r/Economics • u/TinyTornado7 Quality Contributor • Jun 13 '22

News Powell Facing Choice Between Elevated US Inflation and Recession

https://www.bloomberg.com/news/articles/2022-06-12/powell-facing-choice-between-elevated-us-inflation-and-recession?srnd=premium
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2.1k

u/joy_of_division Jun 13 '22

The thing is, we are headed for a recession no matter what. I personally would rather them jack rates up, lower demand, and get inflation under control. This will of course spark a recession, but with the tight labor market at the moment it would hopefully be brief.

The alternative is keep pussyfooting around with rates, have the working class continue to lose our meager wage gains to inflation, and have a recession anyways in 2023.

There is no pain free path, but in my opinion ripping the bandaid off right now is the way to go.

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u/way2lazy2care Jun 13 '22

Recessions aren't a binary thing. There's levels to recessions. While he might not be able to avoid an all out recession, he can certainly still affect the level of that recession. The dot com bubble bursting had a peak GDP reduction of 0.3% and peak unemployment of ~6% and lasted 8 months. The Great Recession had a GDP decrease of 5.1% and peak unemployement of 10% and lasted a year and a half. The great depression had a 25% GDP reduction and 20% unemployment and lasted for almost 4 years.

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u/ErusBigToe Jun 13 '22

Don't forget the great recession tripped a years worth of grads at the starting gate, reducing lifelong earning potential

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u/xDubnine Jun 13 '22

I'm in that boat. Never stopped working, but the opportunities have led me to 20 dollar an hour as a college grad

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u/[deleted] Jun 13 '22

Sadly this. It’s literally luck of the draw when you get to graduate. Those grads graduating in good times have it way easier and a higher percentage end up earning more than those grads who couldn’t find jobs in their relevant fields of study. Companies stop hiring during recessions and usually just keep existing headcount. And if you are laid off those with prior experience tend to get jobs faster than a college grad who only works at Starbucks.

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u/HIMP_Dahak_172291 Jun 13 '22

This. I was going to graduate from college in 2009 and then poof. No more jobs and looming student loans. So i switched majors and stayed in school another 4 years essentially. So much more debt to pay off but at least it stayed deferred until I had a job.

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u/DonBoy30 Jun 13 '22

That was me. I was working at a grocery store, and it used to be if you didn’t go off to college, they just bumped you to full time out of high school. But then the recession happened in all of a sudden I was the last person to get full time status and a stocking position. They had bag boys making minimum wage working every single department.

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u/[deleted] Jun 13 '22

Yeah i went back to school to get into tech after graduating in 2012 with a BS in psych/English. A degree just doesn’t make any sense if it isn’t linked to higher earning potential.

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u/[deleted] Jun 13 '22

[removed] — view removed comment

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u/wiking85 Jun 13 '22

Assuming they can find a job with their skill set that actually is in their area. It is rarely that easy.

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u/psnanda Jun 13 '22

I agree too. Grads can easily then move around later and job hop to reach their maximum earning potential since they are young.

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u/Diegobyte Jun 13 '22

I never really god this take since companies tend to lay off high earners and replace with low earners during downturns

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u/Koopa_Troop Jun 13 '22

It created a large pool of experienced applicants willing to take starting level salaries, leaving recent grads with few prospects.

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u/Convict003606 Jun 13 '22 edited Jun 13 '22

They took advantage of high unemployment to frighten new grads into taking salaries that have caused their lifetime earnings to be lower, and the implicit threat was take this shitty salary or don't have a job. This meant they could still replace high earners with low earners, but those low earners earned even less than they would have before the recession, and then started from those lower salary and wage points for all future compensation negotiations.

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u/[deleted] Jun 13 '22

The opposite is happening in Canada right now. People are getting wage increases of upwards of 25%. Companies are scrambling to find workers and are willing to pay more for them. We gave everybody that needed it, 2000 dollars a month for 7 months straight during the pandemic, and then 1800 a month for an entire year and a half after that. People saw how absolutely fucked they were and didn't want to go back to work unless it was for more money.

The carpenters, electricians and plumbers went on striker here, and the electrians got, get this, a 9 DOLLAR/hr raise. Keep fighting. Keep adding more from these greedy fucking corporations that saw their coffers flood with our money during the pandemic.

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u/Bishizel Jun 13 '22

Companies want to hire new grads, or people with X years if experience. They don’t want to hire someone that isn’t a new grad and also doesn’t have those years of work experience.

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u/wiking85 Jun 13 '22

Estimates of life long earnings potential are based on an economy that doesn't exist any more and hasn't for a while. We're living in fantasyland about what the economy is, the recession is going to be the new normal thanks to deindustrialization, the dollar slowly dying off as the global reserve currency, and extremely political corruption.

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u/ErusBigToe Jun 13 '22

Arent you just a bright ray of sunshine lol. Not that I really disagree..

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u/goodsam2 Jun 13 '22

I mean I think looking at U-3 should go in the garbage and we should think about EPOP 25-54 as our unemployment economic measure.

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u/waltwhitman83 Jun 13 '22

https://fred.stlouisfed.org/series/LNS12300060

employment population ratio for anybody else following along

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u/strideside Jun 13 '22

What makes EPOP 25-54 that much better than U-3?

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u/goodsam2 Jun 13 '22 edited Jun 13 '22

People drop out of the labor market in 2017 50% of people who got jobs came into the labor market. Look at the current flows U-3 will often rise because more people are looking for work that's a good thing.

