## The US Economy and Inflation

• 3.5k
Seems to be a lot going on with the US economy right now -- as is the case around the world. High inflation, led by energy.

I wanted to take a quick snapshot of Forum sentiments with the following completely non-biased questions.
Yes
100%
No
0%
2. What is the most important cause of current inflation? (10 votes)
COVID disruptions to supply chains
0%
Post-COVID demand
10%
The war in Ukraine
10%
Corporate price gauging
10%
Increased cost of labor
0%
All of the above
60%
None of the above
10%
0%
Federal Reserve quantitative tightening
40%
Corporations absorbing cost
10%
Windfall tax/higher taxes on corporate America
30%
Austerity
0%
Abolish capitalism
20%
• 8.7k
In OECD countries, corporate welfare and malfeasance are out of hand and have long been in need of "correction". At this "late stage", I suspect only catastrophic climate change in the coming decades might possibly force a structural transition from current shareholder to greater stakeholder control (i.e. 'fiscal-regulatory-monetary policy' & 'investment' decision-making) in advanced economies.
• 2.1k
I don't see the other possible cause: The federal government printing and giving away too much money.
• 3.5k

True — I should have added QE/expansionary monetary policy.
• 5.5k
And an option of self-imposed compliance by companies as a result of sanctions but they're doing it in such a way that makes doing business more expensive and only too happy to force the costs of those choices on consumers.

I think you cannot really tell what will happen. I suspect a recession but it could well be japanification is the economy. I don't believe, like some writers, that people are on a spending spree after covid lock downs. That reduction in spending was the result of people losing jobs. Since most companies were propped up with subsidies, the extra spending is the result of people getting jobs again, moving to pre-covid levels but most companies more or less maintained operational capacity. If this was the only driver, we should've seen deflation during covid but we didn't.

Second area, we've seen shortages in components and raw materials due to covid disruptions since 2020 causing inflationary pressures during the pandemic. You would expect, especially if people would be spending more coming out of covid, that production capacity would increase. Instead we've seen three quarters of reduced shipping in consumer electronics. Why?

Only reason I can think of is that supplier sentiment is the market is overheated and we're bound to have a recession, (see for instance onetrust laying of 10% after a record q4 in 2021, Tesla layoffs etc.).

QE is definitely a contributor, we've had years of asset inflation already (real estate, cryptos, shares, bond yields dropping) fueled by cheap credit and at the first sign of serious interest hikes, everybody is falling over each other to rebalance their portfolio. To where is a mystery to me, I've not been involved in markets closely anymore for over two years.

Wars never helped.

So, all of the above and then some?
• 1.1k
Energy crisis, making basically everything more expensive globally as it is at the base of the entire economy.

Also certain material shortages left and right.

And accumulated debt in the system trying to correct itself.

Those are underlying long term structural causes I'd say, then you also have short term factor like covid, Ukraine war, geo-political tensions and protectionism etc...

Demand takes off after covid, but it turn out supply of energy and materials is rather inelastic ... Increasing energy supply for example typically involves building large infrastructure taking years to build. So prices can only go up if we want to resume growth after covid, which implies increased demand.

Since energy and materials supplies and debt are a structural problem going forward, I'd expect some kind of long-term economic consequences, but wouldn't want to guess exactly what and when.

Only reason I can think of is that supplier sentiment is the market is overheated and we're bound to have a recession, (see for instance onetrust laying of 10% after a record q4 in 2021, Tesla layoffs etc.).

What if supply just isn't as easy to increase as one thinks? You see this all the time in economics, that increase in supply is just a matter of demand incentive and volition. But in case of energy and materials there are physical processes to mine or harvest them. The idea that supply would follow demand only follows up to the point there aren't any physical limits we run into to increase supply.
• 1.6k
Inflation is nothing other than an increase in the total amount of currency, thereby reducing the value of each individual unit of currency.

The only places where currency is created legally is in the printing presses of central banks.

When there is out-of-control inflation, it is because central banks are printing too much money.

Why are they printing too much currency? Because it's an easy, short-term way for governments to get more money to spend on all its hobby projects, and it makes the public carry the cost (inflation is literally a hidden tax).

