[kyrieeschaton]

20% of all dollars were created in 2020. The only thing preventing that from translating into the broader price level is that money velocity collapsed due to the Covid shutdowns. Instead most of that has channeled into financial and property asset prices.

Once velocity increases, as is the plan if you assume 2021 is the year we "recover" from Covid restrictions, the Fed will have a choice between inflation and deflating the money supply (eg by selling a huge portion of their accumulated financial assets). The latter implies a rise in interest rates that harms economic recovery and government borrowing costs, potentially reducing available fiscal stimulus.

I would like to read an analysis of how they plan on veeeery carefully extricating themselves from this situation but as far as I can tell the strategy is to wing it.

[neffy]

It's not velocity - that's a red herring (complete misunderstanding of monetary behaviour by Rothbard et. al.)

There are a few things going on simultaneously, one is that a lot of the new money is going into the finance sector, so there is inflation, but it's in share prices which doesn´t get captured by the CPI measurement. The other thing is that banking regulation no longer depends on the reserve requirement, but on the capital reserve requirement which controls how much lending the banks can do (and through that the amount of money creation.) So the inflationary spiral is now, banks increase capital, which increases lending, which increases the money supply, which increases the value of existing capital, etc. It is fortunately a lot slower than what would have happened if the old asset reserve requirement was still all that controlled the system. You can see it starting to affect M2, but it will take a while to feed through.

[gizmo]

The FED strategy is to do enough to keep the recovery going, but not so much that it overheats. GDP growth will over time make the debt burden bearable as interest rates tick higher.

With 10 million unemployed and 44% of households being behind on mortgage/rent/bills the economy is not going to roar back to life. With demand depressed because the actual economy hurting badly inflation will be moderate and temporary and deflation will remain the top concern of the Fed.

Of course we do see prices in some areas going up. Houses for instance. But that makes sense when you think about it. Nobody wants to move to a smaller house/apartment during a pandemic, and millions are simply not paying their mortgage instead of downsizing. Meanwhile those with money are moving away from cities and buying bigger places. The implications for housing prices are obvious. But this asymmetry won't last because the relief programs are temporary.

Burry believes that rising prices and some inflation proves we are at the cusp of Weimar Germany style hyperinflation. That is, at least for now, not borne out by the data in the slightest.

[thedudeabides5]

MMT is pretty simple.

Run inflation higher than interest rates to push down the nominal value of debt.

Usual example is the UK after WWII.

https://fred.stlouisfed.org/series/CPIIUKA

You don't need hyper inflation to inflate away your debts, just enough monetization to bring indebtedness in line.

Now, does that mean the currency will retain value vs real assets, no it means the opposite.

Hence the move in stocks, real estate, bitcoin, gold, etc;

[grey-area]

And what happens when inflation rises and they need to control it with non-zero interest rates? Then stocks, real estate etc crash and we're back in another recession, which they try to solve with... more money and lower interest rates. We've already seen this story a few times.

Inflating away debt is fine if it is done slowly and has been done for centuries.

The extreme asset valuations we've seen after a decade of QE are unprecedented.

ZIRP and QE are not fine and are not working for the stated purpose, if anything they're making the economy more fragile. There's an interesting overview of the choices here from Lyn Alden, none are without complications but it does sound like they'll try to aim for moderate inflation and hope they can control it, but if they need to put the brakes on in a hurry the traditional methods of doing so could have extreme effects on overvalued assets:

https://www.lynalden.com/february-2021-newsletter/

[dragonwriter]

> Run inflation higher than interest rates to push down the nominal value of debt.

MMT [with apologies to The Matrix]: “Do not try and inflate away the fiscal deficit. That's impossible. Instead only try to realise the Truth... There is no debt, and no ‘fisc’.”

While you can preprogram spending and call it “debt” in MMT, you can't understand MMT from within the metaphor of the fisc, the limited public purse which must be filled by revenue and/or borrowing to enable spending.

MMT isn't really about how you use blunt-instrument monetary policy like fed target rates, it's about not needing the separation between sharp-tool “fiscal” and blunt-instrument monetary policy, because “fiscal” policy actually lacks fiscal constraints and has only monetary constraints, and therefore can and should be used instead of blunt-instrument monetary policy. While conventional economists tend to criticize the US for being overreliant on monetary policy because of Congressional failure to deploy fiscal stimulus in recent downturns, MMT dial that up to 11, viewing the divide between fiscally-constrained but more targetable policy and monetary policy which has no fiscal constraints as artificial and unnecessary, as the constraints actually applicable to either are the same and purely monetary.

[kyrieeschaton]

MMT does not depend on or imply the relation between debt and inflation, it addresses the metaphysics of "government debt" as such. In fact it suggests you should not "inflate away the debt", as if governments were subject to an actual fiscal constraint of spending = taxes + borrowing (the premise MMT rejects).

[giantg2]

Considering Yellen has basically stated (and has a history of doing), she would rather do too much and deal with inflation rather than not do enough.

So my take away is that we'll see inflation above 3% in the next two years.

[jfengel]

It's already well above 3%, if you could include the stock market in the metric.

That's the problem facing Yellen: not just doing enough, but doing something that won't just end up inflating the kinds of assets owned by the wealthy. Consumer prices have been stable because despite the increase in money supply, consumers as a whole were treading water (at best) even before the pandemic.

She would be happy to do something that caused CPI to get above 3%. It would mean the Fed could finally take the punch bowl away. They've been refilling it for well north of a decade, and it drains as fast as they fill.

[marcosdumay]

> The only thing preventing that from translating into the broader price level is that money velocity collapsed due to the Covid shutdowns.

Hum... Money management 101 says that if velocity goes down, you must print more money to compensate. Otherwise you get a deflationary crisis added into your real world one. (And fiscal policy should intervene increasing the velocity, but fiscal policy is a fraud everywhere, so nothing new here.)

The real test on the seriousness of the US monetary policy is whether they will drain the market once the velocity increases. I do expect them to, but well, anything may happen.

Anyway, that part of the comment on the title is a case of "well, duh?!?" What else could we expect any central bank to do right now? But the data is still interesting.

[atq2119]

MV=PQ is popular in some circles, but it doesn't describe casual links.

You can't reason about how those quantities behave from the equation, which is a mere accounting tautology.

Both recently and in QE post-global financial crisis, V went down because M increased without any reason for why the right-hand side of the equation should change.

[mmcconnell1618]

You bring up an interesting point about the velocity of money. Two things come to mind:

1) If wealth distribution in the US is getting more top heavy, is a certain percentage of the currency slowing down in velocity as it is held by wealthier people who aren't spending it?

2) What is the rate of population change vs. the change in money supply? If the population is growing at 5% a year, the money supply growing at 5% a year should be net neutral for inflation. I think the US population is growing less than 1% per year so maybe this isn't really a hedge against inflation.

[ryanmarsh]

how they plan on veeeery carefully extricating themselves from this situation

I think war usually follows... Someone who knows monetary history better please comment.

[moritz64]

To expand on "money velocity": Inflation reaches high-priced assets and those which are largely bought by institutional investors first - Real estate and equity.

Cantillon's effect is the keyword: https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...

[throw0101a]

> Once velocity increases

Let us prayer that it does.

I'd much rather deal with an economy that is "too hot" than with one in which millions of people are unemployed.