Genesis of Today's Inflation

[piezoe]

The noun "Genesis" means the root or beginning of something. It is generally accepted that fallout from the covid pandemic and the war in Ukraine have already and will continue to contribute to unacceptably high inflation. But neither of these factors comprise the genesis of our current inflation. For that we need look no further then: (1) the U.S. withdrawal from the TPP in January of 2017, thus killing a not yet consummated trade agreement many years in the making, and, at the same time, making possible: (2) the Tariff Chaos created by the United States beginning in 2018, tariffs whose inflationary effects are still, like a bad hangover, with us to this day.

The TPP would have removed over 18,000 tariffs including elimination of Tariffs on all U.S. manufactured goods and nearly all U.S. farm products. As with all complex agreements between multiple parties there was no one who could not find something in the TPP to object to. Thus socialist stalwarts Bernie Sanders, Elizabeth Warren, and Noam Chomsky found themselves in bed with reality TV's entrepreneur Donald Trump! Can there be any question that on the TPP issue America's socio-political milieu approached maximum strangeness. Nevertheless, there can be no question that staying in the TPP would have made the Tariff Chaos of 2018-2019 impossible.

The on-again, off-again U.S. Tariffs of the 2018-2019 period of U.S. trade insanity included tariffs as high as 50% (washing machines and solar panels), and covered a broad array of U.S. products (including aluminum and steel). Our "United States of Amnesia"* had forgotten the harm visited on working class Americans during the Great Depression by the short-sighted Smoot-Hawley Tariff Act of 1930.

By no means have all of the tariffs of the 2018-2019 period been rescinded. Some are still with us! When inflation is being caused by increased demand at a time of reduced supply the least damaging way to reduce it is to address the supply side, rather than the demand side. The Fed's tools, however, are mainly focused on the demand side. Raising the Funds Rate is a weak, demand-side tool at that. Incremental rate increases mainly lessen the equity markets' "Wealth Effect" on individuals. That's somewhat helpful. But that alone won't do what must be done. It isn't until rates get quite high that we will see much reduction on the demand side, and by then we are virtually guaranteed a very bumpy if not a crash landing. If we ignore the supply-side, the Fed's approach is likely to require a recession before we see enough decrease in demand to stop the rise in prices.

Right now, anti-inflation measures should focus on the supply side. Fed rate increases actually work against this. Yes, once a recession arrives prices will cool , but this is the wrong way to deal with the kind of inflation we are experiencing. President Biden should have jettisoned all the 2018-2019 tariffs in January of 2021. He's lifted some, but more action is needed. There should be no more delay. C'mon Mr. President, first things first. Cool the anti-China rhetoric --it's doing more harm than good. Get rid of those remaining 2018-2019 tariffs. You could do it as soon as Monday morning with the stroke of a pen! There will be opportunity later to quibble with Xi over details once inflation has cooled.

[Thanks to Overhead for reminding me, by his comment in another thread, that i had intended to comment on the lingering effect of our precipitous withdrawal from the TPP and ill effect of our failure to undo the crazy tariffs 2018-2019.]
___________________
*an expression borrowed from Gore Vidal without his permission. (He's dead.)

 

[SoyUnGanador]

What in God's name are you talking about? The inflation is coming from the U.S. government huge spending deficit and the Fed printing money to buy U.S. bonds to fund that overspending. Money supply is increasing at like a 25% annual rate because of this. A monkey could figure this out, it is so simple.

Tariffs, LOL. No.

 

[piezoe]

What in God's name are you talking about? The inflation is coming from the U.S. government huge spending deficit and the Fed printing money to buy U.S. bonds to fund that overspending. Money supply is increasing at like a 25% annual rate because of this. A monkey could figure this out, it is so simple.

Tariffs, LOL. No.

It is nothing unusual about high deficits. We've had a surfeit of them in recent years. Which ones have caused, in your mind high inflation, and why did the others not? Examining these deficits of the past may take you to a deeper understanding of the relationship between deficits and inflation. Can you find any examples of high inflation that were not preceded by especially large deficits. If you can, you might ask why.