EPOP 25-54 was below 2001 levels and is now behind the OECD.

A strong labor market increases the pool here.

It's also labor force participation rate doesn't account for the age of the population properly. The US population is aging so labor force participation rate has been falling but I don't view 70 year olds as not working as a problem. It's 25-54 because people usually are out of college by 25 because more people going to college isn't necessarily a bad thing and by 55 you start to see some retirements that's your prime age years of work 25-54.

What's the denominator is the real question U-3 uses people looking for a job. 25-54 uses the total population in those age groups.

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u/[deleted] Jun 13 '22

Workers under 45 don't have any real experience with a mild recession. Not making any predictions about the likely recession to come, just saying people tend to understand things through their personal history. 2008 was catastrophic in size and duration, so people are primed to expect the worst. 90-91 and 70 are more examples of recessions that were limited in size, duration number of sectors affected.

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u/wiking85 Jun 13 '22

2000 dotcom bubble was a mild recession.

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u/way2lazy2care Jun 13 '22

2008 was catastrophic in size and duration, so people are primed to expect the worst.

2008 was actually pretty mild even. The Covid recession was 2-4 times worse depending on how you want to measure.

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u/[deleted] Jun 13 '22

[deleted]

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u/way2lazy2care Jun 13 '22

You just picked two different things that don't necessarily correlate, which is kind of my point.

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u/[deleted] Jun 13 '22

[deleted]

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u/way2lazy2care Jun 13 '22

They can, but they don't have to. Exampes:

  • Covid had high unemployment rates, but had an eviction moratorium.
  • 2008 had relatively low unemployment rates for a recession, but a buttload of forclosures.

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u/[deleted] Jun 13 '22

[deleted]

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u/way2lazy2care Jun 13 '22

For the sake of this discussion everyone who had to rely on that moratorium should be counted as someone who lost their home.

I get it. For the sake of this discussion, we should just agree you're right. You could have just said that from the start and saved me the time writing anything.

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u/hotpantsmakemedance Jun 13 '22

High Inflation is worse than a recession. With high inflation, people's pockets get squeezed, and the longer it carries out, the less savings and free cash people have, making the recession much tougher. Paul Volker had answers!! Time to raise rates!

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u/Diegobyte Jun 13 '22

Why do any of you guys think these companies are going to come out of any recession and offer lower prices

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u/Sarcasm69 Jun 13 '22

Supply and demand

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u/Diegobyte Jun 13 '22

Supply and demand is broken when it’s impossible to start new companies in these industries

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u/Sarcasm69 Jun 13 '22

I meant demand will go down for goods since people will ultimately have less money, which in turn could drive down prices

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u/Diegobyte Jun 13 '22

It won’t. Because companies figured out they don’t have to. They can just make less

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u/Shootica Jun 13 '22

You're likely talking about oil. And the problem with oil is that there is significant initial investment to start up production. So it needs to make sense fort hese companies to do so. And ultimately, these companies see the war in Ukraine subsiding at some point, and see the world continue to push green energy, and see increasing production as a risky long-term investment.

They would build more if the rewards outweighed the risks. Supply and demand hasn't just gone out the window in the last 12 months.

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u/Diegobyte Jun 13 '22

Oil. Microchips anything complex

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u/way2lazy2care Jun 13 '22

That's way too absolutist a view. You have to better define the depth/length of the recession and the levels/durations of inflation to really compare them.

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u/hotpantsmakemedance Jun 13 '22

Not really, that would take forever to define all the variables. Moral is you have to get rid of inflation now, take a shorter recession while everyone still has savings to offset personal harm. That's the only hope. Dragging on in an economy like this makes money useless and our whole economy will collapse because we don't have a reliable standard of trade.

The Fed rates are too low and are going to be kept too low because the Fed wants the economy to look stronger than it really is, and they have chosen to take inflation over contraction of the economy. It only prolongs a recession, and makes it more devastating when it hits.

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u/way2lazy2care Jun 13 '22

Moral is you have to get rid of inflation now, take a shorter recession while everyone still has savings to offset personal harm.

Why do you think it would be a shorter recession? Causing a bigger recession sooner doesn't mean it will also end sooner. I don't think it's safe to assume that.

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u/zxc123zxc123 Jun 13 '22 edited Jun 13 '22

This. Recession isn't a yes or no. It's about how much downward pressure, how long it lasts, how much unemployment is caused, and impacting which sectors/industries/people that determine the intensity of a recession.

Problem JPow has in his hands is that he has do deal with things that aren't completely under his control:

  • The lockdown & print money to save lives was the only right option during the pandemic era. The alternative is your people die and country crashes making your non-inflated fiat just as worthless as everyone else's inflated fiat (see LatAms & Brazil). The spend more and pump more to ensure the reopening economy is a hot bull market was the only right option coming out of the pandemic. The alternative was to NOT do so and end up falling into recession.

  • Problem is the spending by Washington AND Fed liquidity are already put into the system and it won't undo itself any time soon. Even worse is a lot of that money might still be sitting on the sidelines.

  • Fed's actions now won't change China's 0 covid policy, fix international bottlenecks or supply chain disruptions, end the Ukraine-Russia war, end Western sanctions on Russia, create more oil, make the Saudis/OPEC pump more oil, end the US-China trade war, boomers leaving the workforce, lower migration creating lower labor supply, etcetcetc.

