Brace Yourself: Mass Inflation Warning

CFS Chairman of the Advisor Board William R. Rhodes was interviewed by Trish Regan of American Consequences. They discussed the dangers of inflation, and the need to tackle it rapidly so it doesn’t turn into a more serious problem of stagflation or hyperinflation as the US experienced in the late 70s and early 80s. Bill also points out that the inflation problem is not unique to the US; it is also a problem for the UK, continental Europe and other countries as well. He states that the time for action on reducing inflation and rising prices is now, before it becomes embedded in the expectation levels of the population.

Listen to the Interview Here.

FRB Governor Randal Quarles Offers Parting Thoughts

Commentary by Steven Lofchie

Former Vice Chair for Supervision Randal K. Quarles covered a broad range of topics in his farewell remarks. He celebrated the overall strength of the banking system and suggested areas where there is latitude for regulatory change or recalibration.

“But I did at the time, and still do, have concerns about the possible precedents that have been created by the novel [credit] facilities that we [the Federal Reserve] created [as a reaction to the pandemic].”

Federal Reserve Board Vice Chair for Supervision Randal K. Quarles

Read his remarks, Between the Hither and the Farther Shore: Thoughts on Unfinished Business.

Fed Gov Waller Discussion

The Center for Financial Stability (CFS) hosted remarks and a discussion with Federal Reserve Board Governor Christopher J. Waller on the economic and monetary outlook on Friday, November 19.

Remarks and the discussion are available at:
https://youtu.be/hQIA4bVFKXw

Thanks also to Howard Marks, John Ryding, Michelle Caruso-Cabrera, Colin Teichholtz, Nick Sargen, Colby Smith, Nick Silitch, Lisa Lee, Bruce Tuckman, and Jeff Young for excellent questions.

Today’s WSJ: “How the Fed Rigs the Bond Market”

Today, The Wall Street Journal published my op-ed titled “How the Fed Rigs the Bond Market.”  Themes include:

High inflation should no longer be surprising, nor should it be labeled “transitory.” Its existence should prompt serious reflection on policy decisions and spur action to avoid a financial crisis.

The big issue is financial stability.

– The U.S. Treasury bond market has been rigged and manipulated since the Federal Reserve’s second quantitative-easing program began in 2010. The consequence of this blurred line between Fed and Treasury responsibilities—”monetizing the debt”—is inflation.

– Sales by the infamous “bond vigilantes” used to serve as a warning of inflationary policies. The signal has been muted.

The op-ed offers specific actions for Congress, Treasury, and the Fed to defuse imbalances and gradually restore market dynamics to the determination of bond yields.

We look forward to any comments you might have.

To view the full article:
https://www.wsj.com/articles/how-the-fed-rigs-the-bond-market-inflation-yields-financial-crisis-treasury-11637165868

Thoughts on inflation

This morning, Bloomberg’s John Authors said it well “We have October’s inflation numbers, and they were bad. Indeed, they were worse than the worst fears, with U.S. CPI exceeding the highest estimates provided by economists to Bloomberg. When you go below the surface, they’re even more troubling than they look.”

Macro and financial market analysis often includes a bit of guesswork. However, there are certain mathematical forces of nature in markets, economics, and debt management that are frequently ignored. Money, the government’s budget constraint, and the resulting seigniorage tax are among them.

Under the leadership of Professor William A. Barnett, the Center for Financial Stability (CFS) has provided many tools for investors and officials to reduce the probability of errors in making meaningful decisions.

Here are a few to help frame the new debate around what John Authors suggests is “how long it will last.”

Two Measures for the Fed and Investors
https://centerforfinancialstability.org/research/Measures_Fed_110221.pdf
Inflation Fears Offers the Fed a Chance to Modernize with Money
https://centerforfinancialstability.org/research/Modernize_Money_042621.pdf
Post-Pandemic Economic Risks
https://centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf
Advances in Monetary and Financial Measurement (AMFM)
https://centerforfinancialstability.org/amfm_data.php

We look forward to any comments you might have.

Two Measures for the Fed and Investors

With inflation in excess of 5% in each of the last 5 months, two measures would have been helpful for the Fed and investors in prior months. To be sure, they should influence Fed and investor decisions going forward.

They include

  • Center for Financial Stability (CFS) Divisia M4-,
  • Global inflation diffusion indexes that analyze price and expectation signals in 49 countries.

To view the two measures:
https://centerforfinancialstability.org/research/Measures_Fed_110221.pdf

We look forward to any comments you might have.

Barnett Keynote on BREXIT at UK Conference on Uncertainty, Risk Measurement and COVID-19 Challenges

CFS Director of Advances in Monetary and Financial Measurement (AMFM) Professor William A. Barnett delivered the keynote lecture “Is the BREXIT Bifurcation Causing Chaos in the United Kingdom?”

