Share this @internewscast.com
As I and too few others have argued since early on in the present pandemic, urgently needed demand-support measures like those taken in 2020 were bound to raise prices until accompanied by equi-proportional supply-support measures. You simply cannot add purchasing power to a macroeconomy without raising prices unless you add more, not produce less, of what’s to be purchased as well.
That is the source of our present inflationary pressures. These are indeed transitory, but will persist till our capacity to supply ourselves catches up with our capacity to purchase what isn’t yet here to be purchased.
In the medium-to-longer term, then, we’ll end inflation only by ramping-up production of all essential goods, and all inputs to such goods – notably but not solely microchips – as quickly as possible. We must replicate, in effect, the feat of the Roosevelt Administration in taking America from producing just over 3,000 warplanes per annum in 1939 to producing 60,000 warplanes per annum by 1940 – after Germany’s rapid conquest of France that spring sounded the ultimate ‘wakeup call.’
The recent proliferation of ‘supply-chain’ talk, thankfully heard now as never before, is of course welcome in this respect. But it regrettably tends still to be more about the ‘chains’ than the ‘supplies’ – more about transport than what is transported. Yet as I’ve written in these pages already, our present supply-chain and consequent inflation woes should be viewed as an opportunity to restore not just America’s transportation infrastructure, but also its role in producing what’s transported both at home and abroad – its role as Workshop of the ‘Free World.’
It is time, in other words, to re-shore production of semiconductors, advanced electronics, pharmaceuticals, batteries, solar panels, and all other essential products of the economies of tomorrow, and in so doing to restore our once-preeminent productive prowess and large middle class.
MORE FOR YOU
(And this we will manage only through public action like that we employed in our Second World War mobilization – building and leasing-out the very facilities in which our producers produce, as well as the houses, schools, and health facilities our workforce will need if it’s to be mobile and nimble.)
While we are taking these medium- and longer-term measures, however, certain essentials on which working Americans already depend must be kept affordable even in the immediate term. Fuel, foodstuffs, heating oil, all the things people must purchase to keep living and working each day, must be insulated against inflationary pressures now, even before their supplies (and their substitutes’ greener supplies) can be massively boosted.
How might we do that? Some have suggested the 1940s and 1970s expedients of price controls. Others suggest reinvigorating antitrust and other forms of competition policy. These – especially antitrust reinforcement – are of course fine ideas, at least over time.
But where time is precisely what’s lacking, far more fast-acting will be measures that target price-inflating speculation in the commodities markets – the kinds of thing hedge funds and Wall Street trading houses always do with cheap Fed-supplied money, which account for commodity prices’ not merely rising, but rather rising, falling, and rising again. That volatility is what needs ending right now.
How do we do that? Here is where I think it helpful to ‘re-up’ the measures that I proposed last time that monetary easing imposed hardship on some even while rescuing others – twelve years ago. At that time I proposed the Fed short commodities so as to fine-tune its easing. Now it seems I must propose this again. Here’s what I mean …
Early each weekday morning in Lower Manhattan, agents at a Wall Street trading desk trade on carefully drafted sets of trading instructions. The instructions direct the agents to purchase and sell specified quantities of specific securities, as well as to enter into specified sale and repurchase (‘repo’) agreements with specified counterparties.
The decisions on which these traders transact have been reached earlier the same mornings by executives who have digested reams of financial and market data concerning quite recent past and anticipated future market behavior. Shortly after the sun rises over the East River, the traders will begin executing the instructed trades. They will be buying and selling, lending and borrowing all morning.
So far, so unsurprising. But now comes the part you might not have known about: The traders I note here will be trading on behalf of the United States of America. For they are effectively government agents. They work for the Federal Reserve Bank of New York, ‘first among [the] equals’ that constitute the Federal Reserve System’s network of regional District Banks.
The trades to which I refer here are of course known to Fed-watchers as ‘open market operations.’ They are publicly conducted, market-moving transactions meant to affect a particular price that I’ve elsewhere dubbed, in intended analogy to the ‘systemically important financial institutions’ (‘SIFIs’) targeted by Titles I and II of the post-crisis Dodd-Frank Act of 2010, a ‘systemically important price or index’ (‘SIPI’).
The principal SIPI that the Fed presently targets is the prevailing money-rental, a.k.a. ‘interest,’ rate. Interest rates are systemically important for multiple reasons, but chief among them is the interlinked fact that the interest rate is a price that determines a host of other prices – most notoriously home prices, but also the prices of all goods and services whose supply requires producers to borrow in order to produce.
Given its ubiquity as a production cost and, relatedly, as a determinant of the value of money hence ‘price stability,’ it is not difficult to see why the money rental rate would count as a SIPI in need of public guidance. Yet interest rates are not the only prices that meet this criterion.
