Yves here. As long-standing readers know, we’ve never exhibited much interest in economic forecasts since even macroeconomists admit they are horrifically unreliable once you get beyond 6 months. Forecasts seemed particularly uninteresting in the post crisis era when a lot of people were trying to paint happy faces on what was eventually declared to be secular stagnation. The much more interesting stories were things like how if evah would the Fed back out of ZIRP, the continuing rise of inequality and how US health care costs were eating the economy. But now we have had many interventions related to Covid, as well as a lot of dropped balls. And we’re going to see in due course how this plays out when we get to a recovery.
This article is admittedly one forecast of how 2021 might play out. Most Wall Street economists assume Covid will be largely behind us by late 2021. If the new variants don’t get the better of the vaccines, and the vaccines confer more than 6-8 months of immunity, that could prove to be spot on.
The new hot button worry among the optimists is inflation. They may be correct but I don’t think they are articulating the reasons very well.
The reason we are seeing a K shaped recovery is the loss of a lot of low level jobs. Some of that is business closures (not not necessarily reflected in bankruptcies but mere shuttering of operations) and many of those aren’t coming back soon. Think of stores in central business districts, and swathes of the travel and hospitality industries. I’m not sure that capacity gets added back quickly and smoothly. This forecast does directly point to supply constraints as having the potential to curb an expansion but doesn’t unpack that
Another issue is oil. Higher gas prices serve as a dampener. If oil stays over $60 a barrel, those charges will hit consumer budgets and percolate though the economy. Lumber and copper prices have spiked, anticipating the costs of repairs of water damage all across Texas. Recall that the inflationary effects of the Texas power outages are coincident factors that don’t help the recovery story.
However, what I don’t see mentioned here is how the downdraft from dealing with past due residential and business rents will affect the economy. For instance, in NYC, 90% of restaurants can’t pay the rent they owe. How many of their landlords are prepared to give them a break? And what about tenants? Many experts expect a wave of evictions when the various moratoriums expire. Some may be able to cobble together a new arrangement. Some may have to live with relatives, which could force them to look for new jobs. Some will wind up homeless. And for the landlords that evict, how long before they find new renters?
By David Llewellyn-Smith, Chief Strategist at the MB Fund and MB Super, the founding publisher and editor of MacroBusiness and previously, the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. Originally published at MacroBusiness
BofA:
In a normal business cycle recovery, the economy gradually returns to full employment, causing a lagged return of inflation pressure. This gives monetary and fiscal authorities’ time to recalibrate policy before there is serious overheating. This cycle looks far from normal:
Super easy monetary and fiscal policy suggests the fastest business cycle recovery since the 1950s.
The recovery could be so hot, it starts to bump up against supply constraints before reaching full employment.
By late next year, policy-makers could face some very tough choices as they try to decide whether to pull back or not.
Two accelerators and no brakes? Never in history has the US had such a big, coordinated double dose of super-easy monetary and fiscal policy. Despite the drop in the unemployment rate from a peak of 14.3% to 6.3% the Fed shows no sign of withdrawing stimulus. Not to be outdone, the Biden Administration is proposing: a repeat of the 13% of GDP stimulus from last spring and an even bigger infrastructure plan to follow. Add to that another 14% of GDP in excess bank deposits from last year’s stimulus and the economy is primed for surging spending as it reopens. Michelle Meyer and team are forecasting 6.5% GDP growth this year and 5% next year compared to trend growth of less than 2%.
While inflation has been very sticky in recent years, we can’t rule out an early rise. A simple supply and demand framework illustrates the challenge (Exhibit of the day). The“aggregate demand curve” slopes down to the right—the lower prices are the more people will want to spend. Fiscal and monetary stimulus tend to shift the aggregate demand curve to the right. Meanwhile the“aggregate supply curve” slopes up—higher prices encourage firms to supply more goods and services. Moreover, it is common to assume that the supply curve gets increasingly steep as spare capacity shrinks and the economy approaches potential output and full employment.
The concern is that the US could hit the upward sloping part of the AS curve very quickly. If demand surges and businesses bring back capacity slowly there could be pockets of inflation. These short-run supply-side constraints are particularly relevant if a number of small businesses have closed for good. Many economists point to a temporary spike in year-over-year inflation in March and April as prices surge relative to depressed prices last spring. However, there could be a second surge due to a supply constrained reopening in late spring-early summer.
Looking further ahead, given the speed of the recovery, it could prove hard for policymakers to hit the brakes in a timely manner. The Fed is seeking an undefined overshoot of the inflation target and hence will wait until the last minute to hit the brakes. Meanwhile there is strong momentum towards additional fiscal stimulus, including a big infrastructure plan. With unified government, infrastructure spending should be relatively easy to pass since projects can be directed to reluctant Senators.
Our hope and expectation is that after years of low and sticky inflation, the increase will come slowly, buying time for a policy turn. But, we worry about a boom this year and next followed by a bust in 2023, as policy makers hit the brakes later, but harder. After all, once inflation starts to trend higher, it can only be stopped with at least some rise inthe unemployment rate. One of the rather depressing historical regularities is that the unemployment rate has never risen by more than 0.5% without a recession following. For now, however, let’s enjoy the ride.
My view is that US inflation will remain stronger than elsewhere but not overheated because China is hitting the brakes, commodities will tumble, dragging down CNY and EUR, driving up the USD.
There’s a lot of people worrying about inflation right now.
I don’t. The reasons most people worry about the inflation is the usual “they print money!” blurb, which ignores that inflation can be either demand or supply driven.
