Too Many Smart People Are Being Too Dismissive of Inflation

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Anonymous Bosch
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Too Many Smart People Are Being Too Dismissive of Inflation

Post by Anonymous Bosch »

Here's an interesting op-ed from Democratic investment asset manager Steven Rattner, who served as a lead adviser for the Obama Administration:

Too Many Smart People Are Being Too Dismissive of Inflation
nytimes.com wrote:We are all, to one degree or another, shaped by early experiences.

My father grew up during the Depression and never lost his fear of debt. I spent an early part of my career as a reporter at The New York Times, chronicling the rampant inflation that scarred the economy in the 1970s and the Federal Reserve’s struggle to contain it.

So far, the wary eye that I have kept on prices for four decades has been unnecessary. But now, with Congress poised to approve an additional $1.9 trillion in spending through the American Rescue Plan Act, I’m worrying again.

Yes, the monthly price index that tracks consumer prices continues to look benign. But even when casting aside the stimulus that the Biden administration wants to add to the economy, some important early warning signals have begun flashing.

The prices of many commodities are surging — copper and lumber because of a jump in home building. Global steel demand has pushed up iron ore prices. Even tin, heavily used in electronics, has soared as suppliers rush to meet consumer demand for new gadgets.

Inflation expectations are also on the rise among traders. Interest rates on long-term Treasury bonds — a reliable inflation indicator — remain historically low, but have been marching upward. That, in turn, has shaken financial markets, which rightfully view climbing interest rates as the enemy of their investments.

It is against this backdrop that Congress is on the verge of injecting an additional $1.9 trillion into an economy that has already received more than $4 trillion in boosts from Washington. According to several estimates, the measure’s spending far exceeds the extent of the shortfall in economic output caused by the pandemic.

And let’s not forget the effects of easy money from our central bank. The Federal Reserve, which has driven short-term interest rates to near zero, has also injected more money into the economy in the past year than it did fighting the Great Recession in 2008.

It’s true that, with the benefit of hindsight, we did too little to address that recession. But we are in serious danger of overreacting to this one.

Now that the Covid-19 vaccination campaign has picked up, consumers are set to unleash trillions of dollars in excess savings this spring and throughout the rest of the year. Estimates suggest that in the aggregate, U.S. families saved $1.6 trillion more this year than they normally would have. This large amount of “dry powder” was goosed by a combination of less spending in general and households that held on to the money from direct government checks.

As the pandemic, with some luck, eases, people will doubtless open their wallets and restart vacations and shopping sprees. Jobs in the service sector are already starting to come back.

Some commentators, and White House advisers, dismiss inflation fears on the grounds that the economy has fundamentally changed since the 1970s. Indeed, right before Covid-19, our unemployment rate was down to levels that in the past caused inflation to pick up.

That has led to many pronouncements that when it comes to inflation, this time will be different. “It’s better to overreact than underreact to crises” has become a conventional mantra, along with a promise that if inflation picks up too much, the Fed has the tools to deal with it.

OK — but let’s not be so blasé about how hard it would be to put that tiger back in its cage. Forty years ago, curbing the painful hike in prices took the Fed raising interest rates to 20 percent, forcing the economy into a brutal recession.

While such a catastrophe is far from guaranteed, more prudence is merited. Start with cutting back the $1.9 trillion package. When responding to critics, President Biden has asked repeatedly, “What would they have me cut?

Fair enough, Mr. President, here’s some of what should be rejiggered:

The $422 billion in stimulus checks that will put money in the pockets of millions of Americans financially unaffected by the crisis should be replaced by much more targeted (and less expensive) efforts around those who have been directly hit with economic losses.

Policymakers should explore, for instance, income replacement programs that would help Americans who still have jobs but have had their earnings cut significantly by the pandemic — relying on changes in adjusted gross income from 2019 to 2020, as derived from tax returns.

The $510 billion in aid to states and localities (including for education) should also be dramatically reduced; the Committee for a Responsible Federal Budget recently explained how Moody’s Analytics estimates only “an additional $86 billion of aid is needed to cover revenue losses.”

That assistance should also be more concentrated on where the need exists. According to Bloomberg, California’s revenues for this fiscal year are roughly 10 percent greater than expected (partly a result of soaring technology company valuations), while general-fund revenue in New York is estimated to be 11.7 percent lower than prepandemic forecasts.

