In an environment with "unanchored" inflation expectations, the manufacturer, producer or supplier believe that their costs are going to significantly rise in the future. In an environment without government regulations preventing higher profit margins aka price gouging, there is no hamper to price increases on the buyer, perpetuating forward inflation. In the historical context of ever-increasingly-efficient supply chains, primary inflationary bursts could be viewed as transient. A temporary increase in the cost of a good or service would be immediately removed when the temporary hurdle was resolved. If labour costs rose too significantly, a manufacturer could move operations to a lesser developed nation. If mineral deposits were depleted; or regulations protecting miners became too expensive, a supplier could move to any number of untapped lands. If resource costs for energy became too expensive, a producer could always develop more. The major theme is that the system had room to explore and expand. In many regards, there has never truly been a need for the United States to own the burden of regulations. The system was built to become increasingly efficient, and competitive parties would find the most profit-bearing way towards a deflationary effect. There was always a cheaper solution, economic controls needed only to exist to limit how much any entity could leverage transient price increases.
In a normal inflationary loop, there would be a major cost spike, say a fire in a major lumber farm. The cost for lumber in a region might increase due to lack of supply. The lumber producer needs time to set up a new farm, and charges more for the wood in reserve as a temporary fix. A supplier could come in transporting lumber from further away, but still at a much lower total cost than the lumber producer. The Federal Reserve need only make sure the lumber producer wasn't able to take a loan 100x their collateral worth in an effort to stockpile more wood, and to keep the costs artificially high for a longer period. The Federal Reserve need only make sure that a supplier could access a loan to allow a supplier to bring in lumber from another source. The Federal Reserve need only make sure that the banks perform their duties to these functions in an orderly manner. The Federal Reserve is the Central Bank of the most powerful country on Earth, it need not fear the petty swipes of lesser beings.
Then there is an abnormal inflationary loop, something that is well beyond the capable hands of the Federal Reserve; say a diplomatic, or violent faceoff between competing nations. The cost of goods from those nations might be insurmountably high, or on a longer time horizon for the system to work itself around. The slowdown in functions surrounding that good or service is unavoidable. The product will cost more, eating away at the consumers ability to purchase, and perpetuate activity. The system could adapt in an innovative way, via technological development or expanding towards other markets. If the cost of oil is too high, the system will expand alternative energy generation methods or reduce energy usage. However, if the resource needed, say tritium in fusion nuclear power plants, is completely unavailable; scientific knowledge dictates a fission nuclear power plant can be made to produce more. The system can correct given a ~5+ year lead time. In that time span, the system faces a crisis: charge more for energy now and use less energy, or build alternative energy generation methods given they will become unnecessary in 5 years. While this example may only be valid in 20+ years, it stresses the point: Is it worth the money? The Federal Reserve, or any other central bank to scope, need to weigh that question on the scale of their sovereign stability. If the central bank tries to give too much money to the system to correct the problem, and ease the suffering of their citizens, they lose power on the international scale in the zero-sum game. If the central bank favours an international positioning over the security of it's citizens, it risks sovereign instability. Again, the Federal Reserve need not fear the petty swipes of lesser beings.
Problems exist outside of anyone's control. A major pandemic might strike that forces massive quarantines to prevent widespread death. Or an oil embargo causes an entire economy to seize. The system slows down; less people go places to buy things thus less things get made thus less people make money to go places to buy things. There is no way to prevent this slowdown, and a recession strikes. In a short enough timespan, say a 6-8 month lockdown with eventual complete restart of all previous activity, the recession is temporary. The government and Central bank can work in conjunction to prevent failures of any company or labourer and economic participant, such that the entire economy can and will restart immediately. Post-dotcom bubble, entire industries were wiped out. Speculative markets collapsed, forcing large groups of the population out of the labour-force. Late-70s: manufacturers, producers and suppliers moved massive amounts of work out of America. Much the same way a company like Nike might move operations from China to Georgia or Maldova. All the workers in China who made shoes, no longer make shoes for Nike, and may not make shoes at all given production was above local demand. Unless a Chinese or other international business steps in to buy the supply chain and take a market share in exporting shoes, those workers won't make shoes ever again. Recessions might last a few years as the market takes time to evolve towards making other goods or services, i.e. those workers find new income sources. In the environment that those workers become obsolete, and makeup a sizable enough portion of the economy, they force a cascading effect to slow down so much so, it becomes a depression. Post-Great Financial Crash, banks had limited leverage and participants had limited income generation. Much of the economic activity collapsed. An extended recessionary period was resolved by the Federal Reserve allowing expanded leverage via cheaper money to experiment new ways to increase economic activity. Much the same way capital was needed to expand medical infrastructure and knowledge, capital was exchanged for failures and successes. Allowing for failure gave the chance for success, and creating an environment allowing for successes to out-reward the cost of failures, and in an environment of possible success, successes were had. Money was never lost; it entered into the cycle through one input, and perpetuated economic activity before being lost through outputs. If outputs are appropriately controlled and can be fed back into the system, it can spin ad infinitum.