The solution is lower government spending (after all much of this money printing is the result of the government wanting to spend more than it earns!), and much, much stricter control on government and the central banks, which are currently intermingled to the point that central banks can no longer perform their role as safeguard.

Besides this, the public needs to understand that there is no such thing as free money, and they need to stop demanding it from their governments through the voting process, because this is part of what incentivizes governments to make unaffordable, unrealistic promises that can only be fulfilled through printing money.
• 5.9k
I think you have in the options many important issues as options lacking in the OP.

The inflation is the direct result of a long inflationary monetary policy, the low and negative interest rates and all the stimulus programs. Basically everywhere. And what broke the dam was the direct stimulus to the consumer during the pandemic. That simply went to prices as supporting banks and corporations didn't because of the bursting of the speculative bubble. Or to put it short, what said (and you acknowledged, which should be noted here).

And the way to handle this, would be higher interest rates. The Paul Volcker response.

Higher interest rates isn't quantitative tightening, Quantitative easing was double talk for money printing.

The real question is that are people aware of this? Do they understand how inflation works? It's been a long time, 40 years, that the nation (meaning the US) has been on a high inflation environment.

I think the good thing is that the US has democrats in charge. They likely are more responsible than republicans would be. But I'm not sure just how high the inflation will go before it's taken out by high interest rates paid on bank accounts.

The US Fed is now between a rock and a hard place.
• 5.9k
The idea that supply would follow demand only follows up to the point there aren't any physical limits we run into to increase supply.

That's why you have the price mechanism. If something becomes unobtainable, it's price goes extremely high. That creates incentives to replace the "something" with another thing. Hence high oil prices are the best thing that can happen to alternative energy resources.

And the last mechanism is simply an economic downturn. If you don't have it, well, there isn't then a market for it. People just have to go without it.

And btw to everybody, has anybody seen anything anymore from the MMT crowd? :snicker:
• 1.1k
That's why you have the price mechanism. If something becomes unobtainable, it's price goes extremely high. That creates incentives to replace the "something" with another thing. Hence high oil prices are the best thing that can happen to alternative energy resources.ssu

Yeah substitutability, that works only up to some extend. Batteries without lithium are inferior,maybe we will eventually find something that could replace lithium, maybe not, there are not an infinite amount of elements in the periodic table. Or fertilizer for example is made with natural gas, we don't know of any good other way I don't think. In the abstract it sounds good, but there are practical 'physical' problem to the idea.

Hence high oil prices are the best thing that can happen to alternative energy resources — SSU

Only if oil and its derivatives aren't used to produce and distribute said alternative energy sources, which is, as it stands, a big if.

Either way, and I've said this before, coal, oil and natural gas are by far the most energy dense sources of energy we have access to. They are the reason we have had an industrial revolution to begin with. I highly doubt the idea of substitutability applies to fossil fuels, because they are what the entire economic system as we know is build on, and not only for the energy they provide. But the amount of energy you can use directly translates to amount of work that can be done, which in turn directly ties into the productivity-equation. If you need to invest more to get access to other energy sources, i.e. energy will be more expensive, this will have consequences for the rest of the economy.

And btw to everybody, has anybody seen anything anymore from the MMT crowd? :snicker:ssu

Yeah I also would like to see someone try an explanation post-inflation :-). I dunno, I though it had some promise because we didn't have inflation for the longest time no matter what we did it seems, but what we have now seems a knock against it to say the least.
• 376
The real question is that are people aware of this? Do they understand how inflation works? It's been a long time, 40 years, that the nation (meaning the US) has been on a high inflation environment.ssu

And the last episode launched the neoliberal era. If we go into stagflation, which would mean the Fed's interest rate hikes don't bring inflation under control, we'll head into stagflation. What policy changes would follow that?
• 1.6k
And the way to handle this, would be higher interest rates.ssu

You're probably right, but this pill has become a particularly bitter one to swallow, because the raise in interest rates it would require to counteract the current level of inflation will probably be the nail on the coffin of a great many private companies which are already hanging by a thread.

You probably saw how the stock exchanges reacted to even a slightly higher interest, one that doesn't come close to the measures required to repair this mess.

