Much as I dislike the man on a personal level, I have to admit he has been more right on inflation than the RIA's and such who get paid for nominal, not real inflation-adjusted AUM, or the bulk of the fund universe that takes their pay based on nominal returns.
From Bloomberg, April 26:
The former Treasury secretary said he is ‘not that optimistic’ about the fight against rising prices and that the Federal Reserve lost credibility by acting too slowly.
Former Treasury Secretary Lawrence Summers said taming inflation will likely lead to a “meaningful” economic downturn. Speaking at the Morningstar Investment Conference in Chicago, he said that fiscal stimulus and low interest rates during the pandemic turned the US from a “2% inflation country to 5% inflation country.”
“I think we’re going to have difficulty getting near a 2% inflation target until and unless the economy slows down substantially,” he said. Summers, a Harvard University professor and paid contributor to Bloomberg Television, said earlier this month that the likelihood of a US recession is increasing and that the Federal Reserve is nearing the end of its interest-rate hikes.
The latest inflation reading for March showed the average overall prices rose 5% from a year earlier. Other takeaways from the talk included:....
....MUCH MORE
Having acknowledged Summers' ability to recognize the inflation as it was developing, he is wrong to characterize the Fed as having acted too slowly.
The Fed did exactly what they wanted to do, no ifs, ands or buts about it. They wanted the inflation and they wanted it to entrench itself.
It wasn't a mistake, it was deliberate.
Some previous Larry on inflation:
October 2022, regarding Paul Krugman: Inflation: Larry Summers Is Troubled
If interested here is the video hosted at Princeton.
Here is the video for Part I, "Will the Biden Stimulus lead to Inflation? A Conversation with Paul R. Krugman and Lawrence H. Summers", February 12, 2021, no transcript (it was via Zoom) but we do have Bloomberg's "Summers and Krugman Debate Stimulus. Here’s a Blow-by-Blow Account"
And on our overarching view of what's up and what's what:
July 22, 2022Paul Krugman Says: "I Was Wrong About Inflation"
This was one of eight "I was wrong" pieces that the New York Times had their columnists do this week, and Herr Dokter, Dokter [he's a double doc in the German style] Herr Professor Krugman was given top billing, ahead of Thomas Friedman being wrong about China and Michelle Goldberg being wrong about Al Franken.
[sidebar: how funny would it be if Franken moved back to New York and ran for the Senate against Kirsten Gillibrand?]
I think the Times' not-quite-a-mea culpa project is an effort to regain some credibility using the technique of the serial liar: admit to those things that are blindingly obvious. I've seen it done so often over the years that what I hear is: "How can I lie to you if you won't listen to me?"
A bit jaded, I know.
From the New York Times, July 21:
In early 2021 there was an intense debate among economists about the likely consequences of the American Rescue Plan, the $1.9 trillion package enacted by a new Democratic president and a (barely) Democratic Congress. Some warned that the package would be dangerously inflationary; others were fairly relaxed. I was Team Relaxed. As it turned out, of course, that was a very bad call.
But what, exactly, did I get wrong? Both the initial debate and the way things have played out were more complicated than I suspect most people realize.
You see, this wasn’t a debate between opposing economic ideologies. Just about all the prominent players, from Larry Summers to Dean Baker, were Keynesian economists, with more or less center-left political leanings. And we all had similar views, at least in a qualitative sense, about how economic policy works. Everyone in the debate agreed that deficit spending would stimulate demand; everyone agreed that a stronger economy with a lower unemployment rate would, other things equal, have a higher inflation rate.
What we had instead was an argument about magnitudes. The rescue plan was huge in dollar terms, and as Team Inflation warned, if it had a normal-size “multiplier” (the increase in gross domestic product caused by a dollar of additional government spending) it would lead to a highly overheated economy — that is, to a temporary surge in employment and gross domestic product far above their sustainable levels, and hence high inflation.
Those of us on Team Relaxed argued, however, that the structure of the plan would lead to a much smaller surge in G.D.P. than the headline number would suggest. A big piece of the plan was one-time checks to taxpayers, which we argued would be largely saved rather than spent; another big piece was aid to state and local governments, which we thought would be spent only gradually, over several years.
