🎙️ Inflationary Range

Is India destined to be an economic superpower? As an alternative to China, India is a fast-growing manufacturing and tech hub, yet its population remains largely impoverished.

Still, the country is a large democracy, and almost 1 billion people are eligible to vote in India’s upcoming elections. Its GDP is expanding fast, too, up 83% from 2014-2023 versus the U.S.’s 54% growth and China’s 68%.

India is also pouring money into infrastructure, physical and digital, to sustain growth. But, like its democracy, India’s economy is imperfect, facing challenges simply on a bigger scale than peers due to its population size.

More on how far India has come, and where it may be going next, in our Charts of the Day.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Should the Fed change its inflation target?

• Americans throw out roughly $68 million in coins

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

💬 Should The Fed Change Its Inflation Target?

2% this, 2% that, yeah, yeah — we’ve all heard it before: 2% is the Fed’s inflation target.

Why 2%, though? It’s a question starting to float around Wall Street. Convenient timing for the Fed, too, which is still trying to engineer a “soft landing” where the economy can return to 2% inflation without causing a recession.

• Moving the goalposts to 3% would suddenly make that battle much easier.
  

• As Bloomberg’s Joe Weisenthal argues, “In theory, a higher inflation target would serve as a signal to businesses to hire and invest at a higher pace, without fear that the Fed will imminently slam the brakes on the economy.”

2% vs. 3%: For years after the 2008 Financial Crisis, as we struggled to get inflation up to 2%, a 3% inflation target offered the prospect of heating up the economy more before needing to cool it down.

For some who’ve long thought that a 2% inflation target was too low, the Fed’s current battle with inflation, where it’s close to being able to declare victory but not all the way there yet, is a chance to change businesses’, investors’, and consumers’ expectations for inflation going forward.

• Mohamed El-Erian, a well-known macroeconomic thinker on Wall Street, recently wrote: “The Fed would be well advised to take this opportunity to undertake a belated pivot to a more strategic view of secular prospects. Such a pivot would recognize that the optimal medium-term inflation level for the U.S. is closer to 3% and, as such, give policymakers the flexibility to not overreact to the latest inflation prints.”
  

• In other words, the Fed has been long overdue to revise higher its focus on 2% inflation, at least according to El-Erian.

Why it matters:

Weisenthal emphasizes that reducing inflation to 2% today may actually be at odds with completing other major economic goals. For example, the White House's push toward electric vehicles, domestic manufacturing, and the frenzied building of data centers to power AI are straining electric grids.

• So, as we undergo this major economic reallocation, Weisenthal thinks higher inflation may actually accelerate the transition.

Why? Top-down government policy is remaking the economy, fueling supply chain bottlenecks. Weisenthal adds, “A higher level of inflation overall can erode the real wages in the losing industries, helping create an inducement for workers to transfer from a fading industry to an industry on the rise, and thus ease supply pressure.” 

For psychological reasons, pay cuts are very difficult to implement. Dying industries would rather, say, lay off 30% of their staff while keeping existing employees’ salaries intact than maintain everyone’s jobs but cut wages by 30% across the board.

• Higher inflation would support wages rising faster in emerging industries like EVs and AI while making it clear to those in declining industries that they need to switch jobs if they want to boost their income prospects.

Bloomberg’s Marcus Ashworth makes the argument more concisely, reflecting on what can be learned from recent inflationary episodes: “The most obvious lesson: Steering multi-trillion-dollar economies to land with laser precision onto a 2% inflation pin needs to be abandoned.”

Instead, he proposes an “inflationary range,” offering more flexibility to policymakers.

Watch Mohamed El-Erian’s CNBC interview for more (from December)

More Headlines 

💰 Microsoft invests $1.5 billion in AI firm G42

💎 Gold is ‘shining bright like a diamond’ and could hit $3,000, per Citi

🏙️ NYC sees ‘tech talent boom’ as top destination for relocating workers

🛢️ Chevron launches $500 million tech fund

🎓 Private equity is investing in…college admissions?

🪙 Americans Throw Out Up to $68 Million in Coins

Americans throw out about $68 million of coins every year. One startup is trying to do something about that.

We kind of wish we had thought about this startup idea, but alas: Reworld, a sustainable-waste processing company outside of Philadelphia, has been collecting discarded coins from incinerated trash for the past seven years. 

• They have recovered at least $10 million worth of coins out of an estimated $68 million Americans toss away annually. The company's machinery separates metals, including coins, from the incinerated waste.
  

• As one professor commented: “If you lost a $100 bill, you’d look for it. If you lost a $20 bill, you’d look for it. If you lost a book, you’d look for it. But you’re just not going to look for a penny.”

Bye-bye coins? Meme coins might be in vogue, but physical coins are becoming less popular due to the rise of digital payments. Yet the U.S. Mint spent $707 million producing coins last year. The penny infamously costs more than its value to make. Many countries, including Canada, New Zealand, and Australia, have removed their one-cent coins from circulation.

• More than half of the coins in the U.S. are kept at home, and large amounts are lost or discarded. The Transportation Security Administration collects hundreds of thousands of dollars worth of coins yearly at airport checkpoints. Reworld also recovers coins from various sources, such as trash and incineration.
  

• After sorting and cleaning, Reworld separates usable coins from damaged ones. Of the $10 million recovered, about $6 million has been in good enough condition to use. Reworld then turns over the collected coins, which range from $500,000 to $1 million annually, to a third party to count and deposit them into local banks.
  

Why it matters:

Well, for one, it illustrates the power of creative business ideas. When executed well, businesses can solve problems of all sizes. 

Down but not out! Despite the declining use of coins, some people find creative uses for them. One couple profiled in The Wall Street Journal built a floor using 65,507 pennies, spending $655 on coins and $1,195 on supplies.

Reworld employees also fondly regard buffalo nickels, setting them aside as collector items — these coins were only made between 1913 and 1938, and they can be worth thousands of dollars.

Read more

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Quick Poll

Yesterday, we asked: I think the dollar will continue to outperform other major currencies through the end of the year…

— Most respondents said the dollar will remain strong, writing: “Mainly due to the ‘safe haven’ concept” and “U.S. defense industry will lead the way” and “AI productivity along with a more market-based economy will push efficiency for some time to come.”

— On the flip side, a reader commented, “This is a false economy held up by elites.”

See you next time!

That's it for today on We Study Markets!

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