Since I'm beating dead horses this week, let's continue. When Congress passed the various COVID rescue bills, it resulted in massive deficits in 2020-21, which drove up the money supply. How much? This much:
The red shaded area is the excess above the normal growth of M2 money supply, and provides a good proxy for the way COVID stimulus worked its way through the economy. It's easy to add up the total excess and put it in a chart. Here is that chart:
Apologies that it's so busy. The dark blue dashed line is inflation. The other two blue lines show the M2 excess and the stress on supply chains as calculated by the New York Fed. Notice that they both follow the inflation line pretty closely.
The light orange line shows interest rates set by the Fed. Notice that it doesn't follow inflation even slightly. By the time it peaks inflation is already gone.
Inflation was caused by supply chain shortages and COVID stimulus. When they ended, so did inflation. I would like this chart to be tattooed on Jerome Powell's forehead.
Still waiting on that H1 2023 double recession, amirite?
https://jabberwocking.com/two-recessions-are-barreling-toward-us-next-year/
Maybe you don’t understand monetary policy’s impact on the economy as well as you think you do?
Yeesh, this was 2 years ago??
It looks more like its you who doesnt understand the topic?
The Fed was very clear in their intention to fight inflation by lowering demand for goods, services and workers. Higher unemployment and slow growth were the prescription according to the Fed members who were raising rates.
Obviously the Feds collective argument was that they could achieve these items in perfect synchronicity and then take their foot off the break to avoid a deep recession. But the key was that the Fed itself predicted noticeable impacts to growth and unemployment. Kevin was just repeating what the Fed was telling us publicly in their own projection reports. Growth would slow sharply at the end of 2022 and beginning of 2023, unemployment would spike and this was the key to bringing down inflation late in 2023 or 2024.
With hindsight, we know that the Feds expectation that inflation would stay elevated in late 2022 and 2023 was wrong as was their projection that growth would slow sharply and unemployment spike.
Kevin is showing that the Fed was wrong in their understanding of where the economy was when they were raising rates in 2022/2023, wrong in their estimates of what the impacts would be and wrong in their guess as to what was necessary to bring inflation down.
Insisting that he doesnt understand the topic because back in 2022 he was taking the Fed at their word kind of misses the point.....and in a way, makes the exact point that Kevin is trying to make here. The Fed didnt understand what was happening at the time and didnt understand what the results of monetary policy would be. Dont blame Kevin for repeating what the Fed was telling us at the time.
I think someone with a background in control systems engineering should opin on the plausibility of the Fed controlling the entire US economy with a single control input having effects subject to "long and variable lags."
It is simply not true that, back in late 2022, the Fed was predicting a double recession in 2023. This entire cycle, the Fed has expected a softening in the economy as the base case while avoiding a recession. The economy (thankfully) proved more resilient than that. But the Fed was consistent in their projections that we could control inflation while avoiding a recession. A recession was always possible, but it was not their base case.
Also - and here's the really important part - they acknowledged a great deal of uncertainty about the path forward. They said that they didn't know for sure what would happen, and they tried to do their best with imperfect information and limited tools.
Meanwhile, Kevin was saying that the Fed was making a massive mistake, that we were *already* heading for a recession before they started hiking rates, and that Powell and his band of merry men were dooming us to a double recession. "We are so fucked" were his precise words.
He has consistently displayed a level of certainty that boggles my mind. No one can predict what's going to happen to the economy, and yet Kevin seems to think that (1) he can, (2) it's blindingly obvious, and (3) anyone who disagrees with him is stupid, evil, or both.
I'd like to think that I would never have approached this topic with as much certainty as Kevin has. But even if I had been so certain, I'd *really* like to think that, having been as wrong as Kevin has been, I would subsequently tone it down and acknowledge that I may not know as much as I think I do.
He's still doing it, by the way. A little over a week ago, Kevin was sure Kamala was going to win. Then, when she didn't, Kevin declared that it couldn't have been about inflation, even though for months people have been telling pollsters and interviewers and focus groups that they don't like high prices. He's got charts! Those charts say inflation is whipped! The election that he wrongly predicted can't have been about the thing that people say it was about!
I'm just asking for some humility. A little perspective. I've been reading Kevin's work for 16 years, and I've never seen him get hung up on anything like he has about inflation.
