Root cause of inflation

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.nytimes.com/2022/02/17/opinion/inflation-supply-…

By Steven Rattner, The New York Times, Feb. 17, 2022

…
The bulk of our supply problems are the product of an overstimulated economy, not the cause of it. …Americans have resumed spending freely, and along the way, they have been creating shortages akin to those in a shopping mall on Black Friday.

All that consumption has resulted from vast amounts of government rescue aid (including three rounds of stimulus checks) and substantial underspending by consumers during the lockdown phase of the Covid crisis. … It’s a classic economic case of “too much money chasing too few goods,” resulting in both higher prices and, given the extreme surge in demand, shortages. … The Commerce Department reported last week that imports into the United States surged by almost 21 percent last year. …

Smaller government budget deficits reduce net spending by government, thus helping offset demand by consumers. [end quote]

Bingo! “Guns’N’Butter” spending caused high inflation in the 1970s.

Do METARs want to predict what will happen to inflation in the coming years? Watch government fiscal stimulus, which puts spending power into consumer hands. Watch transfer payments, which put money (demand) into people’s hands without increasing productivity (supply). Watch military spending.

https://fred.stlouisfed.org/series/A084RC1Q027SBEA

Government transfer payments spiked in 2020 and 2021 due to the Covid Economic Impact Payments. Although there probably won’t be another EIP in 2022, the level of transfer payments is significantly higher (roughly 30% higher) now than it was before the pandemic started.

The new infrastructure bill will pump $550 Billion in new spending over 5 years. I’m totally in favor of repairing America’s deteriorating infrastructure but the money will not produce new consumer goods or services. It’s inflationary.

Further deficit spending will be inflationary.

If demand goes up because consumers have more money while supply does not keep pace, inflation will result. That’s the simple reality.

I see more inflation in our future unless there is a reduction in deficit spending and/or a recession which is a painful way of reducing demand.
Wendy

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If demand goes up because consumers have more money while supply does not keep pace

And the All Holy Job Creators won’t increase supply to match this new demand… why exactly? Maybe they like their increased prices and profits, even if it hurts the country?

It seems as if when we send money to the rich (i.e. QE, bail-outs) it’s good. If we send money to Average Joe it’s bad. I don’t agree.

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<If demand goes up because consumers have more money while supply does not keep pace

And the All Holy Job Creators won’t increase supply to match this new demand… why exactly?>

I fully expect supply to rise enough to meet demand…eventually. I even expect supply to exceed demand…eventually. That’s the beauty of the free market.

But it’s going to take awhile.

Inflation will rise until the manufacturers invest in new production to meet demand. When they are equal, inflation will subside.

Having invested in new production equipment, supply begins to increase faster than demand. Then inventories will exceed new orders, manufacturers will put excess inventory on sale, and finally will start laying off employees when production exceeds demand. Laid-off employees have less demand. This is how recessions have often started in the past.

That is the classic business cycle.
Wendy

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All of this is convoluted to me.

The stimulation that was the largest factor was the FED’s $120 Billion per month.

The $550 billion over 10 years? More like Uncle Sam’s pocket change.

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Do METARs want to predict what will happen to inflation in the coming years?

There’s a danger that the Fed tightens and tightens into a rolloff of government largesse meaning there’s two factors attenuating the economy’s growth … and quite easily into recession.

The fed has a history of not being able to see forwards even though they know their policies take time to work.

So then given that the US is still running a trade deficit with the world, given there’s been no lasting redistribution mechanism … back to the rich amassing assets and clogging up the velocity of money. Deflation of goods, inflation of assets again. (Later, after the Fed deflates things first).

However it’s possible that the government does get hooked on deficit spending and inflation then continues, but with negative real interest rates government debt can be handled as it depreciates in real terms and as a proportion of GDP. The losers are those holding the debt … the biggest holder being China I believe. Wow that would be a result!:joy::joy:

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A popular politician just said that there is no inflation, just corporate greed…

The Captain

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All that consumption has resulted from vast amounts of government rescue aid (including three rounds of stimulus checks) and substantial underspending by consumers during the lockdown phase of the Covid crisis.

Well golly Mr. Jeepers, here we are again.

Research at the time showed a small fraction of stimulus checks went for discretionary items. Most went for rent, food, and savings.
https://www.nbcnews.com/business/business-news/how-are-stimu…

US households reported spending about 40% of their checks, with about 30 percent saved and another 30% used to pay down debt.
https://www.nber.org/digest/oct20/most-stimulus-payments-wer…

The “substantial underspending” was in services like restaurants and vacations and travel. Spending that did happen on hard goods must have produced inflation then on those things back in 2020, no? No.

Bingo! “Guns’N’Butter” spending caused high inflation in the 1970s.

And yet Ronald Reagan spent more on defense than LBJ ever dreamt of, and ran higher deficits than at any time in history. And what happened? Almost no inflation. (Lucky boy, the price of oil dropped by 2/3, with ripple effects up and down the supply chain.

Do METARs want to predict what will happen to inflation in the coming years?

Some is being “baked in” for sure. Rents are increasing, food costs are increasing, and oil is more expensive (different cause.) That will be hard to wring out, but (my guess) about half of it will go away if/when the supply chain fiasco is ironed out. That would put it at about 3%, which is tolerable.