Demand w/o the “print money!” would have died. There is no evidence that when/if situation returns to normal the money will continue to keep up stoking the demand, as a lot of the printed money, for a lot of people, just replaced the money that would have been normally earned.
I could see inflation being stroked by a supply shock, if the supply was constrained by the pandemics – and there are some indications that could happen. But not if situaton returns to normal. IMO, the inflation would be likely if the pandemics continued, with the disruptions in production and supply chains, because then you’d have “normal(ish)” spending power vis a vis (potentially) substantially reduced supply.
Ignacio
But there could be occasional spikes on some products such as the example with copper that might help to break definitely the confidence in Markets as overlords of the economies.
I would expect also that at least some supply chains will not go back to previous normals and shifts in the operators could occur and be important. Whether companies like Amazon take a permanent grater share could be a dangerous development to follow closely and might leave a lot of permanent markets losses and a quality downgrade as I see it.
Only a single comment on the excellent commentary by Yves above regarding the unknowns on operational protection by vaccines. I wouldn’t say vaccines provide immunity for even 6-8 months. Immunity, if there is such and it results significant in numbers (never 100% of vaccinated, particularly amongst the elder cohorts) might last less than that, let’s say 2-3 months (of near sterilizing immunity) while protection (against the worse outcomes) might last much longer (12-24 months or more, and even against variants for which immunity is no longer provided, thanks to cellular responses). A possible effect of vaccines would be much higher individual and social tolerance to Covid.
Larry
Agreed on your second point Ignacio. This remains completely unpredictable, but many experts see COVID becoming another global endemic infection that we just deal with, akin to influenza. Yearly vaccinations that largely prevent hospitalization and death, but there are yearly swings of illness and a fraction of the population with bad outcomes every year.
The speed of vaccine development in each global corner of the world has been remarkable to watch. Different approaches all yielding great results. What’s sad is a lack of global coordination to get as many people vaccinated as quickly as possible.
PlutoniumKun
As to Covid, there seems to be a lot of good news coming out of the early adapters, such as Israel. Its maybe too early to say whether this is marketing or real science, but at least it seems that they work in the short term. Maybe we’ll get lucky and they will work longer, but it seems a guarantee of mega profits for years for those companies if we need annual shots.
I think you are right to highlight behavioural changes, which could be very unpredictable. On twitter this morning a virologist I follow posted a ‘good news’ photo of an elderly man greeting his grandchildren for the first time in a year, a day after getting his first shot. Nobody pointed out that he won’t have resistance for several days, so that is risky behaviour to say the least. If there is silence on this on the twitter account of a scientist, I can only wonder what other inappropriate behaviour we will see.
bold'un
Could inflation be hiding, especially in the things that are no longer available? If small businesses and small bank branches shut then I have to go to the next (larger) town more often, pay for parking, petrol and my time. Surely that is all inflation (my personal cost-of-living) as opposed to official CPI.
So many especially online businesses are moving away from unit pricing into all-you-can-eat subscriptions which conveniently obscure price points and introduce a covert minimum entry charge. Small thing, but I have been watching a TV series on Amazon Prime and I could pay-per-view the first two series in Jan21 but now in Feb I can only watch with a monthly sub…
Meanwhile our local government is thinking of introducing ‘permit parking’ in our street, which has been free up till now. This is to stop local employees parking in residential streets to avoid daily parking charges; but it is also a new expense for us.
Can we say there is an inflation in rent-seeking (=subscription-seeking) which is not captured by per-unit-based indices?
deplorado
Financializing the commons of course inflates the cost of living. So yes it is inflation. But of course, not per CPI.
PlutoniumKun
Yes, the inflation worries seem weird, I thought that even the mainstream had accepted that we are long past the days when this is a significant worry. I’m not sure there is too big a risk of a supply shock as there seems plenty of capacity in most sectors, although one wild card could be climate disruption and food costs, there are already strains in China it seems. This Spring is already unusual all across the globe for a number or reasons, which could be ominous for the year ahead. Another possible wild card could be Beijing easing up on capital restrictions in order to force the Yuan down, I could see a lot of Chinese investors seeing this as a good time to pick up cheap assets, this could artificially put a floor under some asset values.
The big risk to me would seem to be the huge number of small businesses and their inability to pay rent hitting big sections of the banking sector. I’ve heard rumours from various people I know working at the coalface in banks is that non payment of mortgages and repayments is a much bigger problem than publicly admitted. Having gotten into the habit of not paying money back, some businesses might find that a hard habit to break.
Halcyon
When I hear people discuss inflation, so often I feel like I want to scream. I’m not an economist, but there’s this idea which to me seems crazy which seems to say that there’s some sort of uniform inflationary swing where the dollar (say) is suddenly worth less across the board (perhaps, the naive ones think, because we’ve printed too many dollars.)
As if the dollar has one uniform value. When the reality is clearly that the dollar has a different ability to purchase different commodities and services – be they yen, doughnuts, or bitcoins – and these each have to be treated, to first order, more or less separately. Sure, in some cases some commodities are so interwoven into the economy that fluctuations in their value can cause a more generalised inflation. But for everything else it’s a balance of supply and demand.
So what have we seen in this crisis? By and large, fortunate white-collar workers have kept their jobs and their salaries intact, only they’re not eating out and having their fancy holidays, and maybe they are benefiting from some extra stimulus cheques or furlough money here in the UK. Ergo, the kind of things the wealthy buy with their money when they’re not able to purchase fancy meals and holidays have INFLATED in price. Hence the asset price inflation, the stock market boom and bubble, and the relatively strong housing market in the UK (aided by the bizarre but Tory-base-serving stamp duty holiday.)
