The Fed and Inflation

Investment Analysis Clubs Macro Economic Trends and Risks
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For the second time in three days, The Wall Street Journal Is arguing that the Fed should stand down in its inflation fight. I saw a pretty good one there on Monday (link below) and on the same day the new BusinessWeek arrived with the same message in a well argued column.

I’ve thought for a while (and said here) that the Fed should stop the increases, that inflation is already well on the way down, and that the 2% goal is unnecessarily low (I argue for 3%) - the 2% appears to be based on not much more than a casual comment in a television interview some years ago.)

The best is the piece by Barry Ritholtz in BW, which I hope links here. (Bloomberg is very fussy about these things.)

https://www.bloomberg.com/news/articles/2023-08-18/jerome-powell-and-the-fed-need-a-new-plan-to-fight-inflation?leadSource=uverify%20wall#xj4y7vzkg

Or maybe you can get there through Ritholtz’s webpage? Let’s try:

The Journal’s opinion article was Monday

And this one today:

So. My advocacy rests on two pillars: 1: The job is done, it just takes time for the results to appear. The Fed is chasing a goal with no real intellectual foundation, and risks (as Ritholz says) overshooting, in much the same way as they have been late to recognize the problem and late on other issues as well. And if they overshoot, they risk a recession next year, right in the middle of a political campaign, something the Fed historically tries to avoid.

And 2: If/when a recession happens, a 3% rate gives you some room to maneuver in cutting rates to get things going again. If you are already at 2%, you have precious few levers to pull. Look at how much they have had to pull the other way and you get some sense of how hard and how fast you might need some leverage to redirect the economy.

I also think that one of the biggest “inflation-busters” has yet to happen, and that’s in October when tens of millions of student loan payments become active again. That will drain a lot of discretionary dollars that might have otherwise been spent on lattes, clothes, movies, and retail - and because it’s invisible and waiting around the corner, any effects are completely invisible as yet.

So that’s it. Dear Fed: Sit tight. You’ve done the job. You may be able to produce more cars by doubling the workforce, but you can’t hatch a baby in 1 month by adding 9 fathers. Slow down, take a breath.

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The job is not done.

Wall Street needs to stop looking for a handout.

We are not in the supply side period where every excuse to hand Wall Street ten billion dollars is a good excuse.

If you want the equity markets to do well look to fiscal policy. It takes longer to work.

You do not get a choice between fiscal or monetary policy. We are out of the period of just printing money crap. But you do get a choice to invest wisely…or not.

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They said all along that they were focused on the job market (the wage-price spiral) and increase unemployment. Have they changed their mind?

DB2

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Here’s a link to the recent fed statement. Where exactly did “they say” that they want to increase unemployment?

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The FED keeps noting the employment rates. That is different.

This is about asset prices. But you can not tell the powers that be they will take a haircut.

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Why don’t the Fed go after a ‘sound money’ policy?

“Sound money” has a clear message recognized for centuries around the world. It describes the musical, metallic ring of a gold, silver, or copper coin dropped on any hard surface of glass, stone, wood, or metal. Sound money literally refers to real wealth, with a natural, unmistakable signature of honesty and integrity, as opposed to the swishy paper and plastic debt used almost exclusively today.

A sound money policy doesn’t transfer wealth ‘upwards’ as the fiat money system does which is why The Fed. wants inflation. Or should say the private bankers who own and run The Fed:

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Huh?

I read your linked article and it is basically just an article from 2015 summarizing some of the history of precious metal currency - there is no advocacy in the article. What is it that you are advocating that the Fed do? Write new legislation authorizing precious metal currency? The Fed does not have the authority to change legal tender - much less compel or otherwise authorize the funding necessary to create such.

A sound money policy doesn’t transfer wealth ‘upwards’

Again, huh? You think wealth did not get transferred upwards when we were on the gold standard?!? I know America is not your home country but I encourage you to learn more about our history if you think that economic, fiscal, and monetary policy was not used to the advantage of the rich and powerful, even under a gold standard.

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Why the Fed is pushing unemployment higher
https://thehill.com/policy/3658981-why-the-fed-is-pushing-unemployment-higher/
Federal Reserve Chairman Jerome Powell said Wednesday it will be almost impossible for the central bank to beat inflation without hundreds of thousands of Americans losing their jobs.

Fed officials expect the unemployment rate to rise to 4.4 percent next year, up from 3.7 percent in August, as they jack up borrowing costs and slow the economy, according to projections released Wednesday.

Fed Chair Jerome Powell said this week that the trajectory of monetary policy doesn’t hinge solely on today’s jobs report, but markets are still bracing for impact.

DB2

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Because gold backed currencies are never going to work again.

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at the end of Jackson hole summit, I think Powell will say things like “economy is still buzzing strong, if we pause rates, inflation may rear its ugly head”… I think some mind game to keep the world in check. A lesser evil to just keep raising rates than risk inflation spikes. Hurt them where it hurts and a greater good will prevail.

