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Frances Coppola: Mr. Powell, If You Want Higher Inflation, Give People Money

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Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.

The Federal Reserve has just announced a change to its inflation targeting regime. Instead of shooting to hit 2% every year, it will aim to achieve 2% “on average” over an unspecified period of time. So, if inflation runs below target in 2020 and 2021 because of a pandemic-induced recession, the Fed might allow inflation to rise above 2% and stay there during 2022 and 2023, thus achieving an average of 2% from 2020 to 2024. The idea is that by allowing inflation to run “moderately” higher, the Fed could maintain low interest rates and quantitative easing [QE] long enough to achieve full employment, rather than starting to withdraw it before full employment is reached.

There’s only one problem with this. There’s absolutely no reason whatsoever to think that temporarily raising the Fed’s inflation target would raise inflation. 

Ever since the financial crisis of 2008, the Fed has struggled to meet its inflation target. As this chart shows, the Fed’s preferred measure of inflation, core personal consumption expenditures (PCE), has rarely come close to 2%, let alone exceeded it:

Source: St. Louis Fed

This is despite interest rates at historic lows and, latterly, an extremely strong labor market. In his speech at the Jackson Hole conference, the Chairman of the Federal Reserve, Jay Powell, commented that the inverse relationship between inflation and unemployment, upon which Fed interest rate policy has traditionally relied, appears to be broken:

The historically strong labor market did not trigger a significant rise in inflation. Over the years, forecasts from [Federal Open Market Committee] participants and private-sector analysts routinely showed a return to 2 percent inflation, but these forecasts were never realized on a sustained basis.

Basically, until the pandemic hit, everyone was working but they weren’t getting pay rises. So there was no sustained upwards pressure on consumer prices from wage demands.  

There wasn’t any sustained inflationary pressure from money creation, either. The failure of QE to return inflation to the Fed’s target is one of the big mysteries of the last decade. All that new money should have set off an inflationary spiral – but it didn’t. Well, not in consumer prices, anyway, though it has inflated asset prices, and continues to do so. 

To be sure, the Fed is far from the only central bank struggling to get inflation off the floor. The ECB has failed to meet its 2% target for the whole of the last decade. And the Bank of Japan has never managed to raise inflation above zero for any length of time, despite negative interest rates, massive QE programs, and the biggest government debt pile in the world.

See also: Commentary: Fed Chair Jerome Powell Details Inflation Target Changes

But why is the Fed so intent on getting inflation off the floor, anyway? Isn’t inflation an unfair tax on savers? Isn’t deflation a good thing for consumers? According to Mr. Powell, “inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.”

This is the dreaded “deflation spiral” described by the American economist Irving Fisher in his essay “The Debt Deflation Theory of Great Depressions.” When there is sustained deflation, those who owe money became ever more indebted. As Fisher put it, “the more the debtors pay, the more they owe”. 

In today’s debt-laden economy, American households and businesses are too indebted to cope with sustained deflation. Low, stable inflation at least gives them a chance of paying their debts. If we are to have any chance of reducing the dominance of private sector debt in the economy, deflation needs to be avoided at all costs. 

But inflation that is too high is also harmful. It discourages saving and punishes those who have managed their finances prudently. Most people agree that the double-digit inflation of the 1970s was far too high. In this new regime, the question is how high will the Fed allow inflation to rise? At present, we don’t know – and that is not a recipe for confidence in the Fed’s new framework. 

But if Japan is anything to go by, the Fed’s new framework won’t make any difference anyway. In 2013, the Bank of Japan raised its inflation target from 1% to 2%. Six years later, there was almost no effect on actual inflation. A central bank’s ability to raise inflation is limited by its tools. The evidence seems to be that when interest rates are nailed to the floor, as they have been in Japan for over a quarter of a century, the tools available to central banks, such as QE and cheap funds for banks, simply aren’t very effective at raising inflation. 

Jay Powell’s problem, and indeed the problem now faced by all central bankers, is that he can’t give money directly to people.

This is not the first time U.S. policymakers have announced higher inflation in the absence of policies that might actually create it. In December 1933, the New York Times published an open letter to President Franklin D. Roosevelt from the British economist John Maynard Keynes. In it, Keynes roundly criticized Roosevelt’s plan to raise prices:

“Too much emphasis on the remedial value of a higher price-level as an object in itself may lead to serious misapprehension as to the part which prices can play in the technique of recovery. The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round.”

And he then went on to complain about the outsize role of money creation in Roosevelt’s plans:

“Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt.” 

