Elon Musk is concerned about the future of the economy.
The CEO of Tesla, the electric vehicle manufacturer (TSLA) has in recent days reiterated its fears about what lies ahead for the economy as the Federal Reserve prepares to raise interest rates again in hopes of curbing inflation to its 40-year high.
The central bank is holding a two-day monetary meeting from September 20-21. After this meeting, economists, business and markets expect the institution to raise its rates by at least 75 basis points, or 0.75% given the latest figures showing that the rise in the price of goods and services is far from calm.
Some experts, such as former Treasury Secretary Larry Summers, even favor a scenario of an interest rate hike of about 100 basis points, or 1%.
“It’s seemed obvious to me for a while that a 75 basis point 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 point move to bolster credibility.”
Inflation vs Deflation
But a few days later, Summers, president emeritus of Harvard University, acknowledged that the Fed’s job was a delicate and daunting one.
“The @federalreserve is in a difficult position. From here on, with Fed funds terminally priced above 4.25 percent, it will have to be quite aggressive to avoid an overall easing of financial conditions,” he said. him on Sept. 15.
Musk, the richest man in the world and boss of four companies — Tesla, SpaceX, The Boring Company and Neuralink — is highly critical of this monetary policy whose only tool currently is to raise interest rates sharply to avoid the so-called hard landing. of the economy or recession.
The tech tycoon believes that a 0.75% jumbo rate hike by the Fed is likely to lead to the equally troubling scenario of deflation.
“A major rate hike by the Fed will bring deflation,” the billionaire warned on Sept. 9.
Deflation is the opposite of inflation. It is characterized by a continuous decline in the general price level. It may encourage households to delay purchasing decisions while waiting for further price falls, economists say. The consequences can be devastating if overall consumption drops. Companies that can no longer sell their products then 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 are generally not indexed to inflation. So companies can invest less and households are less able to buy and consume necessities.
But the closer we get to the Fed’s monetary decision, the more the consensus around a 0.75% gain seems to be catching on in the markets. Opponents of the jumbo rate hike are repeating their warnings. So Musk has just re-warned the Fed by claiming it made a “fundamental mistake” in tracing the current inflationary situation to that of the 1970s.
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He goes even further by explaining that the central bank is reacting very slowly in a world that is changing 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 appears to be leading the Biden administration astray with its belief that inflation is persistent, with the 1970s as its guide,” Wood sneered on Sept. 17. “The inflation of the 1970s started in 1964 with the Vietnam War and the Great Society and budded for 15 years.”
But current inflation started less than two years ago with supply chain problems exacerbated by the Covid-19 pandemic and Russia’s war in Ukraine, she joked.
“The Fed is solving supply chain problems by reducing demand and, in my view, unleashing deflation, making it a key linchpin,” Wood added.
This is where Musk, who clearly agrees with Wood, comes in.
“Yes, the fundamental flaw is reasoning by analogy, rather than first principles,” Musk noted on Sept. 19.
Then a Twitter user pointed out that: “We have to knock on the table that this is = 1949, when inflation broke, by 10% and quickly return to -2.5% deflation within 12 months 👇🏻”, the user said . “Whether the @federalreserve waits or runs for a month doesn’t matter. Deflation hits them on the chin because they’re using old data.”
This is where Musk made his most scathing criticism of the Fed, suggesting it was too slow to respond to the risks threatening the economy.
“There is too much latency in the Fed’s decisions,” said the tech mogul. “Problematic in a rapidly changing world.”
In short, Musk is suggesting that if the Fed reacts too slowly in a rapidly changing world, the central bank will be out of touch with the speed of how the world currently works.
The central bank would therefore likely be an archaic institution.