The Financial Times header ‘Volatility in US Treasuries Hits Highest Point Since March, 2o2o was hard to miss but the column’s thrust was spot on, Basically the 2-year Treasury yield – which closely tracks Fed rate increase expectations – rose to a peak of 1.64% last Thursday - the highest one day rise since 2009. This “as traders bet the Fed would tighten monetary policy to tamp down inflation.” This also followed the release of data which showed consumer prices had risen in January the most since 1982.
But none of this, including the Federal Reserve's panic (now in the face of runaway inflation), ought to be a mystery. At least for those who have been following financial news. Recall way back when, before the pandemic erupted and put lives and businesses on hold, there was endless hand wringing over the "too low" inflation. At that time- late 2018, early 2019- to jog people's memories, there was even scattered talk about negative interest rates. Also negative yields. Even a WSJ piece from June 8, 2019 (p. A2) joined the panic, warning:
"Worries span the globe. The yield on 10 year German government debt Friday declined to record lows below negative 0.2 %. Japanese government bonds of the same maturity traded below negative 0.1 %. About $11 trillion of bonds around the world, concentrated in Europe and Japan, carry negative yields now accounting for about 20 percent of all debt world -wide according of Torsten Slok - chief economist at Deutsche Bank Securities."
The Fed back then, let us recall, was wondering how to stoke inflation a tad higher. Why? They believed correctly - with interest rates then so low (0.25%) - they'd have little leverage if a recession did strike. Months earlier, I even warned about the too low interest rate environment in an October, 2018 blog post:
It's been known for some time now, at least the past 18 months, that many in the financial sector -including Federal Reserve members - have been seriously considering the implementation of negative interest rates. As to why, it's not exactly 'rocket science'. With interest rates just barely a click (25 basis points) above zero, the Neoliberal economics mavens are pondering what to do in the event of another recession, say for economic stimulus. And, to be sure, if Trump somehow gets in a major recession is almost certainly in the offing according to many with an eye on jittery markets.
Also quoting Rob Kapito of Black Rock Investments that the then 25 basis point interest rate "amounted to a tax on retirees." The Fed never truly believed a negative interest rate on savers and seniors would go over too well, which is why they hoped to stoke up rates just a tad, but not too much. Alas, things didn't work out that way. An unforeseen pandemic struck and put the kibosh on an array of economic forecasts as well as models. What worked before didn't work now and the models were mostly out of joint. At root, the Fed and Jay Powell could not have predicted high aggregate demand coupled with severe supply side problems - entailing lower production and decreased participation in key labor areas.
Aggregate demand is composed of two parts: 1) demand generated by consumers for goods and services, and 2) the demand for investment in goods. When the level of aggregate demand is high, both these components are generally equally high, and the levels of production and employment are high. On the other hand, when aggregate demand is low - or even one of the components (e.g. (1)) is very low, then levels of production plummet. What we’ve seen in the pandemic, however, is (1) but coupled with lower levels of production and less employment – on account of supply side issues, and lockdowns, spread of the virus.
As columnist Martin Wolf has noted ('The Looming Threat of Long Financial Covid', Feb. 15) in The Financial Times , economic activity "contracted in 90 percent of the world's countries in 2020" and that included the U.S. That proportion "exceeded those affected by two world wars, the Great Depression and the 2008-09 financial crisis." Strangely, after some stock dives initially - which sent Trump into hysterics in an election year- the U.S. stock market recovered and actually performed well, thanks to the Fed pumping in cheap money. (The DOW has risen 20% since February, 2o20). This came via the super low interest rates as well as the quantitative easing tactic of buying millions of dollars in bonds each month. But everyone knew ultimately the 'party' would have to end.
It basically did as inflation arrived - especially after two further variants (Delta and omicron) emerged, and spending on services as well as more goods increased. But some of this inflation was systemic, while other price rises were imposed. In the first case, a global chip shortage - beyond any leader's control - reduced vehicle inventories just as Americans were buying cars in record numbers, pushing up prices. Peloton, in the latter case of imposed higher prices, "added $250 fees on bikes and a $350 delivery and setup fee." (WSJ, Feb. 11-12, p. B6). And it is no secret that a 'ton' of other companies are exploiting the media trope of widespread rampaging inflation to raise their prices on assorted goods, to make it so. (Or they are paring back the amounts packaged and charging the same, like for canned tuna, sausages etc.)
But things worsened as more service workers (including tens of thousands of nurses) left - many out of fear of the virus but many more to find better jobs. With less labor to supply the increasing demand, inflation crept up and up. This more or less coincided with Covid restrictions and lockdowns abating and vaccinations rising - whereupon we beheld more demand spikes for goods and services. Formerly locked down citizens still needed stuff to fill their cabinets and cupboards, as well as an array of other ancillary items to fill time - from Peloton bikes, to new computers, to TVs, video games, even online trading, you name it. They also needed more medical visits, attention, and other service needs - like home repair. Trouble is the demand continued to vastly exceed supply. These conditions also persist: Manufacturers in global supply chains are still operating below their capacity to churn out goods even as ships are caught in logjams at ports unable to unload their freight. Meanwhile, workers are stuck at home because restaurants still can't safely open - or lack enough staff.