Then we have the other side of the k-shaped recovery. Here, you’re seeing a deflationary pressure on basic commodities and necessities; the things that poor people buy – from the fact that people are being thrown into unemployment and so on – being partially offset by what stimulus has targeted them so far.
Of course, there are also supply shocks with some services no longer being available and details of how exports and imports are faring that I’m not party to and don’t really know about.
In such a context it just seems obvious to me (an idiot) that referring to inflation as some uniform thing and saying that we have or haven’t “seen it”, or mystical predictions that it might suddenly arise as a result of stimulus, just seems crazy without referring to what is supposed to be driving it. Inflation in the price of a commodity infers when too many dollars chase too few of the commodity. If your analysis isn’t explaining where the dollars are coming from, why they’re actively chasing this commodity, and whether anything has happened to its supply, it is no good imo.
Susan the other
I agree inflation crazy and incomprehensible. It’s because we don’t have a coherent plan to fix the economy, or nobody wants to talk about it, that we hear analysis about “getting back to normal and the threat of inflation.” Business as usual isn’t gonna work. Because it’s way too competitive and deranged. And competition alone can cause disruptions in supply. It’s hard to imagine that sovereign money could inflate any more at this point because the world is awash in it. So far nothing is falling apart. I keep thinking that this surplus of money was intentional because it will be so amazingly expensive long-term to create sustainability and we don’t want the price of natural/resources to be an obstacle. And it looks like we are putting our entire country on life support until we are somewhat stable. But this requires more than money growing on trees, it requires good conservation. And planning. Just look at how insane crypto is: it is a form of infinite fiat. And everybody wants to buy it to have a “store of value” for their usual fiat. At least it’s a good distraction from all our former hallucinations about “inflation.” And hopefully it allows us all to get on with the necessary tasks. Inflation is an illusion – but a persistent one – to paraphrase Albert.
I have lived in your future
Inflation definition is confusing on purpose, it allows the government to steal from the unsuspecting citizens in a way no one in a million can recognize.
Historically inflation was defined as government expansion of the supply of money, and to call price increases inflation is to confuse the symptoms with the cause, and worse, to eliminate the term to describe the cause.
Price increases are price increases. They occur for many reasons, some monetary most not.
Further, the implication is that an X% increase in the money supply = an X% increase in all prices. This is also incorrect.
Massive price distortions occur at the injection points for the new money & credit, called Cantillon effects. Those first in line for the new money & credit in effect get today’s goods and services based upon yesterday’s money supply. It takes time for those injections to ripple through the economy and cause widespread price increases. It’s a massive transfer of real goods and services from the masses to those at the front of the line…
Mikel
Fewer, but more wealthier, people will have support profit margins, big bonuses, etc?
Too simple?
eg
The inflation hysterians are always looking for the bogeyman under their beds. No amount of empirical evidence to the contrary can penetrate their adamantine skulls.
The U6 shows there is a ton of un-and-underemployment and therefore slack in the system.
Mikerw0
Its getting very tiring to keep Wall Street overly happy at the expense of the general population. From an economic perspective the pandemic is better viewed as a long duration natural disaster, than a recession. Similarly, the power disruption in TX. I have a hard time remembering politicians saying withhold money from my state after a disaster because it might result in inflation, or free markets can repair things better (other than Puerto Rico).
In studies done by FEMA, in response to natural catastrophes, they have found that more than 40% of businesses never reopen and that for those that reopen only 29% are still in business two years later.. The probability of a severe hangover far exceeds the risks of some inflation.
One last thing, the life insurance industry is now in real jeopardy due to protracted low interest rates. Their products were not priced for this. So, as happened in Japan in the early 90s, then Europe in the late 90s, watch this space for problems.
cocomaan
I think the comparison to a natural disaster is a good one. Mandatory shutdowns of otherwise healthy businesses don’t happen in recessions. You get to keep running! Whether a business got hammered or not was a matter of bad luck, that this disaster was a socially-driven contagion. Next time it could be an internet outage, or a flood, etc.
I also think a war comparison might be helpful too, since industries shifted to meet the new demands of the wartime economy. I have friends that switched industries or spent a good amount of their working hours working on covid relief. Though the wartime change was not nearly as dramatic as WW2.
tegnost
Puerto Rico…So far from god, so close to the united states?
Andy
For how many more years are we going to have to listen to clueless economist’s fears of non-existent inflation? It’s been nearly 30 years since the US annual inflation rate topped 4 percent. As of January the rate was 1.4 percent year on year.
“While inflation has been very sticky in recent years, we can’t rule out an early rise.” Yes, we can.
tegnost
This article pretty much explains the slow walking the stimulus. The “smart” people (larry summers anyone) are looking ahead to the massive piles of money they expect to make and they need a hungry desperate workforce to exploit in order for that to happen. Funny the article talks about supply constraints as if that is separate from labor supply. Inflation in the modern world is one and only one thing…increased labor cost. Labor costing more is the supply constraint they’re the most afraid of.
chuck roast
A couple of jewels in here:
Yves…”Another issue is oil. Higher gas prices serve as a dampener. If oil stays over $60 a barrel, those charges will hit consumer budgets and percolate though the economy.”
Llewellyn-Smith…”Our hope and expectation is that after years of low and sticky inflation…”
At least Yves gets the percolate part, and we didn’t get the usual, “price increases ex-food and energy”, because, you know, people really don’t need to eat. And why would governments want to actually track food prices? Frozen pizza prices are the same as they always were right? Every body can eat. Nothing to see here. Our hedonic pricing model is perfect. We know this because it’s a “model” and everybody believes a model. Now, just just eat your bigger frozen pizza and be happy you have anything at all.