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What is worse for the economy, 3.5% inflation or 4.5% unemployment? Does that answer change if it is 5% unemployment?

Count me in the camp that prefers more employment at the cost of having to pay a little more for it. Personally, I would rather people have jobs than me to save 1% at the grocery store.

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Probably because it a terrible, terrible concept. This has been proven over and over, most dramatically with the Great Depression, but in other depressions and financial panics around the world.

In “Lords Of Finance” (how Bankers Broke the World) the author delineates how the various countries emerged from the era following World War I. Those that kept to the gold standard did worse, those that went off it earlier did better; in fact there is a perfect 1:1 correlation with those exiting earlier and recovering sooner.

Tying things to a metallic standard constrains the economy, because you can’t “expand” until somebody digs some metal out of the ground, refines it, then buries it in a vault somewhere. Metal may be a “store of value” but it is an awful way to run an economy.

William Jennings Bryant took the populist position of “easy money” by trying to get silver included in the “store of metal” that funded the US economy - this during what was then called “The Great Depression”, now known as “The Long Depression.” Voters rejected it because they were convinced that only gold had value, and the economy creaked along for years and years more.

The lesson is clear. Read a book. I suggest this one:

PS: Bankers hate inflation, it lets people repay loans with cheaper money. All things being equal, bankers like deflation because it makes their collateral assets worth more. Unfortunately the economy around them craters, so maybe not such a good idea.

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Here is a list of all the countries in the world on a Gold Standard.

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Yep, that many. It works so well that literally no one uses it.

https://worldpopulationreview.com/country-rankings/what-countries-are-on-the-gold-standard-today

What gold standard advocates always fail to understand is just how little gold there really is in the world - and no where near enough to run a major economy. The US has 8000 tons of gold. A ton of gold is worth about $67 million. That means that we have a little over 500 billion in gold. Roughly $300 billion exchanges hands in the US alone, every day. That would mean we either have to buy A LOT more gold (with what? Can’t use fiat currency to do it) by selling hard assets, or have unparalleled devaluation of everything.

Economies would crater overnight. Valuations would plummet. What is worse than inflation? Spiraling deflation.

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The Fed has zero ability to do so. The Constitution specifically grants those powers to Congress.

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Congress, like The Fed., is in the pay of the bankers:

Nice work if you can get it:

I tend not to trust my wealth with bankers or politicians, and certainly not to a coalition of both of them

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In what way is that reply in any way related to the topic at hand?

I tend not to trust my wealth with bankers or politicians

That is funny coming from someone advocating gold. There is a far greater risk of manipulation in gold prices than when compared to things like index funds. That risk of manipulation would grow exponentially if a world power decided to move to the gold standard - as they would have little choice but to try and control it - in much the same way OPEC tries to control oil prices.

Gold Trader’s Chat Bragged About ‘How Easy’ It Is to Manipulate Prices

https://www.bloomberg.com/news/articles/2021-07-22/gold-trader-s-chat-showed-how-easy-it-is-to-manipulate-price

Again, I am reminded that you may not be fully informed on US history. Here is an item from 90 years ago that few people seem to know:

The United States Gold Reserve Act of January 30, 1934 required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury. It also prohibited the Treasury and financial institutions from redeeming dollar bills for gold…

Immediately following passage of the Act, the President, Franklin D. Roosevelt, changed the statutory price of gold from $20.67 per troy ounce to $35…

A year earlier, in 1933, Executive Order 6102 had made it a criminal offense for U.S. citizens to own or trade gold anywhere in the world, with exceptions for some jewelry and collector’s coins.

The ban on gold lasted for 40 years.

But hey, you go right on thinking that a coalition of bankers and pols can’t manipulate gold, :rofl:

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@DrBob2 The problem with that is how relative it is. Not very relative to the labor market. It is minor. This wont be a huge downturn for labor.

More importantly he is not saying a downturn in the labor market is needed to stop the inflation. This is about asset prices. The labor market to a degree with see collateral damage.

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Congress by law handed that off to the FED. Not as concerns the gold standard mind you.

Note Rep Howard Buffett ex stock broker and his son Warren Buffett had different opinions on the gold standard. Who would you like to believe?

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If it is necessary to break a wage-price spiral then more unemployment is the lesser evil because inflation hurts the entire population.

Here are Powell and Warren on the issue:

Sen. Elizabeth Warren (D-Mass.): “Chair Powell, if you could speak directly to the 2 million hardworking people who have decent jobs today who you’re planning to get fired over the next year, what would you say to them? How would you explain your view that they need to lose their jobs?”

Powell: “I would explain to people more broadly that inflation is extremely high, and it’s hurting the working people of this country badly — all of them. Not just 2 million, but all of them are suffering under high inflation, and we are taking the only measures we have to bring inflation down.”

DB2

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