I have a question mark at the end of my post title because the truth is that I stopped thinking about macro every other moment a few years ago, and I haven’t paid much attention to it lately except in brief snapshots of time. I have some catching up to do. And it’s good thing that FRED is there as it makes catching up to where we’ve recently been easier.
The first thing that comes to mind is that a rise in inflation is something to expect when the Fed is doing anything close to meeting its mandates during a downturn as plainly read in the Full Employment and Balanced Growth Act. This is something I and others have written about for years, ad nauseum, to the point I just couldn’t do it anymore, especially when bagging on Trump’s authoritarian antics is so much fun.
Some may ask why this is. The short answer is that M*V=P*Y. Money x Velocity = Prices x Income. Or some prefer MV=NGDP. If velocity takes a huge dump, as it did in 2020, to keep NGDP stable, money growth must off set the change. And there could be any number of reasons why velocity takes a dump, but it usually has something to do with organics (though we’ve seen some strange correlations to tight money as a cause in the last decade).
The desire to keep NGDP stable has a lot to do with nominal contracts, and when NGDP is not stable during a downturn, since the split between P and Y is anyone’s guess, one could assume 50/50 but it would be generous, a lot of nasty things happen that are far more uncomfortable than 5% CPI YoY. Think 2008 when the Fed wasn’t particularly interested in the trade off and too willing to foist the cost of forcing sub 2% PCI inflation when conditions were not appropriate for it on the entire dollar bloc.
Having a job and paying more for goods temporarily is better than having no job and not being able to pay for or sell anything, losing desperately needed money on what can be sold, and possibly ending up with nowhere to live.
But enough about that.
What I see on FRED regarding velocity tells me recovery is a long way off. People can say what they want about “stagflation”, but the trends in money growth and velocity that occurred around the great inflation are a different animal that what the trends are now. I do not care if unemployment is at 4.2%. The unemployment rate is only correlated with changes in monetary policy, unless at zero, not the other way around. We really need to get out of the Philips curve cognitive dysfunction and stop giving policymakers involved in forming both monetary and supply side policy a pass for being lazy ideologs or just plain stupid to believe every inflation issue ought to be solved with monetary policy. Check me on this with FRED.
The FED needs extraordinary help to create the kind of inflation that was created in the 1970’s. The presses could be fired up and run 24×7 until the cows come home and create no inflation until the supply side can no longer soak it up. (And yes, I am hinting here that Trump’s economic and trade policy chickens are coming home to roost)
And it’s the strangest thing to me that Reagan era supply side economics hasn’t come back into vogue just when we need it the most. Biden believes all of our problems will be solved with windmills and tight money. LOL. Our problems are more basic and more complex than that. Yes, cheap energy is part of a solution, but only a tiny fraction. What about the rest of the Federal Register?? It is so much more problematic than monetary policy now. But all the president’s men can’t seem to help themselves help us. So sure they are of things that are not so, they see supply side issues everywhere, but apparently cannot see the forest through the trees enough to do things that could help lower inflation without doing any material harm.