The Capital Note

Inflation, You Say?

(Gary Cameron/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Inflation jitters, the Reddit/Tesla connection, taxes and their consequences, Mars rewards, and The Dictatorship of Woke Capital. To sign up for the Capital Note, follow this link.

Biden’s $1.9 Trillion: Too Big to Succeed
Fed chairman Powell managed to bring a little calm to jittery markets yesterday with comments clearly suggesting that the Fed was going to maintain its current course. The S&P 500 and the Dow Industrials closed slightly up on Monday’s close, the NASDAQ Composite slightly down.


Inflation and employment remain well below the Federal Reserve’s goals, meaning easy monetary policy is likely to stay in place, central bank Chairman Jerome Powell said Tuesday.

Despite a sharp rise this year in bond yields that has accompanied heightened concern over inflation, Powell said price pressures remain mostly muted and the economic outlook is still “highly uncertain.”

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” the Fed chief said in prepared remarks for the Senate Banking Committee . . .

However, Powell’s statement did not mention the market’s most pressing concern: the jump in 2021 of longer-duration government bond yields to levels not seen since before the Covid-19 pandemic. The 30-year bond, for instance, is up more than half a percentage point and the benchmark 10-year yield has risen 44 basis points . . .

The Fed last year revised its approach to inflation. In the past, it would levy preventive rate hikes when it saw unemployment drop, thinking that a stronger job market would push up prices.

Now, it has adopted an approach in which it will allow inflation to average above 2% for a period of time before moving to tighten policy.

“This change means that we will not tighten monetary policy solely in response to a strong labor market,” Powell said . . .

“Mr. Powell presumably wants to try to persuade markets that a strengthening economy does not necessarily mean that rates have to rise. Good luck with that when the post-Covid surge in activity [becomes] clear,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics . . .

Enter Dr. Copper and friends.

Bloomberg (from Monday):

Commodities rose to their highest in almost eight years amid booming investor appetite for everything from oil to corn.

Hedge funds have piled into what’s become the biggest bullish wager on the asset class in at least a decade, a collective bet that government stimulus plus near-zero interest rates will fuel demand, generate inflation and further weaken the U.S. dollar as the economy rebounds from the pandemic.

The Bloomberg Commodity Spot Index, which tracks price movements for 23 raw materials, rose 1.6% on Monday to its highest since March 2013. The gauge has already gained more than 60% since reaching a four-year low in March 2020.

Advances on the day were helped by copper, which rose above $9,000 a metric ton for the first time in nine years, before extending gains further on Tuesday. Oil also jumped to the highest in more than a year on speculation that global supplies are rapidly tightening, while coffee and sugar rose . . .

2 percent, you say?

In yesterday’s Capital Note, Daniel Tenreiro referred to rising inflation expectations (quoting a report focused on the bond markets) and the toll they were taking on tech stocks. It’s not hard to connect those expectations with what is going on in the commodities sector. Note, however, the comment in that Bloomberg report that hedge funds have been piling into commodities in anticipation of the way that the economy may develop. The story may vary from commodity to commodity, but it is quite possible that the funds themselves may be pushing up prices in anticipation of a boom that either never comes or, if it does, will prove short-lived (if I had to guess, the latter is the more likely scenario) and is, in effect, no more than a bounce back. Count me skeptical about any notion that a roaring Twenties lies ahead, not least because of what Biden has in mind for the economy. Higher taxes and tougher regulation are a combination more likely to rein in rather than unleash animal spirits.

Speaking of what Biden has in mind, it’s worth taking the time to read this piece by Martin Wolf in the Financial Times in which he builds on the concerns aired by Larry Summers in an article for the Washington Post two weeks or so ago (and, indeed, subsequently).


I have no objection in principle to huge fiscal spending. Indeed, in January 2009, I argued that the US should run a fiscal deficit of 10 per cent of gross domestic product until the damaged balance sheets of the private sector were healed. Shortly thereafter, I argued that we had to learn from Japan if we were to understand the dangers then confronting western economies.


I agree with the general consensus of progressive economists that it would have been much better if the Obama administration had been able to legislate a much larger fiscal stimulus in early 2009, in response to the Great Recession. Yet a comparison of the 2009 stimulus and what is now being proposed is instructive . . .

The Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall. Relative to the size of the gap being addressed, it is six times as large.

To Wolf, a key distinction lies in the inherent difference between the economic nature of the pandemic and that of the financial crisis or a war.

Unlike a financial crisis, Covid-19 will not necessarily create an overhang of bad private debt likely to suppress demand indefinitely. Instead, the balance sheets of people who have earned well and spent little have actually improved. Again unlike a war, the pandemic does not destroy physical capital. There is a good chance therefore that economies will recover really strongly, once fear of the disease has waned. If so, the dominant part of the planned fiscal policy response should aim not so much at short-term relief as at “building back better”, by promoting a sustained increase in public and private investment.

That seems (to me) to be broadly true, although, if there is not a significant return to office work in certain cities, as well as to air travel (in both cases I think there will be), we may see not literal destruction, but certainly a substantial devaluation in the value of a wide swath of physical assets.

When it comes to building back better, the Biden administration appears seems set to disappoint. As mentioned above, his regulatory and fiscal policies seem likely to impede private-sector investment, which will already almost certainly also be held back, at least to a degree, by the long-term scarring that the pandemic will, like the financial crisis before it, leave behind it. (That’s especially true when it comes to the pricing of risk.) To the extent that Biden’s administration does provide investment incentives, they are likely to be perverse ones directed at a climate-change agenda that has got things the wrong way round.

