After I cited low ten-year securities yields, Arnold asked for my basic model of inflation, here was my first email:
- Price level dynamics and money supply processes are murky, at least in recent times
- The median voter hates inflation
- The Fed won’t let inflation happen
…is my model.
I would add a dose of “inflationary pressures really do seem to be distributed pretty unevenly.”
End of email! Here was my second email to Arnold:
I think the Fed knows the true model in gross terms.
I also think there is a good chance the Fed will create a recession in limiting inflation.
But look at Japan. The EU. Even Italy. It’s not just the US.
Temporary inflation pressures all over the place, due to Covid and post-Covid adjustments. No fiscal financial crises. No long-term inflationary expectations of much note. Not in the developed nations.
The stock of saved wealth is now quite high relative to debt and deficits, especially if you count human capital.
So both the basic model and the markets predict no catastrophe, and also no run-away inflation. And central banks know how to boost the demand for money when needed.
Seigniorage returns from inflation are especially low in the contemporary environment, checking another motive for inflation. No “Assignats” revenue is in the works here.
I just don’t see what we’ve got “in the toolbox” to override all of that.
End of email! I should note that I agree with Summers that inflation is higher than it needs to be, that is bad, and it is because we overshot on our combined monetary/fiscal response.
I’ll also repeat my standard challenge: are you short the long bond? Are you buying those puts? I’m not so convinced if all you’ve got is “I’m not buying so many equities any more!”