The US Economy’s Not a Plane and It Won’t Land Gently - Niall Ferguson
From those who prematurely predicted that inflation would be “transitory,” we now hear claims of vindication.
As Humpty Dumpty says to Alice: “When I use a word, it means just what I choose it to mean — neither more nor less.”
Inflation has been above target for nearly two and a half years. Whenever it returns to 2%, we’ll be told: “That’s what we meant by transitory!”
I keep having to remind people that the dream of pain-free disinflation was a recurring delusion of the 1970s. The only times the Fed succeeded in bringing inflation down in that unhappy decade there were recessions: in 1970, 1974-75 and 1980.
A key part of the story is obviously that President Joe Biden’s administration is providing more than $2 trillion to subsidize investment in infrastructure, green technology and microchips.
But there is also the resilience of the housing market, illustrating how much less sensitive Americans are to rises in mortgage rates than they were 15 years ago.
Despite more than 500 basis points of interest rate hikes, stocks in late July were just 3.8% below their December 2021 peak.
An alternative metaphor is the once-popular “Goldilocks economy,” which was supposedly neither too hot nor too cold. As anyone who regularly cooks porridge will confirm, it is only very briefly at the “just right” temperature. Before that, it scalds your children’s lips. Not long after that, it’s cold and unappetizing.
How might the US economy go from too hot to too cold? First, there is a distinct possibility that inflation prints in the autumn could push the annual rate back up toward 4% or even higher, because of so-called “base effects”
The rising yields are telling us that fiscal policy is indefensibly loose.
As the FT’s Martin Wolf recently reminded us, higher rates are also bad news for banks that made a lot of low-rate mortgage loans before 2022, or accumulated government bonds on their balance sheets.
True, the share of corporate due be repaid or refinanced over the coming two years is down from 26% in 2007 to 16% today.
But that’s still $790 billion of maturing debt in 2024, rising to above $1 trillion in 2025.
And don’t forget the unpredictable effects of “quantitative tightening.”
Future historians — if AI hasn’t condemned my species to extinction — will marvel at the amount of time economists in the 2020s devoted to calculating various measures of inflation to one decimal point.
They will also wonder why such a bad analogy as landing a plane was used to explain the effects of monetary policy to the public.
Niall Ferguson Bloomberg 13 August 2023
Inflation’s return changes the world
Martin Wolf 4 July 2023
https://englundmacro.blogspot.com/2023/07/inflations-return-changes-world.html
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