Real Stagflation? My Odds Now More than 50-50, &
Real Stagflation? My Odds Now More than 50-50, &
BRIEFLY NOTED: 2022-03-14 Mo
CONDITION: Omicron Recedes in the United States:
First: Real Stagflation? My Odds Now More than 50-50
I believe that Noah Smith and Neil Irwin have this right. There is now a better than even chance that the US economy faces something like stagflation over the next two years. I think the odds are that the economy could have ridden out Xi Jinping's attempts to deal with omicron while maintaining his "Covid zero" policy, but add onto this the war in Ukraine and its effect on world energy and food prices, and the feds ability to thread the needle looks much much weaker:
Noah Smith: China, Russia, & the Inflation Situation: ‘Neil Irwin tweeted… “We’re currently living in the brief moment between when Finance/Econ Twitter has realized that the new Covid lockdowns in Shenzhen are going to have hugely bad consequences for US inflation, but that has not yet become a widely-reported conventional wisdom.” He’s right…. We thought we had inflation basically contained. The Fed had announced a series of rate hikes…. Covid relief spending… has dried up. As a result, inflation expectations moderated. But then… Vladimir Putin’s unprovoked invasion of Ukraine… the resulting sanctions… raising the prices of oil, gas, and wheat…. [And] now we have the return of Covid in China… very intolerant of any cases at all. So the government just put Shenzhen… into lockdown…
LINK:
Does this mean that, had the Fed known then what we know now about omicron-in-China and Putin's attack on Ukraine, it would have been wise for the Fed to have taken its feet off the gas a year or so ago? I think not. Facing these two new supply shocks from a position of a lower current inflation rate would have a small advantage. But the big difference between the impact of supply shocks hinges on whether they hit the economy when the economy has well-anchored inflation expectations vis-à-vis when the economy that has lost its nominal anchors. Thanks to Brainard and Powell, inflation expectations still look well-anchored to me. And whatever narrow advantage going forward would have been gained by having inflation at 4% rather than at 7% over the past year is vastly outweighed by the costs of having some 3 million people additional without jobs now and without jobs over the past year.
The joker in the deck is that we do not know how far the Chinese government will go in continuing to pursue “zero Covid”, or how effective totalitarians-vs-viruses are going to be. My hunch is that it is likely to get quite bad: people will falsify output statistics rather than tell Xi Jinping that the cost of containing omicron is very high, and omicron looks uncontainable. A recession in China seems likely. The Fed thus needs to be data dependent, to prepare people for an extra year or so of higher inflation, and to repeat over and over again that it has no tolerance for medium-term inflation above 2%/year on average.
And hope things break favorably.
One Video:
Phillip Karber: The Russian (& Ukrainian) Way of War: ’Zebrowski’s raids… <https://www.youtube.com/watch?v=_CMby_WPjk4&t=3300s>:
One Picture:
Very Briefly Noted:
Ben Thompson: Substack Launches App, Substack & the Four Bens <https://stratechery.com/2022/substack-launches-app-substack-and-the-four-bens-in-app-purchase-and-the-substack-bundle/>
Zack Beauchamp: Could Putin Actually Fall from Power in Russia?: ‘What history teaches us about how autocrats lose power…. Two possible scenarios: a military coup or a popular uprising… <https://www.vox.com/22961563/putin-russia-ukraine-coup-revolution-invasion>Trent Telenko: Twitter <https://twitter.com/TrentTelenko>
Gitanas Nauseda: Lithuanian President: Help Ukraine by Fast-Tracking EU Accession: ‘NATO is engaged and Europe is rejuvenated—but we cannot stop halfway… <https://www.ft.com/content/d3ec4ff4-3927-4d6f-8c24-140f47ce42f4>
Janan Ganesh: Beware the Downwardly Mobile: ‘Those who lose status, rather than the worst off, are the main threat to social order… <https://www.ft.com/content/544171d4-3deb-4ac7-a427-042a106ee43d>
Barry Eichengreen: The Monetary Consequences of Vladimir Putin <https://www.project-syndicate.org/commentary/russia-financial-sanctions-will-change-currency-reserves-by-barry-eichengreen-2022-03>
Emma Goldberg: After Two Years of Remote Work, Workers Question Office Life<https://www.nytimes.com/2022/03/10/business/remote-work-office-life.html>
Umair Irfan: COVID–19 origin: Scientists Traced The Outbreak to a Wuhan Animal Seller: ‘What should we do about it? The latest research points to a spillover from animals at the Huanan Seafood Wholesale Market in Wuhan. The world could take steps to prevent this from happening again… <https://www.vox.com/22961822/covid-19-origin-coronavirus-wuhan-china-market-lab-leak>
Olivier Blanchard: Fiscal Policy Under Low Interest Rates <https://fiscal-policy-under-low-interest-rates.pubpub.org/>
Paul Poast: Tweets <https://twitter.com/ProfPaulPoast/with_replies>
Wikipedia: Battalion Tactical Group <https://en.wikipedia.org/wiki/Battalion_tactical_group>
Paul Krugman: Credible Irresponsibility Revisited <https://stonecenter.gc.cuny.edu/credible-irresponsibility-revisited/>
Bendheim Center for Finance: Events <https://bcf.princeton.edu/events/past-events/>
Vincent J Geloso & al.: How Pronounced Is The U-Curve? Revisiting Income Inequality in the United States, 1917–1960 <https://academic.oup.com/ej/advance-article-abstract/doi/10.1093/ej/ueac020/6544663>
Kamil Galeev: ’Many argue that sanctions are “ineffective”. That’s false. They are already highly effective in undermining Russian military efforts and can be made even more efficient. They can guarantee that Russia loses this war if they are goal-oriented and not moral crusade-oriented…
The Economic Innovation Group: Dr. Adam Ozimek Joins EIG as Chief Economist<https://eig.org/news/dr-adam-ozimek-joins-eig-as-chief-economist>* Jørgen Veisdal: One Year of Privatdozent
Sam Jones, John Paul Rathbone, & Dmitri Sevastopulo: The Complete Idiot’s Guide to Military Logistics: ‘Russia’s intended campaign—an assault strike predicated on speed and Ukrainian political weakness—has tipped into a joint combat operation requiring logistical and communications planning that does not seem to have been in place, say analysts….
