Will stimulus lead to inflation? Shiller responds.

[twaddle]

Back-story: a friend I worked with 25 years ago still keeps in touch. We talk finances once in a while. The last time was after the housing bubble popped (yeah, a while ago). I suggested he consider income-producing property if he wanted a "job."

Well, he's now a lot richer than I am.

Anyway, he recently complained about the lack of similar opportunities, and we shared some worry words. He surprised me by asking for other advice behind my back. And he got a response about inflation concerns from Shiller himself.

Part of the response was a link to this debate between Krugman and Summers.

 

[MichaelB]

This is a misleading thread title. It’s “Krugman and Summers” responding, not Shiller.

 

[RunningBum]

Could you summarize their positions so we don't have to wade through over an hour of video?

 

[MichaelB]

Could you summarize their positions so we don't have to wade through over an hour of video?

I can do that, their positions are well known.

Question: is the stimulus package inflationary? Summers - yup. Krugman - nope.

 

[twaddle]

This is a misleading thread title. It’s “Krugman and Summers” responding, not Shiller.

That's fair. I'll give you more of a direct quote from Shiller to keep it consistent with the title.

The question of inflation is the question of the day.

You might appreciate hearing this debate between Paul Krugman and Lawrence Summers on the outlook for inflation in the US at present

As well as a nice graph of the money supply changes.

 

[twaddle]

My friend has been busy. He got another response to the question from Professor Mark Blyth of Brown University. [Mod Edit]

Nothing is guaranteed, but here’s a few points

a) There has been no inflation in the core OECD countries since the mid 1980s except for unanticipated import inflation and that’s been small.
b) The ECB and the Fed (till recently) have a 2% inflation target. Neither has hit them in over a decade.
c) Since 2008 central banks have added (pre-covid) 17 trillion dollars, pounds and yes. No inflation. We have not seen a coherent phillips curve in years.
d) Crowding out can only happen in a loanable funds model of banking. That model is widely taught and yet is utterly wrong: See: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
e) You cannot, by definition, crowd out a global capital market. So where does the interst rate spike come from? And in response to what if the monetary theory is wrong.
f) Deficits - we have shown -over and over again - do not matter - mainly becuase the banking system needs bonds as collateral to function. Markets need deficits (dirty secret)
g) Demography cuts both ways. As boomers liquidate there is more spending, but wages are chronically low for the rest of the economy. Half the US earns less the $20 an hour. In inflation adjsuted terms we have 2020 cost structures and for 50% of the population, 1970s wages. How does that inflate?
h) By definition an aging society cannot generate increasing consumption GROWTH as the denominatory shrinks.
f) Interest rates have been falling since the 1400s. The 1970s was a blip and we generalize from the blip.​

 

[MichaelB]

This is confusing. The links provided are unrelated to the text in the posts. The views of well known economists are sourced from a friends email? Why not just link directly to their opinions?

 

[Running_Man]

Will stimulus lead to inflation. Stimulus has already lead to inflation, but I think the question is really referencing wage inflation and interest rates. Interest rates are a rigged game, debt is infinite in providing low interest rates until the system falls apart. The price of copper has doubled in the last year and the federal government in order to keep debt expense manageable is being forced to buy all the debt. There is a reason Bitcoin has gone from 9K to 55K in less than a year, it is oversupply of dollars finding a home. Krugman in 2017 with price at 14K called Bitcoin the most obvious of bubbles, after 4 years of saying bitcoin had no future, coming 20 years after saying the internet would effect the world no more than the fax machine. But he has sold 24 books, which is most important. US is not Japan and is the international reserve currency.


I see Michael Burry has issed a warning on inflation and notes the very close ties in financial policy of the Weimar republic in 1922 and the present US govenement in 1922 Germany was the strongest currency in the world just prior to eight years of hyperinflation and I trust his analytical opinion far above Summers and Krugman who are far more interested in book sales which require dogmatic opinions. In order to get out of debt as a percent to GDP, it is in the interest of the government to inflate the debt away. The concentration of wealth at the very top where small business is obliterated and large business is doing the best of all time is a recipe for disaster, it encourages massive risk taking in order to avoid being in the bottom 50% who are falling further behind while still being propped up by govenrment "stimulus".

