In 2008, as the global financial crisis was ravaging economies everywhere, English Queen Elizabeth II, visiting the London School of Economics, famously asked, “Why did nobody see it coming?” The high inflation of 2021 – especially in the United States, where the year-on-year increase in consumer prices reached a four-decade high of 7% in December – should prompt the same question.
Inflation is not nearly as bad as a financial crisis, particularly when price increases coincide with a rapid improvement in the economy. And whereas financial crises may be inherently unpredictable, forecasting inflation is a staple of macroeconomic modeling.
Why, then, did almost everyone get the US inflation story so wrong last year? A survey of 36 private-sector forecasters in May revealed a median inflation forecast of 2.3% for 2021 (measured by the core personal consumption expenditures price index, the US Federal Reserve’s de facto target gauge). As a whole, the group put a 0.5% chance on inflation exceeding 4% last year – but, by the core PCE measure, it looks set to be 4.5%.
The Fed’s rate-setting Federal Open Market Committee fared no better, with none of its 18 members expecting inflation above 2.5% in 2021. Financial markets appear to have missed this one as well, with bond prices yielding similar predictions. Ditto the International Monetary Fund, the Congressional Budget Office, President Joe Biden’s administration, and even many conservative economists.
Some of this collective error resulted from developments that forecasters did not or could not expect. Fed Chair Jerome Powell, among many others, blamed the Delta variant of the coronavirus for slowing the reopening of the economy and thus driving inflation higher. But Powell and others had earlier argued that the increase in inflation in the spring of 2021 was spurred by an overly rapid reopening as vaccination reduced case numbers. It is unlikely that both of these excuses are correct. The emergence of Delta, like the pandemic in 2020, probably kept inflation lower than it otherwise would have been.
Supply-chain disruptions were another unanticipated development that allegedly blew up inflation forecasts. But while the pandemic has caused some genuine bottlenecks in production networks, most are churning out much more than last year, with both US and global manufacturing output and shipping up sharply.
This brings us to a more important source of forecasting error: not taking our economic models seriously enough. Forecasts based on extrapolation from the recent past are nearly always as good as, or better than, those based on more sophisticated modeling. The exception is when there are economic inputs that are well outside the realm of recent experience. For example, the extraordinary $2.5 trillion in fiscal support for the US economy in 2021, amounting to 11% of GDP, was far larger than any previous fiscal package since World War II.
A simple fiscal multiplier model would have predicted that average output in the last three quarters of 2021 would be 2-5% above pre-pandemic estimates of potential. To think that a stimulus of this magnitude would not cause inflation required believing either that such a huge adjustment was possible within a matter of months, or that fiscal policy is ineffective and does not increase aggregate demand. Both views are implausible.
Economic models also gave us substantial reason to believe that several factors would reduce the US economy’s potential in 2021. These included premature deaths, reduced immigration, foregone capital investment, the costs of hardening the economy to COVID-19, pandemic-induced exits from the workforce, and all of the difficulties of rapidly reassembling an economy that had been torn apart. Such constraints made it very likely that additional demand would push inflation even higher.
A final set of errors arose because our models were missing key inputs or interpretations. To the degree that people relied on economic models, they often used a Phillips curve to predict inflation or changes in inflation based on the unemployment rate. But these frameworks had difficulty reckoning with the fact that the natural rate of unemployment likely rose, at least temporarily, as a result of the COVID-19 crisis.
More important, unemployment is not the only way to measure economic slack. Estimates from before the pandemic show that the “quit rate” and the ratio of unemployed workers to job openings are better predictors of wage and price inflation. These other indicators of slack were already tight at the beginning of 2021 and were very tight by the spring.
In retrospect, the mental model I find most useful for thinking about 2021 is to apply fiscal multipliers to nominal GDP, use them to predict how much of the fiscal stimulus will be spent, and then try to predict real GDP by understanding what the economy’s productive capacity is. The difference between the two is inflation.
Multipliers indicated that total spending in 2021 would go up a lot, while production constraints suggested that output would not increase by as much. The difference was unexpectedly higher inflation.
Where does this leave us in understanding inflation in 2022? Instead of making inertial forecasts that the future will resemble the past, taking our models seriously means accounting for high levels of demand, continued supply constraints, and ever tighter labour markets with rapidly rising nominal wages and higher inflation expectations. Some types of inflation, notably in goods prices, are likely to decline this year, but others, including services inflation, will likely increase.
