The rise in the unemployment rate has raised concerns about the possibility of a recession, but the story is not as simple as the usual rules of thumb.
My sad takeaway is Michael Kantrowitz's comment that "the good news of unemployment rising is that it takes pressure off inflation." The sad note is the focus of these traditionalists is never about what we can do to maintain a near 100% employment rate (especially good-paying single jobs per person, not bad-paying multiple part-time jobs for 10-12 hour workdays to make ends meet). There's nothing wrong with inflation if people have the income gains to match inflation increases. Inflation just means that some are losers and others are gainers.
Leaving it to these pundits and the Fed where they think the Fed is the only one with the tools, inflation will never get solved, and it's usually the working class that get hit the most. Raising interest rates increases inflation since higher loan interest costs are passed on to consumers, and home buyers and credit debt holders face higher prices. The treasury bond holders (mostly people who don't need extra money) are making extra money for free, doing nothing for society, from the higher interest rates. Although most of these bond holders will re-invest their interest payments, some will spend it now, and soon the baby boomers will start to spend their interest earnings soon as they have more time to go buy a nicer car for America road trips or go on long travels to Paris or Florence. With today's higher interest rates with a high debt to GDP ratio, we now have government outlays in the month of this past June where Net Interest payments of $81B is almost higher than the combined amount of the National Defense at $67B and Medicare at $22B. The Net Interesting payment will soon be much higher than those two combination.
Lowering interest rates could help lower inflation at some level. There are a ton of other things on the fiscal side that can target and reduce inflation areas. The question should first be how can we maintain near 100% employment (good paying jobs) as our number one policy directive. One example is a federally funded Jobs Guarantee (JG) program for the local districts to decide what they need. This is just a buffer stock to help pick up when corporations cut jobs. Then when corporations start hiring again, the JG program have people with continued work experience ready to switch back into corporate work.
For inflation hot spots, do our homework! Find out where they are, learn what's causing them, and only then figure out how fiscal action can reduce those inflation spots. For example, lumber costs are high, leading to higher new home prices? Well, shall we reduce Canadian lumber tariffs? Rents are high? Should we restrict new housing permits that are for premium multi-million homes and city condos? Could we relax permit restrictions for housing project needed that are affordable for the working class? The construction firms may have new incentives to shift some of their workers from premium flats where it takes 50 workers to build an apartment for a family of three over to using the same 50 workers to build 10 apartments for the middle class. Still not enough construction workers? How about fast-tracking immigrants on the borders who have construction skills and give them those jobs. Everyone should be happy.
In summary, the question should be about how do we keep employment high as our number one job. That's more important than inflation since that can be easily managed by smarter people.
Yes I expect he would. In fact his son James K. Galbraith, a great achiever in his own right, explains his thoughts about the problem with mainstream economics and talks a bit about his father John as well. This is a great episode. I hope you find time to listen and if so, please share your feedback.
100%! Thanks; this saves me from the need to write the same thing! According to neoclassical economics, the solution to every problem is that the wealthy need more of the working class and the Fed Govs money! If the economy slows down; the solution is "tax cuts for the job creators!" If the economy is running too hot; increase the costs of US dollars created by banks (non-government sector debt) and increase the income on saving through interest payments!
What's their next junk economic "theory" to pull out of the toolbox? The federal debt fearmongering! How do they propose solving that so-called problem? Cut government spending on automatic stabilizers that support the economy and prevent more people from becoming unemployed! What is the result of cuts to "net government spending" (deficit reduction)? Cuts to "non-government sector" income and higher levels of unemployment!" You end up with one junk economic theory creating a problem that "can only" be solved by another junk theory! Its shameful greed passed off as "economic theory!"
One point where I differ from you is that I don't see employment as the source of inflation ( no trade-off between inflation and unemployment at this point). It's not spending and wages driving the inflation. We are seeing many businesses shutting down and struggling from a lack of demand! Wages are playing catch up to inflation from the OECD numbers I've seen. Isn't it interesting that the one thing you NEVER hear mentioned on these investment programs is the cost of housing driven by Wall Street speculation in the housing market? Insurance, another one of sources of so-called sticky inflation; what does spending and wages have to do with high insurance costs?
