Economics: The Iran War Is A Reason To Cut Interest Rates A.S.A.P

 (Drivebycuriosity) - The Israeli-American war on Iran causes a lot turmoil on the financial markets. The price of oil, that had hovered awhile around the $60 mark, jumped and touched temporarily the $120 mark. The pundits claim that the oil price explosion will hike the US inflation rate and prevent the Federal Reserve from lowering her interest rates in the next time.

I beg to differ. I agree that higher oil prices will lift the price level a bit, but the rise will be just temporarily. Even if inflation will be higher for a while, the Fed needs to cut her interest rates immediately in order to the cushion the oil price shock.

Today´s dilemma reminds of the oil price shocks in the past, especially the crisis in the year 2008 (I explained the 2008 crisis here). From summer 2007 through July 2008 the price of oil spiraled from about $50 to $147! A study by Prof. James Hamilton (University of California, San Diego) shows that this oil price shock turned an already happening economic slowdown into a severe recession (econbrowser): "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives).

Other researchers came to the same results: "Oil prices played a role in eventually bursting the US subprime bubble....In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008 (oilprice). 

It seems we are in the same trap as in 2008. The weakening economy would afford interest rate cuts, but the Federal Reserve could be flocused on the exploding oil price and the fear of rising inflation. But, postponing the interest rate cut would be a mistake.

 

 

The scope for inflation is already limited by the modest growth of the US money supply M2 (image above macromicro  ). As I had explained in a recent post, the high inflation in the recent years was caused by a deluge of money at the begin of the decade ( drivebycuriosity). The money flood - the engine of the inflation - has already ended. 

Today the US economy is already cooling and stressed by the ongoing trade war and the sharp tariff hikes. In the fourth quarter US economic growth (GDP) already slowed to 0.7%. The weak job market is another signal of distress. Sharply rising oil prices create another headwind. When corporations and households have to spend more money for gasoline & other oil products they have less money for other expenses and need to reduce their purchases of goods & services. In 2008 for instance some households stopped servicing their mortgages and other debts in order to pay for their gasoline bill. 

If the Fed postpones the necessary interest rate cuts the negative impulse for the US economy will get even more severe and might start the next recession.

Economics: Why Tariffs Don´t Heat Up Inflation

 (Drivebycuriosity) - There is a lot ado about Trump`s tariffs. Many pundits claimed that the tariffs will heat up US inflation and push the inflation rate above 3% again. They were wrong. In February the inflation rate stayed at 2.4% - as in the month before. 

“Inflation is always and everywhere a monetary phenomenon”, declared Milton Friedman. The money volume, the amount of money available in the whole economy, restricts how much people can spend. If they - for in instance - pay higher prices for imported goods, then they purchase fewer of them or they spend less for other goods & services.

                        Helicopter Money 

Friedman got forgotten in the recent decades but the recent inflation wave confirms him again. The hot inflation at the begin of this decades was caused by a deluge of money in the years 2020 & 2021. Then the Biden administration flooded the economy with stimulus checks in the value of trillions of dollars to fight the Covid19 recession (American Rescue Plan). The government checks got financed by massive bond purchases by the Federal Reserve (Quantitative Easing, known as QE1,QE2 & QE3).

The government money landed directly on the bank accounts of the Americans, blowing up the money volume M2 (bank notes & coins & short term deposits at banks). Milton Friedman described this as helicopter money (cato ). As a result in 2021 & 2022 the US money supply M2, the engine of the inflation, jumped 40%. Unfortunately the money deluge met a constrained supply of goods & services partly - partly because of Covid19. So the price level inevitably had to jump and the inflation rate (first derivation) went up.

                         Causal Relationship

The causal relationship between the money supply and inflation was already recognized by Nicolaus Copernicus! The astronomer explained in the year 1517 why "too much money" causes inflation. Copernicus` "quantity theory of money" is based on observations: Early in the 16th century Spain conquered today`s Latin America and looted the silver stocks. The Spaniards send the precious metal to Europe where it was printed into coins and used as money.

As a result the European money supply jumped, but the supply of goods & services did not change much. The flood of money raised suddenly the demand for scarce goods & services and caused a jump of the price level.

Elaborated studies by Milton Friedman, Karl Brunner, Allan Meltzer and many other economists (known as Monetarists) confirmed Copernicus & the quantity theory of money. They described in the 1960s elaborately how and why the inflation rate follows the growth rate of money with a time lag (causal connection).

