The 2022-23 Economic Crisis Megathread

[The Minsky Moment]

Feel better, thank minksky. What's the point of these short term swaps? Gambling on exchange changes? Or is it supposed to act as a currency hedge?

Currency hedging and securing lower borrowing costs. 

According to BIS, pension funds are big players in these markets.  That's probably a hedging rationale.  Pension funds invest in overseas securities to diversify returns but may not desire to acquire the foreign exchange exposure they take on as a by-product of those investments.  A swap is one way to address that.

[DGuller]

This can't be good. Smart people explain to me how this is over blown

85 Trillion dollars "missing"

Its researchers can predict financial crises three years in advance using machine learning to aggregate predictions from different models.

EDIT:  Damn, scooped by Minsky.

[mongers]

Backin the real world Sainsbury's et al are taking the piss with their cheese prices, bog standard cheddar up a quid since last time.

[HVC]

Probably shouldn't be eating cheese in the bathroom, just saying.

[Tamas]

Things are turning out interesting.

Markets have been on a push for most of this year, seemingly fueled by the Fed becoming quite dovish in their talk.

But, yesterday's US inflation number showing it is picking up again (+0.5% month-on-month versus +0.1% the previous) and today retail sails came out at +3% vs. 2% expected, -1.1% previous.

The inflation number didn't bother the stock markets one bit and it doesn't look like higher than expected consumption will either.

To me this is saying we are heading toward a redo of the 70s, where the first attempt to curb inflation is being let go too early.

[PJL]

I do think interest rates are going to go up more than what the consensus is saying. The economy still seems far too strong for inflation to get to 2%. Wouldn't surprise me to see interest rates hit 6% in the UK.

Or to put it another way, only a hard landing and a recession will stop inflation.

[HisMajestyBOB]

I wish I had bought a bigger house in 2021. Seems likely we'll be stuck in our current place for a while. At least my current mortgage rate is low.

[Syt]

https://fortune.com/2023/02/14/smead-sticky-inflation-decade-millennials-gen-z-spending/

Inflation will remain 'sticky' for a decade—and Gen Z and millennials are to blame, an investment chief says

Despite inflation and recession fears, Americans have continued spending over the past year, keeping businesses open and people employed. Even now, as the money many people saved during the pandemic dries up, spending is still going strong. But the commitment by U.S. consumers to buy, and then buy some more, is a double-edged sword. While it's keeping the economy humming, it could also lead to inflation and high prices for years to come.

Flush with $2.5 trillion in excess savings at the beginning of last year, U.S. households let loose on the economy once the pandemic's emergency phase ended. In March 2022, when U.S. inflation had risen to nearly 8.5% and the Federal Reserve had just announced its first interest rate hike to cool the economy, consumer spending was still 18% higher than in March 2020 and 12% higher than what pre-pandemic forecasts had predicted, according to consulting firm McKinsey.

During the pandemic, households tapped their high savings and federal stimulus checks to reinvigorate the economy, which in 2021 grew at its fastest pace in decades. But the rampant spending partly caused the high inflation today. With the spending expected to continue for some time, it could mean that inflation will stick around longer than it would otherwise.

Part of what's behind the expected buying boom and "sticky" inflation is demographics. Nearly 100 million Americans are at an age when they tend to spend big, according to Bill Smead, chief investment officer at investment firm Smead Capital Management.

"We have 92 million people between 22 and 42, and they're all going to spend their money on necessities the next 10 years, whether the stock markets are good or bad," Smead said in an interview Tuesday with CNBC.

With all the big purchases such as homes over the next decade, the economy will continue to run hot, making the Fed's long-term goal of reducing inflation much harder to achieve, Smead said.

Young Americans' spending

Smead's argument is largely backed up by recent survey data. In 2021, nearly 70 million Americans were between the ages of 19 and 35, and around 150 million, or almost half the U.S. population, was between 19 and 54. These are prime spending years, according to the Bureau of Labor Statistics, as expenses for almost every category—including food, housing, clothing, and transport—increase the most between ages 25 to 54, when incomes tend to peak and people make most of their  big purchases.

Millennials and most members of Generation X are still in their spending prime, and many will continue to be so over the next decade. The older members of Generation Z, who are now in their mid-20s and relatively early in their careers, are also expected to join the big spending club in the next few years.