And we should take a fine-toothed comb to lesser-known wasteful provisions, like giveaways to the airlines and an indirect bailout (added by the House) of multiemployer pension funds. Some of the money that we save by trimming the American Rescue Plan Act can be reallocated to one of our most pressing needs: infrastructure. Those funds get spent more slowly (and because of that put less immediate pressure on prices) and have the critical effect of helping to improve our unimpressive productivity growth rate.

Wasting precious dollars that could be better spent can’t possibly be worth the risk of igniting high inflation again.
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malchior
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by malchior »

Is it too dismissive if many just are waiting for evidence? It is way too early to banging on this drum. We are dealing with supply shocks all across the economy and throughout the supply chain. Extreme shortages will look like inflation until the unprecedented supply chain issues are dealt with. In other words, we won't know what is real inflation and what isn't for a little while.

Edit: Also the die has been cast as of a few hours ago. The Fed has already indicated they'll be watching it closely.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by Drazzil »

I love how the (pardon the french) motherfuckers at the top; gladly and gleefully shovel literal goddamn mountains of cash into the waiting maws of the hogs in the area of finance and wall street when they need to maintain the gold foil on a turd gleam of wall street "growth".

I love how those same goddamned ghouls wring their bony liverspotted hands when it comes to helping those who punch a clock for a living.. THEN they remember things like, budgets, and inflation and austerity.

If there IS inflation, it wont be due to the miserable and miserly 1400 dollars a head going out to people who are scratching to survive.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

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Welcome back Draz! And you are right, it was not a concern when the Repugnicans were doing all the spending.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by Kraken »

I'd like interest rates to rise enough for me to build a new CD ladder. I've still got a couple that are paying 3%, but new CD rates are around 0.2% now. My savings are idling at 0.4% just sitting there in a pile. (A year ago, they were getting 1.5% and CDs were a little over 2%.) A little inflation is good for savers.

That said, I became an economic being in the '70s, so I've seen what double-digit inflation does to one's paycheck. Fortunately, so have the people currently making fiscal policy. They should know when to take away the punch bowl.

People who forecast such things raised their estimate of US growth this year from 5.6% to 6.4%, I think it was (might have the decimals wrong). Unless covid outsmarts the vaccines, Q2 and Q3 are going to rock and roll.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by Jaymann »

Kraken wrote: Wed Mar 10, 2021 10:58 pm I'd like interest rates to rise enough for me to build a new CD ladder. I've still got a couple that are paying 3%, but new CD rates are around 0.2% now. My savings are idling at 0.4% just sitting there in a pile. (A year ago, they were getting 1.5% and CDs were a little over 2%.) A little inflation is good for savers.

That said, I became an economic being in the '70s, so I've seen what double-digit inflation does to one's paycheck. Fortunately, so have the people currently making fiscal policy. They should know when to take away the punch bowl.

People who forecast such things raised their estimate of US growth this year from 5.6% to 6.4%, I think it was (might have the decimals wrong). Unless covid outsmarts the vaccines, Q2 and Q3 are going to rock and roll.
Here's hoping the economy and the war on Covid peak just in time for the 2022 elections. Some people may just realize: JFC, look what competent government can do!
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by LordMortis »

Kraken wrote: Wed Mar 10, 2021 10:58 pm I'd like interest rates to rise enough for me to build a new CD ladder. I've still got a couple that are paying 3%, but new CD rates are around 0.2% now. My savings are idling at 0.4% just sitting there in a pile. (A year ago, they were getting 1.5% and CDs were a little over 2%.) A little inflation is good for savers.

That said, I became an economic being in the '70s, so I've seen what double-digit inflation does to one's paycheck. Fortunately, so have the people currently making fiscal policy. They should know when to take away the punch bowl.

People who forecast such things raised their estimate of US growth this year from 5.6% to 6.4%, I think it was (might have the decimals wrong). Unless covid outsmarts the vaccines, Q2 and Q3 are going to rock and roll.
My 3+% CDs have long since matured. My 2% are coming to an end in the not too distant future. I was still building a ladder for too long I have a good chunk of paying almost nothing CDs for quite some time. I would gladly start building a ladder again when rates go up.

