Shadow Fed

[Finster]

In "Decision", the iTulip Shadow Fed's view is described as follows:

The majority of ShadowFed board members see a stagflationary environment developing. For this reason, several board members are hawkish, leaning more toward continued tightening, even at the risk of pushing the US economy into recession; a relatively minor recession in the near future is better than a big one later. Other board members welcome this inflation as the best way to help the average household manage the paying off of exising debt while discouraging the taking on of new debt.

A relatively minor recession near term is better than what would be needed if it were continued to be forestalled, as concluded by the "hawkish" board members. Indeed, we would not be facing the "stagflationary" pickle we are now had the Greenspan Fed not prematurely aborted the last "recession". That episode skipped over the needed consumer retrenchment, drove savings rates negative, and worsened the trade deficit.

In contrast, the "other board members" claim that the increased inflation will help the average household pay off the existing debt. That seems reasonable, but how would it discourage "the taking on of new debt"? To the contrary, very low (even negative) interest rates reward the borrower and penalize the saver - what the US has already had way too much of and a primary reason it finds itself in the mess it's in.

[jk]

Re: Shadow Fed and stagflation

the theory, or perhaps more accurately "the hope," is that the stag will make people nervous about debt, and that rates are now high enough to shut off the housing atm, also restricting new debt. the flation indeed rewards the debtor, but the insight there is that the biggest debtor and the biggest holder of unfunded off-balance-sheet liabilities is uncle sam, followed closely by the american consumer. those entities are inflationary winners, while the pboc and boj will be the big losers. nya-nya to the pboc and boj.

[WDCRob]

Re: Shadow Fed and stagflation

Thanks JK, been trying to understand that side of the argument.

Fear about jobs and falling real estate prices prevents people from taking on more debt even with reduced rates -- makes sense.

But if money is easy and people are scared, would they just find defensive assets to inflate?

[Finster]

Re: Shadow Fed and stagflation

the theory, or perhaps more accurately "the hope," is that the stag will make people nervous about debt, and that rates are now high enough to shut off the housing atm, also restricting new debt. the flation indeed rewards the debtor, but the insight there is that the biggest debtor and the biggest holder of unfunded off-balance-sheet liabilities is uncle sam, followed closely by the american consumer. those entities are inflationary winners, while the pboc and boj will be the big losers. nya-nya to the pboc and boj.

"Hope" is the operative term here. Indeed, the BOC and BOJ would get their just desserts from the inflationary dollar devaluation. But there's no way to do that through monetary policy without inflicting great inflationary pain domestically at the same time. The lesson here is that there is no such thing as attempting to inflate your way to prosperity, ignoring asset bubbles, and naively hoping to just clean up the mess later.

[jk]

Re: Shadow Fed and stagflation

"Hope" is the operative term here. Indeed, the BOC and BOJ would get their just desserts from the inflationary dollar devaluation. But there's no way to do that through monetary policy without inflicting great inflationary pain domestically at the same time. The lesson here is that there is no such thing as attempting to inflate your way to prosperity, ignoring asset bubbles, and naively hoping to just clean up the mess later.

i think moderate inflation is unfortunately the best choice among all the rotten choices available. we'll be lucky to get away that easily.

[jk]

Re: Shadow Fed and stagflation

Thanks JK, been trying to understand that side of the argument.

Fear about jobs and falling real estate prices prevents people from taking on more debt even with reduced rates -- makes sense.

But if money is easy and people are scared, would they just find defensive assets to inflate?

if the housing atm is closed the only other place to get big leverage is in the financial markets. but in a slowdown/recession/scare what people value is liquidity: cash or near cash. the price of liquidity is accepting low interest rate returns, which in fact may well be negative real returns in an inflationary environment.