 

[twaddle]

This is confusing. The links provided are unrelated to the text in the posts. The views of well known economists are sourced from a friends email? Why not just link directly to their opinions?

Not sure where you see a link unrelated to the text, but personally I wanted to convey the story of my friend and his bold attempts to contact experts.

Anybody can link to some public article. You don't like the added texture?

As Shiller says, inflation is the question of the day.

 

[USGrant1962]

My short version, from Econ 101, is that inflation requires "too much money chasing too few goods". While there is a lot of money sloshing around, there is no shortage of goods. Or of labor thanks to Covid (we were approaching labor shortages a year ago and real wages were rising). And we haven't had real shortages of anything important for a long time. Hence little to no inflation.

 

[twaddle]

There is a reason Bitcoin has gone from 9K to 55K in less than a year, it is oversupply of dollars finding a home.

That seems a bit simplistic to me, given that we've been bombarded with this oversupply for quite a while.

Anyway, this is not about asset inflation, it's about inflation embedded in interest rates.

 

[harley]

It should have, but hasn't so far. So who knows? The game is fixed.

 

[Ian S]

I see Michael Burry has issed a warning on inflation and notes the very close ties in financial policy of the Weimar republic in 1922 and the present US govenement in 1922 Germany was the strongest currency in the world just prior to eight years of hyperinflation and I trust his analytical opinion far above Summers and Krugman who are far more interested in book sales which require dogmatic opinions.

The claim that Germany had the strongest currency in the world in 1922 doesn't seem well-supported. Indeed, by that time it was clear that Germany would likely never be able to pay the reparations imposed on her at the end of the war. That's one difference with today's USA: America's debt is not subject to repayment in any currency other than US$. More details of the sources of Weimar's woes: https://www.businessinsider.com/weimar-germany-hyperinflation-explained-2013-9

 

[JoeWras]

My short version, from Econ 101, is that inflation requires "too much money chasing too few goods". While there is a lot of money sloshing around, there is no shortage of goods. Or of labor thanks to Covid (we were approaching labor shortages a year ago and real wages were rising). And we haven't had real shortages of anything important for a long time. Hence little to no inflation.

Yet we have a thread here about housing prices going through the roof.

Sure looks to me like assets are inflating. Housing and equities. Panic buying appears to be happening for housing in short supply. Houses around here are frequently being bought for cash. Equities being sold and converted? Aging boomers with big bank accounts?

And of course, if not a cash buy, we have the stimulus and nearly free money to borrow.

 

[twaddle]

Inflation is a pretty slippery term, eh? Asset inflation, wage inflation, economic growth, CPI, and interest rates. Different things, some related, some not so much.

 

[Running_Man]

That seems a bit simplistic to me, given that we've been bombarded with this oversupply for quite a while.

Anyway, this is not about asset inflation, it's about inflation embedded in interest rates.

Interest rates are not "imbedded" with inflation. Interest rates are determined by market supply and demand. When governments decidethey can buy as many bonds as necessary in order to keep the interest rates lower, then the market is not functioning as an indicator of value. So what is the common man supposed to do? In great flocks they are buying bit coin and stocks, the biggest country supporting Bitcoin is China where 65% of all bitcoins are produced. It was not coincidental that TESLA purchased 1.3 billion dollars of bitcoin and is counting on the Chinese market for it's sales.

I think it is simplistic to not contemplate why one of the largest market cap companies in the world issues 2 billion in stock and uses one point three billion of that to buy bitcoin and since has doubled the value of the bitcoin held, that something is going on other than retirees reduced consumption. Bonds are becoming openly viable to mock as an investment by any company, since they hold no interest rate they are actually functioning as cash holdings, something to be held for short term until a risk asset can be purchased.

