While I understand the idea that a policy mistake seems much less likely given the seeming advances in understanding and data availability, I fear that by virtue of the fact that the Fed, and basically every major central bank, is focused on backward looking data, the chances are actually still quite high. to me the question is just how long will they continue along the poisoned path.
With regard to the impact of oil prices, isn't a barrel of crude oil delivered to the refinery less expensive from a domestic source than a barrel shipped from the mid east or even South America? We're been told that shipping costs skyrocketed when this inflationary cycle started?.
As Ed Leamer put it: "Humans are pattern seeking story telling animals". In this year-old post, my strategy was to compare different periods to find a consistent story that explains the events observed.
I actually read this thesis backwards. My only counter argument is the that replacing cheap and reliable energy with immature green energy sources is the oil shock of the 2020s?. Secondly, some of these political leaders are ideological. They believe in what they believe because it’s the right thing to do. Some of them tell us about environmental disasters. I worry that you might be wrong about inflation because our deciders see it useful to make energy more and more expensive.
Thank you for this clear exposition of economic differences between the 1970s and today.
In the section titled "'Stag' hunting", you argue why real interest rates today are significantly lower than in the early 1980s---as per the Fed data on the 10-year real interest rate [1] that you cite, around 1.0% and 7.5%, respectively. You discuss this difference in an earlier post [2] that you cite here. As I understand the argument, population growth leads to greater output and demand, including investment; and population growth of younger people relative to older people increases demand for current consumption relative to saving, leading (why?) to higher real interest rates.
I think I follow the intuition, but I don't understand the mechanisms, and I don't know how this squares with data. For example, US population growth rose from 1.0% in 1990 to 1.3% in 1991 and stayed above 1.2% until almost 2000, compared to a growth rate mostly between 0.9% and 1.1% from 1972 to 1990 [3, annual growth rates]. To my (untrained) eye, US population growth rates during 2000---2010, when the 10-year real interest rate was around 2%, look similar to US population growth rates during 1982--1990, when the 10-year real interest rate was above 4% [3, annual growth rates; 1]. US population growth in the 25--54-year-old demographic reached a local peak of around 2.2% during 1980--1990 [4, annual growth rates]. US population growth of the 15--64-year-old demographic reached a local peak of around 1.5% during 1995--2003 (below the 1.7% growth rate in the late 1970s; these data appear to go back to only 1978) [5, annual growth rates]. Despite these increases in population growth, starting in late 1984 the 10-year real interest rate declines fairly steadily to the 0%--1% regime from 2010 onward [1].
So I feel I don't well understand the population argument (or the data I cite above, or both). Might recent memories of high inflation have made investors in the early 1980s view US government securities as riskier, compared to investors' views today, and this contributes significantly to the higher US real interest rates in the early 1980s? Might foreign demand for the US dollar, and by extension US government debt, contribute significantly? If these hypotheses are plausible, then how can we test them?
If you know of other attempts to explain the decline in US real interest rates starting in the mid 1980s, and you find the explanations convincing, then I'd appreciate the pointers. I'd like to better understand how we arrived at the current interest-rate regime, and how things are likely to evolve moving forward.
I know there are various definitions of the inflation rate being classed as hyper inflation. They probably do vary but accountants when they produce their auditted accounts are required to state if it is an hyper inflation set of accounts.
Is there something similar in the definition of stag inflation. It must be rate over time. Do accountants have to state it is such an environment.
Comprehensive and penetrating as well as fascinating analysis.
I felt that a couple of things need more elaboration: i) The post WWII Europe reconstruction project in which the U.S. (largely untouched by devastation-except the horror of being bombed by Japan that was avenged by dropping the fatman; ii) Extensive infrastructure build-up within the U.S. during the Eisenhower presidency that boosted employment as well as consumption; iii) the neo-colonial loot through finance capital in the third world without occupation of the then third world countries including India, South-East Asia as well as the South American continent (“backyard of the United States). This ‘benevolent exploitation masked the ruthless exploitation through outright slavery in the earlier century on the back of which primitive accumulation occurred in the land of the free, viz. the United States - unlike the Old World, which did it through expropriation of the peasantry; because the option simply didn’t exist in the New World.
To round off this exceedingly lengthy “comment”: Your perceptive observation about overhauling of the productive process in the U.S.A., wherein manufacturing has been shrunk to zero, on the one hand by finance and on the other by the “soft” digital revolution that will mercilessly render human (labour) intervention obsolete. Thirdly, militarisation and weaponisation of the world in which the United States is the front runner (remember the Military-Industrial Complex?) - all these go to make for a shrinking space for old fashioned notions of good old ‘development’!
And lastly, the aforesaid transformation of production and life itself will cause not just the rate of profit to fall but also disappearance of profit itself under the capitalist mode of production.
Another point too is that we didn’t have QE during the 1970s. This could have a major impact for good or bad. TBD yet especially with QT trying to take it back.
Nor did we have MBS which grow gdp but effectively just micro transaction risk.
While I understand the idea that a policy mistake seems much less likely given the seeming advances in understanding and data availability, I fear that by virtue of the fact that the Fed, and basically every major central bank, is focused on backward looking data, the chances are actually still quite high. to me the question is just how long will they continue along the poisoned path.