People need to understand that ALL MONEY IS CREATED AS DEBT! US dollars are created as the "debt of the Federal Government" (spending/fiscal policy) or by bank credit (loans/monetary policy). The large majority of US dollars circulating in the US economy come from Bank loans (private sector debt). When the Fed increases interest rates, this is an added cost of the US dollars that are driving the economy. This is no small number that we are talking about; we are talking about every US dollar in circulation is someone's debt! Its a massive wealth transfer and has nothing to do with reducing inflation. If they were actually concerned with inflation, then Congress would do its job instead of pushing the responsibility off on the Fed, which only has one tool.
I can't find in my post where I mention that "employment as the source of inflation." If you can find the line, please let me know as that's what I meant to say during this conversation. I still can't find it. So, let me know.
As for all money is created as debt, it would be better saying the banks create money by crediting bank accounts of those who pass the worthiness test. That money needs to be paid back, so although there can be a quick increase in M2, eventually that goes away with loan repayments. Looking at it as one event, then there's no new net money in the economy. However, when the Government creates money, they too credit bank accounts via the Fed reserve system. That new money is net standing money as it never has to get paid back. In both cases, dollars are Government I.O.U.s, where you can redeem them to pay taxes. Most don't use their bank loans to pay taxes other than using it as a short-term bridge.
Bank loans --- Real debt to the loan holder, a liability to the bank.
Government spends (via Congress Bills) --- Not debt. Just new net money created. If there's a deficit, the Treasury creates bonds to sell (out of thin air) for only the purpose directed by Congress many years ago requiring the daily treasury statement to balance out to zero. We could do away with bonds if we wanted to and let the balance sheet of a consolidated Treasury/Fed model be unbalanced as negative or positive. It wouldn't matter if it's not zero. Then to do that, the Congress would need to pass a law for the FDIC to insure 100% of deposits, not capping them off at $250K. I suppose they could keep 3-month T-Bills with a tiny interest percent just to have a place for pension funds, individuals, and foreign suppliers to park their savings with zero risk.
I was referring to your summary. What I was attempting to point out is that I don't think we are at a point where inflation would need to be sacrificed for higher employment. (Other factors are driving the current inflationary episode.)
After the US dollars are created, there's no separation between the dollars created by the Federal Government's "net spending" (debt/IOUs) and the dollars created by "bank credit" (loans/non-government sector debt) until they're redeemed by Federal Taxes or loan payment. Where do you think the money created by a home loan goes? It just circulates in the economy right alongside the dollars created by the Federal Government. Redemption is a separate process, as you described.
Money always has two sides: on one side, it's a liability (debt) of the issuer, and on the other, it's a credit of the user. If all debt (IOUs redeemed) were paid, there would be no money.
When people hear the word "debt," that automatically triggers red flags. Explaining to people how money is created by typing numbers into bank accounts is not adequate (it's not "better to say"). The two understandings are not interchangeable. People need to understand what "money" is (in my opinion). I agree with everything you are saying. It comes down to splitting hairs on how people process information.
Good points Rick. May I add that Government spend is different than bank loans in what is paid back. A bank loan of $1000 (new money created by the bank) would need its principle of $1000 to be paid back plus bank interest fees. That principle paid back is destroyed. I'm not concerned about the bank interest fees because that's just moving money from the bower's pocket to the bank's pocket. However, when the Government spends $1000 (Congress passes a bill for 50 pizzas) and then taxes back, say the pizza guy's 25% tax rate, then the net remaining in the economy is $750 (minus pizza stock). That $750 doesn't need to be paid back to the government. Not trying to split hairs, just think this is an interesting discussion since you helped me think more about my wordings. I'm always learning from people like you on how to help friends better understand MMT. I appreciate your feedback. :)
Yes, the "Federal Government" can run deficits in US dollars to infinity! That is not to say it should, but it can! The non-government sector debt created by bank loans must be paid back plus interest. Those interest payments remain in the non-government sector circulation while the principal payment deletes (destroys) the money (credit) created by the loan). As the price of homes, cars, ect, increases, the size of the loans increases. This expands the amount of money in circulation. As I said in my first comment, this is where the majority of US dollars circulating in the US economy come from >90%. As you pointed out, when the Federal Government "net spends" (runs deficits), the US Treasury offsets the net spending by issuing US Treasury Securities (Fed Gov Borrowing).
