29 Comments

Thanks for the great read and your shedding light across all the angles.

I'd like to add to your point of "deficit creation" (aka the state-led inflation of pumping M2) that Bidenomics has seemingly made a miracle possible. They designed something called the "Inflation Reduction Act" that in my eyes will be protracting the inflation curve further through demand-pull inflationary forces - namley in overstimulating ESG investments across the board by subsidizing ESG like Solar Panel/Wind Turbine instalment.

This will likely inflate services and also likely push demand for ESG installations over the available supply, in service time as well as materials/tech needed. "Get it cheaper" will be the driving narrative for ESG providers to drive people to take subsidies and potentially a loan for the rest of the sum for getting Solar installed on your roof.

I am amazed at how much sand you can throw into (media) people's eyes by calling something the exact opposite of what its execution of policies will create.

And this is just U.S. based.

Globally speaking, in core EU there is a whole different beast by overideologized policy driven by the "Need to go Green, whatever it takes" - even freezing one of the world's largest economies (Hint: it's the country of Bratwurst and Beer) over the coming winter and having its energy-intensive industry simply shut down due to unsustainable (read: hyperinflationary) rises in gas / energy cost.

Economy 101 - the same government dictating the stop of energy imports are calling for subsidies, aka creation of more money through ECB in the form of loans to "help the people weather the energy crisis" they managed to maneuver themselves into over the past decades masterfully - that is a true double whammy created by green ideologists to put more oil into the fires of inflation in EU.

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This is macro economics 101:

1) Looking from the IS-LM perspectives: if there is only fiscal expansion, nominal interest rate will always rise due to increase in supply of government bonds and/or increased in economic activities and only an equal expansion in monetary policy could keep the interest rate down and keep the economy expanding

2) From a political point of view, no government can get democratically elected by raising taxes and reduced government spending and therefore point 1 is a path of no return. i.e expanding government debt + holding interest rate steady and towards zero

3) The big issue is that only Investment component of the economy get stimulated and as interest rate goes to negative, the percentage of non-productive investment will soar until the point that the non-productive part will consume a large parts of the needed goods and drive up AD curve.

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Great one Bear. Your ability to look at both sides of an argument is certainly so thought-provoking!

Although supply chain failures were not THE primary driver of inflation, I do believe certain chokepoints within them added a bit of fuel to the fire. More importantly, future chokepoints are likely to be inflationary. Couple of random thoughts:

-- There was an interesting video a couple of months ago on CNBC about how the port of Los Angeles, one of the biggest ports in the US (if not the biggest), is quite inefficient compared to Chinese and Korean ports (https://www.youtube.com/watch?v=jIHzGD5mb5o). In a time of simultaneous shift in consumer consumption patterns, this must have contributed to a widening of the gap between supply/demand and relative scarcity combined with abundant cash drove prices up.

-- In addition to the above, the railroad system in the US is far from state-of-the art. This should be a factor that would further exacerbate availability issues in non-normal times.

-- As I see it, all of us living in the West went through a period of abundance and never stopped to think that certain goods we take for granted could actually not be there for us at some point, under certain circumstances. Our supply chains were fit for a world of peace and cooperation, so one can argue that supply chains have failed us to a certain extent.

-- The current geopolitical landscape certainly does not help. Zoltan Poszar makes a great back of the envelope analysis in his dispatch entitled "Money, Commodities, and Bretton Woods III

", on how self imposed sanctions from the EU on Russian oil can lead to second order effects in the form of inefficient reconfiguration of supply chains, leading to delays and scarcity of supply which, all else being equal, are inflationary.

-- Looking ahead, protectionism should lead to reconfiguration of supply chains to increase resiliency. Again, if all countries try to reconfigure their supply chains at the same time (which is likely to happen) that would create a simultaneous demand for specific goods, making the reconfiguration of supply chains more expensive. The delta in the cost will likely be passed on from contractor to contractor, all the way down to consumers.

The above are some quite random thoughts on how supply chains have and will likely affect inflation. It is very hard to argue that supply chains were the primary factor behind inflation, but I also do not think it is easy to argue that supply chains did not contribute in an inflationary way.

