The inflationary risks associated with Biden's "going big" covid relief package: Summers v Krugman
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  The inflationary risks associated with Biden's "going big" covid relief package: Summers v Krugman
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Author Topic: The inflationary risks associated with Biden's "going big" covid relief package: Summers v Krugman  (Read 872 times)
Torie
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« on: February 15, 2021, 10:34:38 AM »

Their debate, instead of turning into a brawl, kind of "degenerated" into more of a love in. At the end, both agreed to varying extents that the reanimation of inflation, after a long hibernation, from a 1.9 trillion stimulus package was a risk, and given most of it would probably pass, we will get to find out the the result of that roll of the dice, one way or the other. But nobody knows that result at present. Gamestop came up of all things.

https://www.bloomberg.com/news/articles/2021-02-12/summers-and-krugman-debate-stimulus-here-s-a-blow-by-blow-account




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Benjamin Frank
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« Reply #1 on: February 17, 2021, 07:08:56 AM »
« Edited: February 17, 2021, 08:08:08 AM by Frank »

This is the whole debate here:
https://www.youtube.com/watch?v=TdNYb3aOi9o

In short, both Paul Krugman and Larry Summers believe the stimulus will not be inflationary because most of the checks sent out will be saved rather than spent, whether the money goes to consumers or to state and local governments.

He also argues, that the rest of the spending, on vaccines, getting the shots in arms or upgrading schools should not been seen as stimulus, but as necessary investments.

Summers argues that once the Covid is largely dealt with the available money will lead to a spending and borrowing boom which will result in inflation sometime in 2022. He adds that would obviously interfere with any new infrastructure spending for 2022 (beyond school upgrades) that he thinks is critical, rather than the consumer spending caused by the spending of the government checks. So, he favors a stimulus bill of no more than around $1 trillion.

Krugman argues the marginal propensity to spend from savings is much lower than Summers argues so that that the stimulus checks would be spent over a much longer time period.   Summers expresses surprise at this and argues that Krugman is incorrectly applying here the drivers of the marginal propensity to spend.

For what it's worth, I'm much closer to Larry Summers on this, along as there is some certainty on an infrastructure spending package in 2022. Summers argues an infrastructure package for 2022 could be passed with this reconciliation.
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StateBoiler
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« Reply #2 on: April 21, 2021, 10:32:16 AM »
« Edited: April 21, 2021, 10:45:17 AM by StateBoiler »

I read lumber has not gone down in price since last week of March.

The Fed and the CEA last week put out inflation numbers and immediately tried to downplay them as "April 2020 was a low base" and "reflation". Economist I read occasionally take:

https://johnhcochrane.blogspot.com/2021/04/inflation-levels.html#more

Quote
March inflation is up. The CEA delivered a historic tweetstorm. It starts with

Quote
temporary factors: base effects, supply chain disruptions, and pent-up demand, especially for services

I'm glad for once to have nailed a forecast: That Fed and Administration's first response to inflation would be to invoke "temporary" factors, just as in the 1970s.  We'll see how that pans out.
The CEA goes on to "base effects,"

Quote
In the near-term, we and other analysts expect to see “base-effects” in annual inflation measures. Such effects occur when the base, or initial month, of a growth rate is unusually low or high..

This unusually large price decrease early in the pandemic made April 2020 a low base.

Since this is about the past, we can say something more definite. Yes, if you start from a low base, you can see a lot of growth. To get around the arbitrariness, let's look at price levels. Here is the recent CPI (blue) and CPI less food and energy (red). These are the levels of the CPI -- conceptually how many dollars it takes today ($271) to buy what $100 bought in 1983.



This is non-seasonally adjusted CPI (blue) and CPI less food and energy (red). If anything the story, reflation was over last fall and this is something new is clearer. But, as 2019 reminds us in both graphs, stuff happens.

