Elon Musk worries about the future of the economy.
The CEO of electric vehicle manufacturer Tesla (TSLA) has been reiterating in recent days his fears about what lies ahead for the economy as the Federal Reserve prepares to raise interest rates again in hopes of tackling inflation at its highest level in 40 years.
The central bank is holding a two-day monetary meeting on September 20-21. At the end of this session, economists, the business community and markets expect the institution to raise interest rates by at least 75 basis points, or 0.75%, amid the latest data showing that rising prices of goods and services it is far from calm.
Some experts, such as former Treasury Secretary Larry Summers, even favor the scenario of a rate hike of about 100 basis points, or 1%.
“It has seemed obvious to me for some time that a 75 basis point move in September is appropriate,” Summers said on September 13. I would go for a 100 basis point move to add credibility.”
Inflation vs Inflation
But a few days later, Summers, who is president emeritus of Harvard University, acknowledged that the Fed’s work was delicate and daunting.
“The @federalreserve is in a tough spot. Going forward, with Fed funds rates above 4.25%, it will have to be aggressive enough to avoid an overall easing of economic conditions,” he said on the 15 September.
Musk, the world’s richest man and boss of four companies — Tesla, SpaceX, The Boring Company and Neuralink — is highly critical of this monetary policy, whose only tool currently is a sharp rise in interest rates to avoid the so-called hard landing of the economy or recession.
The tech mogul believes a massive 0.75% interest rate hike by the Fed is likely to trigger the equally worrisome deflation scenario.
“A significant Fed rate hike risks deflation,” the billionaire warned on September 9.
Deflation is the opposite of inflation. It is characterized by a continuous fall in the general level of prices. It may encourage households to postpone purchasing decisions as they wait for prices to fall further, economists say. The consequences can be disastrous as overall consumption declines. Then, companies that can no longer sell their products cut back on production and investment.
Above all, deflation can cause the borrowers’ financial situation to deteriorate. This is because the real or inflation-adjusted cost of debt increases because loan repayments generally do not adjust for inflation. So companies are less able to invest and households are less able to buy necessities and consume.
But the closer we get to the Fed’s monetary decision, the more consensus around a 0.75% hike seems to prevail in the markets. Opponents of the jumbo rate hike are repeating their warnings. As such, Musk has just warned the Fed again that it made a “fundamental mistake” by tracing the current inflation situation back to that of the 1970s.
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He goes on, in fact, to explain that the central bank is too slow to react to a world that is changing too fast, and perhaps too fast for the institution.
It all started with a tweet from star investor Kathy Wood who criticized the Biden administration and the Fed for listening too much to Larry Summers and ignoring other signs of deflation risk.
“Larry Summers appears to be seducing the Biden administration with his belief that inflation is intractable, driven in the 70s,” Wood tweeted on September 17. “The inflation of the 1970s began in 1964 with the Vietnam War and the Great Society and flourished for 15 years.”
But the current inflation started less than two years ago with supply chain problems exacerbated by the Covid-19 pandemic and Russia’s war in Ukraine, he quipped.
“The Fed is solving supply chain issues by crushing demand and, in my view, unleashing deflation, putting it in a significant turn,” Wood added.
This is where Musk comes in, who apparently agrees with Wood.
“Yes, the fundamental mistake is reasoning by analogy, rather than first principles,” Musk commented on September 19.
A Twitter user then pointed out that: “We have to hit the table that this is = 1949, when inflation was breaking out, at 10% and quickly returned to -2.5% deflation within 12 months 👇🏻,” said user. “Whether the @federalreserve waits a month or pivots it doesn’t matter. Deflation is hitting them on the chin eg they are using old data.”
This is where Musk delivered his most blistering criticism of the Fed, suggesting it was too slow to react to the risks threatening the economy.
“There is too much delay in Fed decisions,” the tech mogul said. “Problematic in a rapidly changing world.”
Basically, Musk is implying that if the Fed is too slow to react to a rapidly changing world, the central bank is out of touch with the speed of how the world works right now.
Therefore, the central bank would likely be an archaic institution.