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I don’t understand the “no inflation for forty years” argument. That’s pure academic nonsense. Besides SOME electronic devices (because of technological advancements), what has gone DOWN in price? Houses? Car? Rent? Food? Energy? Travel? Clothing? I mean come on, do these liberal academics even go outside?? SMH…..

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>So, where did all this money come from? The Fed printed it.

The amount of people that should know people who keep shoving this simple fact under the rug is astonishing to me.

> In real terms, the country is still consuming far more goods than the pre-pandemic trend.... In real terms, the import of goods grew by 20% during the pandemic.

Hey look, you've got actual data behind your claims rather than hand waving the problem in a statement. How many talking heads talking about supply chain issues actually looked at the numbers I wonder.

Academics love talking about "inflation expectations" because it implies that they can control inflation without a cost. If only there was a way to convince the public "its all in their head", they can continue business as normal. If you're a discipline of Milton Friedman and accept "inflation is everywhere and anywhere a monetary phenomenon", you also accept there is a real cost to defeat inflation, that you must stop the "inflationary tax".

Whenever I think on inflation, I always start with this article (actually an excerpt from his autobiography) by Paul Volcker, "What's wrong with the 2% inflation target".

https://www.afr.com/policy/whats-wrong-with-the-2pc-inflation-target-paul-volcker-20181025-h172ij

>A 2 per cent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It's difficult to be both a target and a limit at the same time. And a 2 per cent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.

>I do know some practical facts. No price index can capture, down to a tenth or a quarter of a per cent, the real change in consumer prices. The variety of goods and services, the shifts in demand, the subtle changes in pricing and quality are too complex to calculate precisely from month to month or year to year.

>Moreover, as an economy grows or slows, there is a tendency for prices to change, a little more up in periods of economic expansion, maybe a little down as the economy slows or recedes, but not sideways year after year.

Damning critiques from the man himself.

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Sep 16, 2022·edited Sep 16, 2022

Another great read . It is awesome that you lay out everything, and let the reader decide the right answer for themselves, based on the data. Seems like Evan Feldman below wants you to tell him what to do. Maybe you should pretend to know everything about the future and the outcomes of theoretically unproven tools such as QE and QT ( which no one can ). Being sarcastic of course. Or maybe he wants you to tell him that money supply isn’t a factor, as he owns a money printing factory and you’ll run him out of business.

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A bit too simplistic, imho.

There can't be one reason for such a problem, should be multiple reasons, even though monetary policy might be the biggest contributor.

You can do better! :)

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Thanks for another excellent article. You changed my view on supply chains and current demand. And I learned that Monetary policy enables Fiscal policy.

However, I am left wondering, why the Fed would respond to a pandemic with such dramatic with money printing, when such a common analysis of a business cycle would show that it would have serious adverse effects to curb. Why do you think the Fed would react in this way?

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If you haven't yet, I reco reading the old Pragmatic Capitalism posts from 2008-2011 assuming they;re still avail. He does a good job of examining how the banking system works and what is required for Fed QE funds to flow into inflation. This is in the context of the financial crisis of 08/09 and allows you to look at what variable changed this time. That's not the only source but I recall he was all over it.

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Thanks for this. Your notes are so well thought out and eloquently delivered with finality. “Words can be meaningless. If they are used in such a way that no sharp conclusions can be drawn.” Feynman

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Footnote 4 is great. Amazing write up again! Thanks

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The misallocation of funds doesn't seem to get mentioned a great deal in talking about how loose monetary policy may or may not cause inflation. Levine talkes about calling our time the Moviepass era because the Moviepass business plan of charging people 10$ for a month for unlimited visits to the cinema when each visit costs 10$ was perhaps the dumbest business plan of all time. Still, Moviepass collected a ton of investor money. At Moviepass, however, computers were purchased , spaces rented out or bought, office furniture was accumulated and people were paid real salaries and those people bought cars and mattresses and expensive wine. No one would have invested in an idea as dumb as Moviepass if the Fed had not vomited liquidity on the markets. The marketplace for ideas broke down because every idea got funded. In a nutshell that is how the Fed manipulated the S&P 1600 points to the upside by adding 6 or 7 trillion $ to their balance sheet.

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There was plenty of inflation over the 40 years of declining interest rates. But because the inflation was in asset prices nobody was bothered about it and it wasn't included in CPI.

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