RFS wrote: ↑Tue Sep 21, 2021 12:05 pm
... will the Feds ever be transparent about inflation data to the point where 10 yr rates would actually rise?
I have been leaning towards the transitory camp for the last few months, but over time I've had to question the idea and I'll get to that in a second. Here is the thing, bond rates may not correlate to inflation at all. Imagine using standard analysis that the Fed tapered tomorrow. Will stocks go up or down in price? Likely down. Where does that money go? Into bonds is a reasonable guess. It is in fact possible due to risk-on/off behavior that bond yields will *fall* without the Fed being involved. Jeff Snider has talked through this point of view in detail if you care to research it, but all I want to do is generate reasonable doubt to the base narrative. There are other Eurodollar stories too, like the "dollar milkshake" that put reasonable doubt to the theory.
With that, the question around inflation is, what is the cause of inflation? If you believe inflation is about money printing, Japan is on QE # 24 I believe. Incidentally, Japan's 2021 inflation numbers are around 0 and were lightly negative in 2020 (based on a quick google search). It isn't clear CB printing always creates inflation. This is all around the idea that inflation is a general increase of prices. I don't disagree with the idea that asset prices are going up and eventually everything may get eaten up as an "asset". I don't believe that is what is happening with inflation this time around. Instead, I suspect it has more to do with the "external" factors. This has been argued to be the "supply chain" issue. I think that is where the fed is. They are like, "Our print button never did this before, so why now?" Blame it on those darn supply chains. Lumber is their example proof of this.
Where I think things have been different is it isn't just supply chains that are a problem. Many of the mines we have are at capacity. Electrification and rotting infrastructure. Companies called in their revolving credit at insane levels in March of 2020 in case of a credit system freeze (which is money printing). The US government repaired short term balance sheets of nearly the entire US population at the expense of their long term balance sheet, which then was bought by the Fed (actual money printing unlike that QE stuff). Companies have levered up their balance sheets for buybacks to the point of instability, but also making the stock more rare. "Pump and dumper" style schemes are running around everywhere from Wada in video games to Zillow in real estate. Companies live off debt for longer, disrupting more of the conservative companies and can become monster-sized like Amazon, Google, all while buying up all the competition with debt and using network effects. Labor behavior has changed. More folks are learning about the games being played in wall street and are playing their own. Folks are angry in society, feel they have no voice, have a sense things have been going wrong for a long time and companies are trying to buy them off via increased wages. Some of these points may lead to deflation later, but have temporarily led to inflation. I don't care if you agree or not with any given factor, nor do I care if you think a given factor is inflationary or not. The question is: How can the Fed address these sorts of factors out loud when they believe in magical thinking (e.g. "animal spirits") causing stimulated economics? They certainly don't believe QE has large effects when their own studies suggest "modest" effects at best.
Let me try one other example. Imagine the farmers put 50% of the crops on fire. Imagine at the same time the fed not only tapers but magically deleted half of all currency (M1, M2, don't care). The last 50% of crops will: A. Inflate in value in USD terms. B. Deflate in value in USD terms. My guess is at 50% food supply, many people will starve and thus food will inflate, regardless of the fact that there is only half as much currency. Unless you said there would be no price change, it would appear monetary printing is not the only form of inflation and the Fed does not control all forms of inflation that appear to exist. If the Fed said they can't fix it, they believe others will become depressed and won't spend, so the Fed can never admit to not being able to solve the problem.
One last point, in 2016 the 10-year T-note was at 1.6% (low) while inflation was at 1.8% per CPI, based upon a quick google search. The yield-to-inflation has been flirting at negative for years. Why do you believe if the Fed printed a 10% inflation rate that the 10 year would rise? Why not assume the system is rigged at multiple levels? It's not like the stories I might tell are not a rigged system, just different rigging with different players. I'd point to stories suggesting credit creation is at a bank level and the fact that the regulation forces less banks creates less dollars for the small players, forcing players to get big, like the banks. This kills general employment and forces prices down because the little guy can't afford more than that, ala deflation. The same regulations require the banks to buy up a lot of bonds because these are really big banks. They must buy even more bonds when things look shaky, like if the stock market falls for collateral reasons... pushing the yield ever down, regardless of inflation. So it's QE pushing rates down or its banks... The deflation you see would keep businesses from growing, so any non-QE printed money will still force the prices up because of TINA. I'll stop that story there because my point is not to convince you this story is right or wrong, but to question if the narrative you have has the right premises and how you might test them.