Those "Federal Government deficits (net spending)," in the end, are drained back out of circulation and into savings accounts in the form of Treasury Securities. The domestic non-government sector, foreign sector, and the Fed (federal government) own the Treasury Securities. Federal Government debt=non-government sector savings, including the foreign sector and even the Federal Government. Because US dollars are Fed Gov IOUs, there is nothing on the asset side of your own IOU to "save." It's just internal accounting like any business of size does.
The redemption of money (Fed taxes and loan payments) is key to maintaining its value and stability. Without a redemption process, it's not "money!"
Hey Rick, Have you seen this great video from Prof. Eric Tymoigne going into the details explaining how the balance sheets work among the Treasury, Central Bank, Private Bank, and Individual account holder? It's very interesting and would enjoy sharing it with you. He starts with the Consolidated model and then follows up with the current Coordinated model.
I'm sure you've covered this previously, but where does the gig economy fit into all this? Rideshares and the like do not show up in the establishment surveys and they are likely (IMHO) under-reported in the household survey. That wouldn't matter if they weren't a growing share of "employment." Are we seeing a bump up in "unemployment" that is partially/all offset with a bump up in gig work?
Today more chatter on Sahm rule as unemployment rate hits 4.3%.
How do I see next 6 months? There's a lot of uncertainty in next 6 months due to very crucial elections. The economic policy direction is at crossroads. With Donald Trump victory, there will be chaos in US policy and it's very difficult to predict the reaction of those policies.
Great insights, thank you, Claudia. I wonder whether we may not fully be accounting for structural changes in the job market, i.e. automation and the gig economy, which could be affecting unemployment rates in new ways. I guess we'll see....
Sahm-thing to ask! The debate on U3 seems to be complicated by labour supply question markets. Bloomberg's Wong wonders if Trump wins whether the supply will be so constrained that even in a recession, the U3 will not go up its usual 200-250bps. What do you think about that? Obviously, in this scenario, with a more moderate move in U3 rate it would feel like a recession because the focus would be not on supply but the demand side of labour which migh fall it the usual non-linear way. Confused! Please advise
On a separate issue, is it not likely that it WOULD have started reducing the EFFR already if it did not have the weird idea that a reduction must be followed by another and not a possible reversal?
Should not the Fed have reduced the EFFR in December, possible reversed the reduction in early 2024 and have reduced again at mid-year or some pattern like that.
Is it not a mistake for the Fed to set a rate with more expectation that the subsequent setting will be in one direction rather than another? Is that not in contradiction to the idea that the Fed is data driven?
You present a lot of relevant information, but much is vitiated by your not including your expectation of Fed POLICY! No recession eminent? That depends on the Fed? Is not the Sahm rule itself contingent on the Fed leaving unchanged the vector of policy instruments prevailing at the time the rule is evoked?
It is good that you commented on the possibility your rule may have some twists this time. My view is that the rule may suffer from structural change in the economy, largely due to the pandemic. The pandemic introduced some non-linear and non-economic factors. A temporary reduction and then otsize increase in labor supply. Labor hoarding by businesses. Accelerated retirements and labor force reductions from illness or death related to covid. New models of working remotely and labor relocating, which affected productivity plus or minus. Adjustment to business models to cope with reduced labor supply. In short, the pandemic caused a major shock. It's not surprising, the sahm rule may need some adjustment in either timing or magnitude, at least for this event. And maybe in the future as well. This is part of why models and rules need to be monitored and adjusted over time. That is part and parcel of economics as a social science, which deals with people as a group. Not atoms or equations! It does not necessarily invalidate the concept of the rule.
Your columns are always informative. Thank you!
thanks!
My sad takeaway is Michael Kantrowitz's comment that "the good news of unemployment rising is that it takes pressure off inflation." The sad note is the focus of these traditionalists is never about what we can do to maintain a near 100% employment rate (especially good-paying single jobs per person, not bad-paying multiple part-time jobs for 10-12 hour workdays to make ends meet). There's nothing wrong with inflation if people have the income gains to match inflation increases. Inflation just means that some are losers and others are gainers.