The same is true of public-sector investment. Even if we pass over the bloat contained in the current package (we should not), it seems that much of Biden’s infrastructural agenda will also reflect the fact his wrongheaded priorities. Rather than focus on toughening the nation’s resilience against already known risks that the weather (let alone any climate change) may bring (sea defenses for low-lying coastal cities, strengthening the grid and so on), his administration seems set on pursuing investments in decarbonization that (research dollars — a good use of funds — aside) seem both premature and pointless, and may well retard rather than advance growth.

And then (yes) there is the small matter of inflation.


Unemployment is falling, rather than skyrocketing as it was in 2009, and the economy is likely before too long to receive a major boost as covid-19 comes under control. Second, monetary conditions are far looser today than in 2009 given extraordinary Federal Reserve policies, the booming stock and corporate bond markets, and the weakness of the dollar. Third, there is likely to be further strengthening of demand as consumers spend down the approximately $1.5 trillion they accumulated last year as the pandemic curtailed their ability to spend and as promised further fiscal measures are undertaken.

While there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown.

Indeed they are, and as Wolf notes:

Some analysts seem to view a big upsurge in inflation as inconceivable, because it has not happened for a long time. This is a bad argument. Many once thought a global financial crisis was inconceivable because it had not happened for a long time. In the 1960s many thought the inflationary upsurge of the 1970s similarly inconceivable.

Many seem to believe nowadays that lower unemployment will not raise inflation. But at some point excess demand is sure to raise prices and wages. At that time, inflation expectations will start shifting permanently upward. The 1970s and 1980s taught us that bringing them down again is very costly, not just economically, but to the credibility of government.

Indeed, neither Wolf nor Summers quite come out against the Biden plan as it stands, but they are (very politely) sounding a note of alarm to which Congress would do well to pay attention. Investors seem to be beginning to, and that is a message worth listening to as well.

Around the Web
“I’m shocked! Shocked to find that gambling is going on in here.”


Tesla’s stock performance and the amount of online attention the electric car maker receives on social media platforms such as Reddit are closely tied together, a Barclays study found.

“On the autos team, we have painfully learned that social media memes can matter more for TSLA share performance than actual financial metrics, fundamentals or (dare we say) valuation,” the firm said Tuesday in a note to clients. “There is a positive correlation between the number of WSB [WallStreetBets] submissions exclusively citing TSLA, and the performance of the stock.”

Taxes have consequences:

The Wall Street Journal:

Real-estate veterans and hedge-fund executives believe a seismic shift is under way, one that is moving vast amounts of Wall Street wealth from New York to South Florida. For the past several years, Wall Street has been colonizing the Sunshine State, attracted to more favorable tax policies and sunnier climes. And the momentum is only accelerating amid the pandemic.

David S. Goodboy, founder of the Palm Beach Hedge Fund Association, a networking organization for finance professionals in South Florida, said he saw his base of paying members almost triple in the past year. When he scheduled an in-person networking event in January at the West Palm Beach home of one of the organization’s wealthy members in January, he said he was shocked to get 300 RSVPs . . .

The rewards of Perseverance:

The Hustle:

[Last week] marked the end of the Perseverance rover’s 300m mile journey to Mars and the start of a 687-day mission to  better understand whether the planet would make for a nice place to live.

Costs for development and operation of the rover will likely total $2.4B

… But the benefits on Earth are likely worth far more

Since the 1960s, NASA’s Mars programs have led to countless innovations, including materials for heart surgeries, methane-leak detectors, and — importantly — carbonating beer.

With Perseverance, it’s no different:

  • Honeybee Robotics developed drill bits for the rover’s robotic arm that were also commercialized for use with standard drills

  • Tempo Automation simulated designs for NASA’s circuit boards and then discovered the technology’s utility in the broader circuit manufacturing process

  • Tech in Photon Systems’ spectroscopy tool for Perseverance is being tested for use in pharmaceuticals, food processing, and wastewater management . . .

Random Walk
From Rupert Darwall’s review in Real Clear Books of The Dictatorship of Woke Capital:

The Dictatorship of Woke Capital provides the best account so far of how finance capital ended up on the woke side of the culture wars. The book’s great strength is tracing the lineages of woke back to their sources. Soukup identifies two principal streams. The first, an all-American affair associated with progressives such as Richard Ely, Woodrow Wilson, and John Dewey, gave rise to the administrative state and the creation of a class of professional administrators unaccountable to voters and “trained in the ‘science’ of administration to manage society more rationally and carefully than the masses would, if left to their own devices.”

The second has its origins in Europe, with an assortment of Marxists and post-Marxists such as Antonio Gramsci, György Lukacs, and the Frankfurt School. It then proceeded, in the words of the German 1968-er Rudi Dutschke, on “the long march through the institutions,” the New Left successfully colonizing virtually the entire American system of higher education.

If anything, Soukup underplays the impact of Herbert Marcuse and the New Left. They had repudiated vulgar Marxism because the American working class refused to play the revolutionary role that Marx had assigned it, opening the way for the New Left’s rejection of industrialization and what a leading critic of the Frankfurt School called an “aesthetic repugnance for industrial society.” As willing customers of the “merchants of kitsch,” the American working class kept the system of oppression in business. The New Left transformed the American working class from oppressed into oppressors. The culture wars are in reality a class war waged against the working class and all those whose livelihoods depend on their work – in manufacturing, transportation, and farming and, most of all, in the energy sector . . .

— A.S.

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