RFS wrote: ↑Tue Sep 21, 2021 12:05 pm
... Fed Governor was literally titled "Deflation: Making Sure "It" Doesn't Happen Here."
I think it is actually more likely that the 10 yr goes negative. This is because when The Everything Bubble bursts... Wouldn't the US run this exact same play?
I think the first question you generate is, which is worse, a "bitcoin" style deflation world or an inflation world? In a bitcoin world, everyone HODLs it because all other assets are deflating relative to bitcoin. The same is true for any other currency in deflation land, but this is where bitcoin is right now. So no one spends money, no one buys anything, there are no jobs because why invest when you can just HODL? There are lots of folks who argue we are in that world. In fact, you might say stocks are that asset, with bitcoin joining in recently. The deflation comes in the form of bitcoin halvings and buybacks. To tie it back to a
different thread, the number of lentils you can buy is going up every year you own stock, not because the business is doing better but because of inflating prices and flows. In such a world, the HODLers grow rich while those who must buy lentils grow poor from no work. People decide they should grow gardens and that growth has ended.
In an inflationary world, consumable and investment items cost more tomorrow than they do today. This is that "general price increase" view of inflation again. Lentils should cost just as much as stocks relative to each other, regardless of the inflation rate, all other variables being equal. To put it another way, 10 dollars of lentils is equal to 10 dollars of S&P shares today and if the currency doubles, it would be 20 dollars of lentils is equal to 20 dollars of S&P shares. In an "extreme" version of a world like this businesses have a hard time pricing things, because the price keeps going up. This becomes hyperinflation eventually. In a less extreme world, it is linear inflation where a business just factors in some "fudge" number into their price which then becomes the inflation rate, given the aggregate factor. This destroys debt faster and costs retirees.
It turns out the question is a trick, both are bad, but are bad for different classes of people. This could turn into a Marxian sort of class struggle analysis, if you like that sort of thing, or it could go into a "which is easier to solve" analysis or we could just look at what has happened and see what we should do about it. I'm going for the last.
I'm currently of the mind that we've been in something more like a deflation world due to QE for years, but I continue to update my priors as I learn more. If you think this will continue, HODL assets. The question is, when will the federal government run into liability levels that they cannot handle and what will the results be? It seems that no one, not even China wants to be the center of the currency world or the "reserve currency". The only other mainstream ideas are to use a basket of currencies or a relatively fixed size amount of currency (bitcoin, gold)(*). I think history is a poor guide at this point. Japan has 200+% of debt to GDP, "Self financed". How long the US can go for is just unknowable. Foreigners buy/sell debt based upon their need to repay loans in US dollars. This is the "dollar smile" idea, to say nothing of the "dollar milkshake". If the US starts having real trouble with their debt (not debt ceiling trouble mind you), it will likely be the end of the US reserve currency. While that is coming, the question of the how is really hard to predict. Maybe we see foreigners have to buy up dollars one last time to pay off their US denominated debts when the US crisis you imagine occurs. In which case, it may not be the blowup you imagine, rather it will just be the last time the US can raise more debt. In that case, a massive deflation will happen until the US directly monetizes reserves, ala central bank digital currency. Then it will turn into massive inflation. I personally think this is a harder thing to predict compared to the HODLer plan, but I also do think you should handicap it. How much and in what ways depends on you and how you imagine the blow up occurs.
(*) There are other ideas around solving this but they are by minor economists who are ignored. Steve Keen would be an example of this.