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20% of all dollars were created in 2020. The only thing preventing that from translating into the broader price level is that money velocity collapsed due to t

20% of all dollars were created in 2020. The only thing preventing that from translating into the broader price level is that money velocity collapsed due to the Covid shutdowns. Instead most of that has channeled into financial and property asset prices. Once velocity increases, as is the plan if you assume 2021 is the year we "recover" from Covid restrictions, the Fed will have a choice between inflation and deflating the money supply (eg by selling a huge portion of their accumulated financial assets). The latter implies a rise in interest rates that harms economic recovery and government borrowing costs, potentially reducing available fiscal stimulus. I would like to read an analysis of how they plan on veeeery carefully extricating themselves from this situation but as far as I can tell the strategy is to wing it.

giantg2 6y ago
Considering Yellen has basically stated (and has a history of doing), she would rather do too much and deal with inflation rather than not do enough. So my take away is that we'll see inflation above 3% in the next two years.
- jfengel 6y ago
  It's already well above 3%, if you could include the stock market in the metric. That's the problem facing Yellen: not just doing enough, but doing something that won't just end up inflating the kinds of assets owned by the wealthy. Consumer prices have been stable because despite the increase in money supply, consumers as a whole were treading water (at best) even before the pandemic. She would be happy to do something that caused CPI to get above 3%. It would mean the Fed could finally take the punch bowl away. They've been refilling it for well north of a decade, and it drains as fast as they fill.
  - voisin 6y ago
    On topic and timely WSJ article on inflation: https://archive.is/AsvgT https://archive.is/AsvgT It isn’t just stocks. Our inflation measures make a mockery of including households’ largest expense - housing.
    - jazzyk 6y ago
      ... and healthcare, which has been rising 13%-15% every year
      - voisin 6y ago
        Inflation numbers don’t include healthcare?!
        jfengel 6y ago
        Yes, they do. It's 8.833% of the index. Health insurance makes up 13% of that part, or about 1% of the overall CPI. So even a large increase in health care contributes only a tiny amount to inflation. https://www.bls.gov/cpi/factsheets/medical-care.htm https://www.bls.gov/cpi/factsheets/medical-care.htm Of course, these are averages. If something catastrophic happens to you, it can easily consume your entire budget.
        ac29 6y ago
        They account for health insurance in a different way than you might think just looking at those 13% / 1% numbers might suggest. The short version is that if you pay $10000 in insurance premiums, but get $8000 of health care costs covered, they call that $2000 of insurance cost (since youd be paying the $8000 out of pocket otherwise). Of course, with the state of insurance in the US, its more complicated that that in reality. I think the overall 8.8% figure is probably reasonably accurate for total health care costs, on average.
    - refurb 6y ago
      Why does it make a mockery? It’s included in CPI and for a large swath of America housing isn’t growing by 10% each year, so we’d expect housing inflation to be moderate on average.
moritz64 6y ago
To expand on "money velocity": Inflation reaches high-priced assets and those which are largely bought by institutional investors first - Real estate and equity. Cantillon's effect is the keyword: https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_theory https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...
neffy 6y ago
It's not velocity - that's a red herring (complete misunderstanding of monetary behaviour by Rothbard et. al.) There are a few things going on simultaneously, one is that a lot of the new money is going into the finance sector, so there is inflation, but it's in share prices which doesn´t get captured by the CPI measurement. The other thing is that banking regulation no longer depends on the reserve requirement, but on the capital reserve requirement which controls how much lending the banks can do (and through that the amount of money creation.) So the inflationary spiral is now, banks increase capital, which increases lending, which increases the money supply, which increases the value of existing capital, etc. It is fortunately a lot slower than what would have happened if the old asset reserve requirement was still all that controlled the system. You can see it starting to affect M2, but it will take a while to feed through.
thedudeabides5 6y ago
MMT is pretty simple. Run inflation higher than interest rates to push down the nominal value of debt. Usual example is the UK after WWII. https://fred.stlouisfed.org/series/CPIIUKA https://fred.stlouisfed.org/series/CPIIUKA You don't need hyper inflation to inflate away your debts, just enough monetization to bring indebtedness in line. Now, does that mean the currency will retain value vs real assets, no it means the opposite. Hence the move in stocks, real estate, bitcoin, gold, etc;
- grey-area 6y ago