 

 

(source )

                   Constrained by M2

The US inflation is constrained by the slowly growing US money supply. M2 advanced in February just 4.2%, about 2 percentage points above the growth of the real economy (GDP  google). There is not much range for inflation.

Contemporary Art: Prometheus and Pietà @ The Hole New York

(Drivebycuriosity) -  Manhattan`s Bowery is a magnet for tourists. But you also could find one ambitious art gallery at least: The Hole. Recently I spotted there a show by the South Korean artist Lee Gihun ( thehole). The exhibition is called "Prometheus and Pietà". I enjoyed his powerful & surreal phantasies and display here my favorites, a very subjective selection as usual.

 

According to the press release “Lee creates dark post-industrial landscapes populated by animals and hybrid beings, merging painting and drawing in each work with acrylic and oil pastel on canvases that reach up to eight feet in scale”.

 

Enjoy! 

 

Books: The Possibility Of An Island by Michel Houellebecq

 (Drivebycuriosity) - Michel Houellebecq belongs to the most important contemporary philosophers and novel writers in France, maybe of the world. I enjoyed his book "Elementary Particles", that I read decades ago, and his novel "Submission", about the islamization of France (my review ). I am also fascinated by his novels "Serotin"  (my review ) & "Annihilation" (review). Houellebecq`s texts are precise and analytical; he performs literary autopsies - and he likes to provoke.

 "The Possibility of an Island" is the most challenging Houellebecq novel I read so far (amazon ). The plot is told in first person and follows a 40 something, who is - as usual by Houellebecq - pathetic & obnoxious, but also smart and has the gift of an analytical mind. 

The protagonist has a very successful career as a comedia  by bringing "together the commercial advantages of pornography and ultra-violence.” We learn about his professional development, his relationships with women and his experiences with an uprising bizarre sect (this is a spoiler free blog). Parts of the plot are told in a far future by distant descendants of the protagonist.

The novel is philosophical with a pessimist undertone - as usual for Houellebecq. I am not too much impressed by the plot. But what makes me reading him again and again - and makes me a fan of him - are the author`s sharp wit and his analytical & precise musings about almost anything.

 

               Incestuous Temptations 

Houellebecq portraits "the honest folk, those who work, who ensure the effective production of wealth, also those who make sacrifices for their children—in a manner that is rather comic or, if you like, pathetic (but I was, above all, a comedian); those who have neither beauty in their youth, nor ambition later, nor riches ever; but who hold on wholeheartedly, and more sincerely than anyone, to the values of beauty, youth, wealth, ambition, and sex; those who, in some kind of way, make the sauce bind".

He makes fun of the "mediocrity of the middle classes" in general and captures the "incestuous temptations of mid-career intellectuals", who are aroused by their daughters or daughters-in-law, with their bare belly buttons and thongs showing above their pants.

 

          Same Fate As The Punks

The author shows a surprisingly optimist view about the Islamization of the western world (different from his novel "Submission) and assumes that the Islamic fundamentalists, who had appeared in the 2000s, will suffer more or less the same fate as the punks! At first they had been made obsolete by the appearance of polite, gentle, and pious Muslims — a kind of equivalent of New Wave, to continue the analogy; the girls at this time still wore the veil, but it was pretty, decorated, with lace and see-through material, rather like an erotic accessory, in fact. And of course, subsequently, the phenomenon had progressively died out: the expensively built mosques were deserted, and the Arab immigrant girls were once again available in the sexual marketplace, like everyone else.

 

                      Quest For Salvation 

Houellebecq finds it amusing to observe that it’s always the enemies of freedom who find themselves, at one moment or another, most in need of it.

He makes fun of the saints, who - in their quest for salvation -, obey motives that were only partially altruistic (even though submission to the will of the Lord, which they professed, must have often been simply a convenient way of justifying to others their natural altruism), but prolonged belief in a manifestly absent divine entity provoked in them displays of idiocy incompatible in the long term with the maintenance of a technological civilization.

 

                    The One Real Pleasure

Houellebecq claims that sexual pleasure is not only superior, in refinement and violence, to all the other pleasures life had to offer; it is not only the one pleasure with which there is no collateral damage to the organism, but which on the contrary contributes to maintaining it at its highest level of vitality and strength; it was in truth the sole pleasure, the sole objective of human existence, and all other pleasures—whether associated with rich food, tobacco, alcohol, or drugs—were only derisory and desperate compensations, mini-suicides that did not have the courage to speak their name, attempts to speed up the destruction of a body that no longer had access to the one real pleasure.