Another interesting fact, if you try to buy a silver eagle in hard form you will pay $35 per ounce for the metal itself at wholesale, even though paper sliver is going for $27. So silver does not have that much inflation over the past year unless you are someone who actually needs the silver.

The CRB index is about to break a 12 year trend line from the decline in 2008 and has risen nearly 100% since "stimulus" payments gave hold.

Here are the current YTD price increases in some commodities:
Crude Oil USD/Bbl 25.99%

Natural gas USD/MMBtu 14.34%
Gasoline 28.84%
Propane USD/Gal 41.86%
18,000 tons of copper 18.26%
Lumber: 15.42%
Cotton: 15.54%
Sugar: 17.17%
Lithium: 45.1%
Tin: 31.41%
Cobalt: 55%
Corn: 12.76%
Rice: 4.94%
Hog Prices: 20.42%
CRB Index: 12.4%
US Houses Year over Year 10.97

The idea that a 30 year bond trading at 2% is an indication that inflation is under control is an economic self fulfilling forecast of economists who view controlling the interest rates as equivalent to controlling "inflation" and allowing for economic activity to maintain as "debt"

 

[twaddle]

As you say, RM, supply and demand is a big factor. In the case of bitcoin, supply is pretty well known. Demand is fickle. Not something I think I can predict.

But interest rates impact me directly, so I find the GDP and CPI factors more interesting to chew on.

 

[misanman]

Maybe peripherally related - we just got the 2021 assessment for our lake cottage. The assessed value went up 27% year-over-year. Fortunately, there is a limit on the increase of taxable value each year, but the current market value has shot up to almost 4 times our taxable value.

 

[twaddle]

It's such a complicated picture, really. We're mixing monetary policy with a fiscal stimulus, for one.

Bottom-line: I have no idea how this will play out, so I have to revert to my old stand-by of "minimize regret." (I don't regret missing out on the bitcoin boom, but maybe someday I will.)

Update from my friend. Turns out he already made a move and liquidated a lot of his real estate. So he's mostly concerned about sitting on a pile of cash and being afraid to deploy it, I guess. I'll suggest bitcoin.

 

[Running_Man]

Yet we have a thread here about housing prices going through the roof.

Sure looks to me like assets are inflating. Housing and equities. Panic buying appears to be happening for housing in short supply. Houses around here are frequently being bought for cash. Equities being sold and converted? Aging boomers with big bank accounts?

And of course, if not a cash buy, we have the stimulus and nearly free money to borrow.

Presently in my home town houses are selling in 2 days after listing with an average price of 10 percent over list price. Rents have increased 25% in one year here, offset I am sure by the rent declines in Chicago. In New York you can rent an apartment for 2/3 - 1/2 of rent two years ago, it is extreme dislocation occuring.

 

[24601NoMore]

Gasoline alone is up 25+% YTD.

Housing prices are going ballistic. Especially new construction. You can't touch a decent 2,500+ sq foot new construction house with "nice" but not crazy finishes here for under $8-900K ("low cost of living" Midwest state) all-in (house, land, landscaping, deck, sprinklers, etc). Meanwhile, "old" (used) houses sit on the market for months. EVERYONE wants new - and many are mortgaging themselves to the moon and back to buy new.

Food prices are going crazy. Product sizes are shrinking (don'tcha just love the "56 oz" containers of things? Yeah, THAT works for recipes - NOT).

Face it..inflation is indeed ramping up..and has ramped up bigly in the past few months already.

Huge new stimulus ($1.9T+?), "Infrastructure" bill (another couple trillion), etc is not gonna help things any on the inflation front.

As an early retiree who made a lot of sacrifices during my life to save a few pennies, this (and, candidly, the stability of our entire monetary system) concerns me GREATLY. The value of the $$s we saved is already worth ~95% what it was just a few months ago (see DXY chart) compared to a basket of 6 other non-US country currencies. Where we'll wind up in a year or three is terrifying to contemplate.