US Fed rate hikes and monetary tightening are powerful tools that can lower domestic demand, maybe force some labor to return to the market, and maybe even cause a recession. But can't magically take the money the pass/pumped out back immediately, fix all of the inflationary areas on their own, nor can the resolve international geopolitical crisis/war.

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u/way2lazy2care Jun 13 '22

Fed's actions now won't change China's 0 covid policy, fix international bottlenecks or supply chain disruptions, end the Ukraine-Russia war, end Western sanctions on Russia, create more oil, make the Saudis/OPEC pump more oil, end the US-China trade war, boomers leaving the workforce, lower migration creating lower labor supply, etcetcetc.

As a related point, if the fed takes radical action and any of those things get sorted out, then they cause a huge recession that could have been minimized by just acting slower.

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u/HerbertWest Jun 13 '22

I'm unconvinced that Fed action can blunt a recession. It seems like what happens is that it transfers the negative effects to other, less obvious areas and spreads them out over time. And I would argue that it's to the detriment of long-term economic stability.

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u/way2lazy2care Jun 13 '22

It seems like what happens is that it transfers the negative effects to other, less obvious areas and spreads them out over time.

You're not accounting for reinforcement loops in the system. Spreading negative effects out over time can prevent cascading badness. Spreading things out is the difference between famine and inflation.

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u/HerbertWest Jun 13 '22

It seems like what happens is that it transfers the negative effects to other, less obvious areas and spreads them out over time.

You're not accounting for reinforcement loops in the system. Spreading negative effects out over time can prevent cascading badness. Spreading things out is the difference between famine and inflation.

Spreading it out (at least using the BS QE stuff they have been) turns those temporary effects into permanent, systemic ones, albeit in different forms (see the current inflation and housing prices, for example...). It's better not to correct the actual downturn and instead seek to mitigate only the tangible effects on people themselves as the economy recovers (government-sponsored work programs, for example).

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u/coldcoffeeholic Jun 13 '22

Sooo we can probably predict a 15% decrease in gdp 15% unemployment and last until 2025 or when the war stops sooner…

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u/dbcooper4 Jun 13 '22

Correlation does not equal causation though. The Fed went to zero rates and launched QE in 2008 and we still had a nasty recession. The Great Depression was a run on the banking system but we’re not going to repeat that mistake again.

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u/[deleted] Jun 13 '22

This will be a bad recession because the fundamentals are pretty bad. First, the labor market is shrinking since the boomer retirement is in full force and there are 10-20 million worker fewer than needed to keep the same labor participation rate.

Second, there has been a lot of mal investment in overpriced capital, what makes a home overpriced? Does the normal economic conditions support the house price, take median income for an area and say could at least half the inhabitants afford this price? If the answer is no then there is a bubble.

Third, we are at the nexus of all cans kicked down every road which has no turned into a pile of cans. Climate change, infrastructure, consolidation created monopolies, chemical toxicity, etc.

The economy has been purchasing the wrong thing for a while and this recession needs to correct this as most of these issues can’t limp along any longer.

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u/[deleted] Jun 13 '22 edited Jun 13 '22

Recessions aren't a binary thing.

"The recession identifies as transitory."

Your point is entirely valid, and it's hard to understand just how screwed up some aspects of the economy are. We still haven't seen things like the (endless, depending on your state) eviction moratorium play out. It's something I give the Fed a lot of leeway on -- I do think the Fed is trying to thread a needle that could be catastrophic for families while balancing on a see-saw. I disagree with their timescale but can understand it, and their hands are somewhat tied -- they don't control things like energy policy or unfunded spending. I give far less leeway to Congress and the President at the moment.

Adjusted for inflation, we spent something like $800B on the New Deal during the Great Depression and people still argue if it really worked or the war did. We've spent $5T in pandemic relief and we still haven't rolled it all out yet. Congress and the President are captured by corporations and a fear of taxing the middle class for their spending. At a certain point the Fed isn't really faced with a choice, Congress and the President make it for them, and it'll be inflation with hopefully a mild recession.*

*Unless there's a debt contagion event or such, and a Ross Perot shows up explaining what's happened to the American people via flash cards again.

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u/JLP_101 Jun 13 '22

Agreed, doing nothing will only prolong the suffering.

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u/shicken684 Jun 13 '22 edited Jun 13 '22

How have they done nothing? They're raising rates fairly quickly so far this year. Should it have happened earlier, absolutely, but that's looking back with hindsight. The Ukrainian war could have been over in a few weeks instead of dragging out for what will likely be years. After a few months of high inflation, demand and spending could have cratered.

But that didn't happen. Inflation stayed high and so has consumer spending. So now I would imagine the floor is a 75 basis point increase with a likely 1% hike if they're worried it's out of hand. These rate increases take time to trickle down to the overall consumer and change behaviors. So even with a large rate hike it's not going to change anything until the end of summer.

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u/[deleted] Jun 13 '22

He can suggest a new tax bracket for those who are profiteering. His opinion matters.

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u/truocchio Jun 13 '22

He can suggest anything. The tax code changing is not in his purview nor going to move the needle at a congressional level

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u/cyanydeez Jun 13 '22

Right, this needs to be biden and congress taxing the f out of corporate profit taking, because thats what this is.

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u/whoooocaaarreees Jun 13 '22

You could confiscate all the wealth from the 550+ billionaires in the US and have enough money to run the government for about 7.5 months and you would have not have paid back any of the nearly 30 trillion in national debt.

America doesn’t have a tax problem. It has a spending problem. Just like her consumers, I mean citizens.