We also argued that if there were a temporary overshoot on G.D.P. and employment it wouldn’t sharply increase inflation, because historical experience suggested that the relationship between employment and inflation was fairly flat — that is, that it would take a lot of overheating to produce a big inflation surge.
So here’s the odd thing: The multiplier on the rescue plan does, in fact, seem to have been relatively low. A lot of consumers saved those checks; state and local government spending rose by less than one percent of G.D.P. Employment is still below its prepandemic level, and real G.D.P., while it has recovered to roughly its prepandemic trend, hasn’t shot above it.
Yet inflation soared anyway. Why?
Much, although not all, of the inflation surge seems to reflect disruptions associated with the pandemic. Fear of infection and changes in the way we live caused big shifts in the mix of spending: People spent less money on services and more on goods, leading to shortages of shipping containers, overstressed port capacity, and so on. These disruptions help explain why inflation rose in many countries, not just in the United States.
But while inflation was confined mainly to a relatively narrow part of the economy at first, consistent with the disruption story, it has gotten broader. And many indicators, like the number of unfilled job openings, seem to show an economy running hotter than numbers like G.D.P. or the unemployment rate suggest. Some combination of factors — early retirements, reduced immigration, lack of child care — seems to have reduced the economy’s productive capacity compared with the previous trend.
Even so, historical experience wouldn’t have led us to expect this much inflation from overheating. So something was wrong with my model of inflation — again, a model shared by many others, including those who were right to worry in early 2021. I know it sounds lame to say that Team Inflation was right for the wrong reasons, but it’s also arguably true.
One possibility is that historical experience was misleading because until recently the economy was almost always running a bit cold — producing less than it could — and inflation didn’t depend much on exactly how cold it was. Maybe in a hot economy the relationship between G.D.P. and inflation gets a lot steeper.
Also, disruptions associated with adjusting to the pandemic and its aftermath may still be playing a large role. And of course both Russia’s invasion of Ukraine and China’s lockdown of major cities have added a whole new level of disruption....
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A few quick comments:
1) The people pitching the "Inflation isn't a problem" narrative weren't just making an intellectual argument. They were attacking, vilifying, smearing and slandering anyone who didn't fall in line.
May 7, 2022
"Inflation Is No Accident"
November 2021
Questions Rabobank Was Asking: "Is Someone Trying To Delay The Global COVID Recovery To Ram Through Even More Stimulus"
April 20, 2021
The Fed, The Treasury, The Congress And You: It's All About Transferring Wealth Upward
No matter what the Federal Reserve spokespeeps say their goal is, the result is always the same.
This is a very real problem and probably means a Fed overshoot is baked in the cake.
And finally, the numbers, as they developed, from Trading Economics (also on blogroll at right):
The PCE, the measure the Federal Reserve Board says it watches most closely, what with its under-weighting of shelter costs—half that of the CPI, which itself is distorted lower by using Owner's Equivalent Rent—and all, first crossed the Fed's 2% line in March 2021.
The Fed could have acted on its balance sheet and on interest rates at that time.
Giving them the benefit of the doubt, that they wanted to be sure a rising trend was in place, they could have acted after the April release.
Ditto for a desire to target 2% as an average, meaning running hotter than 2% to bring the trailing average up. By May 2021 with the PCE printing at almost double the Fed's stated target there was no reason to delay tapping on the brakes, beginning the interest rate hiking cycle and announcing the start of Quantitative Tightening - perhaps not going into run-off mode but balancing new purchases of treasury's and Agency MBS's with maturing paper.
They didn't.
And for some reason the Fed thought it more important to delay action than it was to appear credible; what with the "transitory" talk and all. And the Fed kept delaying, and kept on spouting non-sense for a year after they should have taken action.
Again, for emphasis, the Fed knowingly decided to look like stupid liars rather than honestly explain what they were up to. The question is: Why would they do that?
All I can surmise is that it must be something really, really big to let CPI inflation get to 8.6% [note: May CPI] while talking stupid shit all the way up
