Elon Musk is worried about the future of the economy.
CEO of electric vehicle maker Tesla (TSLA) in recent days he has been worried about the future of 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 has a two-day monetary meeting on September 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 light of the latest figures which show that the rise in price goods and services it is far from calm.
Some experts such as former Treasury Secretary Larry Summers even favor a rate hike of around 100 basis points, or 1%.
“It has been clear to me for some time now that a 75 basis point move in September is appropriate,” Summers said on September 13. “And, if I had to choose between 100 basis points in September and 50 basis points, I chose to move 100 basis points to boost credibility.”
Inflation vs. Deflation
But a few days later, Summers, who is president emeritus of Harvard University, admitted that the task of the Fed was sensitive and scary.
“The @federalreserve is in a difficult position. Going forward, with terminal FED funds priced higher than 4.25 percent, it will be aggressive enough to avoid a complete easing of financial conditions,” he said on September 15.
Musk, the richest man in the world and the manager of four companies — Tesla, SpaceX, The Boring Company and Neuralink –, is very critical of this monetary policy whose only tool at the moment is rates to raise sharply to avoid the so-called hard things. crash 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 worrying case of deflation.
“A big Fed rate hike risks deflation,” the billionaire warned on September 9.
Deflation is the same as inflation. It is characterized by a continuous fall in the general price level. It may encourage households to postpone their purchase decisions while they wait for further price cuts, economists say. The consequences can be catastrophic as overall consumption falls. Then, companies that can no longer sell their products reduce production and investment.
Above all, deflation can worsen a borrower’s financial situation. That’s because the real cost of debt rises, or at an inflation-adjusted cost, because loan repayments aren’t usually indexed to inflation. So companies are less able to invest and families are less able to buy and consume necessities.
But the closer we get to the Fed’s monetary decision, the more the consensus seems to be around a 0.75% hike with the markets. Opponents of the jumbo rate hike reiterate their warnings. So Musk has just warned the Fed again by declaring that it was making a “fundamental error” by tracing the current inflationary situation to that of the 1970s.
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He even goes further to explain that the central bank is very slow to react in a world that changes very quickly, and perhaps too quickly 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 signs of deflation risk.
“Larry Summers seems to be leading the Biden administration astray with his conviction that inflation is inevitable, with the 70s as his guide,” Wood slammed on September 17. “The inflation of the 70s started in 1964 with the Vietnam War and Great Britain. Society and boom for 15 years.”
But the current inflation began less than two years ago with supply chain issues exacerbated by the covid-19 pandemic and Russia’s war in Ukraine, she quipped.
“The Fed is solving the supply chain issues by pushing demand and, in my opinion, unleashing deflation, and setting it up for a major pivot,” Wood said.
This is where Musk, who obviously agrees with Wood, comes in.
“Yes, the fundamental error is reasoning by analogy, rather than first principles,” Musk said on Sept.19.
Then a Twitter user said: “We need to be pounding the table that this = 1949, when inflation was breaking, at 10% and quickly reversing to -2.5% deflation within 12 months 👇🏻,” said the user. “Whether the @federalreserve waits a month or a pivot, doesn’t matter. Deflation hits them on the chin bc they use old data.”
This is where Musk made his most scathing criticism of the Fed, suggesting that it was too slow to respond to the risks threatening the economy.
“There is too much latency in Fed decisions,” said the tech mogul. “A problem in a rapidly changing world.”
Essentially, Musk is implying that if the Fed is too slow to react in a rapidly changing world, the central bank is out of touch with the velocity at which the world currently operates.
So the central bank would probably be an ancient institution.