I therefore expect another year of significant US inflation, maybe not as high as in 2021 but plausibly in the 3-4% range. But the most important forecasting lesson from last year is humility. We should all be adding some large error bands around our expectations and be prepared to update our outlooks as the economic situation unfolds.
Jason Furman, Professor of the Practice of Economic Policy at the Harvard Kennedy School and Senior Fellow at the Peterson Institute for International Economics, is a former chairman of President Barack Obama’s Council of Economic Advisers. Copyright: Project Syndicate, 2022, and published here with permission.
65 Comments
It would make a good James Bond film where the villain is a Billionaire who opens up a lab to produce a new COVID variant to make the reserve banks print more money and make the rich villain much richer. The rich must have a party when a disaster hits the rest of us. They never lose.
LOL (nearly) all the interest.co.nz commenters saw inflation coming.
- The central banks (pretended like they) didn't see it coming.
- The Keynesian academics/economists couldn't predict the sun rising in the east
- The legacy media didn't see it coming and can't think for themselves.
- The politicians can't explain it and/or think it's corporate price gouging
- The normies still don't know it's happening.
Thank God for Bitcoin.
Agree.
After two years....Chickens are coming home to roost.
Luckily for reserve bank and politicians, we are still in panademic, for them to cover up their back but for how long.
Hoping better sense prevail and let economy takes it course - May be will have short term pain but will be better for long term.
BTC as an inflation hedge is a meme and has been the current narrative for a while. Earlier narratives were it was the digital currency, then it was digital gold. Next year will be a new narrative when it becomes apparent to the masses it is not an inflation hedge. BTC is simply an instrument to be manipulated for the financial gain of the savvy. It was not originally like this, but such is human greed it has been exploited and will be milked for every last cent like other industries.
Hard capped supply, only variable is demand. Do the maths and lengthen your time horizon.
Liquid BTC on exchanges is only 1.3m BTC and dropping by about 100k a day.
https://twitter.com/glassnode/status/1473429570984415235?s=20
Programmatic inflation rate of 1.75% reducing to 0.84% in 2 years, you literally cant beat it.
The supply is only hardcapped as long as the developers and miners want that to be the case.
It is highly likely that they will eventually remove the hard cap. It's already been discussed by bitcoin core developers. The method would simply be to cancel further halvings.
https://www.trustnodes.com/2019/03/26/peter-todd-advocates-raising-the-…
Bitcoin is mathematically doomed as it is, because when the rewards for mining go down, the electricity to run the network does not. But there's no inherent value in bitcoin or reason why it should be valued at, say, $1B per coin. People will refuse to pay it. So if bitcoin prices cannot rise to the level required to pay for the electricity to keep the network operating securely, the only other avenue is transaction fees. But (most) people won't pay $100 transaction fees to send $50 worth of bitcoin to someone else.
Basically, as the halvings continue: the coin price must rise substantially, but rational people will say "why is this worth $XXXXXXXX? There are other cryptocurrencies that do everything better than bitcoin does", or the transaction fee must rise substantially, but again rational people will say "why would I pay $100 in fees to move $50 in value when I can use another cryptocurrency and pay $0.0001 in fees to move $50 in value?".
The only variable that can be easily moved is to remove the cap of 21 million coins, but that itself will bring about a crisis in confidence from all of the people (such as yourself) who truly believed it was always going to be capped at 21 million coins and never changed. All those arguments about it being the only deflationary currency, etc, will be blown to smithereens and the proponents will be left with egg on their face.
Lol nice BCash article you have there, I guess ultimately time will tell.
No, the nodes are the ones that control any changes to the code base, and that's me. There's no way I will vote for a change in the hard cap supply, because why would I want to dilute my value/time? It makes absolutely no sense.
But yes, it is theoretically changeable, it just takes 90% + of the nodes to vote for it, they are just economically incentavised not to.
Transaction fees are basically free atm. Lightning network is also instant, so you can make as many transactions as you like, then close off the channel with one transaction on chain to finalise the payments. So a one off fee of maybe $50 to cover thousands of transactions. Also, on chain is the base layer, so it requires higher security to use. It will most likely be used by the large institutions and banks to finalise payments because they need that level of security and finality. While everyday people will use the second and third layer solutions.
There's Bitcoin and then there's shitcoins. No other project will ever have the decentalisation and antifragility as bitcoin does. There is no leaders or people in control of Bitcoin that can be coerced or attacked to change the network rules. If they can change the rules once, what's to stop them from doing it again? it looses all trust and defeats the entire point: Don't Trust, Verify.