I plan to read more books by him.
 

Science Fiction: Inhibitor Phase By Alastair Reynolds

 (Drivebycuriosity) - Alastair Reynolds belongs to my favorite science fiction authors. His novels and short stories show what contemporary scifi can offer. Reynolds has a PhD in physics and started his career as research astronomer for the European Space Research and Technology Centre (part of the European Space Agency) until 2004 when he left to pursue writing full-time. And he also has a lot of fantasy and excellent writing skills. 

Reynold`s novel "Inhibitor Phase" is his latest  space opera (amazon).  Humanity is struggling for survival. An alien machine civilization is attacking and destroying human habitats wherever they are. The alien war machines are ubiquitous, based on a superior technology, and they attack coordinatedly like a hive mind (the idea that superior civilizations aim to destroy all organic life in the universe appears also in other Reynold novels and is part of Xixin Liu´s "Remembrance of Earth" trilogy - known are the dark forest hypothesis).

"Inhibitor Phase" has a lot of fascinating ideas. I enjoy the description of an intelligent spaceship, that serves the protagonists like a perfect dog, but also works like a 5-star hotel, and there are many fancy & smart weapons. Reynolds describes a lot action and spices the tale with some horror. 

But I have problems with the plot. Some of the leading characters remind me of the funny Dr. Dolittle books I read in my childhood. Maybe Reynold tried to be humorous and to entertain young adults. He can do better - as he proved with his his novels "Pushing Ice" (my  review), "Revelation Space ( review) & "Permafrost" (review ).

Economics: Why Is Inflation Sinking In Spite Of Trade War & Tariffs?

  

(Drivebycuriosity) - Tariffs or not, the US inflation rate is sinking. In December the number dropped to 2.4%, rebutting the pundits who predicted that Trump`s tariffs will hike inflation again. Their predictions are based on economic illiteracy & ignorance of history. In the last quarter the US economy (measured by the GDP) grew about 3.7% (atlantafed ), the money volume M2 advanced in December just 4.6% (macromicro ). There is not much room for inflation. 

“Inflation is always and everywhere a monetary phenomenon”, declared Milton Friedman. The money volume, the amount of money available in the whole economy, restricts how much people can spend. If they - for in instance - pay higher prices for imported goods, then they purchase fewer of them or they spend less for other goods & services.

                        Helicopter Money 

Friedman got forgotten in the recent decades but the recent inflation wave confirms him again. The hot inflation at the begin of this decades was caused by a deluge of money in the years 2020 & 2021. Then the Biden administration flooded the economy with stimulus checks in the value of trillions of dollars to fight the Covid19 recession (American Rescue Plan). The government checks got financed by massive bond purchases by the Federal Reserve (Quantitative Easing, known as QE1,QE2 & QE3).

The government money landed directly on the bank accounts of the Americans, blowing up the money volume M2 (bank notes & coins & short term deposits at banks). Milton Friedman described this as helicopter money (cato ). As a result in 2021 & 2022 the US money supply M2, the engine of the inflation, jumped 40%. Unfortunately the money deluge met a constrained supply of goods & services partly - partly because of Covid19. So the price level inevitably had to jump and the inflation rate (first derivation) went up.

                         Causal Relationship

The causal relationship between the money supply and inflation was already recognized by Nicolaus Copernicus! The astronomer explained in the year 1517 why "too much money" causes inflation. Copernicus` "quantity theory of money" is based on observations: Early in the 16th century Spain conquered today`s Latin America and looted the silver stocks. The Spaniards send the precious metal to Europe where it was printed into coins and used as money.

As a result the European money supply jumped, but the supply of goods & services did not change much. The flood of money raised suddenly the demand for scarce goods & services and caused a jump of the price level.

Elaborated studies by Milton Friedman, Karl Brunner, Allan Meltzer and many other economists (known as Monetarists) confirmed Copernicus & the quantity theory of money. They described in the 1960s elaborately how and why the inflation rate follows the growth rate of money with a time lag (causal connection).

                   Poorly Informed

I assume that the public is as usual poorly informed and misguided by economic illiterate pundits and uneducated journalists. The inflation callers focus on the recent tariff hikes, but ignore that rising prices for internationally traded goods & services are just a part of the story and are compensated by falling oil & natural gas prices, cheaper homes & rents and that there are no tariffs on domestic services like dentists or the vast US leisure industry.

