The War on Inflation is about to Get Ugly — Response to Robert Reich’s article
by Elizabeth Pearce, CFA
As the NYTimes headline, Rail Workers Strike Threatens New Crisis on the American Supply Chain, hit my phone, I wanted to respond to to Robert Reich’s article, Who Will Bear the Pain? The War on Inflation is about to Get Ugly, in Substack.
There is a tendency to applaud Federal Reserve for wanting to fight the worst inflationary surge since the 1980’s. Five years ago, I would have agreed with pulling some pages from Volker’s playbook. That is, tighten for a few quarters, in order to prevent the escalation of wages and prices.
That is still the world in which Jerome Powell thinks he operates. An essentially stable world where 2 exogenous shocks have hit the economic system.
The first, Covid-19 pandemic, shut down everything. Now, manufacturing has restarted, and companies are readjusting. In a surprisingly large number of cases, organizations are still going through a period where new employees are on a learning curve and the benefits of economies of scale are being re-established. Retirements, deaths, and other employment departures have caused the loss of tacit knowledge. Still, to the Fed, this as just the normal aftermath of an outside shock to a stable system which requires a period of re-establishment.
The second shock is similarly understandable. Russia cutting off natural gas to Europe will cause an economic slowdown, hardship for people, and even deaths. But like the aftermath of a couple of months of shelter-in-place and the establishment of new patterns, this too is predictable and understandable aftermath of an exogenous shock.
I understand the Fed’s goals. There is an old adage: The Fed always gets it right, eventually.
I hesitate to say, “This time it is different” because economic systems reflect human nature, which doesn’t change. However, Central Bankers have been known to cling to the wrong assumptions and make policy moves that, initially, worsen conditions for the populace.
I fear that Powell and the other members of the Fed are working from the belief the world is essentially the same as it was a decade, or even 5 years, ago. Their current policy decisions don’t seem to reflect an upcoming winter of food scarcity, and other effects of the changing climate.
Right now, everyone possible should be employed and Congress should be doing its best to stimulate Resilience Gardening, urban tree planting and infrastructure building in anticipation of more severe climate change in the future.
Its not just economies that reach a homeostasis: that concept originated to describe natural systems. Globally we are at, or have passed, multiple tipping points. This article, published last week in Science discusses this in detail. https://www.science.org/doi/10.1126/science.abn7950 The article is further discussed by Umair Hague in:
Climate Change is the Express Train to Hell — And We’re on It
Three Things Most People Don’t Understand About Climate Change Yet — But They Should
Economists know that the future usually looks much like the past. But the weather events of the next couple of years are likely to be more extreme, making planning and economic prognostication more difficult.
The Fed always gets it right, EVENTUALLY.
A clear message is needed to be sent to unions and businesses, by the Fed, that in recognition of the global changes contracts and pricing patterns should be shorter than normal. The ability to plan is a key to stable economies and prosperity, so that is a difficult message for bankers and politicians to share, and probably even more difficult for businesses and unions to hear.
But once the Fed feels we have a handle on the systemic issue of climate change, as opposed to minor and transitory shocks to the economic system, THEN inflation should be tackled.
My personal belief is the next few years will see a strong rebound in Resilience Gardens. Resilience or Victory Gardens have been increasing for several years. By way of background, in WWII, 40% of the produce eaten by Americans was grown by individuals (as opposed to farms). Similarly, while Russia was experiencing the economic dislocations caused by the shift from the oligarch socialist to oligarch capitalists, many individuals suffered and there was general “belt tightening.” But with 50% of total food production coming from local gardens, Russian people have not starved.
Rapidly increasing short-term interest rates, which would increase unemployment in the near-term, while spending is needed in preparation for more floods, more fires, more droughts, more extreme heat events, and while individuals and families are coping with a rapidly changing world seems unnecessarily cruel and, frankly, as stupid as insisting the world is flat.
I recognize this is off topic, and way off brand, but I needed to share these thoughts with “the world.” Back to soil health and climate resiliency tomorrow.