Inflation expectations are one of the most potent accelerators of inflation; if companies believe inflation is coming, they will make moves to protect their margins by being first to swing with a price increase. If the consumer believes inflation is unanchored, they will be more willing to pay higher prices before cutting demand. While prices increasing might cause the consumer to decrease the amount they buy, if they believe it should be getting more expensive, they will be unwilling to punish dramatic price increases. In a 1974 paper, Tversky and Kahneman spell out a simple psychological fact: anchoring biases. The consumer understands the direction, but is caught in the narrative, failing to identify inflation well above deserved. This of course doesn't matter in markets of extreme condensation, where competitors are few and willing to cooperate. Squeezing the consumer is one way recessions can happen, as they burn through savings and take on overleveraged credit, their ability to buy in the future is forfeited for a quick buck. Without a significant wage increase, this environment's prolonged recessionary period can quickly turn into a depression as more and more future profits are crushed under massive interest payments and reduced purchasing power.
In a more modern turn of inflation expectations, resources without appropriate cost-anchoring pose a serious issue on the corporate side. The cloud is expensive, but how much really? The software companies rely on to keep their financial records has no clear cost matrix, and the technological side of costs have been inflating far greater than any other. Cloud computing services has increased from 145 billion dollars of spending in 2017 to 500 billion projected for 2022. In comparison, the largest 25 agriculture companies have an 84 billion dollar market capitalization. There is detached from expected, and then there is detached from reality. These massive increases in technological inflation are paid for by debt and creative accounting. While the creative accounting is more for the banks haircuts, the debt is the killer. Companies take debt at projected earnings over the next five plus years, based on modeled growth over the last five plus years. If a recession hits harder than expected, those earnings collapse and bankruptcies tick up. The cascading effect of an industry daisy-chained poses a serious issue when companies like Google and Facebook exist off overinflated advertisement earnings, as is being revealed by the FBI investigation into Jedi Blue. The wealth inequality effect is bad for lower class spending, but if the high earners can carry the weight, an economy can appear to grow. If the high earners start earning a lot less, or inflation becomes deeply entrenched and rooted everywhere, that growth shrinks and recedes.
When the Federal Reserve talk about inflation expectations, they talk about the psychology of the economy. When they offer free money for extended periods to everyone without appropriate safeguards, they enable that psychology to affect the economy. When the Federal Reserve raise interest rates and explicitly state they will beat inflation, they disable the psychology to act and enforce the psychology to change. The Federal Reserve has studied and proven this effect, they can modulate the economy by affecting it's psychology. However, they based that thesis in 2016. A poll done by Axios in 2021 showed 60% of Americans do not trust the Federal Reserve, up from 50% a year earlier. If the Federal Reserve are not trusted, how much can they affect the psychology of the economy? This author's biggest question has always been how much do they really know, given their record? When trust erodes, expectations unanchor behaviour. While the Federal Reserve may not need to fear the failures of their weaker peers, they may not be reliant on models that work for their environment. Previous bank runs have occurred when the central bank of any nation is unable to back the printing of money as it is pulled from the Monetary supply of that nation. The Federal Reserve stepped in in 2020 to make themselves the lenders of last resort to prevent any bank run from international, or national money markets. Elizabeth may be the Queen of England, the Bank of England may be it's King, but the Federal Reserve has made itself god.