I don't know what will happen with my investments. I'm over invested in securities and played calls poorly as I just comprehend an enduring 20%+ annual gain. I can't see how taxes aren't killing the masses of retail investors at this very moment and how inflation won't be killing us all soon. Like I said, I've played poorly but my personal portfolio, on paper, is still up 20%+ year over year. Any idiot can show that kind of gain in this market. I'm evidence. But the piper will be paid. One way or another. Probably in more than one way.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by noxiousdog »

Inflation is in a constant struggle with productivity and wealth generation. Inflation comes when too many dollars are chasing too few goods and services. As long as the goods and services keep in high supply (see: Amazon). We have tons of infrastructure projects that can be delivered in both replacement (bridges/roads) and future (energy transformation). Automation is keeping the supply side high and it's accelerating.

While I see the potential for inflation, I'm with malchior that we need to see some evidence first. Copper (as the example used) has been in high demand for a couple decades now, but energy is low. While commodities as a whole have been rising, they haven't been rising as compared to the rest of the economy (it's the lowest performing sector in my portfolio by a long shot).
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by malchior »

FWIW the market is trading in anticipation of CPI at 2.47 CAGR and 2.2 CAGR over the next 10-years - around the inflation target. Which makes sense because the Fed has good policy tools for this. That indicates the market believes that looking forward we will see higher inflation short-term and then a period of lower inflation in the long-term that'll bring it back in line. It doesn't mean there isn't risk but macro-wise this looks ok for now.

One of my criticisms of the Rattner piece would be I'd like to hear a case beyond spot price increases for secular inflation. The 70s stagflation is often ascribed - at least this was what I was taught in macro - to a massive supply shock in energy which theoretically is a component of all prices. If energy prices are high, then all prices tend to rise since energy is a universal input. He doesn't make a good case for one here. He just talks about targeting inefficiency. That is a fairly weak case IMO. I would have given him something if he talked about some of the logistics issues. I actually think there is a minor case for shipping being a problem right now for instance. Raw supplies and consumer goods being shipped from overseas are subject to very high shipping rates due to low capacity in the short-term. That is probably the biggest risk we face but even then I don't see it being the driver for broad-based inflation.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by noxiousdog »

There was an interesting piece on Skeptics Guide to the Universe which coincided directly with what you're saying.

A study came out that If the true cost of fossil fuels were recognized at the consumer level, the price would be significantly higher than it is today. I think we have talked about that extensively here on OO.

As we deleverage the energy market from those fuels, all the indirect costs will deleverage as well leading to deflationary pressures.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by Isgrimnur »

malchior wrote: Thu Mar 11, 2021 11:27 am If energy prices are high, then all prices tend to rise since energy is a universal input.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by Pyperkub »

Typical blathering on costs with no real analysis of benefits. What's interesting is that this package is far more like what he argued for just a year ago, with no comment on inflation:
Recognizing the urgency, almost two weeks ago the Federal Reserve announced a half-percentage point cut in interest rates, which will help both businesses that borrow as well as many current and prospective home buyers.

And while the Fed has already signaled its readiness to do more at its policy meeting this week, with the benchmark rate now just above 1 percent, not much room to cut remains.

That leaves fiscal policy, where ideas are swirling and political gamesmanship has begun. The president seems to want payroll tax relief. That takes too long, those at the top collect too much, workers at the bottom of pay scales get little and those not working receive nothing....

...That means taking advantage of the unprecedented fall in interest rates. Never in history has the federal government been able to borrow money for 10 years at 0.90 percent and around 1.47 percent for 30 years, both substantially below the inflation rate.

I well recognize that our $17 trillion of debt is a daunting problem, but so is crumbling infrastructure that threatens our future growth.

But in locking in these low rates and moving boldly on infrastructure
If one leaves the states and populace to fend for themselves, while aiding the top earners (he also wrote a piece about that, but with no talk of inflation, as usual), the bottom of the economy drops out. This is an investment in the core pieces of Maslow's Hierarchy of Needs for the Country.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

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Summers Sees Signs of Scarce Workers as Harbinger of Inflation
Bloomberg.com wrote:President Joe Biden’s $4 trillion plans to overhaul the role of government in American lives is aimed at the right targets but risks inflation in an economy that’s recovering fast from the pandemic, said former U.S. Treasury Secretary Lawrence Summers.

