When I wrote this column for the New York Times in early April 2021, I encouraged the Biden administration to think differently about how to respond to any unexpected pop in inflation.
Thank you, I still don’t understand how inflation caused by supplychain bottlenecks resulting from covid and energy prices rising because of the Ukraine war can be reduced by raising rates? The world container index is on a strong downward trend now as some of the covid caused pent up demand has worked itself through the system. Energy prices are also going down although still high. Food prices are declining but not in shops yet. Many raw material prices such as steel , iron ore, lumber are on strong downward trends. Is the interest raise policy focused on avoiding labour to ask for a higher salary ?
First, it can't, full stop. Monetary policy is useless in addressing supply side issues.
Second, yes, sorta. It might be more accurate to say that the purpose is to break the back of labor, suppress wages, and stop the newly empowered workers at places like Amazon and Starbucks who are voting for unions, just the way Volcker explicitly did in the 1980's.
Also, the unemployment that is induced will only very slowly decrease demand. The poor still have to eat -- and they don't buy many cars. The pain hits the bottom of the economic participants first and these people do not have much consumption to cut back on. Meanwhile people in the suburbs are still going to be bidding up the prices of travel, appliances, and cars in a supply constrained economy.
'Stephanie wrote 'it takes large rate hikes that create financial crises, insolvency, and bankruptcies severe enough to crash the economy—followed by jobless recoveries.' Exactly what Big Money wants & needs to protect their wealth. Larry Summers and those like him are lackeys for those few folks with immense resources.
Larry is so distracted by the abstract orthodoxies of neo-classical macro that he probably is not capable of conceiving how a 50% discount/rebate policy at the point of retail sale would end private banking's problematic paradigm of Debt Only, mathematically end inflation forever, immediately double everyone's purchasing power and so permanently enable the kind of fiscal deficits MMT only hopes could be possible. JUST DO THE MATH and realize that retail sale is the optimal point in the entire economic process to implement a macro-economic effect.
The other point to bear in mind is that interest rate increases not only penalise borrowers, but also benefit savers. There's a quasi-fiscal effect for pensioners, or any other cohort that benefits from rising rates because they derive more interest income. So the monetary channel becomes a very diffuse mechanism to dampen demand and reduce inflationary pressures. It's like using a sledge hammer, rather than a scalpel to do an operation. Fiscal policy is a much more effective inflation-fighting tool.
It is fascinating how a flawed economic theory continues to perist in academia and in the political sphere. How many "Larry Summers" are churned out every year from universities and business schools? What Stephanie says makes perfect sense but it meets too many minds which has been programmed in a wrong way ...
Every member of Congress should reread (or, sadly, "read") Stephanie's brilliant April 2021 NYTIMES column. In about 1,000 words--I didn't count them--she lays out the argument beautifully as to just how wrongheaded it is for Congress to ask: "How will we pay for it?" It's actually a trick question to which there is only one possible correct answer, as obvious as it is sensible. "With money."
Correct, except MMTers say we still have to be aware of the possibility of inflation if supply does not equal demand. A 50% Discount/Rebate policy at retail sale terminally and macro-economically ends concern about that orthodoxy...and enables so many other benefits for every individual and commercial agent.
I'm glad you asked. Private banks create upward of 97% of our money simply with accounting entries, i.e. debits and credits. The 50% Discount/Rebate policy at retail sale perfectly mimics this process except both the discount and rebate aspect of the policy are monetary gifts...instead of loans/debt. So you go to a local grocery store and buy $50 worth of goods and you only pay $25 for them. The store opens a Sales Discount account and credits it for the $25 of the discount it gave to you. Then the FED or some other monetary authority mandated to fulfill the rebate aspect of the policy debits $25 to that account which means the merchant is made whole on their entire price including profit.
Your and everyone else's purchasing power is immediately doubled, the available free and clear demand for every good and service is potentially doubled and BENEFICIAL price and asset DEFLATION is macro-economically implemented because retail sale is a universally participated in by each and every individual agent. Now if that is not a paradigm changing economic concept (monetary gifting) and temporal universe reality inversion (from chronic erosive inflation to beneficial deflation)... I'll eat my hat.