Millennials, who surpassed baby boomers as the largest age group in the U.S. in 2020, will likely make up most of the spending as they age into homebuying. The number of Americans aged 18 to 44 and responsible for the most spending is forecasted to grow by almost 5% between 2020 and 2030, according to the Census Bureau, which is good news for the economy, but not so much for reducing inflation.

"We think the inflation is going to be far stickier and longer lasting," Smead said, referring to high prices becoming hard to bring down past a certain level.

Sticky inflation is hard to shake off

It isn't the first time Smead has blamed younger generations for high U.S. inflation. Last summer, when inflation was consistently breaking 40-year records, Smead said in an interview with CNBC that "too many people with too much money chasing too few goods" is what really causes inflation. The next few years of spending by young Americans, he said, was comparable to when baby boomers replaced the Silent Generation as the country's biggest spending demographic, shortly before the inflationary crisis of the 1970s.

January's consumer prices, a common indicator of inflation, were 6.4% higher than a year ago, the BLS said Tuesday, the seventh straight month of year-over-year declines. But January prices were also slightly higher than in December, as costs rose for some items including fuel, food, and clothing.

Stubborn inflation, combined with a consistently strong job market, mean the economy is strong, but it may also make the Fed's goal of reducing inflation harder. For example, Mohamed El-Erian, an economist and president of Queens' College at the University of Cambridge, told Bloomberg last month that inflation would likely become "sticky" at 4% around mid-2023.

Whether inflation becomes sticky and for how long is still up for debate. While both Gen Z and millennials age into what have traditionally been prime spending years, they also may be less likely to spend in general.

Millennials have been the hardest-hit by inflation over the past year and, along with Gen Z, were less likely to spend than older generations during the pandemic, especially on big-ticket items including homes and cars. An example is historically low homeownership rates among 30-somethings last year compared to baby boomers and Gen Xers when adjusted for age. Young Americans, even wealthy ones, have delayed big purchases more than previous generations, with many blaming slow wage growth, student debt, and job losses.

[HVC]

Millennial suck they aren't spending on housing or goods. The millennial suck they're spending too much. Dammed if you do and dammed I'd you don't

[Syt]

Buying too many avocado toasts.

[Josquius]

Thats one advantage of gen z becoming a thing this past few years- millenials suck because we can't afford nice things. Gen z on the other hand are getting shit as they don't even want things.

[Valmy]

The message seems more like having young working people generating income and spending it instead of sitting on it like older people will generate inflation, not that there is anything bad the Millenials and Gen Z are actually doing wrong besides just existing.

It seems to me a high demand for goods and services may drive in inflation but it also drives employment and business opportunities. So it seems like a good environment to be young and a bad one to be old.

[Sheilbh]

Thought this was really interesting - in particular that the height of Reaganism/neo-liberal consensus was the period with the lowest profits (I imagine different in financial sectors)


It is striking in terms of the contribution of inflation in those record profits. Definitely seems to increase the logic of windfall taxes.

[Legbiter]

The message seems more like having young working people generating income and spending it instead of sitting on it like older people will generate inflation, not that there is anything bad the Millenials and Gen Z are actually doing wrong besides just existing.

It seems to me a high demand for goods and services may drive in inflation but it also drives employment and business opportunities. So it seems like a good environment to be young and a bad one to be old.

Yeah in my case I've never known the local Central Bank to be able to tamp down on 10%+ inflation in less than 5-7 years. And single digit real inflation has been around 5-6% for my entire lifetime. Interest rates below 5% happened I think once in my lifetime, during covid.

But yeah, this is absolutely the the best environment for a young go-getter to get his/her bag, money-wise. Optimism rules the day despite bumps in the road if the nation has generations of people to speak of after the Boomers.

[The Minsky Moment]

Thought this was really interesting - in particular that the height of Reaganism/neo-liberal consensus was the period with the lowest profits (I imagine different in financial sectors)

Profit share is hard to evaluate in isolation because owners of capital can reap gains in forms other than profit, including interest and reinvested capital.  Employee share of value added is probably more illuminating, although not perfect because owners in close company structures can take gains as wage income as well.

In the the mid 80s, the employment comp share of value added did decline to a low point of 62.3% in 1984.  Profits did not spike because capital investment and interest costs also increased.  Employee comp share rose again in the late 80s and early 90s only to fall back and hit in the low 62s again in 1996/1997.  Then it goes back up over 65% in 2000/2001.  Then it goes into a free fall, going below 57% by 2013.  it's now rattling around in the high 50s/low 60s range.