“I am concerned that progressives have a tendency to overreach,” Summers said in an interview with David Westin on Bloomberg Television’s “Wall Street Week.” “You need to be progressive but you also need to get the arithmetic right, and I am worried that this program could overheat the economy.”

Summers, who’s a paid contributor to Bloomberg, said there was rising evidence of labor shortages and that “workers are quitting at rates they usually quit at during booms,” which made him concerned about inflation.

Data on Friday showed that a key measure of consumer prices -- known as the personal consumption expenditure price index that the Federal Reserve uses for its 2% inflation target -- rose 2.3% in March from a year earlier, the biggest gain since 2018. The so-called core PCE price index, which excludes volatile food and energy costs, climbed 1.8% after a 1.4% gain in February.

Fed Chair Jerome Powell has repeatedly cautioned investors to expect inflation to rise above 2% this year as the economy reopens. He did so again Wednesday when asked directly about the concerns that Summers has raised in recent weeks about overheating.

“Those pressures are likely to be temporary as they are associated with the reopening process,” he said. “An episode of one-time price increases as the economy reopens is not the same thing as, and is not likely to lead to persistently higher year-over-year inflation into the future,” he told a press conference after the Fed held interest rates near zero.

Powell also played down the risk from worker scarcity, noting that wages have yet to move up in the way you’d expect in a really tight labor market, while the experience from the last expansion was that people would rejoin the labor force, particularly as pay rises or unemployment benefits run out, as they will in September.

“If you were worried about running out of workers, it seemed like we never did,” Powell said. “My guess would be that you will see people coming back into the labor force.”

Summers said he hoped that Powell’s assessment on the temporary nature of higher prices was correct.

“He might be right. But the Fed chairmen who did the most talking about transitory factors were the Fed chairmen we had in the mid-70’s and that’s when inflation was accelerating very rapidly,” Summers said.
Warren Buffett says Berkshire Hathaway is seeing 'very substantial inflation' and raising prices
cnbc.com wrote:Warren Buffett is seeing inflation among Berkshire Hathaway's collection of businesses as the economic recovery from the Covid pandemic kicks into high gear.

"We are seeing very substantial inflation," the Berkshire chairman and CEO said at the conglomerate's annual shareholder meeting Saturday. "It's very interesting. We are raising prices. People are raising prices to us and it's being accepted."

"We've got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they're going up," the legendary investor added.

Berkshire Hathaway owns one of the nation's largest homebuilders Clayton Homes, along with companies such as Benjamin Moore paints and Shaw flooring.

Inflation has begun to accelerate recently due to multiple factors, including increasing demand and struggles with some areas of the supply chain, as well as just easier comparisons with the pace of a year ago. The core personal consumption expenditures price index, which excludes volatile food and energy prices, rose 1.8% in March, the fastest pace since February 2020. The headline number increased 2.3%, the quickest pace for that measure since 2018.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

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CNBC keeps referring to it as transitory and will do so until the Fed reacts and the Fed is saying it won't react... We'll see. But if you grocery shop, you know (around here at least) the prices are up. My grocery bill is probably 30% higher than it was at the tail end of 2020. We all know the piper needs to be paid. You can't create trillions of dollars and "stimulate" as much as we have and expect otherwise. It's been a poor 14 month implementation but it poor as it was, it was necessary. Now we begin dealing with it. We can only hope partisan hackery won't make it more painful than it's got to be. Especially when after 20 years of neglect we still need infrastructure injection and that money still has to come from somewhere.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by malchior »

This was expected. FWIW I don't think they're wrong to talk about the indicators they see but Buffett also is talking about in one of the most impacted segments of the economy. There is no shock to any of this, inflation is already running slightly over the target, and experts have forecast it would go higher as demand surges. The question is does it turn into secular inflation and what do you do if it does. And we have answers to the latter so worrying too much about the former is a matter of living inside a risk envelope.