Then again, the longer the politicians keep throwing this hot potatoe around to avoid having to take unpopular but necessary measures, the worse the pain in the end, when the bubble finally bursts.
• 5.9k
Monetary expansion, demand-side stimulus, supply-side contraction, the great resignation. There is too much printed money floating around, not enough things to buy with it. Most of it is caused by state intervention.
• 5.5k
What if supply just isn't as easy to increase as one thinks? You see this all the time in economics, that increase in supply is just a matter of demand incentive and volition. But in case of energy and materials there are physical processes to mine or harvest them. The idea that supply would follow demand only follows up to the point there aren't any physical limits we run into to increase supply.

It's decreasing though.
• 1.1k
It's decreasing though.

You're talking about consumer electronics specifically here?

Second area, we've seen shortages in components and raw materials due to covid disruptions since 2020 causing inflationary pressures during the pandemic. You would expect, especially if people would be spending more coming out of covid, that production capacity would increase. Instead we've seen three quarters of reduced shipping in consumer electronics. Why? — Benkei

Apparently there is already a drop in demand this year, after the "post-covid" surge last year, coupled with lock-down issues in China, and inflation, etc... all apparently contributing to a scaling down in shipping.

https://www.market-prospects.com/articles/weak-demand-for-consumer-electronics-and-ease-the-shortages-of-supply-chain

But point well taking, this was probably not a good example for the more general point I was trying to argue there.
• 3.5k
Most of it is caused by state intervention.

State intervention in the service of plutocrats.

Your solution: abolish or minimize state intervention; keep the plutocrats.

My solution: abolish or minimize plutocracy. Keep and strengthen democracy.
• 3.5k
QE is definitely a contributor, we've had years of asset inflation already

I think the Fed -- monetary policy -- is responsible for the bubbles in the major asset class: stocks, bonds, housing, and somewhat in commodities. The re-implementation of QE, lowing the federal funds rate to near zero and, uniquely in 2020, buying corporate debt, was due to COVID. I don't necessarily fault the Fed for this. But it continued for far longer than it needed to.

Also, these policies really do nothing but help the financial sector. All of the money goes through private banks, and the greater borrowing that took place was largely spent not on raising wages, research/development, etc., but on stock buybacks. Record levels. Between this and dividends, most of the money was basically channeled to shareholders. And, as we know, the people who own the stocks/assets are a minority, with the "top 1% of Americans having a combined net worth of $34.2 trillion (or 30.4% of all household wealth in the U.S.)". With inflation, I think it's striking that the companies raising their prices (energy companies, food companies, meat producers, etc) are also posting huge profits. So while worker wages have increased, they've used "inflation" as a story to raise their prices to make up for labor costs/supply cost, passing the cost on to consumers rather than absorbing that cost themselves. So, for example, instead of taking the 5% extra labor costs and 4% in extra production costs out of net earnings, they raise prices 9% (or more) and maintain the same level of profits as before (and then some). I think this explanation accounts for most of the inflation we are currently seeing -- far more than simply the "money supply," as some argue. • 3.5k Energy crisis, making basically everything more expensive globally as it is at the base of the entire economy. Sure, but when profits are so high it's worth asking whether or not these corporations can absorb the cost. Turns out they could -- I see no reason why they can't, or no good reason. Rather, they raise prices -- which is passing the extra cost onto others. Why should this be ignored? It's glaringly obvious this is just rampant greed. But it's just taken as the way of the world, as if a natural law. It isn't and never has been. It's a choice. It could be regulated, as it was in the past. But we're still in the neoliberal era, alas. Inflation is nothing other than an increase in the total amount of currency, thereby reducing the value of each individual unit of currency. Milton Friedman's theories are now obsolete. Even the Fed acknowledges this. It's not totally irrelevant, but just doesn't have the explanatory power it was once believed to have. Too simple, and assumes rational actors and efficient markets -- neither of which we have. This is demonstrated by what I said above about the corporate-level decision to absorb labor/production costs (meaning subtracting the extra costs from the record profits) or pass the cost on to consumers by raising product prices. That decision, made by shareholder-elected board members and the CEO (whose compensation largely consists of shares), has nothing whatever to do with the money supply. When there is out-of-control inflation, it is because central banks are printing too much money. They were printing a massive amount in 2008/2009 as well, even instituting QE for the first time. We didn't have inflation after that -- unless you count stock prices, of course (seen in the longest bull market ever). Because it's an easy, short-term way for governments to get more money to spend on all its hobby projects, and it makes the public carry the cost (inflation is literally a hidden tax). This is more parroting of Milton Friedman, unfortunately. It just isn't supported by evidence. QE, the buying of corporate debt, and lowing the FFR all benefit the banks and the corporations that were failing and threatening to bring down the economy. So monetary policy is now generally a safety net for the financial sector. That has little to do with government spending, which is fiscal policy. If you're arguing that fiscal policy is what accounts for inflation, that's a different line. Besides this, the public needs to understand that there is no such thing as free money, and they need to stop demanding it from their governments through the voting process, because this is part of what incentivizes governments to make unaffordable, unrealistic promises that can only be fulfilled through printing money. Except that this is nonsense. There's plenty of money, plenty of resources. The problem is that it goes to fewer and fewer hands. Making the sweeping statement of "government spending" being the issue reflects a favorite political narrative, but nothing more. Certainly not the data. But I agree, in part -- there should be less government spending in some areas. For example, the$800 billion dollars we spend annually on weapons manufacturers. Good place to cut spending.
• 3.5k
I think you have in the options many important issues as options lacking in the OP.ssu