I'm sure you are aware that the deficits are the mechanism through which new outside money is moved into the private sector economy. Since the U.S. dollar is the world's reserve currency, the private sector in our case isn't limited to the U.S. economy. You will know that the U.S. has obligated itself to supply liquidity in dollars to facilitate world trade. The compensation the U.S. receives is in part by being able to use, in effect, the world's productivity as a backer for the dollar, whereas the fiat currency of a small country that does minimal import export will have essentially only their own productivity behind their currency.(I can explain how this works if your puzzled.)
This is a rather complex topic, perhaps too much so for these forums.

There is a recent thread here, something about the dollar milkshake theory. It's interesting. Though it incorporates obvious truths, I take issue with some of the conclusions drawn. You might want to watch the video if you haven't. It's about our obligation to supply dollars to the rest of the world. I.E., it's about deficits!!!!

 

[M.W.]

It was not the TPP. What a nonsense. Monetary policy, my friend, is where you should be looking at.

It's monetary policy and the discovery by Chinese manufacturers that they control the US consumer, they raised prices across the board for virtually EVERY product, using covid as an excuse. The raised prices continue despite the easing of most supply chain issues. This has nothing to do with tariffs but with prices that were raised indefinitely by Chinese manufacturers and traders. Just check on Amazon. For virtually every quality brand you see equally priced or even more expensive Chinese knockoffs and similar featured versions. Not at a 50% or so discount but equally priced as a made in USA or Europe product. That is what consumers buy and rely on, day in day out. Add to that high oil prices, high property prices and you got the perfect storm.

Reducing it to a dialed TPP pact is ludicrous.

The noun "Genesis" means the root or beginning of something. It is generally accepted that fallout from the covid pandemic and the war in Ukraine have already and will continue to contribute to unacceptably high inflation. But neither of these factors comprise the genesis of our current inflation. For that we need look no further then: (1) the U.S. withdrawal from the TPP in January of 2017, thus killing a not yet consummated trade agreement many years in the making, and, at the same time, making possible: (2) the Tariff Chaos created by the United States beginning in 2018, tariffs whose inflationary effects are still, like a bad hangover, with us to this day.

The TPP would have removed over 18,000 tariffs including elimination of Tariffs on all U.S. manufactured goods and nearly all U.S. farm products. As with all complex agreements between multiple parties there was no one who could not find something in the TPP to object to. Thus socialist stalwarts Bernie Sanders, Elizabeth Warren, and Noam Chomsky found themselves in bed with reality TV's entrepreneur Donald Trump! Can there be any question that on the TPP issue America's socio-political milieu approached maximum strangeness. Nevertheless, there can be no question that staying in the TPP would have made the Tariff Chaos of 2018-2019 impossible.

The on-again, off-again U.S. Tariffs of the 2018-2019 period of U.S. trade insanity included tariffs as high as 50% (washing machines and solar panels), and covered a broad array of U.S. products (including aluminum and steel). Our "United States of Amnesia"* had forgotten the harm visited on working class Americans during the Great Depression by the short-sighted Smoot-Hawley Tariff Act of 1930.

By no means have all of the tariffs of the 2018-2019 period been rescinded. Some are still with us! When inflation is being caused by increased demand at a time of reduced supply the least damaging way to reduce it is to address the supply side, rather than the demand side. The Fed's tools, however, are mainly focused on the demand side. Raising the Funds Rate is a weak, demand-side tool at that. Incremental rate increases mainly lessen the equity markets' "Wealth Effect" on individuals. That's somewhat helpful. But that alone won't do what must be done. It isn't until rates get quite high that we will see much reduction on the demand side, and by then we are virtually guaranteed a very bumpy if not a crash landing. If we ignore the supply-side, the Fed's approach is likely to require a recession before we see enough decrease in demand to stop the rise in prices.

Right now, anti-inflation measures should focus on the supply side. Fed rate increases actually work against this. Yes, once a recession arrives prices will cool , but this is the wrong way to deal with the kind of inflation we are experiencing. President Biden should have jettisoned all the 2018-2019 tariffs in January of 2021. He's lifted some, but more action is needed. There should be no more delay. C'mon Mr. President, first things first. Cool the anti-China rhetoric --it's doing more harm than good. Get rid of those remaining 2018-2019 tariffs. You could do it as soon as Monday morning with the stroke of a pen! There will be opportunity later to quibble with Xi over details once inflation has cooled.