"What's a God to a non-believer."
world-nuclear.org/in...f-nuclear-power.aspx
www.wired.com/story/...acing-a-fuel-crisis/
public.tableau.com/a...facturingmap/NIKEMAP
www.frbsf.org/econom...stern-hemisphere.pdf
www.federalreserve.g...200712/200712pap.pdf
www2.psych.ubc.ca/~s...rskyKahneman1974.pdf
www.statista.com/sta...omputing-since-2009/
companiesmarketcap.c...anies-by-market-cap/
nymag.com/intelligen...eal-with-google.html
www.newyorkfed....ports/sr773.pdf?la=en
www.axios.com/2021/0...reserve-trust-powell
www.thebalance.com/w...-debt-crisis-3305525
In a normal inflationary loop, there would be a major cost spike, say a fire in a major lumber farm. The cost for lumber in a region might increase due to lack of supply. The lumber producer needs time to set up a new farm, and charges more for the wood in reserve as a temporary fix. A supplier could come in transporting lumber from further away, but still at a much lower total cost than the lumber producer. The Federal Reserve need only make sure the lumber producer wasn't able to take a loan 100x their collateral worth in an effort to stockpile more wood, and to keep the costs artificially high for a longer period. The Federal Reserve need only make sure that a supplier could access a loan to allow a supplier to bring in lumber from another source. The Federal Reserve need only make sure that the banks perform their duties to these functions in an orderly manner. The Federal Reserve is the Central Bank of the most powerful country on Earth, it need not fear the petty swipes of lesser beings.
Then there is an abnormal inflationary loop, something that is well beyond the capable hands of the Federal Reserve; say a diplomatic, or violent faceoff between competing nations. The cost of goods from those nations might be insurmountably high, or on a longer time horizon for the system to work itself around. The slowdown in functions surrounding that good or service is unavoidable. The product will cost more, eating away at the consumers ability to purchase, and perpetuate activity. The system could adapt in an innovative way, via technological development or expanding towards other markets. If the cost of oil is too high, the system will expand alternative energy generation methods or reduce energy usage. However, if the resource needed, say tritium in fusion nuclear power plants, is completely unavailable; scientific knowledge dictates a fission nuclear power plant can be made to produce more. The system can correct given a ~5+ year lead time. In that time span, the system faces a crisis: charge more for energy now and use less energy, or build alternative energy generation methods given they will become unnecessary in 5 years. While this example may only be valid in 20+ years, it stresses the point: Is it worth the money? The Federal Reserve, or any other central bank to scope, need to weigh that question on the scale of their sovereign stability. If the central bank tries to give too much money to the system to correct the problem, and ease the suffering of their citizens, they lose power on the international scale in the zero-sum game. If the central bank favours an international positioning over the security of it's citizens, it risks sovereign instability. Again, the Federal Reserve need not fear the petty swipes of lesser beings.
Problems exist outside of anyone's control. A major pandemic might strike that forces massive quarantines to prevent widespread death. Or an oil embargo causes an entire economy to seize. The system slows down; less people go places to buy things thus less things get made thus less people make money to go places to buy things. There is no way to prevent this slowdown, and a recession strikes. In a short enough timespan, say a 6-8 month lockdown with eventual complete restart of all previous activity, the recession is temporary. The government and Central bank can work in conjunction to prevent failures of any company or labourer and economic participant, such that the entire economy can and will restart immediately. Post-dotcom bubble, entire industries were wiped out. Speculative markets collapsed, forcing large groups of the population out of the labour-force. Late-70s: manufacturers, producers and suppliers moved massive amounts of work out of America. Much the same way a company like Nike might move operations from China to Georgia or Maldova. All the workers in China who made shoes, no longer make shoes for Nike, and may not make shoes at all given production was above local demand. Unless a Chinese or other international business steps in to buy the supply chain and take a market share in exporting shoes, those workers won't make shoes ever again. Recessions might last a few years as the market takes time to evolve towards making other goods or services, i.e. those workers find new income sources. In the environment that those workers become obsolete, and makeup a sizable enough portion of the economy, they force a cascading effect to slow down so much so, it becomes a depression. Post-Great Financial Crash, banks had limited leverage and participants had limited income generation. Much of the economic activity collapsed. An extended recessionary period was resolved by the Federal Reserve allowing expanded leverage via cheaper money to experiment new ways to increase economic activity. Much the same way capital was needed to expand medical infrastructure and knowledge, capital was exchanged for failures and successes. Allowing for failure gave the chance for success, and creating an environment allowing for successes to out-reward the cost of failures, and in an environment of possible success, successes were had. Money was never lost; it entered into the cycle through one input, and perpetuated economic activity before being lost through outputs. If outputs are appropriately controlled and can be fed back into the system, it can spin ad infinitum.