I really don't know what this means.

Higher interest rates isn't quantitative tightening, Quantitative easing was double talk for money printing.ssu

I don't know what this means either. Quantitative tightening is the opposite of easing. That means the Fed is beginning to lower mortgage-backed securities and debt on their balance sheet. That was indeed increasing the money supply. The opposite (QT) will decrease the money supply.

And the way to handle this, would be higher interest rates. The Paul Volcker response.ssu

I don't think so. What this will do is burst the bubbles created by the Fed -- stocks, bonds, and real estate. We're seeing that already. That's obvious. And there's a ways to go -- stocks, for example, are still not at trend. The S&P 500's trend line is about 2500, and it's currently at 3688. Still overpriced even after dropping 20% from it's high of 4600 in December.

What's not obvious -- and what the Fed cannot control -- is what corporations choose to do. As I said earlier, we're in a time of record profits. Major energy and food companies could choose to keep costs lower, but they aren't. Why?

It's a choice. And that choice has nothing whatsoever to do with what the Fed does, and so it will not have the effect they want. All it will do, again, is burst the stock/bond/housing bubble they helped create.

Corporate profits will remain intact for a while, because any cost will be passed on to consumers and labor through increased prices and major layoffs. That's the choice of the private sector. So inflation will continue. But that can only go on so long. Once that stops, either because of a backlash from consumers/labor or, less probable, government intervention (due to mass public pressure to act), we'll see prices stabilize. But they'll be a lot of pain in the meantime, and that pain will be felt disproportionately on the middle and working classes -- as always.

COVID supply disruptions, the "great resignation"/union organizing/wage increases, and the Ukraine war are all important. But again, the CHOICE by corporate boardrooms to have others pay for the greater costs is just that, a choice. This is the heart of the problem. It's hard to take pity on companies when they're posting record profits and engaging in record levels of share repurchases all while crying about increased production costs.

At what point do we hold the corporate sector accountable?
• 1.1k
Sure, but when profits are so high it's worth asking whether or not these corporations can absorb the cost. Turns out they could -- I see no reason why they can't, or no good reason. Rather, they raise prices -- which is passing the extra cost onto others. Why should this be ignored? It's glaringly obvious this is just rampant greed.

Right, you're asking for systemic change then, because companies are no social organisations but specifically set up to make profit. In the current set-up one would expect corporations to try and keep their profit margin, right? I mean, I certainly would be surprised if corporations all of a sudden would collectively and voluntarily decide to absorb the cost themselves.

And I will say, I doubt all corporations could absorb the increase in cost all by themselves. Some, the bigger ones probably could, other ones I'm not so sure.
• 3.5k
Right, you're asking for systemic change then, because companies are no social organisations but specifically set up to make profit.

Make profit for whom? According to the US Chamber of Commerce and the Business Roundtable, it's no longer only the shareholders. True, that's just empty rhetoric to appease the angry rabble while they take actions that are the complete opposite of what's stated. But the point stands. The belief that corporations exist to make profit, and profit for shareholders, is a belief.