Leaving it to these pundits and the Fed where they think the Fed is the only one with the tools, inflation will never get solved, and it's usually the working class that get hit the most. Raising interest rates increases inflation since higher loan interest costs are passed on to consumers, and home buyers and credit debt holders face higher prices. The treasury bond holders (mostly people who don't need extra money) are making extra money for free, doing nothing for society, from the higher interest rates. Although most of these bond holders will re-invest their interest payments, some will spend it now, and soon the baby boomers will start to spend their interest earnings soon as they have more time to go buy a nicer car for America road trips or go on long travels to Paris or Florence. With today's higher interest rates with a high debt to GDP ratio, we now have government outlays in the month of this past June where Net Interest payments of $81B is almost higher than the combined amount of the National Defense at $67B and Medicare at $22B. The Net Interesting payment will soon be much higher than those two combination.
Lowering interest rates could help lower inflation at some level. There are a ton of other things on the fiscal side that can target and reduce inflation areas. The question should first be how can we maintain near 100% employment (good paying jobs) as our number one policy directive. One example is a federally funded Jobs Guarantee (JG) program for the local districts to decide what they need. This is just a buffer stock to help pick up when corporations cut jobs. Then when corporations start hiring again, the JG program have people with continued work experience ready to switch back into corporate work.
For inflation hot spots, do our homework! Find out where they are, learn what's causing them, and only then figure out how fiscal action can reduce those inflation spots. For example, lumber costs are high, leading to higher new home prices? Well, shall we reduce Canadian lumber tariffs? Rents are high? Should we restrict new housing permits that are for premium multi-million homes and city condos? Could we relax permit restrictions for housing project needed that are affordable for the working class? The construction firms may have new incentives to shift some of their workers from premium flats where it takes 50 workers to build an apartment for a family of three over to using the same 50 workers to build 10 apartments for the middle class. Still not enough construction workers? How about fast-tracking immigrants on the borders who have construction skills and give them those jobs. Everyone should be happy.
In summary, the question should be about how do we keep employment high as our number one job. That's more important than inflation since that can be easily managed by smarter people.
This is excellent -- I suspect were John Kenneth Galbraith still alive he would approve.
Hi eg,
Yes I expect he would. In fact his son James K. Galbraith, a great achiever in his own right, explains his thoughts about the problem with mainstream economics and talks a bit about his father John as well. This is a great episode. I hope you find time to listen and if so, please share your feedback.
https://thelevypodcast.podbean.com/e/episode-1-james-k-galbraith/
Cheers,
Paul
100%! Thanks; this saves me from the need to write the same thing! According to neoclassical economics, the solution to every problem is that the wealthy need more of the working class and the Fed Govs money! If the economy slows down; the solution is "tax cuts for the job creators!" If the economy is running too hot; increase the costs of US dollars created by banks (non-government sector debt) and increase the income on saving through interest payments!
What's their next junk economic "theory" to pull out of the toolbox? The federal debt fearmongering! How do they propose solving that so-called problem? Cut government spending on automatic stabilizers that support the economy and prevent more people from becoming unemployed! What is the result of cuts to "net government spending" (deficit reduction)? Cuts to "non-government sector" income and higher levels of unemployment!" You end up with one junk economic theory creating a problem that "can only" be solved by another junk theory! Its shameful greed passed off as "economic theory!"
One point where I differ from you is that I don't see employment as the source of inflation ( no trade-off between inflation and unemployment at this point). It's not spending and wages driving the inflation. We are seeing many businesses shutting down and struggling from a lack of demand! Wages are playing catch up to inflation from the OECD numbers I've seen. Isn't it interesting that the one thing you NEVER hear mentioned on these investment programs is the cost of housing driven by Wall Street speculation in the housing market? Insurance, another one of sources of so-called sticky inflation; what does spending and wages have to do with high insurance costs?
