We are living in a fantasy land, which itself is dangerous should reality intrude.
But what is even more dangerous is when you agree to live in someone else's fantasy land.
From the social to the scientific to the economic, playing along to get along, joining the Let's Pretend fashion of the day, can not only get you killed but can riun whatever little time you have on earth.
Today's lesson is FTX the Fed. From ZeroHedge, November 13:
For much of the past year (and certainly at the time, more than a year ago, when the so-called experts, central bankers and macrotourists were still yapping about "transitory inflation" and other things they were wrong about and do not understand), we were warning that at some point the Fed will realize that it is simply impossible to contain supply-driven inflation through stubborn rate hikes which instead would lead to a dire alternative - millions in mass layoffs and newly unemployed workers - and will revise its 2% inflation target higher, a move which will send every risk asset, from high-beta trash and meme stonks, to blue-chip icons, to bitcoin and cryptos, limit up.
To remind readers of this coming phase shift, we most recently warned in June that "at some point Fed will concede it has no control over supply. That's when we will start getting leaks of raising the inflation target"....****.... Yet due to the recency bias of Biden's trillions in stimmies, and a world where workers - whether working form home or the office - have virtually all the leverage, few today can conceive of a world where inflation is zero or negative and is instead replaced with millions in unemployed workers, an outcome which one could (or rather should) say is even worse for the ruling democrats than roaring inflation. At least, with runaway prices, most people have a job and their wages are rising (at least nominally, if not in real terms).However, the higher rates rise, the closer we get to that inevitable moment when the BLS - unable to kick the can any longer - admits what has been obvious to so many for months: the US is facing a labor crisis of epic proportions with millions and millions of mass layoffs. And for those to whom it is not yet obvious, we urge readers to re-read a WSJ op-ed published two months ago by none other than Jason Furman, who was Obama top Economic Adviser from 2013-2017 and currently economic policy professor at Harvard.
In "Inflation and the Scariest Economics Paper of 2022", Furman summarized a paper written by Johns Hopkins macroeconomist Larry Ball with co-authors Daniel Leigh and Prachi Mishra of the International Monetary Fund released by the Brookings Papers on Economic Activity, whose conclusion is as follows: "To bring price increases down to 2%, we may need to tolerate unemployment of 6.5% for two years."
In other words, just as we said, inflation - much of which is supply-driven, which the Fed can do nothing about - will force the Fed to crush the economy by keeping rates for much longer, the result of which will be many millions in unemployed workers, or as Furman puts it, the paper "shows why the Federal Reserve will likely need to maintain its war on inflation, even if unemployment continues to rise."
What is more remarkable about Furman's read of the economist paper is that in addition to its primary theme (the lack of labor slack, or labor tightness, is responsible for some 3.4% of underlying inflation in July 2022), the paper admits precisely what we have been saying all along - that the Fed can't control supply-side variables:
The paper also argues, convincingly in my view, for a different measure of underlying inflation. Fluctuations in energy and food prices are generally due to factors outside the control of macroeconomic policy makers. Geopolitics and weather have elevated the inflation rate in recent years. Plunging gasoline prices are temporarily lowering the inflation rate now. That’s why economists since the 1970s have focused on “core” inflation, which excludes food and energy.
But food and energy aren’t the only things people buy that are subject to supply-side volatility. Prices of new and used cars, for example, have gyrated over the past two years for reasons that are mostly unrelated to the strength of the overall economy. Both regular and core inflation are based on taking averages of price increases and can be distorted by large changes in outlier categories. The median inflation rate calculated by the Federal Reserve Bank of Cleveland drops outliers to remove these distortions.
According to Furman, median inflation - which is a statistically better measure of the underlying inflation that policy makers can actually control - is well above the Fed’s preferred headline inflation print and still shows little signs of moderating and has run at a 6.3% annual rate in the last three months. But the "scariest" part of the new paper, Furman reveals, is when the authors use their model to forecast the unemployment rate that would be needed to bring inflation down to the Fed’s 2% target. He explains why this is so scary:
The authors present a range of scenarios, so I ran their model using my own assumptions... Under these assumptions, which are more optimistic than the authors’ midpoint scenario, if the unemployment rate follows the Federal Open Market Committee’s median economic projection from June that the unemployment will rise to only 4.1%, then the inflation rate will still be about 4% at the end of 2025. To get the inflation rate to the Fed’s target of 2% by then would require an average unemployment rate of about 6.5% in 2023 and 2024.....
....MUCH MORE