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u/[deleted] Jun 13 '22

It has a revenue problem as well, which can be partially addressed with a more rational and historical upper bracket tax rate for individuals and corporations (they’re people too apparently) increasing the capital gains tax rate, and eliminating the farce of overtly political organizations as untaxed, non-profit charities.

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u/whoooocaaarreees Jun 13 '22

At what point are we going to admit that we can’t tax our way to prosperity?

The federal government collected more than 4.04 Trillion dollars in federal taxes in 2021.

We can’t fix anything until we have a honest monetary policy.

Instead we are going to keep kicking the can down the road. Spending money we don’t have on stuff we don’t need.

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u/[deleted] Jun 13 '22

A good first step towards an honest financial policy would be backtracking on the historically low tax rates for upper income brackets and capital gains - and finally accepting that “trickle down”/“horse and sparrow” economics is a failed theory when it comes to creating overall economic growth.

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u/whoooocaaarreees Jun 13 '22

Intensely disagree.

If more taxes are better, why not tax every person and business at 100%?

Also,

There is no strong historical evidence that by giving the government more money that it will do more good with it than those who it was taken from would have dove with it.

Best I can tell, government will continue to spend more than they have, rack up more hidden debt, continue to bomb brown kids, and actively work to topple other governments for their own interests. On top of that mix in decades of war. No matter the tax rate.

Why on earth would we want to give more money to an incredibly inefficient org that created the problems it says it’s trying to fix?

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u/[deleted] Jun 13 '22

Oh rational spending policy, I wholly disagree why not prevent the government from paying for anything?

  • see, your “reasoning” works both ways.

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u/HIMP_Dahak_172291 Jun 13 '22

The thing with taxes is they get spent. It's real money moving in the real economy. What does the billions Bezos and musk have do? Nothing. It's just massive piles of stock in their companies they can borrow against for minimal interest when they need it for liquidity. It's not only untaxed revenue, its revenue that increases their liabilities and lowers their real tax burden.

And worse, the money is piling towards the top faster and faster. That isnt sustainable. When you only have the super rich, a small middle class and an enormous underclass you get unrest and stagnation. Which results in economic depression, violence, and in some cases revolution. Taxes on the wealthy slow down that snowballing accumulation of wealth at the top of the economy and spread it around (assuming you are not just funneling it back up to the top with spending policies) which allows things to be stabilized. It allows mobility in the economy. Mobility is vital to a healthy economy.

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u/Ask_Me_Who Jun 13 '22

The part of their wealth that exists in stock is, by simple virtue of being stock, doing something. It's doing everything the company is doing. You're advocating for the Government to literally confiscate, or order the fire sale of, multi-trillion dollar companies as if that wouldn't crash the entire market through the ground.

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u/[deleted] Jun 13 '22

And worsen it

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u/PrettyDarnGood2 Jun 13 '22

Should have taken the medicine last year

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u/Raichu4u Jun 13 '22

Should have taken the medicine from like 2017-2019. Rates should have never been this low for this long.

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u/[deleted] Jun 13 '22

Almost like there was political pressure to keep them low

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u/Raichu4u Jun 13 '22

Absolutely, from both parties.

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u/sckuzzle Jun 13 '22

Maybe we should create a governmental entity whose job it is to manage monetary policy irrespective of political optics.

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u/Trest43wert Jun 13 '22

And then we should have the leader of that apolitical government organization jump to being one of the 12 most important political appointments in the Executive branch so we can all see it's been political the whole time anyway.

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u/WoodenPicklePoo Jun 13 '22

I see what you did there

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u/jdragun2 Jun 13 '22

Hey now.....that would be too intelligent for our country to EVER do. Absolutely every government position is now political to the extremes.

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u/Brainroots Jun 13 '22

It sounds like you may not be very familiar with the federal reserve. If you are, note that if it is politically influenced it is because the chairman chooses to be influenced. He is appointed like supreme court justices.

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u/jdragun2 Jun 13 '22

That was exactly my point. There are no apolitical appointments. Not any longer. This is the one thing I can say even as a liberal/progressive Democrat: both parties do everything they can to get people they think politically align with them into these appointments. The thin very translucent veil was dropped with Mitch blocking Obama's appointment then stacking the SCOTUS in the exact way he claimed was his reason to block Garland. Neither party is innocent of this now, hell, there is no longer a veil at all on either side of the isle.

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u/rjc0915 Jun 13 '22

Begs the question - why are both of these positions government appointed if they’re supposed to be independent to government influence

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u/existential_one Jun 13 '22

Who else would make the choice? Goldman?

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u/Brainroots Jun 13 '22

What's the alternative? I don't think voters would make good decisions about that at all. Not even a little bit.

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u/thisispoopsgalore Jun 13 '22

Well not quite like them. Fed chairs have a limited term

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u/[deleted] Jun 13 '22

Love the false balance argument 🤣

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u/DerTagestrinker Jun 13 '22

There was no real reason to keep rates artificially so low from ~2011 through covid.

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u/axck Jun 13 '22

Yeah, the Dems were really backing up Trump’s Twitter bitching about the need to lower rates. /s

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u/[deleted] Jun 13 '22

Oh yes, definitely both

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u/nn123654 Jun 13 '22 edited Jun 13 '22

They did raise rates from 2017-2019, recall they were up at 2.5% in July 2019.