People need to understand that ALL MONEY IS CREATED AS DEBT! US dollars are created as the "debt of the Federal Government" (spending/fiscal policy) or by bank credit (loans/monetary policy). The large majority of US dollars circulating in the US economy come from Bank loans (private sector debt). When the Fed increases interest rates, this is an added cost of the US dollars that are driving the economy. This is no small number that we are talking about; we are talking about every US dollar in circulation is someone's debt! Its a massive wealth transfer and has nothing to do with reducing inflation. If they were actually concerned with inflation, then Congress would do its job instead of pushing the responsibility off on the Fed, which only has one tool.
Hi Rick,
I can't find in my post where I mention that "employment as the source of inflation." If you can find the line, please let me know as that's what I meant to say during this conversation. I still can't find it. So, let me know.
As for all money is created as debt, it would be better saying the banks create money by crediting bank accounts of those who pass the worthiness test. That money needs to be paid back, so although there can be a quick increase in M2, eventually that goes away with loan repayments. Looking at it as one event, then there's no new net money in the economy. However, when the Government creates money, they too credit bank accounts via the Fed reserve system. That new money is net standing money as it never has to get paid back. In both cases, dollars are Government I.O.U.s, where you can redeem them to pay taxes. Most don't use their bank loans to pay taxes other than using it as a short-term bridge.
Bank loans --- Real debt to the loan holder, a liability to the bank.
Government spends (via Congress Bills) --- Not debt. Just new net money created. If there's a deficit, the Treasury creates bonds to sell (out of thin air) for only the purpose directed by Congress many years ago requiring the daily treasury statement to balance out to zero. We could do away with bonds if we wanted to and let the balance sheet of a consolidated Treasury/Fed model be unbalanced as negative or positive. It wouldn't matter if it's not zero. Then to do that, the Congress would need to pass a law for the FDIC to insure 100% of deposits, not capping them off at $250K. I suppose they could keep 3-month T-Bills with a tiny interest percent just to have a place for pension funds, individuals, and foreign suppliers to park their savings with zero risk.
I was referring to your summary. What I was attempting to point out is that I don't think we are at a point where inflation would need to be sacrificed for higher employment. (Other factors are driving the current inflationary episode.)
After the US dollars are created, there's no separation between the dollars created by the Federal Government's "net spending" (debt/IOUs) and the dollars created by "bank credit" (loans/non-government sector debt) until they're redeemed by Federal Taxes or loan payment. Where do you think the money created by a home loan goes? It just circulates in the economy right alongside the dollars created by the Federal Government. Redemption is a separate process, as you described.
Money always has two sides: on one side, it's a liability (debt) of the issuer, and on the other, it's a credit of the user. If all debt (IOUs redeemed) were paid, there would be no money.
When people hear the word "debt," that automatically triggers red flags. Explaining to people how money is created by typing numbers into bank accounts is not adequate (it's not "better to say"). The two understandings are not interchangeable. People need to understand what "money" is (in my opinion). I agree with everything you are saying. It comes down to splitting hairs on how people process information.
KEEP UP THE GOOD WORK....MY FRIEND!
Good points Rick. May I add that Government spend is different than bank loans in what is paid back. A bank loan of $1000 (new money created by the bank) would need its principle of $1000 to be paid back plus bank interest fees. That principle paid back is destroyed. I'm not concerned about the bank interest fees because that's just moving money from the bower's pocket to the bank's pocket. However, when the Government spends $1000 (Congress passes a bill for 50 pizzas) and then taxes back, say the pizza guy's 25% tax rate, then the net remaining in the economy is $750 (minus pizza stock). That $750 doesn't need to be paid back to the government. Not trying to split hairs, just think this is an interesting discussion since you helped me think more about my wordings. I'm always learning from people like you on how to help friends better understand MMT. I appreciate your feedback. :)
Yes, the "Federal Government" can run deficits in US dollars to infinity! That is not to say it should, but it can! The non-government sector debt created by bank loans must be paid back plus interest. Those interest payments remain in the non-government sector circulation while the principal payment deletes (destroys) the money (credit) created by the loan). As the price of homes, cars, ect, increases, the size of the loans increases. This expands the amount of money in circulation. As I said in my first comment, this is where the majority of US dollars circulating in the US economy come from >90%. As you pointed out, when the Federal Government "net spends" (runs deficits), the US Treasury offsets the net spending by issuing US Treasury Securities (Fed Gov Borrowing).