GeorgeNYC
What’s that old adage…you can’t tell who’s swimming naked until the tide goes out. The “freeze” on evictions would certainly seem to have covered up a lot of problems. I know from the landlord’s perspective this is a “cash” loss but how does it affect the value of the property? Are banks treating it as some kind of “one off” situation if they have loaned money based on the value of the property? In a normal downturn, if people stopped paying rent, they would be evicted and then the unit would need to then be re-rented. Here, they cannot be removed so the debt just builds up. So what happens when the moratorium is removed? There is certainly going to be less demand for office space. I just cannot see where that goes back to “normal”. Even companies that say that they want people to come back in because of special magic are still not going to want to carry all of that extra space.
So at what point do the “losses” get registered? And how will they be registered? Is everyone in arrears just thrown out? Is there going to be demand enough to absorb that space? I doubt it. So how long can the owners keep pretending that the space is worth “x” and not “x-20%”. I guess you can pretend that as long as someone can “restart” paying that they will not be evicted. But can you forgive that lost cash? Are the lenders going to be OK with that or are they going to see this as an opportunity to foreclose at a bargain?
people are getting four months free rent up front on a two year lease. That is a 15% discount. Plus the rent is free now. What happens once they are past the four months if they really cannot afford it. I guess you can keep telling the bank you are renting the apartment for $2,000 a month event though the net is $1700 as some kind of “one off” incentive. But is everyone going to be able to keep paying that $2,000? Or are they going to default too? I mean in theory once they move in you cannot evict them even if they just refuse to pay.
Once the eviction moratorium ends then the tide goes out.
McWatt
From my retail perspective:
My suppliers just handed me a 6 to 8 percent increase on the thousands of items in their catalog.
They are slashing services, call centers, warehousing etc. and moving everything to online only. They no longer want to talk to their customers. From my side of things there is going to be inflation as companies try to “grow” sales by slashing costs and raising prices.
I have lived in your future
I don’t think inflation is really understood.
I find the Fed obsession with 2% inflation to be bad policy.
Over a generation that is doubling of the price level in aggregate. I doubt wages have doubled within a generation.
I wonder to what extent the inequalities and economic strife we are witnessing is due to Fed policy that erodes people purchasing power constantly. Fed should aim for zero inflation and any such deliberate inflation policy should be automatically tied to wages or be unconstitutional together with keeping interest rates below the inflation rate.
It stunning that Fed doesn’t get called on this by our media.
There is zero evidence that inflation benefits society. The poor will suffer the most from it.
Economists have a terrible record predicting inflation.
I still have to hear an explanation why some developing countries can generate huge amounts of inflation pursuing the same policies that Fed and ECB yet our central bankers don’t seem to be able to generate same here?
Then I think we seem to be underestimating how supply chains might be shifting, just in time will be just in case and the cheapest supplier in China won’t cut it when national security concerns take center stage.
I think inflation is a danger and if it happens will make everyone miserable.
eg
Inflation helps debtors and hurts lenders — which group do you imagine is larger? The former, of course, which is why the “misery” of inflation is not equally distributed.
Oh, and if you think inflation is bad, wait until you get a dose of deflation.
Mansoor H. Khan
Here is my prediction (it is actually very positive eventually).
1. Stock market is way, way, way too high for the underlying profitability of companies and underlying demand (capacity to spend/budget/money in the pocket) from consumers.
2. FAATMAN companies’ valuations are way to high. FAATMAN = Facebook, Amazon, Alphabet (google), Tesla, Microsoft, Apple and Netflix. But this can be fixed. Keep reading!
3. I am expecting a Titanic level Market slide within 0-3 years. Down 70%. Great Depression level. But much faster due to electronic age we live in.
4. I will go in with both feet with ALL my cash into the stock market at that time. My jump-in level is 65% down from peak.
5. Interest rates tell you 90% of the story. This low of rates means DEMAND is very, very weak compared to capacity (I refinanced my 15 year fixed rate mortgage at 2.2% APR). Which means that average Joe does not have sufficient income to borrow and buy. Yes capacity to produce in our beautiful god given economy is huge and ever expanding. That part is correct!
6. Capacity of the economy is stupendously high due to extreme automation. Again, this is the good part. Of course. Thanks to the IT guys like me and you.
7. Federal Reserve cannot do shit at this point. Federal Reserve would be pushing on a string and they know it.
8. The only way to balance capacity and demand in our economy is through UBI (Universal Basic Income). Otherwise known as John Maynard Keynes’ helicopter cash or Clifford H. Douglas’ social credit.
9. If we don’t do UBI we will at least need to do continuous stimuluses by the federal government. Every six months.
10. UBI is better, simpler, more comprehensive, fairer way to stimulate the economy continuously. I would called it: AUTOMATION DIVDEND. That is what it really is.
11. How long will it take for Americans to realize how economy really works (i.e., Keynesian economics). Don’t know. But there is hope. Bernie Sanders and the Democrats in general are not too far from seeing past the scarcity paradigm which conservatives (Republicans) live in. It took me probably 1000 hours of intensely scouring the web to figure out what is going on. Reading books and reading all kinds of blogs and comments in blogs to figure out the truth. By the way in my heart I am a conservative (Republican). But I cannot vote for them because they (Republicans) are clueless about how the economy really works.
12. It took elderly dying in the streets in the 30’s for FDR to realize we need a social security program.
13. A future UBI program should be simple in implementation. All who have SSN should get UBI (no exceptions). Babies and Billionaires included. I would start with $500 per month per SSN. This can be implemented very easily through a partnership between the Social security administration + the Bankers. Very similar to how my mom’s social security benefits are deposited in her Wells Fargo bank account every month seamlessly.
