📈MY TAKE ON THE FED, INFLATION AND CREDIT📊

17 באוג׳ 2023

TLDR: I think the price increase we are seeing is not inflation, the economy is going from bad to worse and the FED's actions don't make any sense.


At the peak of the great inflation of the 70s in USA while both long and short term interest rates were going up together with inflation, so was the aggregate credit.

In fact loans to businesses were growing faster than inflation.

Whereas now, while the short term rates are going up the aggregate credit is going down. Businesses aren’t borrowing and the banks aren’t lending.

And as it was established by Milton Friedman, inflation is exclusively a MONETARY phenomenon.

Therefore price increase followed by unchanged or decreased aggregate credit in not inflation. Which is exactly what we are seeing right now.

It might be attributed to the ongoing effects of the Covid era supply shock which created long lasting bottlenecks, the war in Ukraine or some other fundamental systemic economic problem but it’s not conventional inflation which means that raising interest rates will do nothing but further damage the already weak economy(which is reflected in the unprecedented drop in demand for credit)

So, the further rate hikes that were hinted yesterday by the FED don’t make any sense and we should be expecting a fast race to the zero with more QE when the economic sh*t hits the political fan.

But, let’s wait and see.