Federal Reserve policy makers last week finally screwed their courage up to the sticking point, raising their short-term interest rate target by 0.75 percentage points. This was long overdue, was inevitable and yet comes at a very bad time.
Various sayings come to mind when one surveys Fed actions over the last 15 years. “How the heck did that happen?” “We thought it was a good idea at the time!” “What were we thinking?” My personal favorite is, “and then the wolf finally came!”
We live in a very strange and dangerous time. COVID, open warfare in eastern Europe, climate extremes in several areas of the globe if not worldwide, unprecedented political turmoil in our own nation, two pending elections, one this year and one in 2024, that may be crucial for democracy, all complicate the situation.
Yet financial markets recently were at all-time highs. Housing prices, both in sales of existing residences and in new construction, were setting records. Ditto for sales of used cars down to Minnesota “beaters.” And some of those neat mile-square farms you see to the south when rolling along I-90 are selling for $15 million.
The usual questions about the Fed move arise: Will it reduce inflation? Will interest rates rise even more and will loans become harder to get? Will we have a recession? What will this do to the stock market? What will happen to the prices of houses that we may want to buy or sell?
And are there some real kickers — some real black swans in terms of peril for our economy?
To quote Harvard trained ag economist Willard Cochrane, later a long-time prof at the University of Minnesota: “Hell, yes.”
What will happen to cryptocurrencies that supposedly had a total value over $2 trillion as 2022 opened — such currencies reportedly owned in one form or another by 22 percent of the U.S. population? The ones that are virtually unregulated and of which almost no one really understands beyond that “it uses revolutionary blockchain technology?”
And what about NFTs, so-called non-fungible tokens? These may be artistic images captured in digital form and stored using blockchain technology so that they cannot be duplicated. Their value is whatever people are willing to pay for them. If you just put $100,000 of your retirement savings into one of these, what would anyone be willing to pay for an unbreakable digital image of the sweaty jockstrap or moldy cheese sandwich of some Warhol wannabe when your memory care unit bills start to hit?
And if it seems you were scammed, say by some cryptocurrency or NFT trading fund that suddenly announces it does not have cash for any redemptions, as happened last week, what do you do? Whine to the SEC? FDIC? Call your congressman? Set up a Ouiji board séance to evoke the ghost of George Bailey saving people from a run on the bank with mortgaged money? Don’t kid yourself. In the real world, it’s not a “wonderful life.”
Before getting to these newly created cans of worms, let’s start with the basic question of what effect Fed tightening will have over the near-future — say out to the end of the year.
If Nobelist Milton Friedman’s observation that “inflation is always and everywhere a monetary phenomenon” holds true, then boosting interest rates and making money less available will curb price rises. The actions could even push inflation back down.
And unlike “modern monetary theorists,” I think that Friedman was fundamentally right, but only over the long run. There are other practical details about why prices are rising now.
GOP politicians running for office are sure about telling you this: Joe Biden’s malign incompetence has caused all price rises that are choking the life out of each and every U.S. household!
If so, his dark powers make Voldemort look like Mickey Mouse.
Year-over-year, Dutch prices are up only 8.8 percent in May versus 9.6 in April. Inflation-hating Germany, symbol of rock-ribbed economic prudence, is only up 7.9 percent. The same is happening just about everywhere else in the developed world.
So, whether due to Biden’s occult powers, or incompetence, or external forces beyond his and any other politician’s control, inflation is a widespread fact with the U.S. at the high end. The external forces include oil-market jiggering by big producers Russia and Saudi Arabia before any war started. Then there is the war in Ukraine, plus drought or withering heat in some key food-producing areas, and floods or a cold planting season in others. And there still is objective evidence of supply chain bottlenecks lingering from COVID.
To the extent these are true, the current Fed move and even an expected identical one at the end of July won’t have much effect. And remember that for 70 years econ profs have taught every macro principles student that “monetary policy has long and highly variable lags.”
Crypto “currencies,” meanwhile, scare me. They are like the rookie sailor waking up in his berth after an alcohol-drenched liberty in Subic Bay. He has “Mom” tattooed on his left arm, anchors on his right, and who knows what on his left buttock. He can’t find a mirror to see what it is. Crypto is our economy’s soon-to-be-stinging other cheek.
Yes, these may be revolutionary in technology. And yes, crypto was attractive to its libertarian founders precisely because it would not be regulated. But no one buys them because they fill the historic roles of money, as a “medium of exchange, standard of value or store of value.” They do none of these. So we are in uncharted waters that may be very deep indeed.
Crypto is bought because it seems like an investment that rises magically month after month — at least until it doesn’t. Think Dutch tulip bulbs in the 1630s; think shares in John Law’s French Mississippi Company and English South Sea Company in 1720. These incidents of circular investments have gone from history to legend to fable, with the moral being, you get what you pay for. If the investment has zero intrinsic value, expect its price to follow.
An anecdote from the 1960 presidential campaign illustrates remaining issues: At the 1960 South Dakota Plowing Contest, candidate John Kennedy outlined his new plan to deal with the troubling farm surpluses of the 1950s. The government would simply pay farmers to not produce. A reporter asked, “Will this raise food prices?” Stumped, JFK bucked the question to his ag adviser, Willard Cochrane, who later became a noted University of Minnesota ag economist. Not one to suffer any fool for a second, Cochrane expostulated: “Well hell yes! Of course it will raise them,” before Kennedy’s aides bodily jerked him out of the room.
Will we have a recession? Well hell yes! Will stock and real estate prices fall? Well hell yes! When will they fall and how far? This, no one really knows.Related Articles
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St. Paul economist and writer Edward Lotterman can be reached at [email protected]