With Real Rates Rising, Is the Fed Preparing a Digital Dollar?
It pays today to never underestimate the venality of the people who think they run the world. It also pays to listen to them when they say the most outrageous things.
At virtual Jackson Hole this year FOMC Chair Jerome Powell redefined inflation for the third time in my lifetime. By removing the Phillips Curve from the landscape Powell will now guide monetary policy by the desire to create inflation expectations, a kind of first derivative of inflation under the mostly irrelevant Quantity Theory of Money (QTM).
I talked about Powell’s dilemma and why he had to make this change in a post right after that speech. And I outlined what the Austrian criticism of the QTM was — a myopic focus on the supply of money rather than the interplay of it with the demand for money.
The better definition of inflation expectations is to think of it as the velocity of human action.
Now I’m sympathetic, for argument’s sake, to define inflation expectations as the first derivative of action. If you expect things to get better than you may make choices which lead to lower time preference behavior which, in turn, boosts investment in larger projects and an expansion of the division of labor.
But that growth is dependent on your starting point. If things truly suck making things somewhat better doesn’t mean you’ll put a new roof on your house or start a new business but it may mean that you spend a little more money on better food.
Because of this systemic degradation of inflation expectations and the squeezing out of available investment capital, the Fed would always reach a point where it could not use interest rates to manipulate aggregate demand and boost GDP — Gross National Spending.
The economy always reaches a point where interest rates are irrelevant to creating confidence to take on new debt. I like to use the term ‘debt saturation’ to describe where we are.
Now with Jay Powell’s speech from virtual Jackson Hole, we have him openly admitting this, validating the Austrian criticism. And so, we have the new definition of inflation, freed from the shackles of the Phillips Curve.
It’s still all about prices today but now the Fed is admitting that the economy runs on the time preference of individuals rather than arbitrary definitions of full employment.
Powell uses the term ‘inflation expectations’ but time preference is still better.
This change by Powell was p
Article from LewRockwell