14. Why pay billionaires UBI. Because it is only fair. Money printed is not the same as money spent. If the billionaire does not spend it. The extra money does not “cost” any resources from within our economy. Cool. Isn’t it.
15. If inflation ensues I would implement a consumption tax (a national sales tax) to tone down consumption and balance capacity and demand. By the way I would completely eliminate all federal income taxes including social security taxes If inflation ensues again raise the national sales tax to balance capacity and demand. State and local taxes have to stay since state and local govs can’t print money.
16. If something like the above is not done. Capitalism will be destroyed completely. How ironic, by conservatives themselves because they don’t understand (Keynesian) economics.
17. Capitalism was rescued after the great depression by world war II spending, GI bill spending, Marshall Plan spending, the space program spending, the welfare and food stamp programs spending, the korean war spending, the vietnam war spending, the Reagan’s star wars defense programs spending and defense budget in general. If these “spendings” were not there than capitalism would have collapse by now.
18. Capitalism is too much focused savings and dies of deflation eventually when consumers cannot borrow anymore!
19. This (Keynesian) economics only works because of automation and availability of relatively cheap abundant energy supplies which power our machines and our computers.
20. If we ever cannot get cheap energy supplies… Well back to few hundred million people on earth total and scarcity!
I am praying for a UBI outcome.
I have lived in your future
“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”T.Sowell.
Keynsian economics is a failure overall.
Look up the economic situation in the sixties where such policies were applied. Initially there was no inflation and Fed was always worried similar to today about low inflation, then when inflation came it took Volker to bring it under control after many years.
Keynsian policies were tried during the Great Depression as well and there is considerable evidence that they did more harm and prolonged the economic pain.
We achieved our prosperity through hard work, creativity , saving and investing, not by government dole. Why people think the government is the solution when all their policies have been a failure is a mystery.
Can someone explain how the mechanism of printing unearned money and sending it to people will create wealth and prosperity and what is the historical evidence for it?
tegnost
Paul Volker? The guy who went around with a card stating the weekly wages in construction so he could make sure they went down down? That Paul Volker?
FTA…”Another telling Greider tidbit was that during the time when Volcker was driving interest rates to the moon, Volcker would keep a notecard in a jacket pocket that tracked weekly construction wages. Volcker saw getting them to decline as a key metric that his policies were succeeding. He intoned: “I want unions to get the message.””
It appears you haven’t noticed the trillions given carte blanche to wall st in order to prop up your asset values. Neither wealth, nor prosperity.
urblintz
“We achieved our prosperity through investing and stealing from the poor through a rigged tax code.”
There, I fixed it for you!
urblintz
I can not stop laughing.
The top 1% pays a significantly smaller percentage of their income in taxes (when they pay taxes at all) than those just above the poverty line.
There’s a lot of people worrying about inflation right now.
I don’t. The reasons most people worry about the inflation is the usual “they print money!” blurb, which ignores that inflation can be either demand or supply driven.
Demand w/o the “print money!” would have died. There is no evidence that when/if situation returns to normal the money will continue to keep up stoking the demand, as a lot of the printed money, for a lot of people, just replaced the money that would have been normally earned.
I could see inflation being stroked by a supply shock, if the supply was constrained by the pandemics – and there are some indications that could happen. But not if situaton returns to normal. IMO, the inflation would be likely if the pandemics continued, with the disruptions in production and supply chains, because then you’d have “normal(ish)” spending power vis a vis (potentially) substantially reduced supply.
But there could be occasional spikes on some products such as the example with copper that might help to break definitely the confidence in Markets as overlords of the economies.
I would expect also that at least some supply chains will not go back to previous normals and shifts in the operators could occur and be important. Whether companies like Amazon take a permanent grater share could be a dangerous development to follow closely and might leave a lot of permanent markets losses and a quality downgrade as I see it.
Only a single comment on the excellent commentary by Yves above regarding the unknowns on operational protection by vaccines. I wouldn’t say vaccines provide immunity for even 6-8 months. Immunity, if there is such and it results significant in numbers (never 100% of vaccinated, particularly amongst the elder cohorts) might last less than that, let’s say 2-3 months (of near sterilizing immunity) while protection (against the worse outcomes) might last much longer (12-24 months or more, and even against variants for which immunity is no longer provided, thanks to cellular responses). A possible effect of vaccines would be much higher individual and social tolerance to Covid.
Agreed on your second point Ignacio. This remains completely unpredictable, but many experts see COVID becoming another global endemic infection that we just deal with, akin to influenza. Yearly vaccinations that largely prevent hospitalization and death, but there are yearly swings of illness and a fraction of the population with bad outcomes every year.
The speed of vaccine development in each global corner of the world has been remarkable to watch. Different approaches all yielding great results. What’s sad is a lack of global coordination to get as many people vaccinated as quickly as possible.
As to Covid, there seems to be a lot of good news coming out of the early adapters, such as Israel. Its maybe too early to say whether this is marketing or real science, but at least it seems that they work in the short term. Maybe we’ll get lucky and they will work longer, but it seems a guarantee of mega profits for years for those companies if we need annual shots.
I think you are right to highlight behavioural changes, which could be very unpredictable. On twitter this morning a virologist I follow posted a ‘good news’ photo of an elderly man greeting his grandchildren for the first time in a year, a day after getting his first shot. Nobody pointed out that he won’t have resistance for several days, so that is risky behaviour to say the least. If there is silence on this on the twitter account of a scientist, I can only wonder what other inappropriate behaviour we will see.
