Elon Musk is worried about the future of the economy.
The CEO of electric vehicle maker Tesla (TSLA) has been repeating for the past few days his fears about what awaits the economy as the Federal Reserve prepares to raise interest rates again in the hope of countering the inflation at its highest in 40 years.
The central bank is holding a two-day monetary meeting on Sept. 20-21. At the end of this meeting, economists, the business community and the markets expect the institution to raise its rates by at least 75 basis points, or 0.75% in view of the latest figures which show that the rise in the price of goods and services is far from calming down.
Some experts like former Treasury Secretary Larry Summers even favor the scenario of a rate hike of around 100 basis points, or 1%.
“It has seemed self evident to me for some time now that a 75 basis points move in September is appropriate,” Summers said on Sept. 13. “And, if I had to choose between 100 basis points in September and 50 basis points, I would choose a 100 basis points move to reinforce credibility.”
Inflation vs. Deflation
But a few days later, Summers, who is president emeritus of Harvard University, acknowledged that the Fed’s task was delicate and daunting.
“The @federalreserve is in a difficult position. Going forward from here, with terminal Fed funds priced above 4.25 percent, it will have to be quite aggressive to avoid an overall easing in financial conditions,” he said on Sept. 15.
Musk, the richest man in the world and boss of four companies — Tesla, SpaceX, The Boring Company and Neuralink –, is very critical of this monetary policy whose only tool currently is to sharply increase rates to avoid the so-called hard landing of the economy, or recession.
The tech tycoon believes that a jumbo rate hike of 0.75% by the Fed is likely to trigger the equally worrisome scenario of deflation.
“A major Fed rate hike risks deflation,” the billionaire warned on Sept. 9.
Deflation is the opposite of inflation. It is characterized by a continuous fall in the general level of prices. It can encourage households to postpone their purchasing decisions as they wait for further price declines, economists say. The consequences can be devastating as overall consumption slumps. Then, companies that can no longer sell their products reduce production and investment.
Above all, deflation can cause borrowers’ financial situation to deteriorate. That’s because the real, or inflation-adjusted, cost of debt increases because loan repayments generally aren’t indexed to inflation. So companies are less able to invest and households are less able to buy necessities and consume.
‘Fundamental Error’
But the closer we get to the monetary decision of the Fed, the more the consensus around a rise of 0.75% seems to take hold with the markets. Opponents of the jumbo rate hike reiterate their warnings. Musk has thus just warned the Fed again by asserting that it was making a “fundamental error” by tracing the current inflation situation to that of the 1970s.
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He even goes further by explaining that the central bank is very slow to react in a world that changes very fast, and perhaps too fast for the institution.
It all started with a tweet from star investor Cathie Wood criticizing the Biden administration and the Fed for listening too much to Larry Summers and ignoring other signals that point to deflation risk.
“Larry Summers seems to be leading the Biden administration astray with his conviction that inflation is intractable, with the ‘70s as his guide,” Wood slammed on Sept. 17. “The ‘70s inflation started in 1964 with the Vietnam War and the Great Society and burgeoned for 15 years.”
But the current inflation started less than two years ago with supply chain issues exacerbated by the covid-19 pandemic and the Russian war in Ukraine, she quipped.
“The Fed is solving supply chain issues by crushing demand and, in my view, unleashing deflation, setting it up for a major pivot,” Wood added.
This is where Musk, who obviously agrees with Wood, comes in.
“Yes, the fundamental error is reasoning by analogy, rather than first principles,” Musk commented on Sept.19.
‘Problematic’
Then a Twitter user pointed out that: “We need to be pounding the table that this is = 1949, when inflation was breaking, at 10% and quickly retracing to -2.5% deflation inside 12 months 👇🏻,” the user said. “Whether the @federalreserve waits a month or pivots, won’t matter. Deflation hits them on the chin bc they use old data.”
This is where Musk delivered his most scathing criticism of the Fed, implying that it was too slow to react to the risks threatening the economy.
“There is too much latency in Fed decisions,” the tech mogul said. “Problematic in a fast-changing world.”
Basically, Musk is implying that if the Fed is too slow to react in a fast-changing world, the central bank is out of touch with the velocity of how the world currently operates.
The central bank would therefore probably be an archaic institution.
Source: https://www.thestreet.com/technology/elon-musk-warns-again-about-troubles-ahead?puc=yahoo&cm_ven=YAHOO&yptr=yahoo