  And what happens when inflation rises and they need to control it with non-zero interest rates? Then stocks, real estate etc crash and we're back in another recession, which they try to solve with... more money and lower interest rates. We've already seen this story a few times. Inflating away debt is fine if it is done slowly and has been done for centuries. The extreme asset valuations we've seen after a decade of QE are unprecedented. ZIRP and QE are not fine and are not working for the stated purpose, if anything they're making the economy more fragile. There's an interesting overview of the choices here from Lyn Alden, none are without complications but it does sound like they'll try to aim for moderate inflation and hope they can control it, but if they need to put the brakes on in a hurry the traditional methods of doing so could have extreme effects on overvalued assets: https://www.lynalden.com/february-2021-newsletter/ https://www.lynalden.com/february-2021-newsletter/
  - thedudeabides5 6y ago
    Yeah I don't disagree with Lyn, low rates are underwriting our entire bubble ad not necc the monetary policy I'd prefer. Rather than pushing up financial assets and then jamming everyone into more interest rate sensitive debt, why not print the money, give it to poor people, and create a bit of inflation.
- kyrieeschaton 6y ago
  MMT does not depend on or imply the relation between debt and inflation, it addresses the metaphysics of "government debt" as such. In fact it suggests you should not "inflate away the debt", as if governments were subject to an actual fiscal constraint of spending = taxes + borrowing (the premise MMT rejects).
gizmo 6y ago
The FED strategy is to do enough to keep the recovery going, but not so much that it overheats. GDP growth will over time make the debt burden bearable as interest rates tick higher. With 10 million unemployed and 44% of households being behind on mortgage/rent/bills the economy is not going to roar back to life. With demand depressed because the actual economy hurting badly inflation will be moderate and temporary and deflation will remain the top concern of the Fed. Of course we do see prices in some areas going up. Houses for instance. But that makes sense when you think about it. Nobody wants to move to a smaller house/apartment during a pandemic, and millions are simply not paying their mortgage instead of downsizing. Meanwhile those with money are moving away from cities and buying bigger places. The implications for housing prices are obvious. But this asymmetry won't last because the relief programs are temporary. Burry believes that rising prices and some inflation proves we are at the cusp of Weimar Germany style hyperinflation. That is, at least for now, not borne out by the data in the slightest.
marcosdumay 6y ago
> The only thing preventing that from translating into the broader price level is that money velocity collapsed due to the Covid shutdowns. Hum... Money management 101 says that if velocity goes down, you must print more money to compensate. Otherwise you get a deflationary crisis added into your real world one. (And fiscal policy should intervene increasing the velocity, but fiscal policy is a fraud everywhere, so nothing new here.) The real test on the seriousness of the US monetary policy is whether they will drain the market once the velocity increases. I do expect them to, but well, anything may happen. Anyway, that part of the comment on the title is a case of "well, duh?!?" What else could we expect any central bank to do right now? But the data is still interesting.
- atq2119 6y ago
  MV=PQ is popular in some circles, but it doesn't describe casual links. You can't reason about how those quantities behave from the equation, which is a mere accounting tautology. Both recently and in QE post-global financial crisis, V went down because M increased without any reason for why the right-hand side of the equation should change.
  - marcosdumay 6y ago
    > V went down because M increased without any reason Wait, if we are talking about 2017-2019, that's a different story. But right now, V got to the floor (everywhere, not just the US) because of the pandemic.
mmcconnell1618 6y ago
You bring up an interesting point about the velocity of money. Two things come to mind: 1) If wealth distribution in the US is getting more top heavy, is a certain percentage of the currency slowing down in velocity as it is held by wealthier people who aren't spending it? 2) What is the rate of population change vs. the change in money supply? If the population is growing at 5% a year, the money supply growing at 5% a year should be net neutral for inflation. I think the US population is growing less than 1% per year so maybe this isn't really a hedge against inflation.
chokeartist 6y ago
> I would like to read an analysis of how they plan on veeeery carefully extricating themselves from this situation but as far as I can tell the strategy is to wing it. Agreed I would be interested in this as well. However my understanding is these strategies from a play by play plan perspective are very confidential, for obvious reasons (people would play the market to every FED move, more than they do now).
ryanmarsh 6y ago
how they plan on veeeery carefully extricating themselves from this situation I think war usually follows... Someone who knows monetary history better please comment.
throw0101a 6y ago
> Once velocity increases Let us prayer that it does. I'd much rather deal with an economy that is "too hot" than with one in which millions of people are unemployed.