In the end, it is up to each person to assess the risks of your scenario happening, and allocate accordingly.
There's nothing in you piece I haven't seen a hundred times before and spent hundreds of hours researching, ergo I put my money where my mouth is :)
Pinning all your hopes on lightning network, when the creators of it acknowledge it has fundamental flaws that seem unfixable seems a bit shortsighted.
https://www.forbes.com/sites/billybambrough/2020/07/09/bitcoins-lightni…
"None of this is new and has been highlighted by other people in mailing list posts and even in part in the original lightning network white paper from 2015, so the community is well aware," Elizabeth Stark, the chief executive of lightning network developer Lightning Labs, admitted via email.
I dont need to pin all my hopes on it. However I am one not to bet against innovation.
The original paper is an interesting read, sounds like lowering the incoming and outgoing channel numbers can reduce the potential damage. I wonder what the actual damage would be, as the average channel size is 3m sats or ~$1,500.
We continued with a discussion of multiple mitigation techniques that could reduce the scope of the attack, by taking into account the fundamental elements that contributed to its success. Still we believe that in many ways the vulnerabilities exploited by our attack are inherent to the way HTLCs work, and thus the attack cannot be avoided completely.
There has been a lot of innovation. You referred to that as "shitcoins".
as the average channel size is 3m sats or ~$1,500.
If lightning network is going to be the salvation of bitcoin, then the average channel size is going to be a lot bigger than that in the future.
Lightning Network is fundamentally flawed. As is bitcoin just from a straight tokenomics angle, as well as the 51% attack vector. Other cryptocurrencies do not have these flaws because they were fixed in their designs, but bitcoin still suffers from them because miners don't want to change the protocol away from what it is, which presently benefits them.
Unfortunately Bitcoin is not a hard capped supply. People simply invented other Crypto's which is watering down the available supply in the total market. Bitcoin will hit a brick wall, possibly it already has and at best it will stabilise but worst case it will decline. Punters are also now in it to make a quick buck and the longer it doesn't perform the more people will pull the pin on it and switch to another crypto that is. Its a market with a herd mentality that is just perfect for the modern world of Facebook users.
In practice, he thinks it wont be....
In any case, just look at the current hashrate chart and tell me Bitcoin is dead
Blockchain Explorer - Search the Blockchain | BTC | ETH | BCH:
Yea I get it, I'm super pro crypto. All your points are great but price remains as manipulated as ever. Price is controlled by a select few and the derivatives market assists this in a great way. When they want price to pump or dump, it will, regardless of any of your points. Large positions are being created right now then they will pump it to 50s/60s and off load. Rinse and repeat. Money for gravy and they make billions. They don't give a rats if some country is buying 50btc here and there lol.
Sorry I have to lol and almost stopped reading at "physical bitcoins". Moving on I assume you mean there are no spot bitcoins left to sell. And my counter point to that is that when there is no spot btc supply left as you say, the price is manipulated down just as easy as up. If there is no spot supply then no one is selling at high prices (because there is none to sell!) and derivates (futures and options) drive the price where ever the big boys want it to go. Plenty of long squeezes to come also, see current pa.
Why did almost nobody see inflation coming?
Jason Furman, how could you ask such a question to cover up reserve bank that nobody saw so chill, not your (reserve bank) fault.
Since early 2021 it was evident that inflation is getting out of control and all data was pointed towards it but reserve bank and many so called experts ( biased agenda) choose to ignore and manipulated and Fed gave them the mantra to deflect taking action by hiding behind temporary agenda - it was very much evident.
OK now it is clear and reserve bank have decided to control but stock and housing market is and will throw more tantrums, will they be able to overcome their blackmailing and not be pressurised by so called experts, who many are lobbyist ( not experts) and are not unbiased being on payroll.
So to say no one saw it coming in incorrect and also now that they know, how do they tackle or still will use pandenmic as an excuse to distribute cheap and easy money to pump asset class.
Will reserve bank follow this advise :
https://www.marketwatch.com/story/the-federal-reserve-needs-to-shock-an…
They will not, as it does not suit their narrative and are in no rush so will continue with their wait and watch approach as it is to control, if to inflate will be proactive with least regret.
Remember Mr Orr has openly confirmed their mindset - if to support certain section of the society will go for least regret and if it effect negatively to that same section will follow wait and watch.