Could inflation be hiding, especially in the things that are no longer available? If small businesses and small bank branches shut then I have to go to the next (larger) town more often, pay for parking, petrol and my time. Surely that is all inflation (my personal cost-of-living) as opposed to official CPI.
So many especially online businesses are moving away from unit pricing into all-you-can-eat subscriptions which conveniently obscure price points and introduce a covert minimum entry charge. Small thing, but I have been watching a TV series on Amazon Prime and I could pay-per-view the first two series in Jan21 but now in Feb I can only watch with a monthly sub…
Meanwhile our local government is thinking of introducing ‘permit parking’ in our street, which has been free up till now. This is to stop local employees parking in residential streets to avoid daily parking charges; but it is also a new expense for us.
Can we say there is an inflation in rent-seeking (=subscription-seeking) which is not captured by per-unit-based indices?
Financializing the commons of course inflates the cost of living. So yes it is inflation. But of course, not per CPI.
Yes, the inflation worries seem weird, I thought that even the mainstream had accepted that we are long past the days when this is a significant worry. I’m not sure there is too big a risk of a supply shock as there seems plenty of capacity in most sectors, although one wild card could be climate disruption and food costs, there are already strains in China it seems. This Spring is already unusual all across the globe for a number or reasons, which could be ominous for the year ahead. Another possible wild card could be Beijing easing up on capital restrictions in order to force the Yuan down, I could see a lot of Chinese investors seeing this as a good time to pick up cheap assets, this could artificially put a floor under some asset values.
The big risk to me would seem to be the huge number of small businesses and their inability to pay rent hitting big sections of the banking sector. I’ve heard rumours from various people I know working at the coalface in banks is that non payment of mortgages and repayments is a much bigger problem than publicly admitted. Having gotten into the habit of not paying money back, some businesses might find that a hard habit to break.
When I hear people discuss inflation, so often I feel like I want to scream. I’m not an economist, but there’s this idea which to me seems crazy which seems to say that there’s some sort of uniform inflationary swing where the dollar (say) is suddenly worth less across the board (perhaps, the naive ones think, because we’ve printed too many dollars.)
As if the dollar has one uniform value. When the reality is clearly that the dollar has a different ability to purchase different commodities and services – be they yen, doughnuts, or bitcoins – and these each have to be treated, to first order, more or less separately. Sure, in some cases some commodities are so interwoven into the economy that fluctuations in their value can cause a more generalised inflation. But for everything else it’s a balance of supply and demand.
So what have we seen in this crisis? By and large, fortunate white-collar workers have kept their jobs and their salaries intact, only they’re not eating out and having their fancy holidays, and maybe they are benefiting from some extra stimulus cheques or furlough money here in the UK. Ergo, the kind of things the wealthy buy with their money when they’re not able to purchase fancy meals and holidays have INFLATED in price. Hence the asset price inflation, the stock market boom and bubble, and the relatively strong housing market in the UK (aided by the bizarre but Tory-base-serving stamp duty holiday.)
Then we have the other side of the k-shaped recovery. Here, you’re seeing a deflationary pressure on basic commodities and necessities; the things that poor people buy – from the fact that people are being thrown into unemployment and so on – being partially offset by what stimulus has targeted them so far.
Of course, there are also supply shocks with some services no longer being available and details of how exports and imports are faring that I’m not party to and don’t really know about.
In such a context it just seems obvious to me (an idiot) that referring to inflation as some uniform thing and saying that we have or haven’t “seen it”, or mystical predictions that it might suddenly arise as a result of stimulus, just seems crazy without referring to what is supposed to be driving it. Inflation in the price of a commodity infers when too many dollars chase too few of the commodity. If your analysis isn’t explaining where the dollars are coming from, why they’re actively chasing this commodity, and whether anything has happened to its supply, it is no good imo.
I agree inflation crazy and incomprehensible. It’s because we don’t have a coherent plan to fix the economy, or nobody wants to talk about it, that we hear analysis about “getting back to normal and the threat of inflation.” Business as usual isn’t gonna work. Because it’s way too competitive and deranged. And competition alone can cause disruptions in supply. It’s hard to imagine that sovereign money could inflate any more at this point because the world is awash in it. So far nothing is falling apart. I keep thinking that this surplus of money was intentional because it will be so amazingly expensive long-term to create sustainability and we don’t want the price of natural/resources to be an obstacle. And it looks like we are putting our entire country on life support until we are somewhat stable. But this requires more than money growing on trees, it requires good conservation. And planning. Just look at how insane crypto is: it is a form of infinite fiat. And everybody wants to buy it to have a “store of value” for their usual fiat. At least it’s a good distraction from all our former hallucinations about “inflation.” And hopefully it allows us all to get on with the necessary tasks. Inflation is an illusion – but a persistent one – to paraphrase Albert.
Inflation definition is confusing on purpose, it allows the government to steal from the unsuspecting citizens in a way no one in a million can recognize.
Historically inflation was defined as government expansion of the supply of money, and to call price increases inflation is to confuse the symptoms with the cause, and worse, to eliminate the term to describe the cause.
Price increases are price increases. They occur for many reasons, some monetary most not.
Further, the implication is that an X% increase in the money supply = an X% increase in all prices. This is also incorrect.
Massive price distortions occur at the injection points for the new money & credit, called Cantillon effects. Those first in line for the new money & credit in effect get today’s goods and services based upon yesterday’s money supply. It takes time for those injections to ripple through the economy and cause widespread price increases. It’s a massive transfer of real goods and services from the masses to those at the front of the line…
Fewer, but more wealthier, people will have support profit margins, big bonuses, etc?
Too simple?
The inflation hysterians are always looking for the bogeyman under their beds. No amount of empirical evidence to the contrary can penetrate their adamantine skulls.
