Brad DeLong & Ray Suarez talk on Ray's "Shifting Ground" podcast about the current and past fights with inflation: "You really don't complain about leaving rubber on the road when you rejoin the...
Another note on inflation. As much as inflation destroys the value of paper assets, it also destroys the impact of paper debt. Once an equilibrium is reached, only present day labor keeps pace with inflation. Daniel Amerman, CFA, wrote quite a bit on this phenomenon in his early material.
One thing that aided Ronald Reagan and his economic policy was the collapse of the oil price to less than $25/barrel. Big oil continued drilling and exploring, paradoxically, during that era. The potential effect was to hasten the collapse the Soviet economy by damaging their #1 export product. Another driver of inflation during 2006 was the worry about Peak Oil, of course, which never occurred.
"The system has betrayed you… offered you a bargain, and then… did not keep… it. So you are going to be angry"
Biden did not go enough to focus that anger on the Fed. Too much (anything greater than zero is too much) rubbed off on ARA. And the Fed failed to explain that part of the above target inflation was a good thing, allowing relative prices to adjust even as they admitted that they allowed a bit more than was necessary.
Dollar privilege: Unfortunately we have taken advantage of (by running structural deficits) to to consume/import more relater than to invest/export more which at least exacerbated the decline in manufacturing employment in addition to slowing growth.
I don’t like the idea of inflation _being_ “temporary” or not “temporary.” Positive and negatives shocks happen and the Fed reacts well or badly and inflation/deflation is temporary or not. The Fed reacted badly in 2008-2020 and below target inflation became “entrenched.” It was slow off the mark in 2021 and inflation, though not entrenched, has not been as temporary as we would have hoped.
Brad, thanks for the reply.
Well, certainly not the whole story it does appear that Ukraine and the supply chain disruptions caused in large part by Covid, played a major role in this current bout of inflation.
As the supply chain kinks are worked out I think we are seeing one cause for the easing of inflation. I would love to hear your thoughts about what impact the feds actions increase of the interest rates may now be negatively contributing to inflation. As more goods become available, the interest costs associated with those goods puts upward pressure on their prices.
Again, inflation is an extremely complex phenomenon, but I have a hard time, completely ignoring one side of the equation. One fundamental view of the cause of inflation is too “many dollars chasing to few goods.” The Fed has tools to work on only one side of the equation, and they seem to be ignoring efforts that can be, and are being, made to increase the supply of goods.
I would be very grateful if Brad would log in with his thoughts on this matter!
Thanks for always having such enlightening commentary.
I’d like to add a general comment to add to the general conversation concerning this recent inflation. I have started to see a few folks start to address it but mostly I feel my point has been ignored. It is this:
at its most fundamental level, inflation is the result of too many dollars chasing to few goods. The Fed only has tools to work on the dollars. It doesn’t have any tools to directly affect the amount of goods, except negatively.
I believe that a significant component of the current inflation, especially in its early term, was the result of two few goods, mostly caused by supply chain issues, and the fallout from the Ukraine war. Shortages were and are everywhere, restricting the supply of finished goods.
I don’t think there has been nearly enough focus on the quote “too few goods“ side of the ledger. I yes, restricting demand can have an impact on inflation, but alleviating the bottlenecks and increasing the supply of goods seems to me, that it would be an even more effective method, with the added benefit of avoiding a recession.
As a corollary to this, I think there is a serious lack of the Fed looking for ways to coordinate it’s blunt hammer of interest rates increases ￼with other players and strategies to work on increasing the supply of goods. And if we had more goods, there wouldn’t be too many dollars chasing them.
I don’t think this analysis holds in every case of inflation, but it sure does seem to apply to this one.
It sure would be nice to have a well recognized, economist, such as Brad DeLong, or Paul Krugman, to explore this idea and publish some thing that would be widely read.