Reports of declining inflation have led to a lively dispute: what should Fed policy be? Should it increase interest rates again, leave them the same, decrease them? Scott Grannis thinks it’s time for the Fed to cut rates:
There is absolutely no reason the Fed needs to raise rates further, and every reason they should begin cutting rates—beginning with the May 3rd FOMC meeting if not sooner.
Barry Ritholz seems to think they should leave them where they are:
If the FOMC were plugged in, they would realize that their work is done, there is no need to throw millions out of work because we have a shortage of houses, semiconductors, and workers of all kinds. Most goods have returned to pre-pandemic price levels. The biggest driver of apartment prices is the shortage of homes and the high price of mortgages. (Gee, whoever is responsible for that?)
Based on the Economist’s “Big Mac index”, the Fed still has some work to do (it has been suggested that the CPI systematically understates inflation).
So too hot, too cold, or just right? I don’t know. I do know that would ordinary people buy is significantly more expensive that it was in 2019.
The one thing we should be able to take away from all of this is that Modern Monetary Theory has been a siren’s song. Although what MMTers prescribe may be technically correct, it’s also politically impossible. You can always spend more but cutting spending or raising revenue is politically fraught.
… Although what MMTers prescribe may be technically correct, it’s also politically impossible. …
Actually, it is technically correct, but it is technically impossible, as well. MMT correctly describes the Modern Monetary System (MMS), and it correctly describes the limit to money creation. Basically, you stop printing money when it is no longer being used to increase production, and that should be indicated by inflation.
First, the rate of increase of inflation must be predictable. Inflation is rarely in a steady-state (zero acceleration). Usually, it is increasing or decreasing at some rate, and that rate is not constant. To get to the optimal money supply, you will need to overshoot and undershoot that number until it is determined.
While you are attempting to determine the exact amount of money needed for the economy, that number is changing by your overshooting and undershooting. Basically, unneeded production capacity is created during the overshoot, and needed production capacity is destroyed during the undershoot.
Unless you hit the mark exactly on the first try, you are distorting the market, and that distortion is changing the exact money supply needed.
And now for the rest of the story: The inflation rate and acceleration rate are distorting the market enroute to the exact amount of money supply for a perfect economy. Production capacity is being created based upon the demand predicted by inflation.
Hitting the mark, exactly, would require that number to be known by potential producers, and there would need to be some method of determining which producers could increase production so as not to overshoot.
It would require the government to control the money supply and the production capacity for MMT to have a chance of functioning correctly. NOTE: The money supply is mostly created by the private sector through various financial transactions. So, you need to control private balance sheets, as well.
(In the MMS, money is an amalgamation of money and credit.)
As our host has pointed out many times, much of the money created in the US goes to create production capacity in the exporting countries. So, you would need to include their optimal production capacity for exports to the US, but that calculation would need to include the impacts to the domestic production capacity of the exporting country.
I hinted at financial industry production of financial products acting like money, but this includes the entire global financial industry creating eurodollars (balance sheet dollars). Furthermore, this eurodollars production needs to be included in optimal production capacity.
Unfortunately, most of the eurodollar production (and domestic dollar production) is not public, but since they are an integral part of the MMS, I do not see anyway to make it public without fundamentally changing the MMS which would render MMT impossible, technically and practically.
Presently, MMT is theoretically impossible. At best, inflation is a crude indicator of production capacity, and it is not predictive. Basically, inflation indicates that you have exceeded optimal production capacity.
MMT is a convoluted mess created by a person (and built upon by persons) who understand only part of the MMS, and who do not understand how the MMS (or any monetary system) affects production capacity.
Unfortunately, most commentary is by people who are even less knowledgeable.
It may be theoretically possible to create some regression algorithm to determine optimal global production capacity, but it would need to account for emergent products and production methods plus discontinued products and production methods.