From beyond the grave, Keynes sends a powerful message to today’s leaders. If you want inflation to rise, Mr. Powell, you need to get people spending. Announcing that you will permit prices to rise more quickly won’t achieve this. And neither will increasing the money supply, unless that money goes to people who are likely to spend it. 

Jay Powell’s problem, and indeed the problem now faced by all central bankers, is that he can’t give money directly to people. Only Congress has the authority to do this. Until it steps up and acts to improve the incomes of those at the low to middle end of the income distribution, low stable inflation will remain a distant dream. 

Disclosure

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.





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General Motors (GM) Posts Strong Q2 2021 Earnings Report; Misses Wall Street Expectations

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Despite a strong profit and raising its guidance for the year, General Motors announced second-quarter earnings, which did not meet Wall Street’s estimates.

General Motors (NYSE: GM) posted second-quarter (Q2) earnings of $34.2 billion in revenue and $1.97 in adjusted EPS, which missed Wall Street expectations. In comparison, Wall Street projected that General Motors would hit a $30.9 billion revenue, and a $2.23 adjusted EPS. 

The discrepancies in figures were due to several challenges the automakers have been weathering since last year. They include a $1.3 billion warranty recall deficit, including $800 million from the Chevrolet Bolt EV. Also, its electric vehicles have been recalled twice in the past year due to fire risks.

In addition, GM, just like other automobile companies worldwide, has been grappling with a shortage of semiconductor chips. This led to factory shutdowns and cost the automobile industry billions of dollars in 2021. Only on Tuesday, GM announced plans to shut down its three North American full-size pickup truck assembly plants next week. As a result, the reduced number of available vehicle units produced now cost higher, leading to bigger profits.

General Motors Forecasts

GM Financial forecasted earnings for the year to initially range between $10 billion and $11 billion. The company also forecasted $4.50 to $5.25 per share in adjusted pretax profits. In addition, there was also an adjusted automotive free cash flow of between $1 billion and $2 billion. These forecasts factored in the potential impact of the chip shortage currently plaguing the industry. Consequently, the company projected a drawdown of between $1.5 billion and $2 billion in earnings. 

Despite this, General Motors’ shares rose. Although at the time of this writing, GM’s shares saw a 3% dip during premarket trading to $56.35 a share, the carmakers on Wednesday, raised its full-year guidance to between $11.5 billion and $13.5 billion. This roughly translates to earnings of $5.40 to $6.40 a share, which is a significant increase from $4.50 to $5.25 YoY. Furthermore, the overall compounded value now sits at $11 billion from $10 billion. In the face of strong demand, the car company anticipates its first-half EBIT-adjusted to range between $8.5 billion and $9.5 billion. This represents a rise from an earlier year forecast of $5.5 billion.

GM Earnings in 2020

Last year, General Motors reported a $536 million adjusted pretax loss in the Q2 of 2020. Its revenue was $16.8 billion, and it had a Financial EBT-adjustment of $0.2 billion. A net income loss of $758 million was also reported, and the automakers had to shut down several production plants. This wasn’t surprising and was a similar fate shared by many other companies in the industry in the face of the pandemic.

As a follow-through to its recent quarterly report, company GM CFO Paul Jacobson intends to hold a conference call for investors and analysts to discuss recent developments as well as the company’s growth blueprint.

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Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify crypto stories to the bare basics so that anyone anywhere can understand without too much background knowledge.
When he’s not neck-deep in crypto stories, Tolu enjoys music, loves to sing and is an avid movie lover.



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Elon Musk, Tim Cook Deny Meeting to Discuss Tesla Acquisition

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Besides Musk, Cook has also owned up to not having met with Musk on no occasion when he appeared on the New York Times Sway Podcast.

Elon Musk, Tim Cook Deny Meeting to Discuss Tesla Acquisition

The claims published in Tim Higgins new book ‘Power Play: Tesla, Elon Musk and the Bet of the Century,’ that the Tesla Inc (NASDAQ: TSLA) CEO and Tim Cook, the Chief Executive Officer of Apple Inc (NASDAQ: AAPL) had a meeting to discuss the possible acquisition of the electric automaker has been refuted by both parties.

According to Insideevs, the conversation in which Tim Cook said ‘f*** you’ to Musk via a phone call has been adjudged as false. According to the book from Higgins, a New York Times reporter, the Apple boss called Musk to discuss a possible acquisition deal as far back as 2016. Higgins claims that both CEOs’ discussions fell apart when Musk demanded to continue being the CEO of Apple following the acquisition. The proposition was not well received by Cook who said ‘f*** you’ and hung up the phone.