The US is dead broke. We simply can't expect to keep "printing money" in the many-trillions-of-dollars range or passing multi trillion dollar packages over and over again, and NOT have inflation go totally beserk. (To that point, for the first time ever, I'm actually considering buying GLD, IAU or some other inflation hedge like PIRMX. Wish I had bought TIPS years ago when they weren't already yielding negative..oh well!)

ETA - today's market volatility - especially with the NAS - was widely reported to be due to "inflation fears" and little else. FWIW. The Dow did recover..but the NAS got hit pretty hard, and I do wonder if this is the beginning of the air coming out of that balloon - very quickly.

 

[GenXguy]

Gasoline alone is up 25+% YTD.

Housing prices are going ballistic. Especially new construction. You can't touch a decent 2,500+ sq foot new construction house with "nice" but not crazy finishes here for under $8-900K ("low cost of living" Midwest state) all-in (house, land, landscaping, deck, sprinklers, etc). Meanwhile, "old" (used) houses sit on the market for months. EVERYONE wants new - and many are mortgaging themselves to the moon and back to buy new.

Food prices are going crazy. Product sizes are shrinking (don'tcha just love the "56 oz" containers of things? Yeah, THAT works for recipes - NOT).

Face it..inflation is indeed ramping up..and has ramped up bigly in the past few months already.

Huge new stimulus ($1.9T+?), "Infrastructure" bill (another couple trillion), etc is not gonna help things any on the inflation front.

As an early retiree who made a lot of sacrifices during my life to save a few pennies, this concerns me GREATLY. The value of the $$s we saved is already worth ~95% what it was just a few months ago compared to a basket of 6 other non-US country currencies. Where we'll wind up in a year or three is terrifying to contemplate.

My largest bills are going up much faster than government inflation figures.

Property tax, homeowner's insurance.

With the same company for my work insurance, and my health insurance premiums went up about 60%, and my out of pocket for in-network services is more than 3X what is used to be along with a 5X deductible vs. the previous year.

Food probably is also this year, but I haven't tracked it that closely.

 

[target2019]

Average gasoline price in U.S. is up about 10% YTD, mid-February.
Source: https://www.globalpetrolprices.com/USA/gasoline_prices/

 

[24601NoMore]

Average gasoline price in U.S. is up about 10% YTD, mid-February.
Source: https://www.globalpetrolprices.com/USA/gasoline_prices/

Key word there being "average".

Here, it's already up 25+% (I know - I pay the bill for it). Other places in the country are up even more than 25%.

 

[NW-Bound]

Another poster, Lsbcal, a while back on another thread, shared this quote from Liz Ann Sonders, chief investment strategist at Schwab:

"... it's the whole narrative of the Fed pumping liquidity into the system, pumping confidence into the system, and especially in an environment back in March and April, where the economy was shut down, you pump all this money into the system, into the financial system, into the credit markets, and then through the fiscal side--which I know is not really the question--into the hands of businesses and individuals in an environment where the economy was shut down. Well, that liquidity has to find a home and it found it and typically finds it in not just equities, but in asset markets. So, I get the question all the time: What about inflation? Why haven’t we had inflation in light of all of this massive stimulus? And the answer is, well, we've had plenty of it, it's just been in asset prices, not in the real economy."

I found the Morningstar interview with Sonders on Jan 5, 2021, here: https://www.morningstar.com/articles/1016787/liz-ann-sonders-we-could-see-some-inflation-scares.

Sonders expects to see signs of broader inflation when the Covid effects fade in 2021, but does not think that there's high risk of the 70's style of inflation.

While the future is not easy to see, I have to agree with Sonders that it's the easy money plus lack of outlets for spending that lead people to push up things that they can buy like cars, homes, RVs, and also dubious assets such as bit coins, "Gamestonk" kind of stocks, speculative growth stocks, etc..