Ever drive along a highway and suddenly you’re bumper to bumper, and you inch along and then for no apparent reason traffic opens up again? That’s what’s going on now with our economy. There may have been an initial cause for the traffic, but the effect lingers, sometimes for hours. Or months, in the case of the supply chain. Inventories were disrupted by several things: sudden unexpected consumer demand (toilet paper), factories shut down (chicken processing), misallocated resources (chips for cars), transportation snafus (empty shipping containers piling up), opportunistic rent seeking (record profits everywhere); it’s been a perfect storm which has resulted in a cascade of price increases.

The obvious way to tame it is to cut off the money supply, but then you kill the economy, jobs, and the stock market, so perhaps we should think of something else.

I’m totally in favor of repairing America’s deteriorating infrastructure but the money will not produce new consumer goods or services. It’s inflationary.

Unless it produces greater productivity, like the interstate highways did, or like NASA did, or like… Of course you can go the other way and not repair the infrastructure, but I fail to see how that creates jobs, improves lives, or makes things better except for the already wealthy.

If demand goes up because consumers have more money while supply does not keep pace, inflation will result. That’s the simple reality.

The even more simple reality then is to help increase supply. Repair and improve infrastructure. Fix the supply chain. Remove economic impediments like most tariffs. But I fear this is a lost cause, so recession, here we come.

Watch military spending

Aw, that’s so cute.

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But I fear this is a lost cause, so recession, here we come.

In the scheme of things the inflation is temporary.

I am banking on the drops in the equity market.

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Do METARs want to predict what will happen to inflation in the coming years?

Later this year, beginning soon, the Fed raise rates and stop their bond purchases, so both short and long term rates rise and money becomes incrementally tighter in the US. This proceeds over the course of the year, not too fast, but purposefully, and tighter money begins to do its job of reducing inflation.

Later this year, beginning already, the Omicron tsunami recedes and the US population is left with very widespread partial immunity to Covid from vaccines and/or prior infection. The population has pandemic fatigue after 2 years of restrictions and while Covid doesn’t go away (new variant already spreading as we speak: BA.2 a new and improved Omicron subvariant that is widespread globally and in the US already), people are ‘over it’ and society returns to more or less business as usual. This means child care availability increases, no more virtual school, so more parents can return to the work force, alleviating wage inflation and having some beneficial impact on the supply chain problems. These incrementally reduce inflation.

As society returns to normal, spending ramps up on services and drops back on products, easing demand and easing inflation of products.

Businesses ramp up various measures to deal with the supply chain problems, and over time the kinks are worked out and products flow smoothly again. This will take time, but is already happening.

The oft-cited 12 month inflation figures will have comparables that are not from the heart of the pandemic shutdown. I.e. gas prices if they stay relatively stable, will show relatively high 12 month inflation figures for quite a few more months, as comparisons to early 2021 were still heart of the pandemic with reduced travel and demand for gas, but the year over year difference dropping lower and lower over the coming year.

Rent will be a stubborn contributor to inflation for years to come as rents catch up to house inflation that’s already occurred, but with higher rates the house inflation should cool, so that won’t go on indefinitely.

I predict the 7.5% recent figures are about the peak, maybe creeping a little higher in the coming months, but then dropping over the next year and a half to where we’re back in the ballpark of target inflation, i.e. inflation of 3% in a year and a half.

We don’t necessarily have to have a recession while that’s going on, but we never know. It’s a delicate balancing act the Fed is walking.

We should absolutely move forward with the already passed infrastructure spending, and go forward with more of the infrastructure-ish stuff that was in the build back better law. In the long run having quality infrastructure is great for the real economy, making everything more efficient.

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That all sounds correct; but labor shortages will probably continue to some degree until children under the age of 5 can be vaccinated. A lot of women look at what’s left of their salary after paying for daycare and taxes and decide that it’s not worth the risk to their children.

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The real root cause is the lack of population control worldwide, period.

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“Exclusive: oil companies’ profits soared to $174bn this year as US gas prices rose”

https://www.theguardian.com/business/2021/dec/06/oil-compani…

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“Exclusive: oil companies’ profits soared to $174bn this year as US gas prices rose”

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What else do we expect from these crooks?

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Exclusive: oil companies’ profits soared to $174bn this year as US gas prices rose"
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What else do we expect from these crooks?

  1. They’re not crooks
    and
  2. The profits shrink (and even disappear) when oil and gas prices drop.

It’s called supply and demand.

DB2

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oil companies’ profits soared to $174bn this year as US gas prices rose

Shell calls for more LNG supply-side investment on looming demand gap
www.spglobal.com/platts/en/market-insights/latest-news/lng/0…
Shell on Feb. 21 called for an increase in investment in LNG supply in order to meet rising LNG demand, especially in Asia, as it warned that an LNG supply-demand gap was set to emerge in the mid 2020s.

  • China now world’s largest LNG importer
  • US set to become world’s biggest exporter in 2022

DB2

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The stimulation that was the largest factor was the FED’s $120 Billion per month.

What do you mean by “was”??? They still are buying $120B a month, roughly $80B treasury debt and $40B mortgage based debt.

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