Thursday, January 06, 2022


I don't keep close track of the finance world. Some things the big player do are obvious blunders, but others require intimate knowledge of the players to evaluate. I'd heard of people who weren't happy with federal inflation-risky policies, but couldn't tell you who they were.
a reputation hardened around Hoenig as the man who got it wrong. He is remembered as something like a cranky Old Testament prophet who warned incessantly, and incorrectly, about one thing: the threat of coming inflation.

But this version of history isn’t true. While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.

Asset inflation enriches the already rich. Read the article. Is the author missing something?

1 comment:

Christopher B said...

I don't think so.

In a word, it's demographics.

By 2025, virtually everyone in the Boomer generation in the US will have turned 65. Most of those folks would like or will need to live off the assets they accumulated, and planned would increase in value, over their careers for the next 20 or 30 years. If we crash the asset bubble now, anybody over about 50 is going to have a long, austere, ugly old age. I'm fairly sure that's why the Fed blinked in 2010 because the Boomers were just on the cusp of retirement with little runway to restore their finances, and nobody wanted to be responsible for stories about retirees eating cat food for the next 20 years. The big banks are making money is because they are the ones managing, i.e. skimming fees off, the Boomer's retirement assets. They didn't and don't want to see them devalued, either.

That's the exact opposite of the situation in 1980 as the leading Boomers were just entering the most productive stages of their careers. Even though the high interest rates needed to kill inflation made initial acquisition of assets difficult, it did supercharge the returns to those investments, and the following low inflation environment stabilized their value and let everybody refinance their loans. We got lucky that during that period the number of retirees was lower relative to the work force so subsidizing retirement income, while painful, was not so burdensome as to inhibit asset accumulation. That was also during the time when hardly any retirees had self-funded retirement savings but it did hurt people who had planned on receiving pensions.

The author is exactly right that we are in a bind right now. Things were clipping along pretty good until the 2008 bubble popped. If we had accepted the fact that Social Security is welfare for old people even about 5 years before we could have made something similar to the 1980s deal in order to reset asset valuation then. People who had sufficiently self-funded their retirement should have accepted lower or no Social Security payments in order to even things out, though both retirees and younger folks would have had to tighten their belts for a couple of decades. Now the financial response to the COVID disruptions have spiked demand inflation which is going to pinch current retirees on the expense side, and we can't raise interest rates to kill demand inflation without impacting the inflated asset values they need to live on.

We're in for a rocky couple of decades until the retired population is largely the less numerous GenXers, and we're still going to see some reductions, probably means-testing, of Social Security payments in the fairly near future.