David Einhorn's last newsletter he went through a bunch of real-life things that showed how broken the market was (including Archegos and Gamestop). I'm left with the impression cheap money being thrown everywhere and long-term zero percent interest rates have created a ridiculous operating environment. Interest rates have to rise. In fact, I disagree with the notion you can even claim an economy is "healthy" when operating at ZIRP or near-ZIRP. When interest rates rise however, a lot of people are going to be dragged kicking and screaming going into it, which is why I don't expect the government and the Federal Reserve to go that route...which is what happened in the 1970s. We've been on ZIRP or near-ZIRP for 13 years now. There's an entire generation of people that don't understand how debt operates when you have to pay higher interest, be it the 30-year-old looking to buy a house or a guy on Wall Street valuating companies or a venture capitalist or a Congressman that doesn't have a clue about how Treasury yields affect budget discussions.
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Benjamin Frank
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« Reply #3 on: April 23, 2021, 12:44:17 AM »
« Edited: April 23, 2021, 01:14:57 AM by Frank »

I read lumber has not gone down in price since last week of March.

The Fed and the CEA last week put out inflation numbers and immediately tried to downplay them as "April 2020 was a low base" and "reflation". Economist I read occasionally take:

https://johnhcochrane.blogspot.com/2021/04/inflation-levels.html#more

Quote
March inflation is up. The CEA delivered a historic tweetstorm. It starts with

Quote
temporary factors: base effects, supply chain disruptions, and pent-up demand, especially for services

I'm glad for once to have nailed a forecast: That Fed and Administration's first response to inflation would be to invoke "temporary" factors, just as in the 1970s.  We'll see how that pans out.
The CEA goes on to "base effects,"

Quote
In the near-term, we and other analysts expect to see “base-effects” in annual inflation measures. Such effects occur when the base, or initial month, of a growth rate is unusually low or high..

This unusually large price decrease early in the pandemic made April 2020 a low base.

Since this is about the past, we can say something more definite. Yes, if you start from a low base, you can see a lot of growth. To get around the arbitrariness, let's look at price levels. Here is the recent CPI (blue) and CPI less food and energy (red). These are the levels of the CPI -- conceptually how many dollars it takes today ($271) to buy what $100 bought in 1983.

This is non-seasonally adjusted CPI (blue) and CPI less food and energy (red). If anything the story, reflation was over last fall and this is something new is clearer. But, as 2019 reminds us in both graphs, stuff happens.

David Einhorn's last newsletter he went through a bunch of real-life things that showed how broken the market was (including Archegos and Gamestop). I'm left with the impression cheap money being thrown everywhere and long-term zero percent interest rates have created a ridiculous operating environment. Interest rates have to rise. In fact, I disagree with the notion you can even claim an economy is "healthy" when operating at ZIRP or near-ZIRP. When interest rates rise however, a lot of people are going to be dragged kicking and screaming going into it, which is why I don't expect the government and the Federal Reserve to go that route...which is what happened in the 1970s. We've been on ZIRP or near-ZIRP for 13 years now. There's an entire generation of people that don't understand how debt operates when you have to pay higher interest, be it the 30-year-old looking to buy a house or a guy on Wall Street valuating companies or a venture capitalist or a Congressman that doesn't have a clue about how Treasury yields affect budget discussions.

You are conflating two things here.  There is real price inflation, and there is asset price inflation.  Asset prices don't count as 'inflation' as they are merely a switch from one asset (cash) to another asset (investments.)

The purpose of the Federal Reserve is to contain real price inflation within a narrow band.  If asset prices are operating in bubbles, it is not the job of the Federal Reserve to raise interest rates, which causes harm in the real economy, to address this.

Clearly what is going on is that some mostly very wealthy people have too much money to play with and have nowhere useful that they can find to invest it in or to spend it on.  The answer to this is to raise taxes, especially capital gains taxes, and not to raise interest rates.

It's interesting to already see hack right wing economists once again call for interest rates to rise due to asset inflation after dropping those concerns when Trump was President.



The goofy show that I enjoy listening to late at night, Coast to Coast AM has been dropped in most of Canada.  There is a radio station that I can get it in sometimes, but other times I get in a different radio station that airs The (New!) John Batchelor Show.  

John Cochrane, AKA The Grumpy Economist happened to be on the John Batchelor Show that night and I listened after that to him on a podcast he did with John Batchelor that presaged the broadcast I heard.

