The four great nightmares of the last century: inflation, deflation, recession, recession – which of them is more terrifying to 21st century nationals?
It depends, at least to some extent, on the private collection of traumas, stemming from the individual, family, or group memory.
Israelis, who came of age in the 1960s, used to think that a recession was the most terrible thing. The recession of that mid-decade was a time when Israelis would disappear from their homes in the dead of night on the way to the airport so that their neighbors could not watch the act of descent. Israelis who reached their peak in the early 1980s will say inflation, and will be remembered with a shudder of 400%.
Very few Americans remember the 1930s personally, but they have heard about the Great Depression, perhaps from their elders, or from their teachers. Deflation sends them permeating, because no one had any idea how to put an end to falling prices, which causes people to stop consuming, and to stop producing anyway.
Americans from the late 1970s remember the only time in their country’s history that double-digit inflation was recorded, which in turn generated the highest interest rates ever, and plunged America into the sharpest recession since the 1930s.
One can also take an interest in the traumas of the Germans and the Japanese, and see how they affect present anxieties and decision-making processes. Because that’s exactly the point: the discussion of past experience is not just academic or sentimental. This experience is directly related to the priorities of political leaders, central bank governors, and senior advisers.
The used cars
The announcement that the U.S. consumer price index rose last year (May 2020 to May 2021) by 5% surprised the capital markets, and they recorded the worst week since Joe Biden entered the White House in January. But they did not worry the Federal Reserve management, The US Federal Reserve, or Janet Yellen, the Treasury minister in the Biden administration, who is also the Fed’s former governor.
She and the governor who inherited it, Jerome Powell, predicted more or less the same language: Although inflation is higher than expected, these are passing data, the result of the massive renewal of economic activity, the fruit of traffic jams. There is no need to tighten the belt, that is to say raise the interest rate, certainly not in the near future.
Powell said a third of the rise in core inflation (which does not include fuel and food prices) is related to raising the prices of used cars. This statement is the result of a temporary shortage, linked to a car shopping frenzy that accompanied the exit from the Corona crisis. We have already seen something like this in the dramatic fluctuations in wood prices. Between May and May there was an increase of 275%, but since the beginning of May their prices have fallen by 41%.
Powell estimates that inflation will fall to 3.4% by the end of the year, and will fall by 2.1% by the end of next year. The desired target set by the bank for inflation even before the corona virus was 2%.
None of the bank’s chiefs disagrees with this estimate, though according to the Wall Street Journal, “a solid majority of Fed officials think that the inflation rate is more likely to be higher than forecast than lower than forecast.”
Do not snatch the bowl
Inflation forecasts on and off the Fed have an alarming record. Forecasters have repeatedly diminished its severity, for example in the late 1960s. Either way, members of the Fed’s open market committee are in no hurry to “snatch the punch bowl,” in the spirit of one of the most famous financial clichés of our time.
The last time they did so was in 1979, but it was in utterly desperate circumstances. The question of when interest rates will start to rise came last weekend, the not-quite-expected answer: “before the end of 2022.” It came from the mouth of the head of the Fed’s branch in St. Louis (the Fed has 12 regional branches). That announcement cost the Dow Jones 500 points. The accepted estimate is that the interest rate on short-term loans granted by the bank to commercial banks will reach half a percent by the end of 2023.
The experience of inflation in America is the domain of people who are on the verge of retirement or have already retired. No one likes inflation, but the vast majority tend not to jump out of their chairs at these figures. And even among those who remember inflation, the logic of the struggle against it is not uniform. This applies first and foremost to those who influence decision making.
Yellen learns from Keynes
The Washington Post published over the weekend a professional and intellectual profile of Janet Yellen, the finance minister who will soon turn 75. She is a veteran academic, with chairs from both sides of the United States. The Most Important Keynesians of Our Time John Maynard Keynes laid the foundations for government intervention in the economy in the 1930s, influencing 90 years of political economy. The arena, especially in times of crisis.
Yellen began her public career as an economic advisor to Bill Clinton, in the 1990s. Even then, according to the Washington Post, it “tended to side with economists who were less concerned about inflation and more about slow economic growth.”
At the height of her career, Yellen represents a “dramatic transition” from the attitude prevalent in the Clinton and Obama administrations, and was considered convenient to the business world. It asserts a vigorous governmental role in economic activity, and argues with uncompromising vigor in favor of the burden of corporate taxes. While the White House tends to compromise on the level of the requested increase, in order to gain Republican approval for the president’s infrastructure initiative, Yellen stands at 28% (the Trump administration has reduced the corporation tax to 21%).
Yellen’s toughness now puts her to the test that not everyone is sure she can stand it. In Washington cocktails, direct and virtual, there has recently been talk of the impending possibility of its replacement. The natural candidate in such a case would be the young deputy, Wali Adaimo, an immigrant from Nigeria.
But Yellen’s power is still at its waist, and its rhetoric continues to reconcile with the administration’s progressive social agenda, including the declaration that for 40 years not enough has been done to allow “tens of millions of Americans to enter the prosperous parts of our economy.” A reversal of that damage necessitates massive investments in infrastructure and education, she said last week at a congressional hearing.
It does not go so far as to follow modern Monetary theory (MMM), which sees taxes as the most effective means of fighting inflation. Nor does it dismiss the danger of inflation. But subscribe and finish with her not to miss what she thinks of a historic opportunity.
A separate question is what will be the inflationary expectations for the president’s political status, especially in the run – up to the mid – term elections to Congress, in a year and a half or less. 70% of respondents to a new public opinion poll say they are “concerned” about the possibility that President Biden’s economic plans will lead to inflation. Interestingly, among those concerned are 55% of Democrats and 70% of unidentified voters. Republicans intend to strike mercilessly. Democrats hope economic highs (7% growth this year) will help voters concentrate mostly.
Previous lists on yoavkarny.com and https://tinyurl.com/yoavkarny-globes
Tweets (in English) ontwitter.com/YoavKarny