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Should The Fed Declare Defeat And Move On?

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Should The Fed Declare Defeat And Move On?

Authored by Mike Shedlock via,

The Wall Street Journal author Jason Furman fires the opening salvo by mainstream media pleading for higher inflation targets…

Total Credit Market Debt Owed courtesy of the Fed, annotations by Mish

The Fed Should Carefully Aim for a Higher Inflation Target

Please consider The Fed Should Carefully Aim for a Higher Inflation Target by WSJ author Jason Furman

Mr. Furman, a professor of the practice of economic policy at Harvard, was chairman of the White House Council of Economic Advisers, 2013-17.

No Benefit to Inflation

There is no economic benefit to inflation. However, it does create winners and losers, with the winners being those with first access to money, especially the banks, the politically well connected, and the already wealthy.

I have discussed this many times before but it’s worth repeating again. Routine consumer price deflation is a benefit. It’s credit deflation resulting from the bursting of asset bubbles that is very damaging.

That’s not just my opinion, it’s the opinion of the Bank of International Settlements (BIS). 

Historical Perspective on CPI Deflations: How Damaging are They?

For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

The exception to the general rule was the Great Depression but, that was also an asset bubble deflation coupled with consumer price deflation.

In their attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations.

Economists fail to see that asset inflation matters, not just CPI inflation. That’s another point Furman fails to understand. The Fed has blown several assets bubbles of increasing amplitude in a foolish attempt to create more inflation while totally ignoring massive inflation in housing and other financial matters.

Most economists have no idea how to even measure inflation and/or focus only on consumer inflation. The result has been problem after problem.

Inflation Expectations

Furman’s noise about inflation expectations is also a hoot. Fed studies and common sense both show inflation expectation theory to be total nonsense.

Second Fed Study Concluded Inflation Expectations Theory is Nonsense

Also consider A Fed Economist Concludes the Widely Believed Inflations Expectations Theory is Nonsense.

Here are some excerpts from the actual study:

One should not need a study to prove the obvious. And it’s obvious that inflation expectation theory is nonsensical.

The reason has to do with the way inflation is calculated. 

What Can the Fed Do About the Price of Food, Medicine, Gasoline, or Rent?

CPI Weights from BLS chart by Mish

Stupidity Well Anchored: Absurdity of Inflation Expectations in Graphic Form

I discussed the silliness of inflations expectations theory in Stupidity Well Anchored: Absurdity of Inflation Expectations in Graphic Form

Inflation Expectations Q&A

Logically speaking, since the vast majority of the CPI is inelastic, and some of “everything else” is also inelastic, how can expectations matter at all? A Fed study concluded the same thing.

Asset Irony

People will rush to buy stocks in a bubble if they think prices will rise. They will hold off buying stocks if they expect prices will go down.

People will buy houses to rent or fix up if they think home prices will rise. They will hold off housing speculation if they expect prices will drop.

The very things where expectations do matter are the very things the Fed ignores.

Economic Wizards and Their Targets

Furman wants the Fed to stabilize targets below 3 percent then aim for something higher later. What is magic about 2 percent, 3 percent or any other number, given the fact there is no benefit to inflation at all?

The strive for inflation in a disinflationary world created massive asset bubbles and led to global wage arbitrage, outsourcing, and just in time manufacturing.

Now, we have gale force inflationary winds blowing stiffly in our face thanks to deglobalization, decarbonization, and inane energy policies of the Biden administration.

Don’t Worry It’s Only Temporary

The push for 3 percent, 4 percent, whatever percent is of course only temporary just as Nixon’s trashing the gold standard in in 1971 was only temporary.

We still pay the costs of that temporary move. In fact, all of the boom-bust cycles and exponential increase in debt dates to that event.

It would behoove economists to understand that point.

Bottom Line is More Inflation

Not only does Biden demand more clean energy, he also demands consumers pay the maximum amount for it, despite that being counterproductive to the main goal. For discussion, please see The Cost of Soup and Solar Panels is About to Increase, Thank President Biden

And president Biden has latched on to prevailing wages as discussed in Yet Another Biden Regulation Will Increase Costs and Promote More Inflation

No one has bothered to do any analysis of how the push to EVs does not scale or the infrastructure costs to achieve the goal even if the idea did scale.

My readers are far better informed than these alleged economic wizards. For discussion, please see What Do MishTalk Readers Think About “Electric Vehicles for Everyone?”

But, “It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought.”

That’s what made Furman the perfect choice for President Barack Obama’s chair of the Council of Economic Advisers (CEA). And as you can see, he still has the magic touch.

*  *  *

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Tyler Durden Mon, 08/21/2023 – 19:00

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