ends meet. So it's not the excessive spending of interest income by the wealthy that directly causes inflation, it's the spending of the workers receiving that interest income in the form of wages that can eventually put pressure on prices.
That argument completely misses the point (what the number show). Inflation has dropped like a rock, except in housing and energy. Wall Street speculation and the war in Ukraine are the primary drivers, increases interest rates adds to housing cost and increase in energy cost increases the cost of everything (nothing to do with excess demand/ real costs). Meaning the primary driver of inflation was a supply problem not a spending problem (transitory). Despite the Feds attempts to reduce demand, demand remains high as demonstrated by low unemployment numbers. This tells us the feds tools are just changing who has money to spend and it's the resumption of supply lost to COVID that has stamped out the inflation.
Thanks for all the updated information, Dr. Kelton. Keep doing what you are doing! Disingenuous Trolls will be Trolls.!
I'm perplexed and disappointed why the MMT team ,which I understand lists a Government Guaranteed Jobs Program as your no# 1 policy to right so much of what is wrong with our economic/fiscal/social/political systems ,rarely if ever is mentioned in the Lens or other MMT
offerings--the general public needs broadly educated/awakened to GGJP and would quickly
understand it's potential to help close the destructive inequality deep in the wealthiest country
ever in history