Well, many people I read have been offering an overarching narrative that runs something like this: For the past 10 or maybe even 20 years the Fed has kept interest rates artificially low. These low rates inflated bubbles everywhere, as investors desperately looked for something that would yield a decent rate of return. And now the era of cheap money is over, and nothing will be the same.
There’s no such thing as an interest rate unaffected by policy. There is, however, something economists have long called the “natural rate of interest”: the interest rate consistent with price stability, neither high enough to cause depression nor low enough to cause excessive inflation.
So, is the claim that the Fed was consistently setting interest below this natural rate? If so, where was the runaway inflation? In fact, until 2021, inflation consistently came in more or less at the Fed’s target of 2 percent a year.
In fact, until 2021, inflation consistently came in more or less at the Fed’s target of 2 percent a year.
Agreed.
My working hypothesis is that the Fed no longer has the means of effectively creating inflation (as evidenced by the last decade and half).
We had $trillions injected into the economy in 2009 and we had deflation for most of 2009 and below 2% for most of the last decade - with some years averaging below 1%. It was only when people stopped spending for a year+ and cash balanced ballooned (both due to the lack of spending and the excess Covid dollars), that we started to see inflation above target consistently as the economy reopened and people started to leave their homes.
I am of the opinion that the inflation we are experiencing is problem created by fiscal policy and not monetary.
Hawkwin
Who thinks the solution may need to be both to avoid a significant recession.
I am of the opinion that the inflation we are experiencing is problem created by fiscal policy and not monetary.
Yes. If you provided a child care subsidy, there would be more women in the workforce, easing the labor shortage.
And we’ve stopped enforcing antitrust laws. It’s too easy to buy off a sufficient number of Congressmen and Senators to protect your business or industry from price competition. CEOs are actually bragging in earnings calls that they are using “supply chain issues” to price gouge.
And how did the pandemic cause a chip shortage ??? There’s nothing as socially distanced as semiconductor manufacturing – everyone is wearing a “bunny suit”.
The runaway inflation was in asset prices, not in consumer prices.
Read “The Lords of Easy Money: How the Federal Reserve Broke the American Economy,” by Christopher Leonard. This book explains clearly how Fed easy money policies caused asset price bubbles and busts in the 1970s, 1990s, 2000, 2008 and today.
Consumer price inflation is caused by excess consumer demand over the supply of goods and services. Fiscal policy places money directly into the hands of consumers, increasing demand.
Monetary policy places money into the hands of banks. After the 2008 financial crisis, the banks loaned relatively little to consumers, so consumer price inflation was low. But the banks invested in assets, dramatically inflating asset prices.
It would be more obvious if the two types of inflation, consumer and asset price, used the same title – inflation. Instead, asset price inflation is celebrated as a “boom,” even though the subsequent bust can cause long-term harm.
The runaway inflation was in asset prices, not in consumer prices.
So you’re going to punish workers and consumers to fix asset prices? It would make more sense to increase margin requirements on stock trades and reduce the allowable debt/equity ratio for banks – target the source of the problem.
And how did the pandemic cause a chip shortage ??? There’s nothing as socially distanced as semiconductor manufacturing – everyone is wearing a “bunny suit”.
People that were able to work from home needed more or better PCs for Zoom, coding or other heavy duty work. Plus accessories such as cameras and screens, more memory, disk space.
School kids needed dedicated PCs at home, not shared with other kids, parents.
Cloud companies needed more servers to handle all this traffic.
Entertainment (Netflix, Disney+ etc) needed more servers to handle the increased load.
Etc.
As demand rose for those higher-end chips they triggered the increased allocation for those wafers in the FABs. Other products (like chips in cars, home appliances) got cancelled or delayed due to the expectation that demand would suffer. When demand came back there were big waiting lines at the FABs.
Other products (like chips in cars, home appliances) got cancelled or delayed due to the expectation that demand would suffer.
Chips used in cars, appliances, etc tend to be older tech running in non-current fabs (i.e. they use a technology that can not be used produce newer tech semi-conductors).
Just because the big customers disappeared due to the pandemic, the costs of the fab continued. So those fabs found new customers who could use their production facilities. When the demand for the auto, appliance, etc chips returned, there did not exist open production time in the fabs. The only thing that can help restore production is building more fabs to produce those chips.
From the Internet:
“Over the past ten years (2009-2018), semiconductor manufacturers around the world have closed or repurposed 97 wafer fabs, according to findings in the new report.”
There is a graphic at the link showing which fabs closed or were repurposed by wafer size. Older fabs use smaller wafers, so as they become obsolete, they disappear.
Easy. Everyone panicked and reduced their orders. Especially automakers. They assumed that production would be low during the pandemic and slashed their orders to their suppliers, and the suppliers slashed orders to their suppliers, and they slashed orders to the chipmakers, and the chipmakers slashed orders to the equipment makers and the wafer suppliers, and the other base material suppliers. So everyone ratcheted down their capacity … so they could stay in business. And then a few months went by and sure enough people stopped a lot of stuff, but then as a vaccine arrived, and people became less scared, and they started buying everything in sight. And it takes a long time to add back capacity.