 

Economics: Should We Be Scared By Falling Fertility Rates?

 (Drivebycuriosity) - There is a lot ado about the so-called fertility crisis. Worldwide are the numbers of births dropping. If we believe the Cassandras the world is doomed. I beg to differ.

First, I think a smaller population is a big win for the environment and could be the answer to global warming, another favorite subject of the doomsayers. 

Fewer people would burn less energy - and they would emit fewer greenhouse gases. Fewer people also eat less; therefore the incentive to destroy forests, to gain more land for farming, becomes weaker and the problem of over-fishing disappears.

A shrinking population also slows down the trend of turning forests & meadows into the sprawl: fewer people stops the trend of constructing more and more one-family houses, streets, strip malls, store houses & parking places. A shrinking population makes the world greener & cleaner!

A smaller population is also the answer to another doomster alert: "The robots are coming" And: "Automation will destroy our jobs!"  (" thehill). Both trends are mostly compensating each other: A falling demand for workers, thanks to automation, compensates a declining supply by shrinking populations.

 

                      Industrial Revolution 

Machines have been replacing labor for many centuries. In the middle ages wind & water mills already substituted human & animal labor. In the 18th century followed steam power, starting the industrial revolution. In the recent centuries the ongoing automation process has been raising productivity of labor considerably - and the progress has been accelerating. 

Artificial Intelligence (AI) is raising the productivity of labor even even further, reducing the demand for human workers even more. DeepSeek, the newest incarnation of the technological progress, is another step in the ongoing progress to more productivity. Microsoft CEO Satya Nadella claims that Moore´s law is "working in hyperdrive" (finance.yahoo ).

And there is more: science is making exponential advancements in the field of robotics and artificial intelligence and will support the economy and the labor markets in the coming decades. 

      Less Work, More Income

Today even farmers are using robots, for instance for harvesting strawberries or milking cows (wikipedia). Drones are being used in warehouses and yards for inventory management. Robots also help restaurants to deal with the scarcity of labor.  

"Domino’s Pizza Inc. is putting in place equipment and technology that reduce the amount of labor that is required to produce our dough balls", reports time.com. 3D-printers are also replacing workers, even in construction. "A 3D printer can build the walls of a house in as little as two days versus weeks or months with traditional construction materials" notices today.com.  

 A study by economists John G. Fernald and Charles I. Jones from Stanford & the Federal Reserve Bank of San Francisco claims that "it becomes possible to replace more and more of the labor tasks with capital" (robinhanson ). Fernald & Jones define capital as physical capital (machines including robots & computers), plus human capital (knowledge & skills) plus discovery of new ideas (inventions like computer, internet etc.). According to them "artificial intelligence and machine learning could allow computers and robots to increasingly replace labor in the production function for goods", meaning that the society can produce more things without increasing hours worked or even with a shrinking labor force. As a result the growth rate of income per person and the long-run growth rate (now around 2%) will rise as well: "The possibility that artificial intelligence will allow machines to replace workers to some extent could lead to higher growth in the future.

                 Universal Basic Income

Naive observers claim that a shrinking population reduces the demand for goods & services and will destroy many markets and businesses (noahpinion). These pessimists ignore that demand is the number of potential buyers multiplied with the purchasing power per capita. Thanks to the accelerating technological progress the purchasing power per capita is rising and will overcompensate the shrinking number of consumers.

We can learn from history: In England the bubonic plague (1348 Black Death ) reduced the English population by about 30%. As a result the living standard of the survivors climbed! The reduced workforce caused higher salaries and the diminished population lowered the demand for food and cut food prices ( driveby). 

I reckon that technological progress leads to:

    - rising salaries (for those still working), 

    - climbing dividend incomes and stock market gains 

which will raise the purchasing power of most people - enough to compensate the shrinking number of buyers. Even those who don`t invest in the stock market may participate via pension funds and insurance investments. 

The productivity gains will finally translate into higher tax revenues for the governments (by taxing company profits, dividends & stock market gains). Some day a much greater part of goods & services will be produced by robots and other machines. Then fewer people may work than today and many things will cost less. Then the time could come for an universal basic income, paid to everybody, and financed by productivity gains delivered with automation (driveby ).

Small is beautiful.