Understanding U.S. Inflation During the COVID Era. Accompanying slides—here and here.
The U.S. Labor Market and Inflation
I look at the vacancies and the unit labor cost data, and my inference is that right now a lot of patterns of specialization and trade are not sustainable. Businesses are assuming that they can be profitable by finding workers at yesterday’s wages. But at tomorrow’s wages, many of them will have to fold.
Another inference is that we still have too much paper wealth in the economy. As I write this, the S&P 500 is still close to 4000, which I think is high relative to nominal GDP. To bring that ratio down, either NGDP has to rise more, meaning more inflation, or stock market wealth has to fall.
Scott Sumner on the Mercatus podcast talking about NDGP targeting, current monetary policy, and his forthcoming book.
Understanding Recent US Inflation. Robert Barro endorsing Cochrane’s Fiscal Theory of the Price Level (FTPL).
So, a plausible argument is that the surge in federal spending triggered by the COVID-19 shock led to a permanent, unexpected rise in the price level by about 19%. This increase in the price level is a mechanism for financing the extra COVID-related spending. In a reasonable scenario, the CPI inflation rate comes down fairly quickly from its current value of 8.5% and averages around 3.5% over the next five years. While the inflation rate eventually returns to 2%, the upward surge in the price level is permanent.
Marcus Nunes substack trying to partially debunk FTPL by showing that monetary policy was tight, not accommodative, post Lehman.
Are we on the brink of central banking paradigm shift? Adam Tooze, who is just barely sufferable, discussing the insufferable Daniela Gabor’s article, entitled “Zugzwang central banking.”
It is clear to the central bankers as well as everyone else that the core of Europe’s “inflation” problem is in the markets for gas and electricity. The infrastructure and regulation of those markets is dysfunctional. Fixing those problems is the route to price stability. That is a task for national governments not the ECB. The ECB, however, does need to be seen to be doing something. So it will raise rates, inflicting pain that it knows is largely irrelevant to the issue at hand, until governments commit themselves convincingly to reforming energy markets.
Ignoring supply related price increases, especially for something mostly non-discretionary like energy, doesn’t fix anything. Assume there is an economy with $1000 of demand supplied with $500 of goods and $500 dollars of electricity. If electricity supply is cut in half and electricity demand is inelastic, then without expanding the money supply, goods prices will go down 50% ($750 for electricity and $250 for goods).
That sucks, the people are are much poorer. But if the money supply is elastic and the central bank is game, then the money supply can grow, such that there is $1250 in demand ($750 for electricity and $500 for goods). That’s great, until the goods sellers realize that real prices have gone down 50% and double their prices. Now the energy sellers have to raise nominal prices to reflect the real demand. Wash, rinse, and repeat until you have persistently high inflation, and hope that some day energy prices come down.
It is a fairyland game where the central bank pretends that society is as rich as it was before—but it isn’t. You shouldn’t be completely inflexible and cause an instant depression in the non-energy related economy, but the discretionary parts of the economy need to shrink.
Do modern, non-Bundesbank, central banks have the balls to squeeze the rest of the economy and stop inflation? I doubt it. We all believe that Volker crushed inflation in the early 80s, but maybe he just got lucky that oil stopped going up.
Doomberg in NY Mag explaining the energy shortage to the professional class.
Like Libor All Over Again, But With TTF Gas Markets.
If You Don’t Like the Message the Price Sends, Ignoring It Only Makes Things Worse
The longer this war goes on, and the sooner the Russian bleeding becomes intolerable to Putin, the more likely it is that he will escalate, rather than capitulate and accept defeat and humiliation for his country and himself, leading to his removal from power.
Sterling may keep going down, but it won’t be a surprise—Nobody’s coming to save sterling and Is the Pound Close to the Breaking Point?
Autocallables—higher interest rates will give retail less of a reason to sell equity vol.
Buy Semis?—Are We in 1995? Rich Templeton's of Texas Instruments Thinks So and a bullish TXN note.
One man’s moat is another man’s illegal cheerleading monopoly.
The power of folk ideas in economic policy and the central bank–commercial bank analogy.
The structural power of decentralized finance.
With its foundational principle—“debts must be paid”—unchallenged, capital has been free to absorb crypto’s innovations, which are flexible, flashy and full of opportunities for profit. Once the bearded crypto riffraff has been shown the exit, or joined up, creditors, with their structural power, can look forward to a world no less centralized than the one we have now, a world no more democratic, but one in which every debt is inscribed in a shared ledger for all time, immutable and incontrovertible.
Assessing the Decline in Bank Lending to Businesses—Banks lend less to businesses, proportionally, than previously. The increased share of non-bank business lending may result in fewer workouts and a more procyclical default cycle.
Charles C Mann on Dwarkesh Patel’s podcast, there is also a transcript—highly recommended. Mann’s 1491 and 1493 are two of my favorite books.
A deep dive on why lab grown meat will never be a thing.
“And it’s a fractal no,” he told me. “You see the big no, but every big no is made up of a hundred little nos.”
I’m not sure what this means, but I don’t think it’s good. The oldest government in history.
Short guys getting their legs broken to be a little less short. I Wish I Was a Little Bit Taller.
The human midlife crisis seems to be an important and under-recognized phenomenon.
Related: Jerry Lee Lewis - Middle Age Crazy ( 1977 )
The Final Frontier with Steve Jurvestson: Part One. Cringey profile of Steve Jurvestson—strong Andrew Ross Sorkin describing Jamie Dimon energy.
We are accustomed to thinking that modern democracies are always like a pendulum—a swing far in one direction is balanced by a swing back in the other direction. But the descent into tyranny can mess with the whole pendulum mechanism, preventing the counter-swing. We are concerned that the mechanisms that, thankfully, have thus far prevented us from reaching the tipping point and capsizing are being dismantled. The dismantling is being done to some extent intentionally, by despots and wannabe despots, who act variously from greed, depravity, delusion—God knows what!
Both Left and Right Are Converging on Authoritarianism
But what if – and hear me out here – Spotify is cheap and the Big Three are greedy
Darren Beattie interview—Tech bros are red-pilled, but not based.
Women and men are interested in different things—shocking, I know. Includes a link to a personality test that tries to match people with suitable careers. I am best suited to “hunt, trap, catch, or gather wild animals or aquatic animals and plants.”
Why do colleges succeed while their students fail?
Old plasma dilution reduces human biological age: a clinical study. Plasma dilution helps fight aging, without being as creepy as parabiosis.