Just to answer the generally expressed critiques that every business will raise their prices as a result here are the rebuttals to that:
1) In order to opt into the rebate aspect of the policy (and all of its potential doubling of demand benefits) the merchant will have to pledge that they will compete on price and not inflate unless their overall costs exceed the cost savings that the new paradigm program will also enable (the elimination of their payroll taxes and potential corporate and individual tax cuts of 50-75%). As Business models before retail sale will also benefit from the taxation cuts they will need to pledge that they will not raise their prices or they will be not receive the those benefits and will instead be taxed at a rate of 100% on
any revenue they may (or may not) garner from any price increases. The 50% Discount/Rebate policy is an offer that enterprise cannot refuse because of its huge benefits and huge negative consequences of non-participation as per above. No consumer with half a brain will pay 100% of the retail price when they can walk down the street and only pay 50%. Not participating is economic suicide on top of idiocy for not accepting the commercial benefits of the new paradigm program. Finally, if with all of the tax regimes above inflation is still 2-3% then the discount is simply indexed to 52-53%. and finally, finally, if we have to hire an army of forensic accountants commanded by Bill Black to secure the program....so be it. In a fiat monetary system that has eliminated the possibility of inflation it will only be a relatively small addition to the fiscal "deficit" that will be enabled to greatly increase...because inflation has now been mathematically exiled to the dust bin of history.
I distinctly remember Ms. Kelton joining the Democratic Party (and Federal Reserve) chorus that inflation was solely due to supply chain disruptions and COVID recovery.
While I agree Summers' solution is garbage, it does not follow that the policies that led to this inflation are therefore not garbage.
As a person who understands the actual mechanisms that generate inflation, It must be difficult for you to watch our country again undertake the financial-economic analog of a medieval physician “bleeding” a patient in order to cure her. Unfortunately, it will take at least another Fed-induced depression to open orthodox financial-economic eyes and minds to consider the possibility that tweaking official interest rates alone is not a magic solution to manage inflation. That it is, in fact, a dangerous misunderstanding. Unfortunately for the anti-regulation anti-government mainstream, the inconvenient reality is that only active management and regulation of the economy can manage inflation. But that is “socialism” and “socialiam” is bad, bad, bad… It’s hard not to despair.
Thank you, I still don’t understand how inflation caused by supplychain bottlenecks resulting from covid and energy prices rising because of the Ukraine war can be reduced by raising rates? The world container index is on a strong downward trend now as some of the covid caused pent up demand has worked itself through the system. Energy prices are also going down although still high. Food prices are declining but not in shops yet. Many raw material prices such as steel , iron ore, lumber are on strong downward trends. Is the interest raise policy focused on avoiding labour to ask for a higher salary ?
Answers to your questions.
First, it can't, full stop. Monetary policy is useless in addressing supply side issues.
Second, yes, sorta. It might be more accurate to say that the purpose is to break the back of labor, suppress wages, and stop the newly empowered workers at places like Amazon and Starbucks who are voting for unions, just the way Volcker explicitly did in the 1980's.
We need to reclaim ownership of our Natural Resources and anything that's commodified, goods and services.
Side Note: Local, State & Federal Gov't Spending is about $8 Trillion or 38% of GDP
Services are 47% of GDP and not taxed.
Why not?
you mean not "sales and use" taxed. I pay income tax and FICA on my services as a repairman
Yes.
If my understanding is correct, then only 15% of the GDP is subject to these taxes while Gov't spending and Services are not ie 85% of GDP is not.
You're commenting on this column and you don't understand that taxes don't pay for spending at the Federal level?
I understand that if services are taxed, other taxes on those in the lower income brackets may be reduced to nothing.
What services? A visit to a psychologist or a social worker?
The services that comprise 47% of our economy. Perhaps you should invest in eyeglass services.
The way things are going I could probably use a good shrink ;)
It ain't rocket science: inflation now due to structurally higher demand vs. supply in most commodities not driven by housing.
Fed solution: destroy demand because the Fed has zero power to stimulate supply.
Also, the unemployment that is induced will only very slowly decrease demand. The poor still have to eat -- and they don't buy many cars. The pain hits the bottom of the economic participants first and these people do not have much consumption to cut back on. Meanwhile people in the suburbs are still going to be bidding up the prices of travel, appliances, and cars in a supply constrained economy.
"Bad" is a matter of perspective. Everything looks fine to capital.
'Stephanie wrote 'it takes large rate hikes that create financial crises, insolvency, and bankruptcies severe enough to crash the economy—followed by jobless recoveries.' Exactly what Big Money wants & needs to protect their wealth. Larry Summers and those like him are lackeys for those few folks with immense resources.
You never want to go "full Larry"
Good post. I like the phrase about Summers … “by rhetorical design.”
Larry is so distracted by the abstract orthodoxies of neo-classical macro that he probably is not capable of conceiving how a 50% discount/rebate policy at the point of retail sale would end private banking's problematic paradigm of Debt Only, mathematically end inflation forever, immediately double everyone's purchasing power and so permanently enable the kind of fiscal deficits MMT only hopes could be possible. JUST DO THE MATH and realize that retail sale is the optimal point in the entire economic process to implement a macro-economic effect.
The other point to bear in mind is that interest rate increases not only penalise borrowers, but also benefit savers. There's a quasi-fiscal effect for pensioners, or any other cohort that benefits from rising rates because they derive more interest income. So the monetary channel becomes a very diffuse mechanism to dampen demand and reduce inflationary pressures. It's like using a sledge hammer, rather than a scalpel to do an operation. Fiscal policy is a much more effective inflation-fighting tool.