Or the housing crisis. At least on inflation he's been... kind of in the ballpark, I guess? Like he's not wrong that inflation was already heading in the right direction when the Fed started raising rates to a meaningful degree, and you're right that we're lucky the economy turned out to be more resilient than I thought it might have been in 2022, so that the Fed's (IMO) overly enthusiastic rate hikes didn't put us into a recession.
It's the interest rates and recession-is-coming hangups, for me.
Oh, no - it's the "if you adjust for inflation, everything is fine" hangup. Almost forgot that part amongst the no housing crisis hangup because they're kind of related.
I still don't think the yield curve inversion is all that relevant in current context though, and the Kevin post you linked to is kind of what decided that for me.
Kevin was actually listening to the conventional wisdom of the moment. Maybe lots of people don't understand this very well. Consider Larry Summers
prescription for mutiple years of high unemployment, presumably brought about by higher and higher Fed rates, as the only way to bring inflation down.
So other than snark, do you have any comments on Kevin's entry today ?
I acknowledge and regret the snark. I was up too late (and had some wine with dinner). I retract the snark, while sticking to the substance.
As I said to jdubs, my objection is to his certainty. I wish Kevin would acknowledge that this is an incredibly complicated topic, especially because it is one he has been very wrong about recently.
Regarding today's content: I really like the M2 graph, but I don't like Kevin's conclusions about it. What caused M2 to start coming down? Kevin doesn't say, and of course to say with certainty would require many more PhDs than I have (0, to be clear), but as I recall from my high school economics class, the money supply has an inverse relationship to interest rates. When interest rates go up, the money supply goes down, and vice versa (all else equal).
I see Kevin's point that the peak in both inflation and the money supply happened before the Fed Funds rate started moving up, but monetary policy is about much more than just the interest that banks pay to each other for overnight lending. The Fed started tapering its asset purchases in November 2021. It accelerated its taper in December 2021. Its policy statement noted the consistent elevated inflation in December 2021. Short term (but not overnight) interest rates started rising in January 2022 (right when M2 peaked), because the Fed had signaled it was going to start raising rates soon. These things all impact the money supply even before inter-bank overnight lending got more expensive.
Did excess M2 start going down exactly because of the Fed's actions? Probably not! But it is *just now* returning to its trend, even though the Fed Funds rate has been pretty high for almost 2 years.
What if the Fed Funds rate hadn't been that high? I know Kevin likes to talk about long and variable lags, but surely by now he acknowledges that high interest rates have had *some* impact on the money supply, right?
This is more convincing than your last few posts tbh. It's also clear to me that if the Fed were actually going to be effective they should have raised rates sooner and obviously lowered them sooner too.
Is it the Fed's goal to let its rate changes closely follow the inflation rate? No, it isn't. They could easily make it do that if anyone thought it was a good idea.
So...https://fred.stlouisfed.org/graph/?g=1AUce
I have one issue with Kevin's insistence on using aggregate stats even if that is what the Fed uses. It doesn't much matter to people if aggregate inflation is low or that wages in the aggregate have outpaced inflation. Nobody even notices. What they notice is that they things that they personally have to pay for, say rent, have gone up while their own wage hasn't. And they especially notice if it is *their* job that gets lost. That (along with a captive media empire) is what allows faux populists like Trump to win elections by promising things like higher wages, lower inflation, and lower taxes that they won't, and can't, deliver. Reality may have a liberal bias, but voters don't want reality, they want Lake Woebegone.
Do people notice when prices go up? Actually prices of many things, such as gasoline, eggs and other groceries, go up and down all the time and people don't really notice much. To make prices important to people, their attention may have to be drawn to them. Of course Trump has always said that inflation was through the roof when a Democrat was President, but this time there was some truth in it for a while. The "liberal" media continually ran - and still run - stories such as how some consumer claims to be paying 100% more for everything, which is false. Total inflation from the start of Biden's term to this October was 20%, the same as in Reagan's first term. When a lot of people believe something, as MAGAs believe whatever Trump says, others tend to go along. The idea that people make independent, objective judgements about things like this is absurd.
People's impressions about how inflation continues to be high, and how it is much harder to get along economically than before the pandemic, are simply false in the aggregate or average - they are largely partisan driven. This is testable: if I am right about this, Republican voters' view of the current economy will change drastically by the time Trump has been in office for a while.
Assessment of the current economy is not the same as expectations about the economy, which have already changed drastically according to party leaning.