If you don't believe me, perhaps you'll believe the brilliant Cal economist Brad DeLong:
Remember: NONE of the interest-rate increases the Fed has undertaken since its lift-off from zero have yet had time to affect the real economy of demand, production, and employment. And NONE of the interest-rate increases the Fed has undertaken since its lift-off from zero will begin to have effects on inflation for at least another six months. The inflation trajectory is, so far, what it would have been had the Fed stayed at zero up to this moment. That means that there is, now, an awful lot of monetary contraction in the pipeline.
The thing to keep firmly in mind at all times is that we've been living in an artificial world since the start of the pandemic. Nothing is happening because of organic defects or strengths in the underlying economy, but because of either the pandemic itself or our response to it.
The Fed, however, can't bring itself to believe this. They continue to live in a world where inflation is a sign of deep economic cancer that has to be ruthlessly hacked away before it metastasizes—and damn the consequences. They simply can't abide the notion that the best response in our current situation was always to do nothing until the pandemic economy went away on its own.
So instead they did something. They made things worse. Huzzah. Poor people across the country are going to pay the price for this by next summer.
Is it possible that we actually end up with deflation? (Head explodes). Dealing with inflation requires the use of known tools, however, I don’t think economists know how to deal with deflation where money gains value by not spending it.
My buddy's mother makes $50 per hour working on the computer (Personal Computer). She hasn’t had a job for a long, yet this month she earned $11,500 by working just on her computer for 9 hours every day.
Read this article for more details.. https://payathome.blogspot.com/
The Fed has this one tool and they’re so excited when they get a chance to use it. It’s like me with my new air fryer, except that my air fryer won’t tank the economy.
Mortgage rates are way up. That means you can't afford anywhere as big a mortgage as you could afford last year. That ABSOLUTELY means that you have to settle for a smaller house and the seller has to accept a lower price since fewer people can afford the current price.
That means that the real economy has already been affected to some degree.
I'm sorry but DeLong is wrong. I agree that most of the effects of the Fed moves are still to come but some have already taken place.
just to be clear, let's look at housings current impact on inflation and employment.
Employment in construction has steadily increased each month in 2022. Employment in residential building fell slightly in November, but is still higher than September.
Housing units under construction in November is higher than at any point in 2022.
Partly due to how housing inflation is calculated, housing related inflation has been rising for months and will likely continue to increase for several more.
While we can certainly imagine all the anecdata we want, it's not clear that the Feds actions have shown up in any clear way in any actual data.
Selling for a lower price would mean you can also turn around and buy at a lower price.....it's not clear that this has had a big impact on the real economy in any way. Plus, home prices are still quite a bit higher than they were a year ago.
How exactly does making mortgages for new homebuyers more expensive lead to everyone else (people locked into fixed rate mortgages from years ago + people locked into apartment leases months ago) spending less on the things that had soaring prices that allegedly everyone was really freaked out about on a daily basis? You know, things like food and gas?
It doesn’t. Nobody already in a mortgage and nobody already in an apartment lease had any reason to change their purchasing behavior based on the Fed’s actions this year. All the Feds did was (1) directly keep lots of people from buying houses this year and (2) indirectly made it more likely that some people who were (up until now) able to afford their apartment leases suddenly find themselves needing to downsize when their lease is up. But again, I fail to see how either of those things then somehow leads to underpants gnomes lowering all the food and gas prices that everyone was bitching about all year long. There aren’t enough real estate agents to throw out of work and enough renters kicked down market into slummier units to make a dent in demand for food and gas.
Home equity loans?
You can buy lots of stuff with a home equity loan.
Very few people are buying food or gas on home equity loans. And food and gas are the two commodities that everyone has been bitching about this year the most when it comes to inflation. (Nobody seems to notice that clothing prices barely changed at all this year, for example.) So again, how exactly does making new mortgages (and home equity loans, I guess) more expensive lead to households lowering their purchases of necessities like food and gas enough to result in the price of food and gas going down?
Yes, housing has been affected, but what will be the long-term effect? Will damping the housing market help the housing shortage? The movements in rent seem to have predated the rise in mortgage rates. This is a very complex set of factors and there is no reason to think that the Bunch of Big Bankers in the Fed really understand how to control things in this area. How did the Fed and other central banks do in their attempt to stimulate economies in the recession of 2001 by literally creating a housing bubble? Again, the economics profession and the media generally ignore the past failures of central banks.
I agree, and would note that the housing market is not just people who HAVE to buy, but contains people who want, but don't need, to move from acceptable housing to something more acceptable (bigger house, condo to single family, downsizing for empty nesters, single family to condo, etc.) Higher rates affects the timing of these discretionary moves. Anecdotally, I know, since I'm just beginning to consider such a discretionary move and certainly am not going to do anything right now. And with discretionary moves come purchases of appliances, furniture, and other stuff people buy when they move--some of which they finance (now at higher rates). So I think it's just plain overstatement to say that the Fed rate hikes had yet to have any effect.
I believe that DeLong is referring to Macro impacts. Instead of buying new furniture, you may choose to spend that same money on a new car, a vacation or yoga or whatever.
I don't think that DeLong meant that literally no-one has been impacted in any conceivable way.
This is very different than the mid 2000's housing bust because at this moment we haven't seen a fall in related employment haven't seen a fall in related production and because we didn't have the same 'houses as a piggy bank to fund general spending' effect that existed prior to the housing bust, we also haven't seen economy demand drop off.
Hey, remember the Obama Doctrine? "Don't do stupid shit?"
Sorry that got dropped.
Replaced with the Tump/Musk doctrine: "Do stupid shit!"