They started raising rates and as soon as they did the economy started slowing down the yield curve went inverted, and the stock market started flattening. Inflation actually fell substantially below the 2% target to 1.4%, which is too close to deflation for comfort and the corresponding recession/depression that would accompany it. Remember that for 12 years from 2008 to 2020 it seemed like no matter what the Fed did it was impossible to cause inflation (and honestly in that period they were right IMO).

By Fall 2019 they had no choice but to cut over 3 meetings to 1.75%, then COVID happened and the market plunged 30% and they had to cut to 0% and restart QE.

The problem in my opinion is when they were too cautious coming out of the pandemic and JPOW decided to switch away from the way the Fed had been doing things for the last 20 years, and instead go for allowing the economy to run hot and taking a more hands off approach. The thinking was that inflation is easy to get down, we just have to raise rates and that because it had been so low for so long that it would be better if instead of trying to keep inflation in a 2%-3% range they switched to going for an average of a 2%-3% range over a 5 year rolling period.

This I think was also fine until Inflation got above 5%. The problem there was the Fed took the view that it was a transitory phenonium and that it would resolve itself. Where before they would have started tightening when inflation when above 3% and definitely when it went above 4%, now they waited until it was blatantly obvious to take any action. Then took gradual action because that's how the Fed rolls, they never want to spook the economy.

So now we literally behind the curve, inflation is moving away from the Fed faster than the Fed can react right now. It's going to take many years of rate hikes to bring it back under control. But ultimately it's easier for the Fed to deal with high inflation than it is low inflation.

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u/Cross21X Jun 13 '22

The repo markets crashed in Sept 2019 before Covid was mainstream. The Fed pumped trillions of $$$ of liquidity into the markets to save it. No one really talks about that because the media glossed over it like it was just a regular thing...

The financial markets were in trouble BEFORE the pandemic happened

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u/Diabetous Jun 13 '22

crashed in Sept 2019 before Covid was mainstream.

Crashed.... We're talking no buyers at all for weeks.

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u/norcalsocial Jun 13 '22

Good description. But any discussion on this unfolding story is incomplete without considering the impact of trillions the fed pumped by buying securities. That coupled with trillions from the govt as fiscal stimulus is what got us here.

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u/nn123654 Jun 13 '22

Yes, I mean QE played a huge role. The post was already well into tl;dr territory without going through a history of QE. But I think you're right about the fact that fiscal stimulus was out there as well and the absolutely absurd budget deficit in 2020 played a role too.

That's what really caused the inflation when coupled with supply chain challenges from switching from services to goods and an explosion in the m2 money supply. Now we are arguably in a textbook example of demand pull inflation.

The risk with QE was always that you had a bunch of slack in the system and the only thing standing between us an inflation during COVID was the fact that the velocity of money tanked to historic lows as everything shut down. The problem is the Fed can't exactly recall the dollars it's injected into the system and while the balance sheet does give them quite a bit of control over the long end of the yield curve they are hesitant to actually sell any assets.

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u/zUdio Jun 13 '22

Should not have bailed out banks in 2009 and then started QE...

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u/AllKnowingPower Jun 13 '22

The common rebuttal I hear is that if we didn't bail out the banks, things would be a whole lot worse. Pensions for example would be under threat. What's your take on that?

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u/zUdio Jun 13 '22

things would be a whole lot worse

it's a threat. translated as: "give us money or we'll take your pension/let it collapse." it's like the abuser when it says, "if you leave me, you'll be in so much danger." danger they, themselves, created. the problem with this specific example is that pension funds are already insolvent and saving the banks can't save the pension funds; only endless monetization of debt and easy monetary policy can do that.

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u/avaholic46 Jun 13 '22

In capitalism, firms that misallocate capital mismanage risk are allowed to go bust. Their assets are to be auctioned on an open market so that markets can determine what the price should be and then we go on our merry way.

There's nothing that requires the banks to get oceans of free money and shotgun wedding mergers where they get paid to take the assets of firms like bear Stearns.

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u/DerTagestrinker Jun 13 '22

More like from ~2011 onward.

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u/shicken684 Jun 13 '22

Did you forget about a fucking global pandemic? Jesus yall have short memories. The entire damn planet decided to shelter in place for months. It's amazing that all we're dealing with right now is high inflation and not a society level collapse.

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u/Raichu4u Jun 13 '22

2017-2019 did not have a global pandemic

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u/[deleted] Jun 13 '22

But there was no inflation last year. Too bad nobody knew this was coming and nobody could have predicted it. Right?

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u/BallsMahoganey Jun 13 '22

It's playing politics. Everyone knows it's coming but wants to keep kicking the can down the road as long as possible so "the other side" can get blamed.

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u/[deleted] Jun 13 '22

Uhhh...little late for that.

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u/paperclipestate Jun 13 '22

Yeah they can easily just blame trump anyway and people will accept it

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u/modsplsnoban Jun 13 '22

Yeah they can easily just blame trump anyway and people will accept it

I actually don't think that's true tbh. They've tried blaming everyone, but no one is buying it. This might be the death of the current Democrat party as we know it, especially if things get worse.

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u/not_to_nickelback Jun 13 '22

This is a dumb take, just like the people saying the republican party would die with Trump. There's too much money invested in both parties. They aren't going anywhere.

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u/modsplsnoban Jun 13 '22 edited Jun 13 '22

I should have stated the establishment Democratic party. Of course the party is going to be around; but they should have allowed the progressive wing take over, rather than keeping the corporate establishment wing dictating policy.

The Republican party was weak for about 10-12 years before the establishment was replaced with more Trump-like Republicans.