That said this is why we aren't seeing too much worry in the markets. The Feds have a very good track record here and that is why Powell has been communicating the way he has. He's been accurately talking about how we've been running at or below target for a long-time and indicating the Fed wants it to run slightly over target (2.5-3% or even a bit higher) for some period of time because you can't bracket a target if you always choke down below it.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by malchior »

LordMortis wrote: Mon May 03, 2021 1:12 pm CNBC keeps referring to it as transitory and will do so until the Fed reacts and the Fed is saying it won't react... We'll see. But if you grocery shop, you know (around here at least) the prices are up. My grocery bill is probably 30% higher than it was at the tail end of 2020. We all know the piper needs to be paid. You can't create trillions of dollars and "stimulate" as much as we have and expect otherwise.
Maybe. It depends on how much output gap there actually was. The reads could have been off.

That being said, if the GDP data was accurate then the amount the administration is proposing roughly fills the gap and drives to restore GDP to pre-pandemic levels this year. Mid-summer perhaps. Meanwhile, Europe overall is looking at end of 2022 at the moment. Though there is room for skepticism as their projections seem a little rosy considering how disparate the economies are there. The UK is projecting mid-2022 as well and that seems crazy considering some of their exports have collapsed amidst Brexit.

Anyway, the spend will definitely need some 'digestion' and cause some waves. However, it all comes down to how much tolerance we see. The lumber issue we are seeing for instance was probably happening stimulus or not. People's usage patterns for their homes drastically changed. Other sectors are influenced by other broad based secular changes from the pandemic. They'll take time to work through too. And we were already in the midst of a digital transformation process that was driving real efficiency into the economy pre-pandemic that's underneath this too. In other words, there is a lot of change happening and it's going to be a bit bumpy. Is it wise to pour more fuel into the mix? It's debatable but we'll see if it even happens with the political situation being as fraught as it is.
It's been a poor 14 month implementation but it poor as it was, it was necessary. Now we begin dealing with it. We can only hope partisan hackery won't make it more painful than it's got to be. Especially when after 20 years of neglect we still need infrastructure injection and that money still has to come from somewhere.
Infrastructure is *badly badly* neglected and a lot longer than 20 years. The more important thing is that interest rates are very low on government issued debt. Can you get more return than that is the ultimate question. I think beating 2-3% on most of this spending seems attainable.
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by Jaymon »

They (experts) are making predictions, but this is still pandemic, and there is more unknowns I think than can be accounted for.


How much of the work from home force is going to return to the office? And is it going to be a hybrid model? Home vs Office is a big dynamic change for many sectors, huge swaths of "downtown" services and industries are shutdown. Corporate supply changed some of their capacity over to home supply for some industries, how much will need to change back?


We have a handle on the disruption of goods coming out of China, but India is now disrupted, and that is a major supplier as well. Not just of goods, but also of services. How many companies have offices or call centers located in India? Its enough to be a common stereotype, and the damage to workforce is increasing daily.


We have not yet determined the need or lack of need for annual covid boosters. And if there is a need, who is going to pay for that? It can't be an emergency every year.
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malchior
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Re: Too Many Smart People Are Being Too Dismissive of Inflation

Post by malchior »

Jaymon wrote: Mon May 03, 2021 3:58 pm They (experts) are making predictions, but this is still pandemic, and there is more unknowns I think than can be accounted for.
Sure but mostly in the details though. Macro-wise the Fed and the big banks likely have pretty reasonable assumptions for ranges of different sectors.

The thing about the spot inflation we are seeing (at the moment) is that it is directly linked to unexpected shortages. For example, the lumber situation. I dug in a little earlier. That industry has been in decline in North America for 12 years. They've essentially been in a deflationary spiral in that industry and spinning up capacity is very capital and time intensive. You have to lay out 9-10 figures over a 2-3 year time frame with no expectations if there is a sustainable bump in demand. So what happens is you have too few dollars chasing lumber with little alternative. That'll put a lot of price pressure on that good. However, it isn't the basis to jump up and down yelling INFLATION!!! on its own. It is more an up arrow next to Inflation. It is an inflationary source of pressure. We are also seeing a computer chip shortage. Another source of pressure.

Add up enough and it's trouble. But we have tools to manage it though they are not fun and it'll put a lot of pressure on a broken political landscape. But still we don't know if there is much to worry about yet - the magnitude and duration are real unknowns right now.
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