The U6 shows there is a ton of un-and-underemployment and therefore slack in the system.
Its getting very tiring to keep Wall Street overly happy at the expense of the general population. From an economic perspective the pandemic is better viewed as a long duration natural disaster, than a recession. Similarly, the power disruption in TX. I have a hard time remembering politicians saying withhold money from my state after a disaster because it might result in inflation, or free markets can repair things better (other than Puerto Rico).
In studies done by FEMA, in response to natural catastrophes, they have found that more than 40% of businesses never reopen and that for those that reopen only 29% are still in business two years later.. The probability of a severe hangover far exceeds the risks of some inflation.
One last thing, the life insurance industry is now in real jeopardy due to protracted low interest rates. Their products were not priced for this. So, as happened in Japan in the early 90s, then Europe in the late 90s, watch this space for problems.
I think the comparison to a natural disaster is a good one. Mandatory shutdowns of otherwise healthy businesses don’t happen in recessions. You get to keep running! Whether a business got hammered or not was a matter of bad luck, that this disaster was a socially-driven contagion. Next time it could be an internet outage, or a flood, etc.
I also think a war comparison might be helpful too, since industries shifted to meet the new demands of the wartime economy. I have friends that switched industries or spent a good amount of their working hours working on covid relief. Though the wartime change was not nearly as dramatic as WW2.
Puerto Rico…So far from god, so close to the united states?
For how many more years are we going to have to listen to clueless economist’s fears of non-existent inflation? It’s been nearly 30 years since the US annual inflation rate topped 4 percent. As of January the rate was 1.4 percent year on year.
“While inflation has been very sticky in recent years, we can’t rule out an early rise.” Yes, we can.
This article pretty much explains the slow walking the stimulus. The “smart” people (larry summers anyone) are looking ahead to the massive piles of money they expect to make and they need a hungry desperate workforce to exploit in order for that to happen. Funny the article talks about supply constraints as if that is separate from labor supply. Inflation in the modern world is one and only one thing…increased labor cost. Labor costing more is the supply constraint they’re the most afraid of.
A couple of jewels in here:
Yves…”Another issue is oil. Higher gas prices serve as a dampener. If oil stays over $60 a barrel, those charges will hit consumer budgets and percolate though the economy.”
Llewellyn-Smith…”Our hope and expectation is that after years of low and sticky inflation…”
At least Yves gets the percolate part, and we didn’t get the usual, “price increases ex-food and energy”, because, you know, people really don’t need to eat. And why would governments want to actually track food prices? Frozen pizza prices are the same as they always were right? Every body can eat. Nothing to see here. Our hedonic pricing model is perfect. We know this because it’s a “model” and everybody believes a model. Now, just just eat your bigger frozen pizza and be happy you have anything at all.
What’s that old adage…you can’t tell who’s swimming naked until the tide goes out. The “freeze” on evictions would certainly seem to have covered up a lot of problems. I know from the landlord’s perspective this is a “cash” loss but how does it affect the value of the property? Are banks treating it as some kind of “one off” situation if they have loaned money based on the value of the property? In a normal downturn, if people stopped paying rent, they would be evicted and then the unit would need to then be re-rented. Here, they cannot be removed so the debt just builds up. So what happens when the moratorium is removed? There is certainly going to be less demand for office space. I just cannot see where that goes back to “normal”. Even companies that say that they want people to come back in because of special magic are still not going to want to carry all of that extra space.
So at what point do the “losses” get registered? And how will they be registered? Is everyone in arrears just thrown out? Is there going to be demand enough to absorb that space? I doubt it. So how long can the owners keep pretending that the space is worth “x” and not “x-20%”. I guess you can pretend that as long as someone can “restart” paying that they will not be evicted. But can you forgive that lost cash? Are the lenders going to be OK with that or are they going to see this as an opportunity to foreclose at a bargain?
people are getting four months free rent up front on a two year lease. That is a 15% discount. Plus the rent is free now. What happens once they are past the four months if they really cannot afford it. I guess you can keep telling the bank you are renting the apartment for $2,000 a month event though the net is $1700 as some kind of “one off” incentive. But is everyone going to be able to keep paying that $2,000? Or are they going to default too? I mean in theory once they move in you cannot evict them even if they just refuse to pay.
Once the eviction moratorium ends then the tide goes out.
From my retail perspective:
My suppliers just handed me a 6 to 8 percent increase on the thousands of items in their catalog.
They are slashing services, call centers, warehousing etc. and moving everything to online only. They no longer want to talk to their customers. From my side of things there is going to be inflation as companies try to “grow” sales by slashing costs and raising prices.
I don’t think inflation is really understood.
I find the Fed obsession with 2% inflation to be bad policy.
Over a generation that is doubling of the price level in aggregate. I doubt wages have doubled within a generation.
I wonder to what extent the inequalities and economic strife we are witnessing is due to Fed policy that erodes people purchasing power constantly. Fed should aim for zero inflation and any such deliberate inflation policy should be automatically tied to wages or be unconstitutional together with keeping interest rates below the inflation rate.
It stunning that Fed doesn’t get called on this by our media.
There is zero evidence that inflation benefits society. The poor will suffer the most from it.
Economists have a terrible record predicting inflation.
I still have to hear an explanation why some developing countries can generate huge amounts of inflation pursuing the same policies that Fed and ECB yet our central bankers don’t seem to be able to generate same here?
Then I think we seem to be underestimating how supply chains might be shifting, just in time will be just in case and the cheapest supplier in China won’t cut it when national security concerns take center stage.
I think inflation is a danger and if it happens will make everyone miserable.