[Thanks to Overhead for reminding me, by his comment in another thread, that i had intended to comment on the lingering effect of our precipitous withdrawal from the TPP and ill effect of our failure to undo the crazy tariffs 2018-2019.]
___________________
*an expression borrowed from Gore Vidal without his permission. (He's dead.)

 

[piezoe]

It was not the TPP. What a nonsense. Monetary policy, my friend, is where you should be looking at.

It's monetary policy and the discovery by Chinese manufacturers that they control the US consumer, they raised prices across the board for virtually EVERY product, using covid as an excuse. The raised prices continue despite the easing of most supply chain issues. This has nothing to do with tariffs but with prices that were raised indefinitely by Chinese manufacturers and traders. Just check on Amazon. For virtually every quality brand you see equally priced or even more expensive Chinese knockoffs and similar featured versions. Not at a 50% or so discount but equally priced as a made in USA or Europe product. That is what consumers buy and rely on, day in day out. Add to that high oil prices, high property prices and you got the perfect storm.

Reducing it to a dialed TPP pact is ludicrous.

OK, and the connection between these Amazon price increases and monetary policy is???

 

[M.W.]

No connection, it's a combination of those two and a host of other factors that contribute to persistently high inflation.

The connection is between higher sourcing prices and inflation and monetary policy and inflation. What you erroneously attempt is to see a connection between the input factors directly. Econometrics 101 teaches that one of the first test in multiple regression is a test of low or no correlation between the independent variables. Also no causality should exist between independent variables.

OK, and the connection between these Amazon price increases and monetary policy is???

 

[piezoe]

No connection, it's a combination of those two and a host of other factors that contribute to persistently high inflation.

The connection is between higher sourcing prices and inflation and monetary policy and inflation. What you erroneously attempt is to see a connection between the input factors directly. Econometrics 101 teaches that one of the first test in multiple regression is a test of low or no correlation between the independent variables. Also no causality should exist between independent variables.

Then your argument is with SoyUnPerdador , not with me. Unless of course you believe tariffs have no affect on "sourcing prices".

 

[piezoe]

What in God's name are you talking about? The inflation is coming from the U.S. government huge spending deficit and the Fed printing money to buy U.S. bonds to fund that overspending. Money supply is increasing at like a 25% annual rate because of this. A monkey could figure this out, it is so simple.

Tariffs, LOL. No.

I recalled reading this John C. Williams paper. I looked it up for you. I think you'll find it enlightening. It has to do with the affect of monetary policy on inflation. Here it is:
https://www.frbsf.org/our-district/...uly/williams-monetary-policy-money-inflation/

By the way when the Fed buys U.S. Bonds as in Q.E. it is decidedly not "to fund overspending" as you stated.

What you term "overspending" is referred to as the "deficit" and that is always funded by figurative "printing". That's what economists mean when they say the Government always money finances its spending" The money for U.S. Government spending always comes from revenues plus "printing" as needed. Never from "borrowing."

 

[M.W.]

That was my precise point. Tariffs have zero long term effect on sourcing prices. Tariffs increase prices on imports for consumers and even then I would argue that currently persistently high prices have nothing to do with tariffs. Imported products on Amazon are sky high everywhere, including Canada and Central Europe. Those regions are not affected by US import tariffs. You now see Chinese brands that are priced at same or sometimes even higher prices than American or European top brands. Example, top tier smart watches or quality outdoor gear of top brands in Europe, Australia or the US. Just some of the hundreds of examples of different products.

Then your argument is with SoyUnPerdador , not with me. Unless of course you believe tariffs have no affect on "sourcing prices".

 

[piezoe]

That was my precise point. Tariffs have zero long term effect on sourcing prices. Tariffs increase prices on imports for consumers and even then I would argue that currently persistently high prices have nothing to do with tariffs. Imported products on Amazon are sky high everywhere, including Canada and Central Europe. Those regions are not affected by US import tariffs. You now see Chinese brands that are priced at same or sometimes even higher prices than American or European top brands. Example, top tier smart watches or quality outdoor gear of top brands in Europe, Australia or the US. Just some of the hundreds of examples of different products.

I think it would help to define "sourcing prices."