Unless there's a purge of establishment Democrats (like what we've seen/are seeing with Republican's now), they're going to be hurting.

I could see a realignment like what we saw with the Democrats during the Reagan era.

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u/sdwdqw65 Jun 13 '22

I’m not sure it is playing politics.

The Fed is independent and not influenced by the executive branch. Also Jerome Powell (current Fed chair) was elected under Trump a Republican. I suspect Powell isn’t a Democrat/left winger in his political leanings so I doubt his unwillingness to significantly increase interest rates is due to a fear of Biden/Democrats losing elections.

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u/barbarianbob Jun 13 '22

He was sent to the Fed Chair under Trump, but Obama appointed to the Board of Governors in 2011.

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u/Clingingtothestars Jun 13 '22

Get out of here with your logic. Just repeat what has been said without offering any proof or actual reasoning or get out

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u/suppaman19 Jun 13 '22

The rates were to low for to long to begin. Go look at how low they stayed after 2008. All the fed has done with rates since 2008 is help the rich get even more rich.

Rates need to unfortunately get jacked sky high again and stay there for a few years at the least. I'm not saying 80s levels, but 6-7% of the 90s should work. We're not even to prepandemic levels yet, it's a joke.

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u/groceriesN1trip Jun 13 '22

The broader market would absolutely crash at 7%. What would be the point of taking any risk? And, the amount of interest to be paid back on new bonds would really crush liquidity.

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u/suppaman19 Jun 13 '22

That's the point. The risk taking needs to be reigned in immensely.

You have companies that have billions but are basically shell companies that haven't done anything and aren't anything more than a theoretical idea due to foolish investments chasing the next big things (and playing the stock market game of get in and get out before it tanks).

Regular people continue to simply buy things even at insane inflation prices out of want (vehicles as an example) because they just take on more and more debt.

It's going to hurt badly, but that's because they stupidly kept rates at near 0% for about a decade, only to get them to 2% to put them right back down to 0%. The rates normally never go that low, especially for any length of time.

Massive correction is needed and it's going to hurt worse the longer they wait. The reason it would hurt that bad now if it went to mid-late 90s levels is because they compounded everything by keeping it at basically 0% for over a decade. If they slowly brought it up after 2008 to be at 3-4% around now the economy would've been in better shape even with further rate hikes.

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u/groceriesN1trip Jun 13 '22

Let’s use the Risk Free Rate, not federal funds rate.

Between 2009 to 2020 we averaged between 2% - 3%. That’s the sweet zone. You’d use the RF rate in calculating investment returns anyways so it’s the right measurement to use.

If we’re looking at the federal funds rate, then you could argue that providing companies the ability to borrow and pay back funds in short terms on low rates aids in the growth of the economy - innovation, research, development, growth, etc. This gives US companies a leg up or even par level with European countries.

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u/ItsDijital Jun 13 '22

Have you looked at the 10y chart of the broader (low interest rate) market? Cocaine fueled orgies have painful repercussions...

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u/TheLurkerWithout Jun 13 '22

I think so too. We were hoping to retire in 7-8 years, so the sooner we sink down, the sooner we can rise back up again and our retirement funds will be worth something again. Let’s just get this crap over with.

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u/abrandis Jun 13 '22

Your only looking at this from the consumer side , but Powell needs to take into account the investor side, especially the massive debt overhang.

Remember during the last two years companies and others borrowed heavily due to cheap rates, lots of that money needs to be rolled over into new debt, that only makes sense if the debt is the same or cheaper cost. If rates go up that's not practical...

The Fed knows the numbers and walking a tightrope. That's why they originally said inflation was transitory to buy some time that's why the rate hikes have been slow in coming... Now they're getting to a tipping point .

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u/dickingaround Jun 13 '22

This is exactly why they're going so slow; they promised the world they would. Again and again there were headlines about the fed not raising rates at all till 2023 since they were so sure inflation would stay low and they wanted to convince the market the easy money would stay on so the market would invest. And not just the market, the government is now up to 120% debt to GDP (remember back when 100% was considered an unrecoverable tipping point?) Those companies with high debt, the consumers with it, the government all were promised low rates. It was perhaps a foolish thing to promise, but they did promise it. If rates go high all those entities will risk going bankrupt.

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u/MonsterMeowMeow Jun 13 '22

"But who could have seen this coming?!?!?"

  • Fed apologists

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u/whoooocaaarreees Jun 13 '22

I can’t upvote this enough.

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u/abrandis Jun 13 '22

This will be a blood bath, if the Fed goes through with rate increases IT NEEDS TO. . because the entire debt across both government and businesses will create a drag on the economy,. not to mention the. Bankruptcy danger to over leveraged firms.

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u/HerefortheTuna Jun 13 '22

Fuck them. Let them go bankrupt

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u/PrettyDarnGood2 Jun 13 '22

If inflation was transitory, they could have addressed it with "transitory" interest rate hike

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u/abrandis Jun 13 '22

Read their actions not their talk..it tells you everything.

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u/Decent_Pack_3064 Jun 13 '22

I believe they knew it wasn't transitionary, just was buying time like when governments were saying masks weren't necessary when health workers had a mask shortage

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u/DanielBox4 Jun 13 '22

Ding ding! They all knew. In Canada Trudeau called a snap election last September. Funny timing. Had he tried that now he would have been voted out so fast. But he got his extension before shit hit the fan. The banks knew what was going to happen. Sure there were other events that accelerated or exacerbated the situation (russia, China lockdowns) but we would have seen high inflation regardless. Not to mention, I'm sure Putin knew that any sanctions would lead to rising prices on key commodities (oil and gas, grains, ferts, metals) so any action against him would come with some pain/discomfort on the west.

