Appreciate the pushback, both of you — sharp points.
@Bob Totally agree that commodities were a major transmission vector in the ’70s. My focus in this piece was more upstream: why the Fed tolerated inflation even as those shocks hit. The trap wasn’t just oil — it was the Fed’s institutional reluctance to fight back once expectations re-anchored higher.
On fiscal vs. monetary: you’re right that the fiscal impulse is doing the heavy lifting now — and arguably rendering rate hikes less effective via the “income channel” (especially among higher net worth cohorts). This is a real divergence from prior cycles. But I’d argue that monetary impotence is precisely what makes the expectations trap so dangerous today.
As for real rates — I agree they’ve only recently turned positive (depending on your inflation input). But that’s kind of the point: if inflation expectations become unanchored before real rates go positive, it forces the Fed to tighten into weakness or lose control of the narrative. That’s the trap.
Totally with you on gold and YCC. If wave 2 of the commodity cycle hits, and we’ve got structurally large deficits + rising geopolitics + reshoring — the pressure to “accommodate” is going to mount fast. They’ll choose inflation is a great line.
@Yessir — that’s a great addition. The credit channel hasn’t been driving the inflation this cycle, unlike the ’70s. Which makes the stickiness of services and wage inflation even more concerning — this isn’t credit-fueled. It’s structural. That’s arguably more dangerous in the long run, because it’s less rate-sensitive.
Thanks again to both of you. This is the kind of debate that sharpens edges.
Good read, but missing the commodities cycle as an explanatory factor for the 70s. I think you're also exaggerating the power the Fed has to control inflation too. Fiscal is in the driving seat - Fed is largely powerless and paralyzed here. In fact - higher rates has actually proved quite stimulatory to the higher income cohorts through their savings.
I don't think real rates were even positive until mayberecently - gold is telling you that. Using the old CPI metrics, real rates certainly weren't positive even when the Fed thought they were max tight.
Waiting for wave 2 of the secular commodities bull market to hit - then we'll really see whether the appetite for much higher nominal yields is there or not. They'll choose inflation, they always do. Some for of YCC
Appreciate the pushback, both of you — sharp points.
@Bob Totally agree that commodities were a major transmission vector in the ’70s. My focus in this piece was more upstream: why the Fed tolerated inflation even as those shocks hit. The trap wasn’t just oil — it was the Fed’s institutional reluctance to fight back once expectations re-anchored higher.
On fiscal vs. monetary: you’re right that the fiscal impulse is doing the heavy lifting now — and arguably rendering rate hikes less effective via the “income channel” (especially among higher net worth cohorts). This is a real divergence from prior cycles. But I’d argue that monetary impotence is precisely what makes the expectations trap so dangerous today.
As for real rates — I agree they’ve only recently turned positive (depending on your inflation input). But that’s kind of the point: if inflation expectations become unanchored before real rates go positive, it forces the Fed to tighten into weakness or lose control of the narrative. That’s the trap.
Totally with you on gold and YCC. If wave 2 of the commodity cycle hits, and we’ve got structurally large deficits + rising geopolitics + reshoring — the pressure to “accommodate” is going to mount fast. They’ll choose inflation is a great line.
@Yessir — that’s a great addition. The credit channel hasn’t been driving the inflation this cycle, unlike the ’70s. Which makes the stickiness of services and wage inflation even more concerning — this isn’t credit-fueled. It’s structural. That’s arguably more dangerous in the long run, because it’s less rate-sensitive.
Thanks again to both of you. This is the kind of debate that sharpens edges.
Good read, but missing the commodities cycle as an explanatory factor for the 70s. I think you're also exaggerating the power the Fed has to control inflation too. Fiscal is in the driving seat - Fed is largely powerless and paralyzed here. In fact - higher rates has actually proved quite stimulatory to the higher income cohorts through their savings.
I don't think real rates were even positive until mayberecently - gold is telling you that. Using the old CPI metrics, real rates certainly weren't positive even when the Fed thought they were max tight.
Waiting for wave 2 of the secular commodities bull market to hit - then we'll really see whether the appetite for much higher nominal yields is there or not. They'll choose inflation, they always do. Some for of YCC
Excellent point !
I would add also that loans from commercial banks as % of gdp were rising during both inflation waves. Not today