Those "Federal Government deficits (net spending)," in the end, are drained back out of circulation and into savings accounts in the form of Treasury Securities. The domestic non-government sector, foreign sector, and the Fed (federal government) own the Treasury Securities. Federal Government debt=non-government sector savings, including the foreign sector and even the Federal Government. Because US dollars are Fed Gov IOUs, there is nothing on the asset side of your own IOU to "save." It's just internal accounting like any business of size does.
The redemption of money (Fed taxes and loan payments) is key to maintaining its value and stability. Without a redemption process, it's not "money!"
Hey Rick, Have you seen this great video from Prof. Eric Tymoigne going into the details explaining how the balance sheets work among the Treasury, Central Bank, Private Bank, and Individual account holder? It's very interesting and would enjoy sharing it with you. He starts with the Consolidated model and then follows up with the current Coordinated model.
https://youtu.be/PPhOjM-wFUY?si=1CKKAMFOz6gzmUYx
I'm sure you've covered this previously, but where does the gig economy fit into all this? Rideshares and the like do not show up in the establishment surveys and they are likely (IMHO) under-reported in the household survey. That wouldn't matter if they weren't a growing share of "employment." Are we seeing a bump up in "unemployment" that is partially/all offset with a bump up in gig work?
Good comment, I am curious about this as well
Beautiful writeup. Thanks!
Today more chatter on Sahm rule as unemployment rate hits 4.3%.
How do I see next 6 months? There's a lot of uncertainty in next 6 months due to very crucial elections. The economic policy direction is at crossroads. With Donald Trump victory, there will be chaos in US policy and it's very difficult to predict the reaction of those policies.
Great insights, thank you, Claudia. I wonder whether we may not fully be accounting for structural changes in the job market, i.e. automation and the gig economy, which could be affecting unemployment rates in new ways. I guess we'll see....
Bottom line: is everyone okay with the Fed holding off on cutting until November?
Care to run the numbers over the Australian data? OK if you do not wish to, of course.
Whilst your indicator is on unemployment numbers, what about when we apply it to underemployment or total underutilisation?
Sahm-thing to ask! The debate on U3 seems to be complicated by labour supply question markets. Bloomberg's Wong wonders if Trump wins whether the supply will be so constrained that even in a recession, the U3 will not go up its usual 200-250bps. What do you think about that? Obviously, in this scenario, with a more moderate move in U3 rate it would feel like a recession because the focus would be not on supply but the demand side of labour which migh fall it the usual non-linear way. Confused! Please advise
Isn't the fall in the TIPS inflation expectation an indication of at least a bit more tail risk of recession?
If not, what is your take on TIPS significantly below target since June?
On a separate issue, is it not likely that it WOULD have started reducing the EFFR already if it did not have the weird idea that a reduction must be followed by another and not a possible reversal?
Should not the Fed have reduced the EFFR in December, possible reversed the reduction in early 2024 and have reduced again at mid-year or some pattern like that.
Is it not a mistake for the Fed to set a rate with more expectation that the subsequent setting will be in one direction rather than another? Is that not in contradiction to the idea that the Fed is data driven?
You present a lot of relevant information, but much is vitiated by your not including your expectation of Fed POLICY! No recession eminent? That depends on the Fed? Is not the Sahm rule itself contingent on the Fed leaving unchanged the vector of policy instruments prevailing at the time the rule is evoked?
It is good that you commented on the possibility your rule may have some twists this time. My view is that the rule may suffer from structural change in the economy, largely due to the pandemic. The pandemic introduced some non-linear and non-economic factors. A temporary reduction and then otsize increase in labor supply. Labor hoarding by businesses. Accelerated retirements and labor force reductions from illness or death related to covid. New models of working remotely and labor relocating, which affected productivity plus or minus. Adjustment to business models to cope with reduced labor supply. In short, the pandemic caused a major shock. It's not surprising, the sahm rule may need some adjustment in either timing or magnitude, at least for this event. And maybe in the future as well. This is part of why models and rules need to be monitored and adjusted over time. That is part and parcel of economics as a social science, which deals with people as a group. Not atoms or equations! It does not necessarily invalidate the concept of the rule.