Need not say which section they are talking about.
Jason Furman ascribes near-universal forecasting errors in 2021 to not taking economic models seriously enough
I could rewrite this heading in so many ways, for example:
"White middle-aged male neoclassical econ blames erroneous crystal-ball gazing on not taking crystal ball seriously enough"
Professor Furman dis not say whether or not he had anticipated much higher inflation. I suspect that if he had, he would have told us. Thus, I think he is using that most reliable financial tool-hindsight.
I see that the Phillips Curve gets a mention. Like a vampire, no matter how often a stake is driven through it, it emerges yet again.
Don't knock a famous Kiwi economist - Bill Phillips' other contribution to the world of economics, his hydraulic computer MONIAC - Wikipedia, would have predicted the current inflation
MICHAEL HUDSON: It actually is included (housing costs), but in a very moderate way, modest way. I’ve looked at the Fed statistics on rent as a portion of income and mortgage payments as a portion of income. And in the last 30 years, there’s been zero change, according to these statistics. Absolutely flat.
So they decided what the percentage was; they haven’t changed it at all. The consumer price index doesn’t recognize the increase in either rental costs or mortgage costs as housing prices have risen. So they’re under-reported.
But more important, people have had to change what they’re eating and what they’re buying.
But it’s certain, the money that the Fed gave to individual families under the CARES Act, almost all of that was used to pay down debt.Because the way the Treasury made the payments was to credit either their credit cards or their bank accounts. And that most Americans are overdrawn on their bank accounts, or they owe money on their credit cards.
And the money went right out of their hands to reduce the volume of debt they had. And essentially, it was a debt repayment to the bank.That was what happened to most of the CARES Act. It wasn’t spent on goods and services, and so it wasn’t inflationary. Just the opposite.
So there are a number of reasons why prices have gone up.
The big reason is, if you look at the prices that have gone up, they’re monopoly prices. The monopolies have been able to charge more because they’re monopolies, and because there’s less and less competition, and because the government is not really enforcing anti-monopoly legislation.
President Biden is trying to increase that now, but it’s going to take a little while before the prosecution of monopolies and talk of break-ups really concludes.
Also there are a lot of bottlenecks in transportation, as you’ve heard. There are two kinds of bottlenecks: One, you’ve heard about the port in Los Angeles, over the ships. The shipping costs have tripled from Asia to the United States.
The ships are unable to unload because the ports are not organized as ports. Particular companies own the trucks; other companies own the containers; other companies own the ships.
And there is no way to reconcile them to get the containers that are offloaded from the ships once they’re emptied out, there’s no way to get them back. You have to get them back to particular terminals, and it’s not designed by anybody who is competently put there.
The one benefit to the whole economy of all this is that it means that there’s no chance that the secretary of transportation, Mayor Pete [Buttigieg], can ever show his face in public again. But that’s sort of a minor gain.
The other fact is that in companies, there’s a new management philosophy that’s come in, maybe about 15 years ago, and that’s called just-in-time inventory.In other words, the idea is, you want to cut – the less you spend on inventories, the more money you have to pay out as dividends to your stockholders.
If you don’t have to spend money on inventories, then your profit rates go up, and you can pay more.
And so companies say, “Let’s operate with almost no inventories at all. That way, we’ll have a little bit more money to push up the stock price.” And if you’re the CEO, you get your bonus paid on the stock price.
Well, the problem is that the purpose of inventories is to prevent zigzags in prices, when there are shortages. If there is a supply problem, well, you have enough inventories on hand so that you are not going to have a crisis.That’s why the United States has a national inventory of oil, and fuels, and national reserves of things that the government and the economy needs.
But Walmart, and other stores, and distributor retail stores don’t operate in the same way for the economy. They’re after profits. So they didn’t have any inventories.
So a little bit of a shortage all of a sudden caused a massive scramble to try to get enough goods to sell to people. And so it’s that just-in-time budgeting.
And also, of course, there are labor shortages from Covid. People are finally beginning to get almost half of the minimum wage; some people are almost able to earn the minimum wage now.
Where there is a real labor shortage, in New York City, the transport authority said it’s paying its workers an extra $35,000 to retirees, if they’ll sign on for three months to get over the current shortage.
So a little bit is, finally, the class war against labor is alleviated because of the crisis. So those are the real reasons of inflation.