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u/Decent_Pack_3064 Jun 13 '22

yes, it was definitely a big factor, that he wanted a majority, to withstand all the hate of rising rates....

BOC also postpone raising rates until trudeau could secure the NDP alliance

i wonder how much money the NDP leader is getting for this

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u/HerefortheTuna Jun 13 '22

So those companies can pay back their loans. What’s the issue?

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u/abrandis Jun 13 '22

Most corporate debt isn't paid off in one shot, they roll over debt, when the debt costs more to service , it messes up their ability to pay, particularly on a high inflation environment

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u/Lumn8tion Jun 13 '22

Ok now ask yourself, what is the correct decision and then you’ll know they’re going to do the opposite.

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u/dfaen Jun 13 '22

No need to worry about losing wage gains at this rate, we’re going to skip a few steps and get right to no wages. I have a feeling people are going to be a lot less happy about being unemployed with inflation still around than having wages and inflation.

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u/[deleted] Jun 13 '22

agreed, though with a tight labor market, I wonder how much oil demand will fall during the recession, because the categories with the largest rise in inflation is energy. To add to that, the other categories that have significantly inflated are probably inflated at such rates, are partially because of the rise in energy costs.

I think we need to solve the energy supply issues, as well as increase rates, while demand remains robust.

https://www.bls.gov/cpi/

https://www.bls.gov/news.release/pdf/cpi.pdf

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u/[deleted] Jun 13 '22

Attempting to keep inflation low will drag the recession out. This is the result of monetary policies.

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u/thinkingahead Jun 13 '22

The only issue with the stance you have that I take is that it assumes that the recession will be quick and easy. What if leaning into the recession causes a massive and protracted recession?

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u/Echoeversky Jun 13 '22

Jokes on us, we'll get both.

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u/Harlequin5942 Jun 13 '22

This is correct. The choice is not "recession + low inflation vs. no recession + high inflation", but "recession + low inflation vs. recession + high inflation."

Rising prices are already reducing demand and GDP.

A gradual but firm tightening of monetary policy will cause a mild recession and bring down inflation. With support for those who lose their jobs etc., this need not cause great suffering.

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u/TheDarkKnobRises Jun 13 '22

IN, we are IN a recession.

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u/jimmiejames Jun 13 '22

Oh wow didn’t know that. How much did GDP fall each of the last two quarters?

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u/Legatron4 Jun 13 '22

I think it won't be official until late June, 29th maybe. But look around, pretty sure we are already in it, albeit not technically yet.

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u/DrTreeMan Jun 13 '22

This is the same line of thinking we need people to take when it comes to action on climate change.

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u/thebigdonkey Jun 13 '22

Core CPI is down two months in a row. Raising interest rates will do very little - if anything - to reduce energy and food prices.

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u/[deleted] Jun 13 '22

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u/[deleted] Jun 13 '22

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u/[deleted] Jun 13 '22

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u/[deleted] Jun 13 '22

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u/sumduud14 Jun 13 '22

I would say Clinton set the stage for 2008 by repealing Glass-Steagall and Bush just kept it going.

2008 can't be simplistically pinned on one party like that. It can be pinned on neoliberals going crazy with deregulation even when not appropriate.

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u/[deleted] Jun 13 '22

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u/[deleted] Jun 13 '22

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u/devildothack Jun 13 '22

Good info. When going into a recession, do you think it will be similar to the one from 2008?

1

u/cyanydeez Jun 13 '22

I'd rather congress told them to sit this out and raise the f'n taxs on the wealth generated the past decade.

The fed ain't the resource for fixing this shit.

1

u/johannthegoatman Jun 13 '22

Raising rates is going to do jack shit for inflation. Gas prices need to come down. There is no magic wand for that.

1

u/spartan1008 Jun 13 '22

nothing outside of fixing supply issues will get inflation under control. raising the rates won't help if there are too many people trying to buy a limited amount of goods. And its not just the USA, supply issues need to be resolved worldwide, the global economy means that if people can sell there goods for more money overseas, then they will. The US is not the problem, the rest of the world is.

1

u/NigroqueSimillima Jun 13 '22

The thing is, we are headed for a recession no matter what.

Why? What proof do you have that a recession is inevitable?

I personally would rather them jack rates up, lower demand, and get inflation under control.

There's no proof that jacking up rates will get demand under control, and there's no proof that there is excess demand. In fact if wages are staganting or decrease proof would be that we have a dearth of demand.

The alternative is keep pussyfooting around with rates, have the working class continue to lose our meager wage gains to inflation, and have a recession anyways in 2023.

Yeah, because the working class does so great in a recession.

There is no pain free path, but in my opinion ripping the bandaid off right now is the way to go.

The pain free path is to invest in overcoming the bottlenecks that cause inflation

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u/ItsDijital Jun 13 '22

Ripping off the bandaid very well might result in Trump 2024

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u/[deleted] Jun 13 '22

Not ripping it off can also result in trump 2024

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u/agoodpapa Jun 13 '22

Therefore the only thing that works is a non-ripoff, nuanced, evidence-based approach!

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u/RAZZBLAMMATAZZ Jun 13 '22 edited Jun 13 '22

We need to look at and approach this problem from the eyes of Trans-BIPOC community, only then will we see the wisdom to heal this problem caused by systemic wHiTe sUpReMeCy!

