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July 06, 2021


Nick Drew

All I can say is: watch out for commodity prices. I never thought I'd find myself saying this, but the way wholesale electricity (and gas) prices are rising, Hinkley C might not be a net recipient of public money! (Only kidding: there are more hidden subsidies in that deal than just the electricity price.) As for the CO2 price, there's no end in sight to the steep current ramp.

The global boom in construction and manufacturing of all kinds has only just started. And it's a mandated boom: "green" stuff, regeneration and associated mining & infrastructure. May not work out quite as intended, but seems to have legs.


The BoE has been making sure for decades that exceptionally loose credit/money policies mainly drive up asset inflation (which is not "inflation" by decree) by tying credit to assets by way of collateral.

In any case only someone really thick would use extra credit to expand businesses, and thus drive up wages, when it is so much more profitable, and effectively government guaranteed, and involves much less effort, to buy assets and just wait for their prices to inflate rapidly.


«One is that if the Bank expects higher inflation to persist it will raise interest rates – and real interest rates»

It is politically "impossible", and BoE are not the "loyal opposition":

George Osborne: “A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.”

David Cameron: “It is hard to overstate the fundamental importance of low interest rates for an economy as indebted as ours… …and the unthinkable damage that a sharp rise in interest rates would do. When you’ve got a mountain of private sector debt, built up during the boom… …low interest rates mean indebted businesses and families don’t have to spend every spare pound just paying their interest bills. In this way, low interest rates mean more money to spare to invest for the future. A sharp rise in interest rates – as has happened in other countries which lost the world’s confidence – would put all this at risk… …with more businesses going bust and more families losing their homes.”

The entire "inflation" and "labour shortages" propaganda campaign probably has the transparent purpose of preparing public opinion for much expanded immigration from third world countries once COVID-19 restrictions are lifted, which has already more than replaces eastern european immigration, but is obviously not large enough; in particular the Conservatives are negotiating a "gloriously brexity" trade deal with India, and the indian government want in exchange to increase a lot immigration of indians to the UK and offshoring of UK jobs to India.

“One of the biggest names in European private equity said that Brexit will be good for his business, but will mean a 30% wage reduction for UK workers. [...] He added that EU immigration will be replaced with workers from the Indian subcontinent and Africa, willing to accept "substantially" lower pay.”


"demand will eventually outstrip supply and so we’ll see rises in the general price level."

Isn't this old story terribly quaint? If you properly included error bars on statistics of M4 and CPI, wouldn't you just have noise?

Why isn't the solution to inflation Cost of Living Adjustments, Treasury Inflation Protected Securities, and inflation swaps?

"Bank Governor Andrew Bailey points to the example of US lumber prices which have halved since May as supply has risen"

Wasn't the lumber price increase really just due to paper market trading, since timber prices remained comparatively steady and lumber yards were anecdotally full?


«Why isn't the solution to inflation Cost of Living Adjustments, Treasury Inflation Protected Securities»

The problem is not a moderate and constant rate of "inflation", which is already the ostensible goal of the central banks, but a variable and/or immoderate rate of inflation, in which case adjustments will be be quite wrong as they will be trailing.

«and inflation swaps?»

I guess those proposing them are going to pay for them, because they are not going to be cheap, unless "inflation" is moderate and constant, which is already an ostensible goal of the central banks.

The core issue is that a rate of "inflation" that is immoderate and/or variable does create costly consequences, from accounting costs to risk coverage costs, and those costs cannot be handwaved away by expecting that "someone" will pay them.


Hasn't the Fed proven it can easily hand-wave away any cost?

Why can't the Fed explicitly sell inflation swaps as part of open market operations? Won't it be able to manipulate breakevens, and thus expectations? Aren't interest rates just a much cruder tool than inflation swaps for managing inflation?

"costly consequences, from accounting costs to risk coverage costs"

Can't these be automated away?

In https://www.nber.org/system/files/working_papers/w0303/w0303.pdf for example, isn't "menu costs" basically the only potential downside to a fully indexed economy?

"In principle, most prices in the indexed economy could be quoted in the unit of account, the cost of a commodity basket. In that case, the costs of changing nominal prices would be largely the costs of calculating the nominal amount to be handed over in each transaction, based on the stated indexed price of goods. There would be no need to change marked prices in an indexed economy more often than in a non-inflationary environment."

Weren't Stanley Fischer and Franco Modigliani right on this? Does inflation matter, since we can fully index?

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