Paragraphs:
Richard Thaler: Russian Invasion of Ukraine Needn’t Change Stock & Bond Investing: ‘TI was interviewed by one of the financial news networks on one of their morning shows, and they asked me, “What should people do the next time the markets are getting very volatile”’ I said my advice would be to turn off…. Any sudden moves by individual investors are… more likely to be wrong than right because our instinct is to sell when markets go down and to buy when they go up—and buying high and selling low is just not a good strategy…
LINK: <https://www.nytimes.com/2022/03/13/business/richard-thaler-investments-advice.html>
Antoine Bertheau & al.: The Unequal Cost of Job Loss Across Countries: ‘Studying the consequences of job loss can help us understand the extent to which labour markets efficiently reallocate unemployed workers to new jobs. Using a dataset that combines administrative records from seven countries with diverse labour market institutions, this column finds that the consequences of losing one’s job vary across countries. Workers in Denmark and Sweden experience the lowest earnings declines following job loss, while workers in Italy, Spain, and Portugal experience losses three times as high. Labour market institutions have the potential to mitigate these differences…
LINK: <https://voxeu.org/article/unequal-cost-job-loss-across-countries>
Daniel Kuehn: War & Racial Liberalism in Europe: ‘Mises’s commitment to liberal economics, free trade, and freedom from coercion is emphatic, but explicitly racialized. Freedom from conquest is upheld but only for “peoples of the white race.” Free trade and “the open door for economic activity” are championed globally by Mises, even outside Europe, but non-white capacity for self-governance is a question on which Mises will “offer no opinion,” and which he sees as not directly relevant to a liberal, global economic order…
LINK: <https://www.liberalcurrents.com/war-and-racial-liberalism-in-europe/>
Tom Nichols: Calling Out Masculinist Identitarian Politics: ‘Biden and NATO have to be the more responsible parties here to protect world peace. And yes, that sucks…. Our goals should be to raise the costs of war to Russia while closing off Putin’s attempts to inflict the burden of escalation on us…. Putin is losing this war…. If refusing to be baited into war while Putin is destroying his own army seems like “weakness” or “being afraid” to you, I can’t help you…
LINK: <https://www.lawyersgunsmoneyblog.com/2022/03/tom-nichols-calls-out-masculinist-identitarian-politics>
Lorcan Roche Kelly: Five Things You Need to Know to Start Your Day: ‘Ukraine and Russia said they would make their fourth attempt today to establish humanitarian corridors for civilians to flee areas of heavy fighting. President Volodymyr Zelenskiy indicated he is willing to discuss the future of separatist areas while saying he’s not prepared for ultimatums…. The European Union will unveil a plan as soon as this week to jointly issue bonds to finance energy and defense spending. The region’s leaders gather on Thursday for a two-day summit…. Nickel more than doubled to $100,000 a ton before paring gains and eventually seeing trading suspended on the London Metal Exchange…. The Bloomberg report on European consideration of joint-bond sales is giving equities a reason to rally…
I think the Fed should have done in September what it did in November not out of perfect foresight about COVID/PUTIN, but becasue of TIPS. Now that PUTIN/COVID-China have hit, it should say that it will allow inflation to persist a while longer, but reiterate the determination to return it to 2%. [Or are we just in for more supply side shocks from here on and the target should be increased?]
TIPS expectations continue to exceed target. The 5 and 10 year rates (and why doesn't the Treasury create a 2, 3, 4, 7.5 TIPS?) may still be compatible with 2% +X% for Y years and target for years 10-Y to 10, but it's looking less likely.