Many of us have read recently about Republicans from the bygone era of the Reagan coalition who discuss feelings of disaffection. When I read about them, it’s easy for me to personalize as a story about kindred spirits. After having wandered off the reservation several years ago due to the partying having lost its way on economic policy, it’s difficult to find a rationale for wandering back with Trump’s tariff policy slamming that reservation gate closed and applying a heavy duty padlock.
Earlier, I did a post on the Hypermind NGDP futures market, and as is often the case, there was an important piece of information I missed due to timing. As I looked at it again yesterday, I noticed an assumption made in the comments section that stood out, “More inflation means higher NGDP.”
That assumption is probably wrong because the reason inflation is rising is really important here, negative supply shocks raise inflation and reduce AS. In a simplified example, if M*V = P*Y, assuming all else remains equal and nothing goes on with M or V, then we’re just looking at the split between P and Y shifting around, perhaps from 40/60 to 60/40 (or worse – and this is the best case scenario!).
But we need to take into consideration the fact that, even though there has been more and more discussion at the Fed about doing away with the simple growth rate inflation target, something material has yet to come from it. Thus it wouldn’t surprise me if, in response to the rise in inflation due to Trump’s negative supply shocks, we found ourselves in a world where both M and V are decreasing in addition to the split between P and Y shifting around, which is the worst of everything (and probably the best reason I can think of about why growth rate IT is a really not a good idea, and bad trade policy on top of it is really BAD).
With nothing changing on the MP front, TIPS spreads experienced a jump to 2.1% for the five-year and we have experienced dramatically higher market volatility, something we really wouldn’t expect from an expansionary monetary policy. With new and ever bolder tariffs being announced weekly, trade policy itself is currently highly volatile and is likely the source of what we’re seeing in the markets and the TIPS.
We’re not getting more M (or more NGDP) as to cause the rise in TIPS spreads. There isn’t any evidence that we are getting more and the former does not naturally lead to the latter. We’re getting less AS from animus trade policy as to cause a rise in TIPS spreads (negative supply shock), which means more P and less Y. As expected under simple growth rate IT, this will result in less M, V and Y as to keep P roughly anchored around 2% (the logical explanation for metaphor of the extra PB&J squishing out of the proverbial sandwich under the soft NGDP cap).
Facebook may be a convenient, superficially plausible scapegoat for the tech selloff, but it isn’t to blame for the widespread magnitude of it. Trump is to blame for that. It would be beneficial to realize here that the damage being done is a conscious choice that is being made, and given the state of monetary policy, the eggs that are being broken can’t be unbroken. Given that time is a non-renewable resource, this is a net, dead weight loss in the shorter and longer term.