The great mustard shortage

And an intellectual crisis at the Fed

Photo by Elevate on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter where a story about mustard tells you everything you need to know about the future of the global economy.

Intellectual shake up at the Fed

I am not sure why it matters if we are in a recession. Recessions are terrible because it means there is economic destruction. People lose their jobs, and they become poorer and face more risk and uncertainty. You can classify this economy however you want, but people are poorer because real wages are falling and the market is down. People face more risk and uncertainty about the future. Many households are worse off than they were a year ago. Because the labor market is still strong and people still have jobs, this is not technically a recession. But there is economic pain, and obsessing about technical definitions does not make this any easier. I am not sure why anyone thinks “stop complaining because you still have a job” is a helpful message.

The only way to ease the pain is to get inflation under control. The Inflation Reduction Act won’t add to inflation, but I’m not sure it will actually reduce it either, at least not for a while. It falls on the Fed. Yet it seems like many politicians and pundits have memory-holed the 1970s and are insisting when there’s a supply shock to commodities and inflation, the Fed can’t do much about it, so any rate hikes are unnecessary. Why is it so hard to grasp the idea that we have a supply and demand problem and they feed off each other? The Fed needs to step up.

And while it is true that economists don’t have very good models of inflation, we do know a few things about it. One is that if you send everyone checks and pay for it by printing money, you will cause inflation. And this happened just when supply contracted. So here we are. Not all of inflation is due to policy errors, but some of it is, so we need higher rates. And if core inflation is nearly 5%, 2.5% is not neutral.  

Even after all the pandemic stuff goes away, I do think that supply issues will persist. The world is in a weird place, and not just with Russia. China was a big contributor to lower prices during the last 20 years, and their future looks a little shaky. The global geopolitical situation more generally also looks uncertain. We may have more supply shocks to come, and monetary policy is not as effective when it comes to supply shocks. Monetary policy may not be so effective in the future, and the last 40 years of low inflation may have been a lot of luck rather than wise policy. 

Longer term, I wonder if monetary economics is due for a shake-up. This may be the end of Forward Guidance. Is inflation targeting next? I was weaned on the idea that inflation targeting was best practice. If the Fed picked a target, it could deliver it. The target offered markets more certainty, kept the Fed humble, and was achievable because a target could become a self-fulfilling prophesy.

Well, in the years before the pandemic, the Fed could not reach the target. And once inflation falls to 4% or so, odds are the Fed will stop raising rates, especially if unemployment is high; they may even lower them again. And if that happens, what does the target mean anymore? A 2% target rate starts to feel silly if it hasn’t been hit in 10 years. I suppose they can change their target, but if you change your target because can can’t hit it, why do you have a target in the first place?

I am starting to think both forward guidance and targeting were just clever ways to practice discretionary policy and still claim they were following rules (especially once the Fed moved to average targeting—which is just discretion by another name).

Maybe we all memory-holed the 1970s…

Globalization will prevail

There is a story in the Post about the mustard shortage in France. Mustard is the national condiment, and French people are very upset that they either can’t buy mustard or can only get one jar. Everything about the shortage is the perfect parable of our times.

Apparently, Canada is the world’s leading producer of mustard seeds, and France is the second largest importer. Canada is facing reduced cropped yields, and with higher inflation on packaging, higher shipping costs, and all the post-pandemic logistical issues, it can’t deliver as much mustard as it did before. France does grow their own seeds, but insects are eating their crop because of French and European restrictions on pesticides and because of a warmer climate.

Now the French are looking to re-shore mustard seeds because you just can’t rely on global supply chains anymore. Mustard seeds are their semiconductor chips. This story really does have everything.

But despite these calls for domestic production, I wrote in Bloomberg last week that this is not the end of globalization. It is just getting started. Reshoring is expensive, and changing what you grow and produce is not as easy as it looks, especially if it is part of industrial policy. Also, as the mustard story shows, we often need to depend on foreign producers because of our own regulations. Maybe just get rid of those regulations instead. And in any case, if you want more resilience and predictability, relying on any one country is a bad idea, whether it is Canada, China, or your own.

Incidentally, there is plenty of mustard in American super markets. Since Americans don’t love mustard as much as the French, it seems there is scope for some gains from trade here.

New podcast on crypto

I must make a confession. I’ve never understood why crypto is a thing. Many smart people have made lots of money on it and are believers, so I always assumed I was missing something and felt sort of embarrassed by my ignorance.

The believers told me we need crypto because we were debasing our currency and we needed another alternative. But the recent fall in crypto prices and the tumult with stable coin just when inflation took off for the first time in 40 years seems damning. But crypto lives on.

I spoke to Perry Mehrling about it. He has a useful framework to understand how currency fits into the global financial system. I figured if anyone can explain what’s going on with the future of crypto, he can.

Until next time, Pension Geeks!

Allison