In fact, corporations can exist for any kind of reason. There are non-profit corporations. There are co-op corporations. There are corporations that distribute profits in ways that were more akin to the 1950s and 60s when real wages kept up with productivity.

Is changing that belief "systemic change"? Maybe; changing the policies that have been implemented on the basis of this belief certainly would be systemic. Can be done in a heartbeat. Other nations have, and so can we. But since the plutocracy/corporate sector owns "our" government, the chances are slim indeed.

In the current set-up one would expect corporations to try and keep their profit margin, right? I mean, I certainly would be surprised if corporations all of a sudden would collectively and voluntarily decide to absorb the cost themselves.

The fact that we assume or expect this is partly the problem. It means we, the population, have subscribed to the bullshit ideas of corporate America as well. In reality, there's no justifiable reason for this behavior beyond pure, unadulterated greed -- and, of course, class warfare. The rest is a useful story to tell oneself and others.

And I will say, I doubt all corporations could absorb the increase in cost all by themselves. Some, the bigger ones probably could, other ones I'm not so sure.

This only makes sense if the costs were so great that they were no longer profitable. But even in that case, you can borrow and cut other costs -- like the huge salaries of executives or expansion plans. Once all that has been tried, yes perhaps you need to shut down factories/stores or let some of your people go. But that's a long way to travel.

Mostly what I see is record profits. For those without record profits, the usual happens: they enrich themselves to the bitter end, then file for bankruptcy while giving themselves huge bonuses.

The owners will always come out on top. Bet the house on it.
• 13.2k
Now that the inflation genie is out of the bottle, there's real danger, not least because it makes sense (if you believe inflation is sticky) not only to buy lots of stuff because you think it will be more expensive in the future but even to borrow money from the bank at the going commercial rate of, say, 6-8% and spend it on anything you think will lose value at a lower rate than the spread between this cost of borrowing and the inflation rate (or where you believe it to be headed). What's the effect of all this? To increase inflation and increase the belief in its stickiness.

The question then is one of confidence. Can the Fed and other central banks make you believe they have inflation under control? And the less they can, the less they can. This is particularly pertinent for the EU where the base interest rate is still around zero and they are constrained by the need not to collapse the bond markets of the most debt burdened countries, the so-called PIGS.

• 1.1k
Mostly what I see is record profits. For those without record profits, the usual happens: they enrich themselves to the bitter end, then file for bankruptcy while giving themselves huge bonuses.

Yes tacitly, and even not so tacitly, this is what is generally understood as the maxim of our societies, get ahead by whatever means, whatever the cost... just don't do it overly explicit.

But you are right, it is a belief and could be otherwise. What that otherwise entails though is another question, and one to which one might not altogether like the answer.

You say part of the problem is that the populace has "subscribed to the bullshit ideas of corporate America". But that isn't exactly how it works, one does not choose to subscribe to one of a wide range of possible and available options, more apt would be to say they have been conditioned in the corporate consumerist bullshit. Corporate advertising has largely replaced or subsumed societal myth/religion/traditions/mores, whatever you want to call it. and part of what made that possible are historical movements to dissolve those societal structures.

Anyway I could go on, but my point I guess is that the problem runs a bit deeper than expecting corporations to unilaterally and suddenly change their goals to something other than profit-seeking. They are also imbedded in systems that give them certain incentives and constrain them.
• 376

Supposedly we're already in the sticky phase (where it's happening because it's happening).

Every day another bank ceo announces that were going into a recession, as if they're trying to tell everyone not to expect continued inflation and stop buying stuff.
• 1.1k

Yes inflation is I guess always to some extend about confidence, that is what ultimately keeps increasing the velocity of the inflation-ball. But the ball has to start rolling somewhere. Gas-prices in Europe are 5x to 10x of what they where last year and summer is only beginning. These increases are not a confidence issue, but competition on the energy-market driving up the prices. There is the Ukraine war too yes, but prices were already peaking before the war. This is a long-term structural problem, because climate change, because increasing scarcity of resources, because a badly managed energy-transition, because rising geo-political tensions etc... I don't think it's going away any time soon.
• 1.6k
You mean to say you didn't see this coming with the disastrous fiscal policy that the United States and other western countries have been pursuing for years, that people have been warning about for years, decades even?

Everyone knew it was coming, and everyone knows it's failed government fiscal policy at the root of it.

