First up, inflation. As inflation heats up….
Central bankers around the world are lifting interest rates at an aggressive clip as rapid inflation persists and seeps into a broad array of goods and services, setting the global economy up for a lurch toward more expensive credit, lower stock and bond values and — potentially — a sharp pullback in economic activity.
…according to the New York Times. Not all economist and thinkers agree with this. Here’s Hadas Their providing a socialist’s view on why price controls are a better idea. More on her argument in Jacobin. For a counter to that, here’s someone from the Fed arguing that price controls should stay in the history book. I tend to side with the Fed’s view over Their’s, but she raises valid criticisms of the central bank’s approach.
Perhaps I am too used to economics only coming from a male perspective. Perhaps you are too. If so, we might all benefit from reading this: We all play by economic rules set by men. What could a feminist economics look like?
But back to the Fed. If they want to bring down inflation, how does they go about doing that? You can learn about their methods to control the economy here: The Federal Reserve’s Open Market Operations.
Besides dealing with inflation, many economists are looking to see if and when we will be in a recession. One surprising way to do that is look at the price of copper. If you are asking yourself, what does the price of copper tell us about the economy, then read this. For more on this, see: historical Copper price data. Here’s more on the Global price of Copper (PCOPPUSDM) from FRED.
One last thing. On the topics of inflation and the economy, the economist Larry Summers has been popping up more and more because he seems to me he’s been predicting bad inflation early on. Given that, here’s something to keep in mind: Summers Watch from The American Prospect. Let’s just say that I think there are better people to get your advice from.
This piece, Opinion | Still Haunted by Grocery Shopping in the 1980s – The New York Times, by a Brazilian economist highlights the emotional scars that economic hardship has on a person. Key quote for me was this:
Research has found that children living in poverty are at increased risk of difficulties with self-regulation and executive function, such as inattention, impulsivity, defiance and poor peer relationships. It takes generations until society fully heals from periods of deep instability. A study in the early 2010s showed that Germans were more worried about inflation than about developing a life-threatening disease such as cancer; hyperinflation in the country ended almost 100 years ago.
Not only does it touch people individually, but you could make the case that it gets embedded into the culture. Germans are still worrying about inflation! Indeed, I remember my mom telling me how the Great Depression affected her mother to the point that she adopted behaviors she could never shake, not matter how much she had in the future.
Economics can seem dry, especially when people focus on numbers. But those numbers paper over how people are really affected. What is the emotional impact of high (or low) unemployment? What do we see happening in the culture when housing becomes unaffordable or work impossible to get. The numbers are an essential part of the story but they are also just the start of the story.
Is the FED (Federal Reserve System) broken? If not broken then certainly being strongly tested, as this piece shows to me: The Fed Is Searching for a New Framework. New Minutes Show It Doesn’t Have One Yet. – The New York Times.
Since the start of the Great Recession, the target interest rate has gone from just over 5% to just over 0% and has more or less stayed that way for over half a decade. (See the chart). After a very long pause, the chairwoman of the Federal Reserve has begun the process of raising interest rates, a process that her predecessors have engaged in over recent decades as they put their own distinctive stamp on the economy. (See A History of Fed Leaders and Interest Rates – The New York Times). Some of them, like Paul Volcker, have been hugely successful in shaping the economy. Others, like Alan Greenspan, also have shaped the economy hugely, but I would add, unsuccessfully. So what should the FED do?
Paul Krugman has his take, here. Perhaps an extreme inflation target is the answer, just like Volcker’s extreme interest rates were the answer for their time. However, I don’t think they are symmetrical, and the goals of a higher inflation target would be dampened down by other forces. Furthermore, the FED and most other central banks seem only capable dealing with tamping down inflation and not so capable when dealing with unemployment.
The Chairwoman is signalling she will be raising rates soon. We should see what the effect is, and how the economy and President Trump and Congress responds. If the economy goes into a recession, that would say to me the FED is broken. If the economy does not go into a recession, I would say this means the FED still has a limited role in managing the economy. Let’s see.