Because there is no actual money in monetary policy, central banks have forced themselves (by having abandoned the monetary system decades ago) into an economic role that looks something like a hypnotist’s. Inflation is a monetary phenomenon, the man said, but in lieu of any practical experience in money what is a central bank to do?

Manipulate emotion. Give it a try, anyway.

Playing on the public’s lack of familiarity, however, there’s always the double-edged sword; taking things too far.

During periods of disinflation (or periodic outright deflation), the myth of money printing in the form of bank reserves serves as the intended situational antidote. It might seem plausible, at first, how a lackluster economy held back by unseen shadowy (money) forces theoretically can be reversed by making a big deal out what everyone has been taught (incorrectly) to identify with “base money” (a perversion of Friedman that he himself had made in ’97 with Japan).

Yes, the money-printer-go-brrrrr meme (thanks again for the artwork, Mr. Simmons).

Unfortunately for the Fed, and the world, the real world we inhabit doesn’t actually work this way. Outside of stocks, there hasn’t been any detectible effect from the sentimental boost. What does happen is nothing more or better than reflation, a situation very different than inflation and recovery.

Basically, the real money problem causing the disinflation (or occasional bout of outright deflation) gets reduced, the global economy begins to buoy itself back up but only ever by a small bit (the thirties-type money shortage stranglehold never fully disappears). This is confused by a confused set of policymakers for recovery, bringing up the other edge of their two-sided psychology experiment.

Thinking with reflation they’ve hit upon success, official attention is prematurely turned to inflation risks. If too many people begin to believe too much in the money-printer-go-brrrr nonsense, orthodox theory then proposes that inflation (which is still a real money effect) pressures have the potential to turn excessive.

So, instead of monitoring the money system and figuring out if there is actually too much, therefore real inflation, our “central banks” can only hope they piece together a third-hand account of economic conditions so as to further divine from it the public’s aggregated psychological mindset and whether or not it has become “unanchored.”

This, not money or even bank reserves, is what hawkishness is entirely about; tapering QE’s as well as rate hikes.

Some key economic accounts do provide some useful clues about the status of price behavior in the real economy. From these, Economists hope to use them as a workable bypass of their own monetary illiteracy. And there are times when you can kinda, sorta see why they do what they do.

June 1, 2018 was one of those. The ISM had just reported its May 2018 manufacturing sentiment numbers and within them were several doozies. The headline was good, 58.7, but as inflation hysteria gained currency (pun intended) in the mainstream media, this particular PMI set delivered more gasoline to the already hysterical fire.

The numbers indicated first a supply shortage – imagine that! – a clear bottleneck that was impacting supplier lead times and order backlogs; that particular latter subindex shot up to 63.5, the highest in over fourteen years.

Partly as a consequence, the prices paid component seemed unstoppable. Rising to its own seven-year high, at 79.5 it very much appeared to validate if not fully justify the Fed’s psychological direction toward mid-2018’s hawkish certitude. The media ate it up.

As one financial services firm’s research report on this particular ISM report said:

A total of twenty-two commodities were reported up in price, while none showed declines. Yet another sign that inflation is picking up pace as economic growth accelerates, and a signal to the Fed that a total of four rate hikes in 2018 are not just appropriate, but warranted. In addition to a rate hike that is essentially locked in for this month’s Fed meeting, look for updates to both the Fed statement and economic projections to show an acknowledgement that both employment and inflation are running ahead of prior forecasts.

This should sound very familiar…to earlier this year.

It actually didn’t take any hindsight to know how this was all wrong, either; the benefits provided from looking back are more along the lines of more thoroughly clarifying what should have been evident right from the start (of “globally synchronized growth” that was never once actual growth). But the Fed’s psychology direction is continuously dependent upon these distribution mouthpieces, especially the financial media’s.

They all just parrot the FOMC, reinforcing whichever side of the sword authorities think they must deliver. Time and again we find that neither side holds any matter, outside of stocks (which is why financial services has, as an industry, decided to take the path of least resistance which means never once thinking about nor resisting what’s input to the parrot).

The psychology of taper or rate hikes, as the case was in 2018, glaringly fell right apart almost immediately. Euro$ #4 not “prices keep spiraling up” was right then in view and it, not Jay Powell, would ultimate decide the entire global direction.

Inflation, meaning not inflation, very much included.

I make no apologies whatsoever for continuing to point out these near complete similarities; they are absolutely warranted, one after another. There may be what seem like key differences between now and 2018 or 2019, but those are a matter of degree rather than of type. Even the ISM’s prices paid isn’t dissimilar.

The organization today released its data on manufacturing for the month of December 2021. The headline number declined to 58.7 from 61.1, as New Orders softened by more than 1 point to 60.4.

The closely-watched (Inflation Hysteria #2) prices paid subindex dropped substantially, falling all the way down to 68.2 from 82.4. And though 68.2 may still sound obscenely high, that’s eleven less than May 2018 for a measure that tends to significantly outdistance the headline every month.

From the topline of the ISM suite to the various underneath it, the pattern which has emerged over the final two-thirds of 2021 is the same one which would plague Jay Powell’s hawks over the latter half of 2018, spelling outright doom and embarrassment for him and them in 2019.

The trend – even in the ISM’s prices paid – is the same being found (and declared, in Chinese, anyway) all over the world.

This does not necessarily mean 2022 is going to end up as a year of recession or worse, but what the balance of probabilities balance out to, right now, is: 1. Increasingly likely there’ll be another embarrassment for the Fed’s taper/rate hike agenda; 2. Growth scare becomes slowdown becomes…something that’s not inflationary, at the very least; 3. Some level of downside case, which includes a recession possibility but by no means exclusively.

And whatever out of those, none of it happens overnight.

In many respects, a slowdown is already a loss; the global economy, US, too, never really got going all that much in 2021. It was only in the psychology of pseudo-inflation that the term “red hot” could have been applied. Last year’s “boom” deserves the same treatment as 2018’s “boom.”

Inflation Hysteria #2 is showing itself to be quite consistent in pretty much every respect. The biggest difference between this one and the one before, 2018, has been the CPI numbers, but, as I just wrote, that’s still one of degree rather than type.