Milton Friedman's theories are now obsolete. [...] Too simple, and assumes rational actors and efficient markets -- neither of which we have.

Indeed, we have markets that are to a great degree controlled by governments, which turn them neither rational nor efficient. It's the governmental monopoly on printing money that's been at the root of this, coupled with ever-growing governmental control.

And of course the government will try to find "alternative" explanations, and insist things are more complicated. It will blame the public, it will blame the cooperations, and now it's blaming Covid and Russia, while it's printing billions of make-believe money thinking it can break the rules of basic economics.

When has the government ever shown a shred of sense and admitted to its disastrous fiscal policy and its eternal desire for control and more spending being at the root of much of this trouble?

Never.

Likely they use the same line of argument as you do, arguing that theories that put the blame on government are "now obsolete and things are more complicated". Please.

Even the Fed acknowledges this.

The Federal Reserve is an absolute failure and a part of the issue. It's completely politicized and unable to fulfill it's primary goal. What a surprise that the Fed "acknowledges Milton Friedman is obsolete" - Friedman argued to abolish that whole rotten mess.

PS: So great is in fact your blind spot that you didn't think to put the primary cause of inflation as an option in your poll.
• 13.2k

It's funny, we might think that modern economic magicians can help us, but they can't. If there's a bank run on fiat, fiat will collapse. And confidence in fiat, just like confidence in banks, is the only thing standing in the way of that.
• 13.2k
(And by a bank run on fiat, of course, I mean mass withdrawals from fiat into anything of perceived value, i.e. inflation induced panic buying).
• 2.1k
Two comments that really prove nothing:

1. I took over a 5.25% mortgage when I bought a house in 1972 and the going rates were 8% - 9%. I was told "You'll never see such a low rate again!" When I had a house built in 1985 I was fortunate to get a 15 year VA loan at 11.25%.

2. On both occasions when I received checks for over $2K from the government during the pandemic I thought, Why did they send me money I don't need? I suppose that it cost more to differentiate needs than to simply send blanket$$out. Friedman was at the U of Chicago when I was there, but I never met him. :nerd: • 1.1k I want to say confidence in fiat isn't entirely made out of whole cloth. People come to these conclusion because the times, the socio-economical climate is pointing in that direction. In other more stable times one wouldn't deem it worthy of consideration. • 3.5k Everyone knew it was coming, and everyone knows it's failed government fiscal policy at the root of it. Like the$800 billion spent on defense contracts every year? That spending? What "fiscal policy" are you referring to, exactly?

And who is "everyone"? Everyone predicted this for "decades"? Since when, the 80s?

It's helpful to give some substance to generalities. Otherwise I have no idea what you're talking about. Maybe some trope about the national debt?

Milton Friedman's theories are now obsolete. [...] Too simple, and assumes rational actors and efficient markets -- neither of which we have.
— Xtrix

Indeed, we have markets that are to a great degree controlled by governments, which turn them neither rational nor efficient.

No, we have markets that have been deregulated for the last 40 years, largely using the ideas of Friedman as justification. This is the neoliberal era. To turn around and still blame the government is rich, when they were acting in accordance with the bogus ideas of "free markets."

(1) "Government is the problem" -- slogan of the 80s.
(2) Government deregulates for 40 years. Housing crash, recession, real wages decreases, skyrocketing wealth inequality ensue.
(3) "See, we told you government was the problem!"

Very nice, circular story.

Likely they use the same line of argument as you do, arguing that theories that put the blame on government are "now obsolete and things are more complicated". Please.

I didn't say the blame on government is obsolete, I said Friedman's theories are now obsolete. Specifically the one you echoed:

Inflation is nothing other than an increase in the total amount of currency, thereby reducing the value of each individual unit of currency.
— Tzeentch

Milton Friedman's theories are now obsolete.

That "inflation is nothing other than an increase in the total amount of currency" is obsolete. Your claim -- and his -- is not about fiscal policy, it's about monetary policy. The Fed is in charge of monetary policy. The legislature -- the US Congress -- is in charge of fiscal policy.

Let's at least be clear. As I said earlier, if you want to argue that fiscal policy is the true culprit -- as you now seem to be doing -- then that's a different discussion.

So far you've given no convincing support for this claim either.
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