I think it, the rate hike appetite, is a "proxy" inflation lowering justification when the REAL appetite is
keeping wages low, avoiding strikes and stopping union organization. It was obvious when the Fed
Head declared with aggressive seriousness early on that wages had to come down. Thank you for
your clarity and detailed history.
Same sadly applies here in the UK. Exacerbated by the effects of Brexit isolationism.
You're right and Summers is wrong. If only you could get this administration to listen.
Good luck with that.
It is fascinating how a flawed economic theory continues to perist in academia and in the political sphere. How many "Larry Summers" are churned out every year from universities and business schools? What Stephanie says makes perfect sense but it meets too many minds which has been programmed in a wrong way ...
Every member of Congress should reread (or, sadly, "read") Stephanie's brilliant April 2021 NYTIMES column. In about 1,000 words--I didn't count them--she lays out the argument beautifully as to just how wrongheaded it is for Congress to ask: "How will we pay for it?" It's actually a trick question to which there is only one possible correct answer, as obvious as it is sensible. "With money."
Correct, except MMTers say we still have to be aware of the possibility of inflation if supply does not equal demand. A 50% Discount/Rebate policy at retail sale terminally and macro-economically ends concern about that orthodoxy...and enables so many other benefits for every individual and commercial agent.
I don't know what your 2nd sentence means. Please explain.
I'm glad you asked. Private banks create upward of 97% of our money simply with accounting entries, i.e. debits and credits. The 50% Discount/Rebate policy at retail sale perfectly mimics this process except both the discount and rebate aspect of the policy are monetary gifts...instead of loans/debt. So you go to a local grocery store and buy $50 worth of goods and you only pay $25 for them. The store opens a Sales Discount account and credits it for the $25 of the discount it gave to you. Then the FED or some other monetary authority mandated to fulfill the rebate aspect of the policy debits $25 to that account which means the merchant is made whole on their entire price including profit.
Your and everyone else's purchasing power is immediately doubled, the available free and clear demand for every good and service is potentially doubled and BENEFICIAL price and asset DEFLATION is macro-economically implemented because retail sale is a universally participated in by each and every individual agent. Now if that is not a paradigm changing economic concept (monetary gifting) and temporal universe reality inversion (from chronic erosive inflation to beneficial deflation)... I'll eat my hat.
Just to answer the generally expressed critiques that every business will raise their prices as a result here are the rebuttals to that:
1) In order to opt into the rebate aspect of the policy (and all of its potential doubling of demand benefits) the merchant will have to pledge that they will compete on price and not inflate unless their overall costs exceed the cost savings that the new paradigm program will also enable (the elimination of their payroll taxes and potential corporate and individual tax cuts of 50-75%). As Business models before retail sale will also benefit from the taxation cuts they will need to pledge that they will not raise their prices or they will be not receive the those benefits and will instead be taxed at a rate of 100% on
any revenue they may (or may not) garner from any price increases. The 50% Discount/Rebate policy is an offer that enterprise cannot refuse because of its huge benefits and huge negative consequences of non-participation as per above. No consumer with half a brain will pay 100% of the retail price when they can walk down the street and only pay 50%. Not participating is economic suicide on top of idiocy for not accepting the commercial benefits of the new paradigm program. Finally, if with all of the tax regimes above inflation is still 2-3% then the discount is simply indexed to 52-53%. and finally, finally, if we have to hire an army of forensic accountants commanded by Bill Black to secure the program....so be it. In a fiat monetary system that has eliminated the possibility of inflation it will only be a relatively small addition to the fiscal "deficit" that will be enabled to greatly increase...because inflation has now been mathematically exiled to the dust bin of history.
I distinctly remember Ms. Kelton joining the Democratic Party (and Federal Reserve) chorus that inflation was solely due to supply chain disruptions and COVID recovery.
While I agree Summers' solution is garbage, it does not follow that the policies that led to this inflation are therefore not garbage.
She would never say solely, she acknowledged they were big problems... my words.
"Large cost" means that the Leisure Class doesn't suffer.
As a person who understands the actual mechanisms that generate inflation, It must be difficult for you to watch our country again undertake the financial-economic analog of a medieval physician “bleeding” a patient in order to cure her. Unfortunately, it will take at least another Fed-induced depression to open orthodox financial-economic eyes and minds to consider the possibility that tweaking official interest rates alone is not a magic solution to manage inflation. That it is, in fact, a dangerous misunderstanding. Unfortunately for the anti-regulation anti-government mainstream, the inconvenient reality is that only active management and regulation of the economy can manage inflation. But that is “socialism” and “socialiam” is bad, bad, bad… It’s hard not to despair.
Ms. Kelton is absolutely correct.