Inflation expectations are one of the most potent accelerators of inflation; if companies believe inflation is coming, they will make moves to protect their margins by being first to swing with a price increase. If the consumer believes inflation is unanchored, they will be more willing to pay higher prices before cutting demand. While prices increasing might cause the consumer to decrease the amount they buy, if they believe it should be getting more expensive, they will be unwilling to punish dramatic price increases. In a 1974 paper, Tversky and Kahneman spell out a simple psychological fact: anchoring biases. The consumer understands the direction, but is caught in the narrative, failing to identify inflation well above deserved. This of course doesn't matter in markets of extreme condensation, where competitors are few and willing to cooperate. Squeezing the consumer is one way recessions can happen, as they burn through savings and take on overleveraged credit, their ability to buy in the future is forfeited for a quick buck. Without a significant wage increase, this environment's prolonged recessionary period can quickly turn into a depression as more and more future profits are crushed under massive interest payments and reduced purchasing power.
In a more modern turn of inflation expectations, resources without appropriate cost-anchoring pose a serious issue on the corporate side. The cloud is expensive, but how much really? The software companies rely on to keep their financial records has no clear cost matrix, and the technological side of costs have been inflating far greater than any other. Cloud computing services has increased from 145 billion dollars of spending in 2017 to 500 billion projected for 2022. In comparison, the largest 25 agriculture companies have an 84 billion dollar market capitalization. There is detached from expected, and then there is detached from reality. These massive increases in technological inflation are paid for by debt and creative accounting. While the creative accounting is more for the banks haircuts, the debt is the killer. Companies take debt at projected earnings over the next five plus years, based on modeled growth over the last five plus years. If a recession hits harder than expected, those earnings collapse and bankruptcies tick up. The cascading effect of an industry daisy-chained poses a serious issue when companies like Google and Facebook exist off overinflated advertisement earnings, as is being revealed by the FBI investigation into Jedi Blue. The wealth inequality effect is bad for lower class spending, but if the high earners can carry the weight, an economy can appear to grow. If the high earners start earning a lot less, or inflation becomes deeply entrenched and rooted everywhere, that growth shrinks and recedes.
When the Federal Reserve talk about inflation expectations, they talk about the psychology of the economy. When they offer free money for extended periods to everyone without appropriate safeguards, they enable that psychology to affect the economy. When the Federal Reserve raise interest rates and explicitly state they will beat inflation, they disable the psychology to act and enforce the psychology to change. The Federal Reserve has studied and proven this effect, they can modulate the economy by affecting it's psychology. However, they based that thesis in 2016. A poll done by Axios in 2021 showed 60% of Americans do not trust the Federal Reserve, up from 50% a year earlier. If the Federal Reserve are not trusted, how much can they affect the psychology of the economy? This author's biggest question has always been how much do they really know, given their record? When trust erodes, expectations unanchor behaviour. While the Federal Reserve may not need to fear the failures of their weaker peers, they may not be reliant on models that work for their environment. Previous bank runs have occurred when the central bank of any nation is unable to back the printing of money as it is pulled from the Monetary supply of that nation. The Federal Reserve stepped in in 2020 to make themselves the lenders of last resort to prevent any bank run from international, or national money markets. Elizabeth may be the Queen of England, the Bank of England may be it's King, but the Federal Reserve has made itself god.
"What's a God to a non-believer."
world-nuclear.org/in...f-nuclear-power.aspx
www.wired.com/story/...acing-a-fuel-crisis/
public.tableau.com/a...facturingmap/NIKEMAP
www.frbsf.org/econom...stern-hemisphere.pdf
www.federalreserve.g...200712/200712pap.pdf
www2.psych.ubc.ca/~s...rskyKahneman1974.pdf
www.statista.com/sta...omputing-since-2009/
companiesmarketcap.c...anies-by-market-cap/
nymag.com/intelligen...eal-with-google.html
www.newyorkfed....ports/sr773.pdf?la=en
www.axios.com/2021/0...reserve-trust-powell
www.thebalance.com/w...-debt-crisis-3305525