giantg2 6y ago

Considering Yellen has basically stated (and has a history of doing), she would rather do too much and deal with inflation rather than not do enough. So my take away is that we'll see inflation above 3% in the next two years.

jfengel 6y ago
It's already well above 3%, if you could include the stock market in the metric. That's the problem facing Yellen: not just doing enough, but doing something that won't just end up inflating the kinds of assets owned by the wealthy. Consumer prices have been stable because despite the increase in money supply, consumers as a whole were treading water (at best) even before the pandemic. She would be happy to do something that caused CPI to get above 3%. It would mean the Fed could finally take the punch bowl away. They've been refilling it for well north of a decade, and it drains as fast as they fill.
- voisin 6y ago
  On topic and timely WSJ article on inflation: https://archive.is/AsvgT https://archive.is/AsvgT It isn’t just stocks. Our inflation measures make a mockery of including households’ largest expense - housing.
  - jazzyk 6y ago
    ... and healthcare, which has been rising 13%-15% every year
    - voisin 6y ago
      Inflation numbers don’t include healthcare?!
      - jfengel 6y ago
        Yes, they do. It's 8.833% of the index. Health insurance makes up 13% of that part, or about 1% of the overall CPI. So even a large increase in health care contributes only a tiny amount to inflation. https://www.bls.gov/cpi/factsheets/medical-care.htm https://www.bls.gov/cpi/factsheets/medical-care.htm Of course, these are averages. If something catastrophic happens to you, it can easily consume your entire budget.
        ac29 6y ago
        They account for health insurance in a different way than you might think just looking at those 13% / 1% numbers might suggest. The short version is that if you pay $10000 in insurance premiums, but get $8000 of health care costs covered, they call that $2000 of insurance cost (since youd be paying the $8000 out of pocket otherwise). Of course, with the state of insurance in the US, its more complicated that that in reality. I think the overall 8.8% figure is probably reasonably accurate for total health care costs, on average.
  - refurb 6y ago
    Why does it make a mockery? It’s included in CPI and for a large swath of America housing isn’t growing by 10% each year, so we’d expect housing inflation to be moderate on average.

moritz64 6y ago

To expand on "money velocity": Inflation reaches high-priced assets and those which are largely bought by institutional investors first - Real estate and equity. Cantillon's effect is the keyword: https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_theory https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...

neffy 6y ago

It's not velocity - that's a red herring (complete misunderstanding of monetary behaviour by Rothbard et. al.) There are a few things going on simultaneously, one is that a lot of the new money is going into the finance sector, so there is inflation, but it's in share prices which doesn´t get captured by the CPI measurement. The other thing is that banking regulation no longer depends on the reserve requirement, but on the capital reserve requirement which controls how much lending the banks can do (and through that the amount of money creation.) So the inflationary spiral is now, banks increase capital, which increases lending, which increases the money supply, which increases the value of existing capital, etc. It is fortunately a lot slower than what would have happened if the old asset reserve requirement was still all that controlled the system. You can see it starting to affect M2, but it will take a while to feed through.

thedudeabides5 6y ago

MMT is pretty simple. Run inflation higher than interest rates to push down the nominal value of debt. Usual example is the UK after WWII. https://fred.stlouisfed.org/series/CPIIUKA https://fred.stlouisfed.org/series/CPIIUKA You don't need hyper inflation to inflate away your debts, just enough monetization to bring indebtedness in line. Now, does that mean the currency will retain value vs real assets, no it means the opposite. Hence the move in stocks, real estate, bitcoin, gold, etc;

