Elon Musk is worried about the future of the economy.
CEO of electric car maker Tesla (TSLA) Over the past few days, he has been repeating his concerns about what awaits the economy as the Federal Reserve prepares to raise interest rates again in hopes of countering inflation at its highest levels in 40 years.
The Central Bank will hold a two-day monetary meeting on September 20-21. At the end of this meeting, economists, the business community and markets expect the institution to raise its rates by at least 75 basis points, or 0.75% in light of the latest figures showing higher prices for goods and services. Far from calm.
Even some experts like former Treasury Secretary Larry Summers favor the scenario of 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, 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 enhance credibility,” Summers said on September 13.
Inflation vs deflation
But a few days later, Summers, president emeritus of Harvard University, acknowledged that the Fed’s task had been delicate and arduous.
“Federalreserve is in a difficult position. Moving forward from here, with final Fed funds rates above 4.25 percent, they have to be very aggressive to avoid blanket easing in financial conditions,” he said on September 15.
Musk, the world’s richest man and head of four companies – Tesla, SpaceX, The Boring Company and Neuralink – is highly critical of this monetary policy, whose only tool at the moment is to raise prices sharply to avoid the so-called hard. Downturn in the economy, or recession.
The tech mogul believes that the Fed’s 0.75% rate hike is likely to trigger an equally worrying deflation scenario.
The billionaire warned on September 9 that “a rate hike by the Federal Reserve threatens to deflate.”
Deflation is the opposite of inflation. It is characterized by a constant decrease in the general level of prices. Economists say it could encourage households to postpone their purchasing decisions while they wait for further price drops. The consequences can be devastating as overall consumption decreases. Hence, firms which are no longer able to sell their products reduce production and investment.
Above all, deflation can deteriorate the financial situation of borrowers. This is because the real or inflation-adjusted cost of debt increases because loan repayments are generally not linked to 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% rise is in the markets. Opponents of a jumbo rate hike repeat their warnings. And so Musk warned the Fed again by emphasizing that he was making a “fundamental mistake” by tracing the current state of inflation back to the 1970s.
It even goes so far as to show that the central bank’s reaction is too slow in a world that is changing too quickly, perhaps too fast for the institution.
It all started with a tweet from star investor Cathy Wood criticizing the Biden administration and the Federal Reserve for listening too much to Larry Summers and ignoring other signals of deflation risks.
“Larry Summers appears to be leading the Biden administration astray with its conviction that inflation is intractable, with the 1970s being evidence of it,” Wood criticized September 17. The community thrived for 15 years.”
But the current inflation started less than two years ago as supply chain problems were exacerbated by the COVID-19 pandemic and the Russian war in Ukraine, she said sarcastically.
“The Fed is solving supply chain problems by squashing demand and, in my view, unleashing deflation, preparing it for a major pivot,” Wood added.
This is where Musk, who clearly agrees with Wood, comes in.
“Yes, the fundamental error is inference by analogy, not first principles,” Musk commented on September 19.
Then one Twitter user pointed out: “We should hammer the table that was this = 1949, when inflation was breaking, at 10% and quickly rebounds to -2.5% deflation in 12 months 👇🏻,” the user said. “Whether the FederalReserve waits a month or pivots, it won’t matter. The deflation hits them in the chin bc they use old data.”
This is where Musk directed his harshest criticism at the Fed, noting that it has been too slow to respond to risks to the economy.
“There is a lot of delay in the Fed’s decisions,” said the tech mogul. “Problematic in a rapidly changing world.”
Essentially, Musk is pointing out that if the Fed is too slow to respond in a rapidly changing world, the central bank is way off the pace of how the world currently operates.
So it is likely that the central bank is an old institution.