Bill’s remarks explore:

  • Why is Brexit changing economic risk without a source of external shocks?
  • Mathematical properties of chaos with relevance to BREXIT and U.S. monetary policy.
  • Why chaos is not necessarily bad. It is normal in nature (weather, climate, etc.) and is relevant to science and economics. Chaos contains useful information.
  • The United Kingdom and United States economies have undergone significant structural and policy changes in the past decades rendering chaotic dynamics more relevant.
  • Meaningful policy implications stem from the existence of Shilnikov Chaos.
  • Shilnikov chaos, produced by interest rate feedback policy with sticky prices, explains the downward drift of interest rates over the past 20 years.
  • Interest rate feedback policy rules need to be augmented by simultaneous use of a second policy instrument focused on the long run to avoid unintentional downward drift of interest rates to their lower bound.

For the slide deck…
http://www.CenterforFinancialStability.org/speeches/UK_bifurcation_Barnett.pdf
For the lecture…
https://www.youtube.com/watch?v=W2URCxL5owU&ab_channel=KUDepartmentofEconomics%20

FT Letter: Investors shouldn’t bet too much on macro forecasts

Today my letter in the Financial Times (FT) responds to Howard Marks’ “Investors must not bet too much on macro forecasts.”  Marks offers a superb road map for navigating future inflation twists and turns.

However, he misses how macro rules of nature can often be measured – helping investors and public officials better achieve their respective goals.

Monetary measurements represent simply one meaningful mapping.

To view “Inflation was inevitable after the Fed fuelled monetary growth”:
https://www.ft.com/content/2f7f1bad-ed6b-4a6a-9123-0eb024541c8a

We look forward to any comments you might have.

Now, Inflation is Clear and Global

Across the board higher consumer price inflation in the United States removes any ambiguity or doubt regarding the existence of price pressures beyond transitory or base effects.

Overall consumer prices increased by 5.4% on the year ending in June. Core inflation increased by 4.5% over the same period.  In fact, in the last 4 months, both overall and core inflation exceeded market expectations and increased relative to the previous month’s release.

The phenomenon also extends well beyond simply the United States. It is global.

A diffusion index of every inflation release relative to the prior release for 49 countries shows an upward impulse since the beginning of the year. More pointedly, a diffusion index of reported inflation relative to expectations for the same complex of countries illustrates how actual inflation has been exceeding expected inflation especially since May 2021.
(see Figures 1 and 2… www.CenterforFinancialStability.org/amfm/studies/Global_inflation_071421.pdf)

The Center for Financial Stability (CFS) has been clear about risks and financial stability implications.  Our first email on April 22, 2020 noted how the initial impulse in the signal from CFS broad money would be a period of disinflation followed by inflation.

Inflation Fears Offers the Fed a Chance to Modernize with Money
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf
Post-Pandemic Economic Risks
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf

June CFS Divisia money and financial liability data will be released on August 2 at 9:00 AM ET.

The present global macro backdrop for investors and officials is one of the most challenging and complex in decades. We look forward to any comments you might have.

Money Growth Falls – Inflation Threat Remains…

CFS broad money growth slowed to 12.1% on a year-over-year basis in the latest reading for April down from 23.8% in March.

The initial response might be to assume that the large expansion of money is reaching an end. This would be a mistake. The “base effect” elevating monetary growth on a year-over-year basis began to end in March 2021 and fully finished in April 2021. A few issues include:

  • CFS Divisia monetary growth of 12.0% in April dwarfs average growth of 5.6% since 1967 (DM4- excluding Treasury bills).
  • A high frequency reading of CFS monetary data stretching back over 54 years portrays a radically different perspective regarding the performance of broad money and its implications for inflation. It highlights how broad money growth and inflation risks are actually beginning to accelerate (chart available on request).

On April 22, 2020, we were early and clear in our email message “CFS Money Growth Soars to double digits.” The initial impulse embedded in the signal from CFS broad money would be a period of disinflation followed by inflation.

Going forward, inflation will likely continue its upward ascent and stretch beyond the Fed’s comfort zone.

The present global macro backdrop for investors and officials is one of the most challenging and complex in decades. We look forward to any comments you might have.

For more on CFS Divisia money and inflation:
http://www.centerforfinancialstability.org/research/Modernize_Money_042621.pdf
http://www.centerforfinancialstability.org/research/Post_Pandemic_Economic_Risks_050521.pdf

For Monetary and Financial Data Release Report:
http://www.centerforfinancialstability.org/amfm/Divisia_Apr21.pdf

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

1) ALLX DIVM
2) ECST T DIVMM4IY
3) ECST –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) ECST S US MONEY SUPPLY –> From source list on left, select ‘Center for Financial Stability’