I'm pretty sure we can find some "brilliant" economists who say the exact opposite of DeLong. Some of them may even permit public disagreement with their claims, which DeLong does not.
Wow! So DeLong has god-like power to prevent people from disagreeing with him?
In what universe?
In his comments section. I never read him, because even if he's wrong, no one is allowed to say so. As Xi and Putin have shown us, when you surround yourself with yes-men, you make major mistakes.
"Even though I never read him, this economist reminds me of the brutal dictators of Russia and China because if his blog comments section. Which I never read."
Lol. Yes. Insightful.
I have read Brad for probably 20 years. He's a bit rude sometimes in his disagreements. However, he is happy to say "I was wrong" about stuff.
The inconsistency of "I never read him" coupled with remarks about his comments has already been noted.
In addition, I will note that Brad does not suffer (those he sees as) fools gladly. I've disagreed with Brad many times in comments, and all such comments have been published. Of course, if you come in with an aggressive know-nothing comment, that won't be treated favorably.
In the end, this seems to me like an issue of what social norms about how disagreement is expressed might be. There is not universal agreement on this. Kind of like how there is no universal agreement on the appropriateness of violent language and metaphor.
Hear! Hear! He definitely engages thoughtfully when the commenter does.
I've found him to be more foolish than not. As to this supposed 'tolerance' of his, well, I was banned for the crime of being right. Actually, not just being right, but several posters telling DeLong he was obviously wrong and I was obviously right and he needed to get off his high horse, admit he was wrong, and move on.
So no, not thoughtful and not gracious.
I should add to my previous comment that DeLong is not, um, 'mathematically sophisticated', shall we say. Even as he likes to bully people for 'not knowing the math', ugh. 'Twas always thus, and 'twill always be.
Here is DeLong’s substack page — with comments on every article he has written.
https://braddelong.substack.com/
Rentiers gonna rentier. Rich people gonna rich people. Long version: the Fed is made up of bankers and they protect the interests of the moneyed class as opposed to the population at large at about a 90/10 split. OF COURSE they finally caved to screeching about interest rates when inflation finally showed up, regardless of the underlying aspects of that inflation.
That said, that is SOME impact from setting expectations.
But yes, they basically fucked us all in 2023. IMO, they should've raised interest rates a couple of times, and sharply, and then said "that should be enough guys, we'll wait and see now, but we expect inflation to drop back towards acceptable levels over the next 6 months."
But nah, we've got a bunch of banking industry fuckos in charge, and the media and politicians are also made up almost entirely of bourgeoisie folks, so this is what we get.
Nothing, except maybe pride, is stopping you from referring to the term that is generally used to describe this: exogenous.
It might be a wish to write in a way that's more accessible to people unfamiliar with economics jargon. Which is concern for the audience. To me, it's kind of a stretch to call that "pride".
So why not just tell your audience what 'exogenous' means? You're doing a disservice to them otherwise, to my way of thinking. Let me segue to the point that no, you can't always explain something in terms that an x-grader can understand.
The Fed's main criterion has always been unemployment, first through the Phillips curve and then the NAIRU. But the Phillips curve blew up in the 70's and the NAIRU has never worked, as unemployment has repeatedly gone below the supposed limit without causing inflation. Inflation has come down recently, but certainly not because the Fed has caused unemployment to go up - it hasn't. Unemployment has nothing to do with, nor did it in the 70's. But if they keep jacking up rates, it will raise unemployment, after many more months or probably even years, and there will be a recession.
Somehow the fact that the Fed failed to prevent inflation in the 70's is ignored. They act as if they really know what they are doing, but there is no evidence that they understand inflation or how to prevent it. Unfortunately the Fed's supposed mastery is supported by most economists, even though some have been dissenting about the current situation. The reliance on the Fed has prevented more constructive action in emergencies, and given it the green light to bail out the financial system with no penalty for causing crashes.
I feel confident they're more focused on V/U than NAIRU.
Most economists: "We have to raise rates now so that we can lower them later if we need to. Or something."
Rates had to be raised a little bit--it was getting really bubblicious....for example, crypto, Uber and Lyft, and tech in general. And quantitative easing needed to end. The "free money" really distorted the business environment.
But the Fed went way overboard...and they were still talking about the next hike. They need to drop their rate now and quickly--more like .75%age point drops a couple two or three times in a row.
We could’ve simply raised taxes on the people pouring money into wasteful things like crypto and the gig economy. But why do that when you can simply throw innocent middle and lower class bystanders out of work instead?
Because to do so is prima facie evidence that you're 'not serious'. Whatever the hell that means.
+10
Thé money being thrown at high-end real estate, trendy stocks and NFTs is money that should have been paid to wage- and salary-earners. It would have been, if our economic system were not so distorted in favor of owners and the C-suite vs. labor. That money wasn’t borrowed.
The Fed really shouldn't be trying to create recessions as a way to expose ponzi schemes, fraud or other criminal activity.
+10
"The thing to keep firmly in mind at all times is that we've been living in an artificial world since the start of the pandemic. Nothing is happening because of organic defects or strengths in the underlying economy, but because of either the pandemic itself or our response to it."
No-one wants to believe this if believing so would hurt some other story in which they are invested.
A very different example is TSMC delaying N3 (and Apple, consequently shipping an A16 that's basically a slightly improved A15). Much more fun to claim that Apple or TSMC are both "finally showing that they are not perfect", much more fun to gloat about how they are both "doomed, as the inevitable result of hubris" than to accept that, yeah, covid screwed over everyone, and it's unsurprising that schedules planned years in advance (and predicated on a huge amount of multi-national, in-person collaboration) were forced to slip by quite a few months...
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