The January US inflation data might blow up the world…
A week from today, on Thursday 10 Feb, the Fed will release it’s inflation figures for January 2022. This after ending the year on a multi-decade high, hitting 7% (annualised) in December. The last time it was that high was 1982.
In ’82, however, 7% was actually a point on the downslope from a previous high point. It had taken aggressive interest rate rises (a federal funds rate as high as 20% in June of 1981) to bring it back down. It’s since been an established principle, and practice, enshrined in the charter of independent central banks, that interest rates should be adjusted to control inflation.
Innitially the concern was with keeping it from getting too high. Then after 2008, the concern was keeping inflation from getting too low — stopping the economy from slipping into a deflationary spiral like the great depression. Now it’s both. Inflation is roaring back to life in the United States, but some people are scared, with good reason, of what will happen when the Federal Reserve moves to curb it.
One way to think about what’s happening is to compare the economy to a drug addict. The longer someone uses a drug, the less freedom they have in terms of the timing and dosage required to keep the train on the rails. As both withdrawals and the undesired side-effects of the drug become stronger over time, it is increasingly the case that the user is either too-high, or not-high-enough. Eventually, the space shrinks to nothing, leading to a crisis — the only options are overdose or withdrawal, or both.
The drug our economy has become addicted to is credit, cheap credit. Our path, like that of any lying junkie, is getting ever narrower.
Since at least the 90’s, governments have combined austerian thinking aimed at a “balanced” budget, policies of low wage growth, and inflation targeting by central banks. When the first two elements slowed the economy down, the central banks stepped in automatically, in line with their technocratic mandate, easing monetary policy to compensate, masking the effects the way drug use might mask a deeper trauma, abuse or neglect.
The deflationary effect of the austerity and wage stagnation can thus be seen in the ever-more inflationary postures adopted by central banks, and the ever cheaper credit which has driven each new bull market.
Public austerity was the midwife of corporate extravagance. For a while these push and pull factors have been holding each other in check and overall, the economy kept growing. But we are reaching the limits of the current paradigm. I am not the only person smart enough to see this.
If inflation comes in too hot for the market’s nerves, and there does look to be a rush for the exits, the best thing to do would be to say “the hell with it” and raise rates regardless. Let the stock market crash along with crypto and housing and tech stocks, and then step in with fiscal policy and take care of the actual people (for example with a basic income, free health care, affordable housing). But that outcome seems unlikely given the determination of democratic “moderates” to block even Biden’s modest agenda.
If, instead, inflation is steady, or cooling, then we have a little more time before the shit hits the fan.