Federal Reserve policymakers last week finally soured their courage to sticking point, raising their short-term interest rate target by 0.75 percentage points. It was long overdue, inevitable and yet comes at a very bad time.
Several things come to mind when surveying the Fed’s actions over the past 15 years. “How did this happen?” “We thought it was a good idea at the time!” “What were we thinking?” My personal favorite is, “And then the wolf finally arrived!”
We are living in very strange and dangerous times. COVID, open war in Eastern Europe, climate extremes in many regions if not around the world, unprecedented political turmoil in our own country, two pending elections, one this year and one in 2024, that are critical to democracy Maybe, all are complicated situations.
Yet financial markets were at an all-time high recently. Housing prices were setting records, both in sales of existing homes and in new construction. Ditto for selling used cars to Minnesota “beaters.” And some of those neat mile-square farms that you see to the south when rolling along I-90 are selling for $15 million.
Common questions arise about the Fed’s move: Will it reduce inflation? Will interest rates rise further and will it become more difficult to get a loan? Will we have a recession? What will this do for the stock market? What will happen to the prices of the homes we want to buy or sell?
And are there some real kickers – some real black swans in terms of threats to our economy?
To quote Harvard-trained economist Willard Cochran, later longtime professor at the University of Minnesota: “Hell, yes.”
What will happen to cryptocurrencies that are believed to have a total value of more than $2 trillion as of 2022 – such currencies are reportedly owned by 22 percent of the US population in one form or another? The ones that are virtually unregulated and which almost no one really understands beyond “it uses revolutionary blockchain technology?”
And what about NFTs, the so-called non-fungible tokens? These can be artistic images captured in digital form and stored using blockchain technology so that they cannot be copied. Their value is what people are willing to pay for them. If you put $100,000 of your retirement savings into one of these, what would any Warhol wannabe be willing to pay for an unbroken digital image of a sweaty jockstrap or moldy cheese sandwich when your memory care unit’s bills hit Will it happen?
And if it looks like you’ve been scammed, such as a cryptocurrency or NFT trading fund suddenly announcing it doesn’t have any cash for redemption, as it did last week, what do you do? Where’s the SEC? FDIC? Call your congressman? Set up a Ouiji board session to save the ghost of George Bailey from escaping to the bank with the money pawned? Don’t make fun of yourself. In the real world, it’s not a “wonderful life”.
Before getting into these newly created cans of worms, let’s start with the basic question of what the Fed tightening will have in the near future — say by the end of the year.
If Nobelist Milton Friedman’s observation that “inflation is always and everywhere a monetary phenomenon” is true, then raising interest rates and making money less available would curb price increases. The action could even push inflation back down.
And unlike “modern monetary theorists”, I think Friedman was fundamentally right, but only for a long time. There are other practical details as to why prices are rising now.
The GOP politicians running for office are sure to tell you this: Joe Biden’s fatal incompetence has caused all the price hikes that are dodging life outside every American home!
If so, his black powers make Voldemort look like Mickey Mouse.
Year-on-year, Dutch prices rose only 8.8 percent in May, compared with 9.6 percent in April. Inflation-hating Germany, the epitome of rocky economic prudence, is up only 7.9 percent. This is happening almost everywhere in the developed world.
So, whether because of Biden’s covert powers, or incompetence, or outside forces beyond his and any other politician’s control, inflation is a pervasive fact with America on the high end. External forces include oil-market shake-up by major producers Russia and Saudi Arabia before any war begins. Then there is the war in Ukraine, accompanied by drought or extreme heat in some major food-producing regions, and floods or cold weather in others. And there is still objective evidence of supply chain bottlenecks from COVID.
As far as these are true, the current Fed move and the similar one expected at the end of July will not have much impact. And remember that for 70 years economics professors have taught every macro principles student that “monetary policy has long and highly variable gaps.”
Meanwhile, crypto “currencies”, scare me. He is like a rookie sailor waking up in his berth after a drunken freedom at Subic Bay. He’s got “Mom” tattooed on his left arm, anchors on his right, and who knows what’s on his left buttock. He can’t find the mirror to see what it is. Crypto is the soon-to-be prickly other cheek of our economy.
Yes, they can be revolutionary in technology. And yes, crypto was attractive to its liberal founders because it would not be regulated. But no one buys them because they fill money’s historical roles as a “medium of exchange, standard of value, or store of value.” They don’t do any of these. So we are in unknown waters that may be really deep.
Crypto is bought because it seems like an investment that magically grows month after month – at least until it does. Think Dutch tulip bulbs in the 1630s; Think shares in John Law’s French Mississippi Company and English South Sea Company in 1720. These events of circular investing have gone from history to legend, 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 the remaining issues: In the 1960 South Dakota plowing contest, candidate John Kennedy outlines his new plan to deal with the troubled agricultural surplus of the 1950s. The government will pay farmers for not producing. One reporter asked, “Will this raise food prices?” Stumped, JFK answered the question to his agricultural advisor Willard Cochrane, who later became an economist at the University of Minnesota. Not wanting any fool to suffer for a second, Cochrane said: “Well, yes! Of course it will pick them up,” before Kennedy’s aides escorted 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? Nobody really knows this.
St. Paul economist and author Edward Lauterman can be contacted at [email protected]