While there has been a consideration to give up Tesla to Apple as Musk agreed to, that was when the former’s valuation is just about 6% of what it is today. Moreover, Musk said despite requesting to meet with Cook for the takeover consideration, the meeting never actually happened.

“Cook & I have never spoken or written to each other ever. There was a point where I requested to meet with Cook to talk about Apple buying Tesla. There were no conditions of acquisition proposed whatsoever. He refused to meet. Tesla was worth about 6% of today’s value,” Musk revealed via his official Twitter account.

Besides Musk, Cook has also owned up to not having met with Musk on no occasion when he appeared on the New York Times Sway Podcast according to an earlier Bloomberg report.

Elon Musk Says He Had No Interest Running Apple and Tim Cook

As the most valuable automaker in the world by market capitalization, there appear to be no signs that Tesla is up for sale as Musk once intended close a decade ago. Moreso, Elon Musk has said via his Twitter account that he never at any time expressed interest in taking over Apple. Per his words:

“Indeed. Both Cook & I have been clear publicly that we have never spoken or otherwise communicated. I tried to speak to him & he declined. Nor have I ever expressed any interest in running Apple to anyone. Cook is, all things considered, obviously doing an incredible job.”

The doubled-checked claim from both Cook and Musk leaves Higgins’s assertions to be questionable. Despite the book being reviewed by the Los Angeles Times, Musk duly noted that the author has “managed to make his book both false *and* boring.”

 

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Benjamin Godfrey

Benjamin Godfrey is a blockchain enthusiast and journalists who relish writing about the real life applications of blockchain technology and innovations to drive general acceptance and worldwide integration of the emerging technology. His desires to educate people about cryptocurrencies inspires his contributions to renowned blockchain based media and sites. Benjamin Godfrey is a lover of sports and agriculture.



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Li Auto Set for Secondary Listing in Hong Kong to Raise $1.93 Billion

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Chinese carmaker Li Auto set to offer secondary listing in Hong Kong as a hedge against geopolitical risks between America and China.

Automobile manufacturer Li Auto (NASDAQ: LI), is going ahead with a secondary listing on the Hong Kong Stock Exchange (HKEX) despite regulatory crackdowns in the country. The Chinese electric vehicle startup, which is already listed on the NASDAQ, is looking to raise $1.93 billion. It plans to do this by offering 100 million Class A ordinary shares to investors at 150 Hong Kong dollars or $19.29. Li Auto plans to funnel the proceeds from its share offering into research and development of technology and future models. The automobile company is also looking to scale production and increase retail activities around its products. 

Li Auto will announce a final price on August 6th amid the crackdown on Chinese listings. The recent regulatory actions have sparked a huge recent sell-off in Chinese technology stocks. The sell-off has affected everything from food delivery to ride-hailing.

The Chinese government looks to tighten its grip over Chinese technology companies in a bid to avoid a tech-led bubble bursting. This comes on the back of the US SEC imposing stricter listing requirements for Chinese-based companies in America. Amid the excitement and uncertainty of the crackdown, Chinese electric vehicle makers are also looking to capitalize.

Li Auto Is One of Many Chinese Tech Companies with Secondary Listings in Hong Kong

Several Chinese companies already listed on Wall Street have secondary listings in Hong Kong to hedge against Chinese-American tensions. In July, Xpeng (NYSE: XPEV) generated $1.8 billion in a Hong Kong listing. The Li Auto rival issued 85 million Class A ordinary shares and is also already listed in the US. Other Wall Street Chinese technology companies with secondary listings back home are Alibaba, NetEase, and JD.com. 

Owing to the increasing growth of Chinese electric vehicles, the competition has become very intense in recent times, especially among startups. Li Auto, Xpeng, and Nio are all jockeying for dominance in the playing field. In addition to this, all three companies are also directly competing with established companies such as Tesla and BYD. Even the more traditional automakers are always looking to take a sizable market share in the automobile industry. As far as the electrical startups go, Xpeng has already proven to be a force in coming years and is already being dubbed ‘The Chinese Tesla Rival’.

In July 2021, Li Auto recorded a record number of monthly vehicle sales. The company said it delivered 8,589 of its Li One vehicles, the only model in its current model lineup. The Li One is a hybrid vehicle with a fuel tank for charging the battery, giving the car an increased mile range.

Li Auto sold the highest number of vehicles among the trio of Chinese electric vehicle startups listed in the US. Xpeng delivered 8,040 vehicles which was also a company record. In comparison, Nico sold 7,931 cars in the same period.

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Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify crypto stories to the bare basics so that anyone anywhere can understand without too much background knowledge.
When he’s not neck-deep in crypto stories, Tolu enjoys music, loves to sing and is an avid movie lover.



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