Former Treasury Secretary Larry Summers tweeted on Tuesday: “It has seemed self-evident to me for some time now that a 75 basis points move in September is appropriate. 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…”
— from a story by financial journalist James Picerno on SeekingAlpha.com, September 14, 2022.
I have no training or background in economics or finance, other than an introductory course in Marxist economics that I flunked in college.
But I know a basis point when I see one.
Or, when I see 100 basis points.
100 basis points are easier to see, because they are bigger than one basis point. More like a herd of elephants. One basis point… it’s so small, you could totally miss it, if you aren’t paying attention.
So bigger is better, or so they will tell you. Even a person as smart as former Treasury Secretary Larry Summers would rather see 100 basis points than 50 basis points, at a time like this.
Only one problem. Beauty — as they say — is in the eyes of the beholder. 100 basis points can look real ugly, if you have a certain perspective.
From Forbes magazine, earlier this week, a story by :
We’ve all seen the headlines: Interest rates are going up as the battle against inflation continues. It’s now evident that interest rates will most likely continue in this direction for the foreseeable future, at least until inflation is under control. So, all eyes are on The Fed as experts speculate when the next rate increase will be announced…
…The Federal Reserve, or “The Fed,” currently controls the supply of money that’s in circulation in our economy. One of the main objectives of The Fed is to control inflation. The Federal Open Markets Committee (FOMC) sets the federal funds rate at its meetings to influence the economy, and they’ll raise rates when it’s time to slow down economic activity, in order to fight inflation.
So we have this little inflation problem going on. Prices going up, practically everyday. Everyone has been noticing it. We’re not talking about ‘one basis point’ of inflation. We’re talking, like, 800 basis points of annual inflation, this year. We haven’t seen inflation basis points like this since 1981.
Funny, that The Fed never saw them coming.
Which reminds me of a joke.
I remember back in the day, when everyone was telling Elephant jokes, and one of my favorites was one about Tarzan and the elephants.
Q: What did Tarzan say when he saw a herd of elephants coming over the hill?
A: “Look, a herd of elephants coming over the hill!”
Q: What did Tarzan say when he saw a herd of elephants coming over the hill, and they were wearing sunglasses?
A: He didn’t say anything. He didn’t recognize them.
800 basis points of inflation seems to me an awful lot like a herd of elephants coming over the hill. But what do I know? I flunked my economics course.
Not that basis points, by themselves, are a bad thing. Basis points can go up, but they can also go down, regardless of whether we’re talking interest rates or inflation. Mostly, here in America, the basis points related to interest rates went down during the Great Recession, until you could hardly see them.
Which might be part of the reason we’re now seeing 800 basis points of inflation. Making up for lost time, so to speak? Some economists seem to think inflation and interest rates run along hand-in-hand, like Jack and Jill skipping up the hill, holding hands, to fetch a pail of basis points. When Jack falls down, Jill comes tumbling after.
But when the elephants come over the hill, watch out. They are not holding hands.
Hopefully — for everyone’s sake — they are also not wearing sunglasses.