As summarized in a WSJ editorial from 4 days ago:
Clothing prices were relatively flat for most of the pandemic as people stayed home, but they rose 1.1% last month and are up 5.3% year-over-year. Airline fares climbed 2.3% in January even amid the Omicron surge. Fed oracles predicted prices would ease for good in high demand during lockdowns. That didn't happen. They also forecast the inflation rate would decline as consumption shifted to services. That also hasn't happened.
As demand continued to rise supplies still remained low and multiple supply chain blockages persisted - as production cratered (such as in meat packing and auto plants) - owing to lack of sufficient labor and other issues. The combination of factors created the perfect environmental storm for inflation to soar. And soar it did to a 40-year high. It is doubtful given the circumstances of the variants, the efforts to repress viral spread, and the need to spend to secure the populace, that NO president would have done better than Joe Biden. Americans even basically concur as they rate their "personal satisfaction" with their own lives at 85% in recent Gallup polling. Even the lead story in today's WSJ agrees where one reads:
“If you look at consumers’ financial position and the strength of the labor market, you have to say that in general it’s pretty good,” said Joshua Shapiro, an economist at consulting firm Maria Fiorini Ramirez Inc.
So where's the beef? Well it's all in the head. The disconnect with the national perspective (only 17 % approving) is seen as the effect of FOX and other media in negative slanting of news. As William Davies notes in his book, Nervous States: Democracy And The Decline Of Reason', this is based on a manipulation of reality which distorts Americans' national perceptions. What Americans - millions - need to do is detach from the hours and hours of cable pundit addiction, especially to the likes of Bartiromo on FOX, e.g.
"B-B-Biden bad! B-B-Biden bad!"
FT columnist Wolf, indeed, predicts "long lasting legacies" of financial ill health based on data assembled in the recently released World Development Report which forecasts "a high risk of debt distress" for 53 percent of low income nations. Wolf also adds:
“Sharp rises in indebtedness were a necessary response to the pandemic. The problem for most emerging and developing nations is they could afford to borrow too little.”
The number in extreme poverty, Wolf concludes, had therefore jumped by 80 million, the largest in a generation. The WSJ, meanwhile - in several editorials - squawked about "the wealth effect that stimulated consumption" arising from more gov't money in Americans' pockets, e.g. from the America Cares Act ($1200 for each adult) as well as an actual money-based child tax credit and unemployment insurance bonus. According to the WSJ it was these that fueled inflation, so blame Biden and any others who had these bills passed. But Martin Wolf begs to differ, noting it was exactly this higher borrowing to save citizens' bacon in the pandemic that helped many escape prolonged, punishing debt. Again,
"Sharp rises in indebtedness were a necessary response to the pandemic".
At least for humane nations and/or those with the monetary resources to provide for their citizens with a minimum of outside borrowing. For 53 percent of low income nations this simply was not on, as Wolf pointed out. And as an earlier WSJ Exchange piece warned (ibid., Feb. 11-12), "Analysts predict costs to move and store goods will continue to rise through 2o22", meaning no relief from the existing inflation which may even get worse. But, are American voters smart enough not to blame Biden? Janice isn't convinced: "They're idiots and will punish the Dems in November putting the Trump-loving traitors back in office!"
The basic takeaway of Wolf and others is that getting out of the financial pit from Covid will be a long haul. As for inflation, the first thing we need the Fed to do is get the interest rates higher, and not just be a few 25 basis point increases. We need several half point (50 basis point) increases and before the summer alone. (See link below for a different take, i.e. that the Fed must refuse to raise the rates. But to me borrowers have been living off savers long enough as it is.)
All this in the end may be merely academic navel gazing and rarefied wishful thinking. It will remain so until the Repukes get off their asses in the Senate and confirm five outstanding Federal Reserve Board picks (including Sarah Bloom Raskin), as well as Jay Powell as Chairman. Delay is not an option, but knowing the terror-inclined, power mad Repubs, they will try anything to torch Biden's presidency and seize the House and Senate back in the midterms.
Americans hopefully aren't stupid enough to let that happen, not handing oversight power to a bunch that believes defecating in the Capitol and trotting out gallows to hang Mike Pence was "legitimate political discourse".
But who knows? The way brains have been deformed in this pandemic anything is possible.
by Ian Reifowitz | February 27, 2022 - 7:05am | permalink
by Ellen Brown | February 14, 2022 - 7:29am | permalink
by Joan McCarter | February 15, 2022 - 7:59am | permalink
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