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Apr 4·edited Apr 4Liked by Peter Nayland Kust

Since price inflation is de facto currency devaluation, the Fed's second mandate of "full employment" (established in the '40s?) which puts downward political pressure on the fed funds rate, is contradictory to its primary mandate of maintaining the value of the fiat reserve currency.

Isn't this right, Peter?

And isn't this the root problem the Fed has in slaying price inflation?

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author

There is a lot of substance in that.

One point we need to realize is that the "inflation" that gets reported by the various price indices is to a large degree both mis-named and misunderstood. If the price of oil rises because there is less supply relative to demand, that technically is not inflation--but it gets reported just as if it were true monetary inflation.

When supply diminishes relative to demand, prices are supposed to go up. That is apparent looking at any basic supply and demand chart. Diminishing supply and rising demand are upward price pressures regardless of the state of the money supply.

Yet because the Fed treats all price rises as inflation, it has tried to address the economic dislocations of ruptured supply chains from the Pandemic Panic Recession with rate hikes. And it tried to flood the economy with money during the Pandemic Panic Recession to obscure the degree to which supply chains were ruptured.

The massive infusion of money into the money supply was nowhere near as impactful on inflation as has been claimed--not right away. It wasn't because at the same time the Fed opened the money spigot the velocity of money dropped--completely negating the inflationary pressures of the increased money supply. Inflation did not begin to take hold until the velocity of money began to increase.

Perversely, when you look at the timing of when inflation began to rise in this country, the serious inflation surge happened after January 2021--after the third stimulus payment.

https://fred.stlouisfed.org/graph/?g=1aIbo

This suggests that it was not the expansion of the money supply that catalyzed the inflation of 2021 and 2022, but the stimulus payments. By putting surplus cash in the hands of consumers the government boosted the velocity of that money, and especially with the third payment, of which a significantly smaller portion was spent on paying down debt.

And when did inflation rise well past 6%? Beginning in the fourth quarter of 2021--which is when the M1 money velocity also began to increase.

https://fred.stlouisfed.org/graph/?g=1jA3p

However, when we look at the increase in money velocity, its difficult to get to the inflation rates we have seen. From the basic monetary equation MV=PQ, and the 25% increase in money velocity we have seen since 2021, we do not get the many multiples of increase in prices from money velocity alone. At most inflation should have moved up by about 25%, and it has clearly done far more than that.

In order to resolve that discrepancy, we have to drop the amount of Q by a significant amount--which is to say there has to be considerably fewer goods available for purchase--AND THAT IS NOT INFLATION, BUT SCARCITY.

The root problem the Fed has in slaying price inflation is that it is completely misapprehending the monetary dynamics, and attempting to address scarcity with interest rates. You can't hit any target if you aren't aiming at it, and the Fed has not been aiming at the right target since the rate hike strategy began.

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Apr 4Liked by Peter Nayland Kust

Thank you for this substantial response. Peter, your insights are invaluable to me, especially when I am in discussion with others.

May I just add a step-back-and-see-the-important-history aspect. (And no response necessary - I don't want to keep you from your work!)

To me, the story of the 20th century was one of creeping (and instances of more sudden steps, as well as the occasional relief - I don't want to be hyperbolic) destruction of free market economics by, for lack of a more "mature" term, the forces of collectivism/Socialism.

This manifested in the worst ways in terms of labor markets, where it socially became accepted that the Federal government was responsible for *creating* the private employment of free individuals, instead of just ensuring that markets remain free. The same happened with the capital markets. This, of course, directly led to the abomination of bailouts, especially in the banking sector, and the inevitable moral hazard has basically made both markets, which of course *should* be private and free, into part and parcel of the *public* sector.

*This* has destroyed Capitalism, Western Civilization's moral golden goose.

(Thank you for letting spout. I feel better now!)

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author

Broadly speaking I agree with you. The Progressive Era which began in the late 19th century certainly saw an increase in government interventions in the economy, which culminated in FDR's "New Deal" liberalism.

The result of FDR's massive interventions in the economy has been, as you say, the perception that the economy is and always has been under the stewardship of the government--it is difficult today to even discuss economic matters from any other perspective, that's how deeply embedded the thinking is.

Johnson's "Great Society" legislation also moved the economy further to the left. Even notional "conservatives" such as Richard Nixon and George W. Bush increased government intrusion into the private economic sphere.

The extent to which the United States and Western Civilization has ever truly enjoyed free markets is a problematic debating point. Certainly the modern corporatist/financialist model we see promulgated by Wall Street bears more resemblance to 18th century mercantilism than any notion of free market enterprise as articulated by Adam Smith in Wealth of Nations. (Trivia note: people would do well to understand that "Capitalism" as we use it today in almost every instance is used in its Marxist context referring to the owners of "capital" vs the "owners" of labor.)

To whatever extent the US ever had free markets, however, those markets are substantially less free now. Of that there is no debate.

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Apr 5·edited Apr 5Liked by Peter Nayland Kust

Agreed. Just three last comments.

1) I agree markets were never completely free, and I do not advocate any form of Anarchy, even so-called anarcho-capitalism. I put true Capitalism about 10% percent to the left of the right endpoint, Anarchy, because I believe the ideal State should be funded to the tune of 10% of GNP, but that's just personal opinion. The State has an active law-and-order role to play in *all* aspects of true Capitalism, even up to regulating externalities (real ones, not today's out-of-control enviro-fascism).

2) I find it ironic, but lost on today's youth, that the "Great Society" was supported more by Republicans than Democrats (of the day).

3) I distinguish today's crony-capitalism (i.e. captured c-suites and boardrooms) from the corporate structure, which I consider one of mankind's greatest achievements. the spreading of risk has led to an explosion of wonderful risk-taking, which of course has turbo-charged human living standards and progress (*real*, not Progressive, a stolen word). We throw the baby out with the bathwater at the expense of humanity.

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founding
Apr 4Liked by Peter Nayland Kust

Thanks, Peter, for explaining so well the errors the Fed has made, resulting in painting itself into a corner. I don’t think the average American understands the Fed’s maneuverings at all.

So, heading toward the Election, Biden will crow about job numbers, increased manufacturing, strong stock market, and a few other metrics. But gas prices will likely be higher, and interest rates, and grocery prices, and most of the things Americans have to buy - painfully. I can’t think of a way for Biden’s handlers to spin this to their favor. Can You?

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This is the new economic reality. They know that. This is an election year game of pretending things will go back to the way they were pre-Covid stimulus because that's what voters want to hear. The good ole days! This is the new monetary policy, much more intervention than even before to prevent a recession and keep money moving. Maybe some of them in our government don't understand, I don't know. I don't have the excellent graphs and data that you do, but this game of 'just keep saying it' seems evident to me.

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