Inflation helps debtors and hurts lenders — which group do you imagine is larger? The former, of course, which is why the “misery” of inflation is not equally distributed.
Oh, and if you think inflation is bad, wait until you get a dose of deflation.
Here is my prediction (it is actually very positive eventually).
1. Stock market is way, way, way too high for the underlying profitability of companies and underlying demand (capacity to spend/budget/money in the pocket) from consumers.
2. FAATMAN companies’ valuations are way to high. FAATMAN = Facebook, Amazon, Alphabet (google), Tesla, Microsoft, Apple and Netflix. But this can be fixed. Keep reading!
3. I am expecting a Titanic level Market slide within 0-3 years. Down 70%. Great Depression level. But much faster due to electronic age we live in.
4. I will go in with both feet with ALL my cash into the stock market at that time. My jump-in level is 65% down from peak.
5. Interest rates tell you 90% of the story. This low of rates means DEMAND is very, very weak compared to capacity (I refinanced my 15 year fixed rate mortgage at 2.2% APR). Which means that average Joe does not have sufficient income to borrow and buy. Yes capacity to produce in our beautiful god given economy is huge and ever expanding. That part is correct!
6. Capacity of the economy is stupendously high due to extreme automation. Again, this is the good part. Of course. Thanks to the IT guys like me and you.
7. Federal Reserve cannot do shit at this point. Federal Reserve would be pushing on a string and they know it.
8. The only way to balance capacity and demand in our economy is through UBI (Universal Basic Income). Otherwise known as John Maynard Keynes’ helicopter cash or Clifford H. Douglas’ social credit.
9. If we don’t do UBI we will at least need to do continuous stimuluses by the federal government. Every six months.
10. UBI is better, simpler, more comprehensive, fairer way to stimulate the economy continuously. I would called it: AUTOMATION DIVDEND. That is what it really is.
11. How long will it take for Americans to realize how economy really works (i.e., Keynesian economics). Don’t know. But there is hope. Bernie Sanders and the Democrats in general are not too far from seeing past the scarcity paradigm which conservatives (Republicans) live in. It took me probably 1000 hours of intensely scouring the web to figure out what is going on. Reading books and reading all kinds of blogs and comments in blogs to figure out the truth. By the way in my heart I am a conservative (Republican). But I cannot vote for them because they (Republicans) are clueless about how the economy really works.
12. It took elderly dying in the streets in the 30’s for FDR to realize we need a social security program.
13. A future UBI program should be simple in implementation. All who have SSN should get UBI (no exceptions). Babies and Billionaires included. I would start with $500 per month per SSN. This can be implemented very easily through a partnership between the Social security administration + the Bankers. Very similar to how my mom’s social security benefits are deposited in her Wells Fargo bank account every month seamlessly.
14. Why pay billionaires UBI. Because it is only fair. Money printed is not the same as money spent. If the billionaire does not spend it. The extra money does not “cost” any resources from within our economy. Cool. Isn’t it.
15. If inflation ensues I would implement a consumption tax (a national sales tax) to tone down consumption and balance capacity and demand. By the way I would completely eliminate all federal income taxes including social security taxes If inflation ensues again raise the national sales tax to balance capacity and demand. State and local taxes have to stay since state and local govs can’t print money.
16. If something like the above is not done. Capitalism will be destroyed completely. How ironic, by conservatives themselves because they don’t understand (Keynesian) economics.
17. Capitalism was rescued after the great depression by world war II spending, GI bill spending, Marshall Plan spending, the space program spending, the welfare and food stamp programs spending, the korean war spending, the vietnam war spending, the Reagan’s star wars defense programs spending and defense budget in general. If these “spendings” were not there than capitalism would have collapse by now.
18. Capitalism is too much focused savings and dies of deflation eventually when consumers cannot borrow anymore!
19. This (Keynesian) economics only works because of automation and availability of relatively cheap abundant energy supplies which power our machines and our computers.
20. If we ever cannot get cheap energy supplies… Well back to few hundred million people on earth total and scarcity!
I am praying for a UBI outcome.
“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”T.Sowell.
Keynsian economics is a failure overall.
Look up the economic situation in the sixties where such policies were applied. Initially there was no inflation and Fed was always worried similar to today about low inflation, then when inflation came it took Volker to bring it under control after many years.
Keynsian policies were tried during the Great Depression as well and there is considerable evidence that they did more harm and prolonged the economic pain.
We achieved our prosperity through hard work, creativity , saving and investing, not by government dole. Why people think the government is the solution when all their policies have been a failure is a mystery.
Can someone explain how the mechanism of printing unearned money and sending it to people will create wealth and prosperity and what is the historical evidence for it?
Paul Volker? The guy who went around with a card stating the weekly wages in construction so he could make sure they went down down? That Paul Volker?
https://www.nakedcapitalism.com/2019/12/misunderstanding-volcker.html
FTA…”Another telling Greider tidbit was that during the time when Volcker was driving interest rates to the moon, Volcker would keep a notecard in a jacket pocket that tracked weekly construction wages. Volcker saw getting them to decline as a key metric that his policies were succeeding. He intoned: “I want unions to get the message.””
It appears you haven’t noticed the trillions given carte blanche to wall st in order to prop up your asset values. Neither wealth, nor prosperity.
“We achieved our prosperity through investing and stealing from the poor through a rigged tax code.”
There, I fixed it for you!
I can not stop laughing.
The top 1% pays a significantly smaller percentage of their income in taxes (when they pay taxes at all) than those just above the poverty line.
The top 1% should pay 99% of the collected taxes.
You are entitled to your fantasy… and that’s all.