Much like money rental, for example, labor rental rates – a.k.a. ‘wages’ and ‘salaries’ – also are prices that influence other prices economy-wide, labor being at least as time-honored an input as capital in all capitalist economies. And so I have elsewhere proposed publicly conducted ‘open labor market operations’ in order to maintain stable consumer demand and ‘maximum employment’ through our macroeconomy over time.
But now it is time once again to hone in on another set of SIPIs – a set that monetary easing made salient post-2008 and is now making salient again. I refer to the aforementioned fuel and food, a.k.a. ‘commodity,’ prices at the core of those forms of inflation that working Americans have of late felt most acutely.
As some will remember, multiple rounds of Fed monetary easing had worked quite well by 2011 in driving down bond yields and other borrowing costs after the crash of 2008. This had proved crucial, especially when Congress failed to pass adequate fiscal stimulus, in keeping Americans to their jobs and homes during our post-crash debt-deflationary spiral.
There was one respect in which the Fed’s innovations could be faulted back then, however, and that was in respect of the effect that its easing had wrought on commodity prices. Easing-induced credit, then as now, found its way quickly into commodity prices through the actions of speculators betting with Fed money in the derivatives markets on price movements in primary markets.
The resultant price movements, again then as now, of course disproportionately harmed working people in the lower and middle intervals of the income spectrum. They also harmed and antagonized developing nations, with whom the US would still like to get on better in the interest of cooperatively working out less dysfunctional international trade and currency arrangements than those still in place since the Clinton and Bush years.
What, then, should we have done? Should we have forgone QE, ‘Operation Twist,’ and other monetary policy innovations, and with them their overall salutary effects? It seemed to me then, as it does now, that there is a better way. The better way is not to innovate less with monetary policy, but to innovate more.
If central bank policy works an unintended side effect in the form of price-pushing commodity speculation, why not have the central bank counter-speculate at the same time? Let it short that on which the speculators go long with its cheap money. It is, after all, already meant to act as the ultimate market-contrarian, working countercyclically to moderate otherwise self-worsening recursive collective action problems of the kind we call feedback-fed booms, busts, inflations and deflations.
And so I’ll repeat: Fed folk, rather than over-inclusively raising rates in a manner that threatens post-2020 recovery, fine-tune your easing. Short the commodities whose prices are systemically important to working Americans and proximately fueled not by your easing but rather by speculators misusing your easing. That way you neutralize the unintended effect (core inflation) while preserving the intended one (demand-support), at least till production again catches up with demanded consumption nationwide.
Now some misguided traditionalists will of course quarrel with the notion of the central banks’ dealing in something other than treasury securities. But that fight has long since been lost. And, what is more, central banks in centuries past dealt in more than just government securities anyway – bills of exchange, for example.
Why do I say that the Treasurys-only battle has long since been lost? Well, again since 2008, to take the most obvious example, the Fed has held mortgage-backed securities in addition to Treasuries in its portfolio. And it has done so precisely in order to keep a floor under them – and has done so because home prices too are systemically important in our ‘[home-] ownership society.’
But where you can act to maintain a floor, you can likewise act to maintain a ceiling, at least in the short-term. And that is what the Fed’s shorting commodities would do. It would stabilize prices of items whose prices we very much need stabilized, and would do so from that direction – the top – we most need while needed monetary easing remains underway.
This is not as radical an idea as you might think. For one thing there’s already the precedent of dealing in more than just Treasurys – as the bill of exchange and MBS examples already illustrate. For another thing there is the reason we mandate open market operations in these markets in the first place – the fact that their prices are SIPIs, a rationale that embraces far more than government bonds.
And finally there also are multiple instances of proposal and practice alike, whereby commodity prices themselves have been publicly stabilized by means of collectively-maintained stockpiles of the commodities themselves…
Remember Joseph’s advice to Pharaoh in regard to grain stores? Ever heard of strategic petroleum reserves? How about ‘government cheese‘? And, in what was surely one of the most visionary proposals of all, the same fellow who once designed and advocated a much more helpful IMF and World Bank than the institutions we ended up with – J. M. Keynes – advocated a global commodity reserve as well. And he did so precisely in order to end the subjection of working people worldwide to the vagaries of volatile global commodities markets.
If you think about it, then, none of what I propose should be all that surprising. Monetary policy conducted by open market operations in Treasurys is meant to stabilize prices – especially consumer prices. But that’s a blunt instrument.
Monetary policy conducted by augmented operations in mortgage instruments since 2008 is accordingly meant to stabilize prices too – but now more specifically mortgage prices. And ‘strategic’ oil and other commodity reserves often are used, and in some cases are expressly designed to be used, with a view to stabilizing yet other more specific prices – commodity prices.
All we’d be doing, then, in having our central bank short commodities while refraining from tightening up credit, would be having it do what it’s always expected to do: stabilize prices – in particular, systemically important prices. Let’s do that now, for the year ahead, even as we work double-time to restore the capacity requisite to keeping prices low in the decades ahead – the capacity once again to produce.