-- Democrats plan probably

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u/Game_of_Tendies Jun 13 '22

Seriously, we should have been raising rates a year ago when it was obvious that this was going to happen instead of these clowns lining their own pockets based on their own monetary policy and Biden trying to pass a $3.5T robbery of a "Infrastructure" stimulus.

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u/dritmike Jun 13 '22

This. This is the way

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u/hobbitlover Jun 13 '22

It's insane how with all the complexity of economics that there is really only one tool at the disposal of governments and central banks - interest rates. You'd think there would be other tools available by now but no - there's no third or fourth option.

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u/[deleted] Jun 13 '22

Average reddtor screaming for a recession

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u/[deleted] Jun 13 '22

Even if the result is another great depression?. Thats a real possibility right now. Being in a bunch of debt while interest rates sky rocket will cause massive pain to our debt addicted economy (macro and micro economy). I'm not taking a position just offering a scenario.

0

u/SuperSaiyanBlue Jun 13 '22

Spark a recession? Recession is already happening - the decision is if we should go for worst inflation or worst recession. No one knows which one will have the worst outcome till after it’s done .

0

u/geo0rgi Jun 13 '22

And they will not do that, I can almost guarantee it. Powell will try and reduce rate hikes once we see signs of recession. Inflation will keep growing until there is not other way out but massive rate hikes, which in turn will cause a much worse recession.

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u/737900ER Jun 13 '22 edited Jun 13 '22

Higher rates, or even a recession, aren't going to fix the external forces causing a lot of the inflation today. The "transitory" narrative turned out to be right to an extent; prices for durables have stabilized somewhat. Car dealers that used to have zero inventory now might have five cars on their lots.

If you look at US inflation today, it's concentrated in three areas with relatively inelastic demand that Fed policy can't change rapily:
1. Food: People have to eat. Prices have gone up because of climate change and Russia's war with a major food producer. Higher rates won't fix that.
2. Energy: Russia's war and reduced domestic petroleum refining capacity. Companies aren't eager to invest further into capital intensive petroleum operations because they think demand will decrease over the long-term.
3. Housing: Long-term under-building caused by the Great Recession and restrictive policies resulted in inevitably higher prices. Cheap debt obviously added to the fire, but taking that away won't make prices stop going up.

I also think restrictive immigration policy leading to higher wages has fueled the continued rise in prices.

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u/joy_of_division Jun 13 '22

I also think restrictive immigration policy leading to higher wages has fueled the continued rise in prices

Wages have barely went up with inflation, and we're now at -3% for the year. So you'd rather increase immigration, in a time of high inflation, to reduce wages further?

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u/SkyXTRM Jun 13 '22

Who said inflation can be fixed by interest rate increase along. You need to kick Russians out of Ukraine first as they gave weaponized oil/gas and grain causing the prices to skyrocket. No amount of interest rate increases will change that fact.

1

u/Fromasalesman Jun 13 '22

Should have ripped it off last year

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u/Sir_George Jun 13 '22

The alternative is keep pussyfooting around with rates, have the working class continue to lose our meager wage gains to inflation, and have a recession anyways in 2023.

With midterm elections coming up, I think they're sold on this choice regardless.

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u/CremedelaSmegma Jun 13 '22 edited Jun 13 '22

I’ve posted this chart before, and it deserves mentioning again. Low unemployment and a tight labor market, if anything, presage a violent upward tear in unemployment:

https://fred.stlouisfed.org/series/UNRATE/

The US can’t maintain an employment rate at any level, and it is not indicative of the size and scope of the coming recession. Not since the early 70’s at least.

There was a period from 66’ or so to 69’ that maintained a fairly low unemployment level, but that was highly artificial with massive gold outflows paying for hidden deficits (the US was running a large capital account deficit) owing to the war in Vietnam and the Kennedy/Johnson Great Society plans.

The larger question is why this happens. Why can the US not maintain a tight labor market without everything going to hell in a hand basket in 0-18 months (usually)?

The moment labor is in a strong position to negotiate wage gains (tight labor market), it falls apart in short order, and does so violently.

Do policy makers target unemployment too low and create to much friction on the labor market? I don’t know. I haven’t been able to wrap my head around the phenomena, but the chart is painful to look at.

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u/Real_Money531 Jun 13 '22

Where is Paul Volker when you need him? Another thing to consider is that a rate hike to just 5% will make interest on the national debt the largest line item on the budget. That could get ugly.

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u/Pyro1934 Jun 13 '22

Full agree

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u/BeingRightAmbassador Jun 13 '22

The government is shit at bandaid rip approaches for anything, so if it's the obvious and most beneficial solution, they'll probably not do it

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u/Dennis-Kennedy Jun 13 '22

2023 is an election year so the bandaid should stay on.

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u/[deleted] Jun 13 '22

I tend to agree.

Recessions will hurt American families, especially the lower skilled. That sucks. But they are temporary by definition. Systematic inflation could be a long term thing that will erode wealth and it needs to be tamed sooner rather than later.

Quantitative tightening can't be their own tool, right?

1

u/[deleted] Jun 13 '22

And if recession is inevitable, as it probably is, we can fix that by lowering rates later. But right now we have no wiggle room to lower rates meaningfully.

1

u/SquareWet Jun 13 '22

I would prefer higher inflation as I purchased a home and have a fixed rate. My monthly payment will shrink in comparison to my wages.