I hope you are correct, I fear you are not.
Thanks for a very good summary
With regard to the impact of oil prices, isn't a barrel of crude oil delivered to the refinery less expensive from a domestic source than a barrel shipped from the mid east or even South America? We're been told that shipping costs skyrocketed when this inflationary cycle started?.
👏👏👏
As Ed Leamer put it: "Humans are pattern seeking story telling animals". In this year-old post, my strategy was to compare different periods to find a consistent story that explains the events observed.
https://marcusnunes.substack.com/p/macroeconomic-patterns-and-stories
I actually read this thesis backwards. My only counter argument is the that replacing cheap and reliable energy with immature green energy sources is the oil shock of the 2020s?. Secondly, some of these political leaders are ideological. They believe in what they believe because it’s the right thing to do. Some of them tell us about environmental disasters. I worry that you might be wrong about inflation because our deciders see it useful to make energy more and more expensive.
Thank you for this clear exposition of economic differences between the 1970s and today.
In the section titled "'Stag' hunting", you argue why real interest rates today are significantly lower than in the early 1980s---as per the Fed data on the 10-year real interest rate [1] that you cite, around 1.0% and 7.5%, respectively. You discuss this difference in an earlier post [2] that you cite here. As I understand the argument, population growth leads to greater output and demand, including investment; and population growth of younger people relative to older people increases demand for current consumption relative to saving, leading (why?) to higher real interest rates.
I think I follow the intuition, but I don't understand the mechanisms, and I don't know how this squares with data. For example, US population growth rose from 1.0% in 1990 to 1.3% in 1991 and stayed above 1.2% until almost 2000, compared to a growth rate mostly between 0.9% and 1.1% from 1972 to 1990 [3, annual growth rates]. To my (untrained) eye, US population growth rates during 2000---2010, when the 10-year real interest rate was around 2%, look similar to US population growth rates during 1982--1990, when the 10-year real interest rate was above 4% [3, annual growth rates; 1]. US population growth in the 25--54-year-old demographic reached a local peak of around 2.2% during 1980--1990 [4, annual growth rates]. US population growth of the 15--64-year-old demographic reached a local peak of around 1.5% during 1995--2003 (below the 1.7% growth rate in the late 1970s; these data appear to go back to only 1978) [5, annual growth rates]. Despite these increases in population growth, starting in late 1984 the 10-year real interest rate declines fairly steadily to the 0%--1% regime from 2010 onward [1].
So I feel I don't well understand the population argument (or the data I cite above, or both). Might recent memories of high inflation have made investors in the early 1980s view US government securities as riskier, compared to investors' views today, and this contributes significantly to the higher US real interest rates in the early 1980s? Might foreign demand for the US dollar, and by extension US government debt, contribute significantly? If these hypotheses are plausible, then how can we test them?
If you know of other attempts to explain the decline in US real interest rates starting in the mid 1980s, and you find the explanations convincing, then I'd appreciate the pointers. I'd like to better understand how we arrived at the current interest-rate regime, and how things are likely to evolve moving forward.
Thank you.
References
[1] https://fred.stlouisfed.org/series/REAINTRATREARAT10Y
[2] https://www.apricitas.io/p/financial-conditions-are-tightening
[3] https://fred.stlouisfed.org/series/POPTHM
[4] https://fred.stlouisfed.org/series/LNU00000060
[5] https://fred.stlouisfed.org/series/LFWA64TTUSM647S
I know there are various definitions of the inflation rate being classed as hyper inflation. They probably do vary but accountants when they produce their auditted accounts are required to state if it is an hyper inflation set of accounts.
Is there something similar in the definition of stag inflation. It must be rate over time. Do accountants have to state it is such an environment.
Comprehensive and penetrating as well as fascinating analysis.
I felt that a couple of things need more elaboration: i) The post WWII Europe reconstruction project in which the U.S. (largely untouched by devastation-except the horror of being bombed by Japan that was avenged by dropping the fatman; ii) Extensive infrastructure build-up within the U.S. during the Eisenhower presidency that boosted employment as well as consumption; iii) the neo-colonial loot through finance capital in the third world without occupation of the then third world countries including India, South-East Asia as well as the South American continent (“backyard of the United States). This ‘benevolent exploitation masked the ruthless exploitation through outright slavery in the earlier century on the back of which primitive accumulation occurred in the land of the free, viz. the United States - unlike the Old World, which did it through expropriation of the peasantry; because the option simply didn’t exist in the New World.
To round off this exceedingly lengthy “comment”: Your perceptive observation about overhauling of the productive process in the U.S.A., wherein manufacturing has been shrunk to zero, on the one hand by finance and on the other by the “soft” digital revolution that will mercilessly render human (labour) intervention obsolete. Thirdly, militarisation and weaponisation of the world in which the United States is the front runner (remember the Military-Industrial Complex?) - all these go to make for a shrinking space for old fashioned notions of good old ‘development’!
And lastly, the aforesaid transformation of production and life itself will cause not just the rate of profit to fall but also disappearance of profit itself under the capitalist mode of production.
Another point too is that we didn’t have QE during the 1970s. This could have a major impact for good or bad. TBD yet especially with QT trying to take it back.
Nor did we have MBS which grow gdp but effectively just micro transaction risk.