grey-area 6y ago
And what happens when inflation rises and they need to control it with non-zero interest rates? Then stocks, real estate etc crash and we're back in another recession, which they try to solve with... more money and lower interest rates. We've already seen this story a few times. Inflating away debt is fine if it is done slowly and has been done for centuries. The extreme asset valuations we've seen after a decade of QE are unprecedented. ZIRP and QE are not fine and are not working for the stated purpose, if anything they're making the economy more fragile. There's an interesting overview of the choices here from Lyn Alden, none are without complications but it does sound like they'll try to aim for moderate inflation and hope they can control it, but if they need to put the brakes on in a hurry the traditional methods of doing so could have extreme effects on overvalued assets: https://www.lynalden.com/february-2021-newsletter/ https://www.lynalden.com/february-2021-newsletter/
- thedudeabides5 6y ago
  Yeah I don't disagree with Lyn, low rates are underwriting our entire bubble ad not necc the monetary policy I'd prefer. Rather than pushing up financial assets and then jamming everyone into more interest rate sensitive debt, why not print the money, give it to poor people, and create a bit of inflation.
kyrieeschaton 6y ago
MMT does not depend on or imply the relation between debt and inflation, it addresses the metaphysics of "government debt" as such. In fact it suggests you should not "inflate away the debt", as if governments were subject to an actual fiscal constraint of spending = taxes + borrowing (the premise MMT rejects).

gizmo 6y ago

The FED strategy is to do enough to keep the recovery going, but not so much that it overheats. GDP growth will over time make the debt burden bearable as interest rates tick higher. With 10 million unemployed and 44% of households being behind on mortgage/rent/bills the economy is not going to roar back to life. With demand depressed because the actual economy hurting badly inflation will be moderate and temporary and deflation will remain the top concern of the Fed. Of course we do see prices in some areas going up. Houses for instance. But that makes sense when you think about it. Nobody wants to move to a smaller house/apartment during a pandemic, and millions are simply not paying their mortgage instead of downsizing. Meanwhile those with money are moving away from cities and buying bigger places. The implications for housing prices are obvious. But this asymmetry won't last because the relief programs are temporary. Burry believes that rising prices and some inflation proves we are at the cusp of Weimar Germany style hyperinflation. That is, at least for now, not borne out by the data in the slightest.

marcosdumay 6y ago

> The only thing preventing that from translating into the broader price level is that money velocity collapsed due to the Covid shutdowns. Hum... Money management 101 says that if velocity goes down, you must print more money to compensate. Otherwise you get a deflationary crisis added into your real world one. (And fiscal policy should intervene increasing the velocity, but fiscal policy is a fraud everywhere, so nothing new here.) The real test on the seriousness of the US monetary policy is whether they will drain the market once the velocity increases. I do expect them to, but well, anything may happen. Anyway, that part of the comment on the title is a case of "well, duh?!?" What else could we expect any central bank to do right now? But the data is still interesting.

atq2119 6y ago
MV=PQ is popular in some circles, but it doesn't describe casual links. You can't reason about how those quantities behave from the equation, which is a mere accounting tautology. Both recently and in QE post-global financial crisis, V went down because M increased without any reason for why the right-hand side of the equation should change.
- marcosdumay 6y ago
  > V went down because M increased without any reason Wait, if we are talking about 2017-2019, that's a different story. But right now, V got to the floor (everywhere, not just the US) because of the pandemic.

mmcconnell1618 6y ago

You bring up an interesting point about the velocity of money. Two things come to mind: 1) If wealth distribution in the US is getting more top heavy, is a certain percentage of the currency slowing down in velocity as it is held by wealthier people who aren't spending it? 2) What is the rate of population change vs. the change in money supply? If the population is growing at 5% a year, the money supply growing at 5% a year should be net neutral for inflation. I think the US population is growing less than 1% per year so maybe this isn't really a hedge against inflation.

chokeartist 6y ago

> I would like to read an analysis of how they plan on veeeery carefully extricating themselves from this situation but as far as I can tell the strategy is to wing it. Agreed I would be interested in this as well. However my understanding is these strategies from a play by play plan perspective are very confidential, for obvious reasons (people would play the market to every FED move, more than they do now).

ryanmarsh 6y ago

how they plan on veeeery carefully extricating themselves from this situation I think war usually follows... Someone who knows monetary history better please comment.

throw0101a 6y ago

> Once velocity increases Let us prayer that it does. I'd much rather deal with an economy that is "too hot" than with one in which millions of people are unemployed.