It’s not a monetary inflation, except for the financial inflation of housing prices, and the fact that it has created so many multi-billionaires by the Fed’s quantitative easing, that they’ve all created private capital buyout funds, and they’re buying up all the housing and outfitting the owner occupants that want to buy housing, to take over the housing, turn it into rental housing, and charge cutthroat rents to the economy. Link
Horror horror, the great "ε" came haunting every economists.
We know there are shamans and scientists and then lots of in-betweens.
Here's a lesson for every economists regardless if you have a nobel prize tagged to your name,
“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” - Donald Rumsfeld
i would say the majority of ordinary punters saw it coming -- at the shops, food prices, petrol prices, insurance costs, power, rates - i fixed at 2.95% for 5 years last year because of it - suez canal one shit almighty chaos - supply chain disruptions - covid impacts etc
But the Institutions / Governments / Financial industry and all connected to housing Ponzi - saw it - knew it - but refused to accept it and lived in denial - some still are - and as a result made it worse!
Still the pain of a correction is overdue in both housing, and asset prices - so bring it on !
The only people that didn't see it coming are those whose salaries depend on them not seeing it.
The entire internet on the other hand...
https://i.kym-cdn.com/photos/images/original/002/250/019/c63.jpg
I first wrote about the coming inflation some 18 months go here at interest.co.nz
Then again here a month later, also at interest.co.nz.
And then once again here in early 2021.
No-one could be precise about the specific rates or timing, but a big uptick in inflation was inevitable. With some sadness, I arranged my own affairs accordingly.
KeithW
Only the magnificently dumb didn't see it coming,and the cynically wealthy kept quiet about it. As for bitcoin, the use case is destroyed by quantum computing, and dependence on the internet is the greatest of all counterparty risks....
Diamonds, precious metals etc... All will come back to physical ownership of these eventually because it always does.
If Bitcoin is destroyed by Quantum computing, then so is all other cryptography in the world that runs on the same Sha256 system. IE all government data and national secrets, nuclear launch systems etc. They will see it coming from a long way off which will also give Bitcoin devs time to patch.
Diamonds are worthless trash, they can be made in a lab for zero cost.
You can send bitcoin over radio waves, and there are the blockstream satellites that you can connect to. So we can go around the internet with a bit of effort.
That is the point of Bitcoin, it has dematerialized gold and other physical store of values. So now it is available to all 8b people, rather than just the small few that have a sig amount of wealth and access to the financial system, all you need is a mobile phone and internet connection.
"All will come back to physical ownership of these eventually because it always does" Actually, it is all going in the other direction, name me a physical system that hasn't yet been digitalized? Books to online, mail and fax to email and text, records and cds to mps and podcasts, landline to cellphone, and finally gold and assets to Bitcoin.
The mobile wave by Michael Saylor sounds like a good read.
If Bitcoin is destroyed by Quantum computing, then so is all other cryptography in the world that runs on the same Sha256 system. IE all government data and national secrets, nuclear launch systems etc. They will see it coming from a long way off which will also give Bitcoin devs time to patch.
lol. I thought you'd done hundreds of hours of research, and you think all of those other things use sha256? You know that hashing is not encryption, right?
There are quantum secure algorithms for encryption. It is likely that governments are already in the process of moving their state-secret level information to those systems.
Bitcoin is not moving to quantum secure algorithms and it practically cannot - it would require all of the miners to throw out their existing hardware and replace it with new hardware. They won't do that until it is too late.
A few years back there was a commentator crying about how everything was made in China and we should not buy from them because of their human rights record etc, etc. Fair enough, most of the stuff that comes out of china is crap anyway. But everyone still shops at the warehouse right?
Anyway, I commented that you had better be prepared to pay 3 to 5 times the cost of something if you want to hit a product from the USA or Germany etc..and not whine about it. Then trump started his trade war with china in 2018. That was the start of inflation as it started a tit for tat imposition of tariffs which caused manufacturing costs to increase worldwide and hurt usa farmers etc. It was just typical of trump who has no clue about macro-economics. Purely a political play to his anti Chinese constituants... doubling subsidies to farmers at the same time to buy votes. And his followers will never admit it because they don't have the ability to understand it.
And then along came the pandemic with its worldwide supply chain issues.
Make no mistake..and whether you agree with his reasoning for doing it or not.....the current cycle of inflation was kick-started by trump. But it had come to the world relying on china because everyone wanted to pay a cheaper price and outsourced manufacturing from their own countries. Same today. You cannot have it both ways.
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