The question is why would persons wish to deter Powell from following the Volcker path?
Leaving aside political issues I would say the government would rather pay the deficit with more inflated dollars than with less inflated dollars.
US interest payments expenditures are now $8.52 billion dollars.
It will be the working class that will largely bear the burden of higher inflation. Screwed economically again. It is their lot in life. The status quo of income inequality is maintained. Business as usual.
The impact of inflation isn’t felt equally by all Americans. The working class is at risk. They are at the mercy of rapidly rising costs. This includes housing, food, gas, cars, trucks, and other daily necessities.
Unlike the upper middle class and wealthy, the less fortunate Americans don’t possess assets that can appreciate in value, such as real estate, stocks and other investments.
How is it political? The Senator, right or wrong, made an economic (unemployment), complaint. She did not make a political complaint.
It will be the working class that will largely bear the burden of higher inflation.
It will also be the working class that bears the burden of higher unemployment. Unlike the upper middle class and wealthy, the less fortunate American’s don’t possess enough liquid assets to help them if they face long term unemployment.
I don’t share the Senator’s politics but I also am concerned that the Fed, who was rightly criticized for moving too slow in 2021 and 2022, is now trying to make up for that by potentially overcorrecting.
Edit: I will note that Mish also thinks that the Fed gets a grade F for their failure to timely respond to inflation.
Perhaps an upcoming election in 2024? Whomever is sitting in the oval office gets tagged with economic recessions justifiably or not.
For a politician it is never a good time for a recession. And by the same token a politician gets the accolades if they preside over a booming economy whether it is a result of their policies or not.
Still seems an exceptionally weak argument for Mish, or really anyone to make. There are ALWAYS elections. By that standard, everything would be deemed inappropriately political.
'Sides, I don’t personally share the fascination with Volcker. His history of rate management was manic and inflation coming down when it eventually did may be as much correlation as causation.
Volcker’s first full year, he took rates to 20%, brought them back down to 8.5%, only to take them back up to 20% all in the same year! Imagine the economic (and political) fallout of Powell doing something that scatterbrained.
Because as interest rates go up so does the cost of servicing the debt. Where Treasury used to be able to sell debt at 0% or 1% (some countries were offering negative rates and still attracting buyers), now they have to put 5% plus or minus on the table in order to attract cash - and with the debt increasing they have to attract more of it than before.
I’d rather pay a fixed rate mortgage with inflated dollars too, but a lot of US debt is subject to that same inflationary adjustment.
In reality, we don’t service ANY of the debt. We refinance it all including the interest. And add more new debt each year.
A huge portion of it, I think at least 2/3 of it, is subject to these adjustments because they are constantly being refinanced. All those 1-year treasuries issued last year at 1.2% are being refinanced this year at 5.2%. Hundreds and hundreds of billion $s of them. And the 0.15% 2-year treasuries from 2021 are ALL now being refinanced at 5.06%. Also hundreds and hundreds of billion $s of them.
If roughly half the debt gets refinanced to 5% from the old rate of 1%, that’s about an additional $500B interest each year. Hopefully when the other half matures, interest rates will have abated somewhat by then. But in any case, we don’t pay ANY of it off, none of the principal, and none of the interest, and none of the additional interest due to higher rates. It all gets refinanced into new treasury instruments.
Treasury debt (external) totals:
< 1 year - ~$7.5 trillion
1 to 5 years - ~$7 trillion
5 to 10 years - ~$3 trillion
10 to 20 years - ~$0.5 trillion
20+ years - ~$2 trillion
We are very obviously weighted very short-term for much of our debt. That means it has to be refinanced quicker. Now, if interest rates stay “higher for longer” that means we will suffer higher refinancing rates for longer, and we will add all that interest into new debt rapidly.
Because some of the debt creates growth in the economy but the other marginal effect is inflation. The more we borrow at some point the higher the inflation. Ignore the current conditions because the inflation was caused by other factors.
The argument by some is why borrow? Because that causes inflation. Their argument is lets lower taxes instead. The problem with that is two fold. We get the debt and we do not get GDP growth, see 1981 to 2020.
The argument by most now is lets tax the rich. We can keep inflation low and grow the GDP much faster. Some are obstructing the US economy for their own personal gain. The rich are mostly on the tax us more side of this within reason. The rich benefit the most by a faster GDP growth rate. Plus most rich people are really nice people.
The Fed was too scared to raise interest rates when Trump was in office. Trump had the emotional response level of an infant sporting a wet and soiled diaper, can you imagine the attacks he would have launched on the Fed members if they raised rates while he was in office ? And the 2017 tax cuts threw gas on the inflation fire.
He tried, in December 2018. Remember? That was the perfect time to do it, too. But the Fed backed down because an infant threw a temper tantrum. And here we are now.
Biden was in office in the summer of 2021 when YOY inflation was already over 5% and climbing. There was no rational reason to wait six more months (when inflation had climbed to over 7%) to start raising rates. 0.25% increase in November or December of 2021 was well warranted and would have allowed the Fed to telegraph rate increases months in advance to not spook the markets as well as avoid the more draconian 0.75% increases they had to do to catch up.
Snip:
Officially, a 2 percent inflation target was not adopted by the United States until 2012, when the Fed — then chaired by Ben Bernanke — decided to fall in line with the rest of the developed world’s central banks. But starting in 1996, the U.S. central bank quietly started pursuing a target rate of 2 percent under the instruction of former Chair Alan Greenspan, who wanted to keep the news under wraps. The reasons for pursuing that specific number were never clearly articulated by Greenspan, whose “covert inflation targeting” coincided with a decade of fantastic economic growth in the U.S. That lack of transparency was cause for concern for some economists.
I’m not sure exactly what they’re trying to say or are they complaining…? The reality is and has been pretty much understood since before anyone was talking about it, that, at least in modern economies, some inflation is actually good. Somewhere in the 2% range works best because it can be easily accommodated and worked into the system without the problems of significant inflation. Like light to moderate exercise. You stay healthy and progress without the aches and pains and setbacks of hard exercise. There’s no mystery about this.
If I’m not mistaken even Uncle Miltie advocated for inflation in the 1% - 2% range.
He may have gone to far but he was an improvement over the guy he replaced:Arthur Burns. Under the Burns tenure inflation took off[1]
Burns served as Fed Chairman from February 1970 until the end of January 1978. He has a reputation of having been overly influenced by political pressure in his monetary policy decisions during his time as Chairman[[11]](Arthur F. Burns - Wikipedia) and for supporting the policy, widely accepted in political and economic circles at the time, that Fed action should try to maintain an unemployment rate of around 4 percent.