1.On the podcast, Cochrane claimed, with no evidence, that 'nobody sees inflation until it's too late to address it.' and John Batchelor then used that line both with Cochrane and another guest on the program I heard.  The problem is, the only basis for this is that when inflation first started to become a problem in the United States in 1966, the prevailing economic orthodoxy at that time was Keynesianism, and it was not able to explain 'stagflation.'  

2.Cochrane credited Reagan for addressing inflation, and fair enough, but he neglected to mention that Reagan's large budget deficits allowed for inflation to return again in 1986/1987.  The subsequent rise in real interest rates caused George H. W Bush to lose re-election, but, in fact, this inflationary spiral was addressed by 1993 or so with the annual inflation rate going no higher than 5.4% in 1990, and with the exception of the period from approximately 2006-2008 when prices rose as a result of the oil price shock, inflation has not been a significant problem for nearly 30 years now.

On another matter, I was somewhat surprised with the gratuitous and dishonest swipes that Cochrane made against unions on the show.
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StateBoiler
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« Reply #4 on: April 23, 2021, 07:07:54 AM »
« Edited: April 23, 2021, 07:36:02 AM by StateBoiler »

The purpose of the Federal Reserve is to contain real price inflation within a narrow band.  If asset prices are operating in bubbles, it is not the job of the Federal Reserve to raise interest rates, which causes harm in the real economy, to address this.

Raising interest rates causes harm in the real economy? F#ck, most significant economic activity is now based on getting into heavy debt because interest is nothing, which naturally favors the wealthy because they can get higher loans. How is that not harmful in a macro-economy sense? Let's also set aside that the official CPI measure has been completely gamed to undercount inflation for decades practiced by both parties for political reasons. So "containing inflation" has been mostly legislated away when your official metric is designed to undercount.

Quote
It's interesting to already see hack right wing economists once again call for interest rates to rise due to asset inflation after dropping those concerns when Trump was President.

Did you read Cochrane from 2017-20? He had a lot of criticism for President Trump's handling of the economy.
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Benjamin Frank
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« Reply #5 on: April 23, 2021, 02:59:30 PM »
« Edited: April 24, 2021, 05:46:36 PM by Frank »

The purpose of the Federal Reserve is to contain real price inflation within a narrow band.  If asset prices are operating in bubbles, it is not the job of the Federal Reserve to raise interest rates, which causes harm in the real economy, to address this.

Raising interest rates causes harm in the real economy? F#ck, most significant economic activity is now based on getting into heavy debt because interest is nothing, which naturally favors the wealthy because they can get higher loans. How is that not harmful in a macro-economy sense? Let's also set aside that the official CPI measure has been completely gamed to undercount inflation for decades practiced by both parties for political reasons. So "containing inflation" has been mostly legislated away when your official metric is designed to undercount.

Quote
It's interesting to already see hack right wing economists once again call for interest rates to rise due to asset inflation after dropping those concerns when Trump was President.

Did you read Cochrane from 2017-20? He had a lot of criticism for President Trump's handling of the economy.

1.Higher loans are only harmful if there is a sudden sharp rise in interest rates.  Short of raising interest rates, the government could impose on banks a regulation that requires them to conduct 'stress tests' on loans before making any loan.  Many countries in the world  have these stress tests.

2.The last time I checked, the billion prices project did not show significantly higher inflation than the CPI.

3.I'm not surprised that Cochrane criticized Trump's handling of the economy from time to time.  Unlike the goofs who commented on the economy on Coast to Coast AM (like Catherine Austin Fitts or Charles Coppes neither of whom are economists and both of whom kind of mix and match their economic ideas with Fitts often putting her finger to the wind), Cochrane has a definitive point of view on the economy.  He is clearly a neo-Keynesian so he wasn't going to be happy with Trump's anti free trade or high spending ways.  The problem is it's been 40 years since Reagan implemented neo-Keynesian policies and we've had 40 years to see that they've led to an increase in income and wealth inequality.  So, rather than admit his mistakes, when he tries to justify these things, Cochrane either revises history or facts.
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All Along The Watchtower
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« Reply #6 on: May 05, 2021, 04:00:33 PM »

Is Biden going big, or are the Carters succumbing to shrinkflation?



Jesus, Joe just towers over Rosalyn...
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