Tuesday, November 23, 2021

A Perfect Economic Storm

I've been a regular reader of Bill Bonner's economic ramblings for years. My earliest reference to him here on the blog was back in 2011, a decade ago, and I'm fairly sure I was reading him longer than that.  Possibly into the early '00s.  Today, his home site is called Rogue Economics, but he has had a few others.  I currently get his daily emails and read many but not all.  Articles by Bill tend to be weekdays. Saturdays are usually other partners, and Sunday is a summary with links to postings from the previous week. 

Bill is an interesting commentator and observer of the world, strongly focused on the win-win transactions of a free market as opposed to the win-lose world of the command driven, fake economies.  Last week, he ran an article that was called, “Who Could Have Seen That Coming?” in the email but which the website tonight calls, “What to Expect When the Government Ignores Consequences.”  I like the original title better.

He starts it with a simple proposition.  If you were to see someone with a gas can and matches apparently targeting a Federal building, shouldn't you say something?  (Let's pretend the Federal building is worth saving.)  Then he follows with this gem to get you to keep reading:

The Federal Reserve printed up nearly 5 trillion brand-spanking-new dollars between August 2019 and today.

Surely, there must have been at least one alert economist among the 1,000 Ph.D.s on the Fed’s payroll who noticed that they were about to cause the whole economy to go up in flames.

Surely the “one alert economist” at the Fed must have known that no nation had ever created this much money in so short a period before.  Nobody questioned this?  Have you ever heard the expression, “it takes a Ph.D. to be that stupid?”  This is an example.  Here I must quote another economic columnist I used to read, the Mogambo Guru who wrote about monetary creation in 2009:

Whether or not this theory is true, I don’t know, but I don’t think so, as I have never read anything like, “From the moment that the government started creating and spending large amounts of money, everything got better and better, and the more money that was created for the government to spend, the better things got, until they reached Utopia and everybody lived happily ever after.” 

Every one of the millions of us who have seen inflation and monetary destruction before this could tell the Fed what was going to happen.  Something about the training of those Ph.D.s at the Fed has blinded them to even acknowledging the role of central banking in all the economic collapses in history.  Remember this famous quote from Nobel Prize winner Milton Freedman: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”  

The truth though is that Fed wants inflation; the only question is exactly how much inflation they're going to create.  You can find any number of citations saying they aim for 2% inflation, although they rarely achieve it.  By the Rule of 72 (really 69.3, but you can't do that in your head) says to divide 72 by that 2% and it tells you the cost of living doubles in 36 years.  If they reported the COL honestly and consistently. 

The Fed is deathly afraid of deflation, of prices going down, which is their natural tendency.  As people get better at doing their jobs, the costs go down and the brains at the Fed say that there will be no reason for people to spend beyond their immediate needs (and even the cost of food goes down as producers learn new ways to increase crop yields or food production).  They believe forcing people to spend is the proper goal because their forcing is what drives the economy.  

The response to the Covid-19 outbreak has created a perfect storm of things that are now causing epic inflation.  First, there's this:

Supply chain disruptions were relatively unknown back in March 2020, when the spree of money-printing began in earnest. Now, they’re as common as strip malls.

How came they to be?

When the offices, restaurants, and bars closed, people turned to their home computers… found that they had stimmy money from the feds in their accounts… and determined to spend it.

Then there's the attempt to shut down transportation by limiting domestic energy production (while saying they're trying to convince OPEC increase production).  That raises shipping prices which immediately adds to the prices of everything simply because everything gets shipped.  The prices of food go up; again because everything gets shipped.  Because of the supply chain disruptions you add real cost increases caused by real market forces - lower supply for the same demand pushes up prices - to prices being bid up by the increased supply of dollars.  Housing and car prices, both used and new, go up.  

Now a totally new wrinkle caused by the virus responses including the "jab or job" blackmail the Biden administration is pushing.  People quit their jobs.  As Bill puts it:

Perhaps less foreseeable… but with so much liquidity weeping from the clouds, many people just decided to stay home permanently.

In what came to be known as the Great Resignation, some 4.4 million workers went AWOL, in September alone.

And then businesses, eager to meet the increased demand, found they had to pay higher wages and benefits to keep their workers happy. Our friend David Stockman tells us that the latest Employment Cost Index figures show labor costs rising at a 6% annualized rate.

Compensating workers is the number one expense of U.S. industry. So, any rise in labor costs is important… and must be passed along.

It is also the most “sticky” of cost increases. Prices for raw materials may go up and down, but once an employee gets a raise, it is hard to take it back; there’s nothing “transitory” about it.

Nothing about the current situation is transitory.  It will keep going.  Shadowstats shows that using the methods for measuring inflation during the end of the Jimmy Carter era shows the same levels of inflation as the end of the Jimmy Carter era (1980).  

The Carter years are still widely quoted as the worst period of inflation in the US.  Those were my first years working for a living, getting 5% pay raises compounded every six months (10.25%/year) which still didn't keep pace with inflation.  The eventual fix for the inflation was to raise the prime interest rate into territories now considered impossible, hitting 19.1% in June of 1981.  Pigs will fly fast enough to break the sound barrier before that rate could be instituted now.  The line item for "interest on the debt" in the Federal Budget would blow up - blowing the budget up with it.  Everyone knows they need to stop the monetary creation and raise interest rates, but that's destructive, too. 

Everywhere you look, it seems the chances of a total collapse of the dollar are higher than at any time.  Those chances continue to go up with this inflation. 

 


7 comments:

  1. Yup. And that will *not* increase stability of a populace already so divided that they can't agree on . . . anything.

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  2. Raising interest rates would be to both cut the throat of the federal government because servicing the debt would suddenly consume 340% of the federal budget, and simultaneously put everyone with an ARM out on the street when their house payments ballooned, and the entire housing market went up like the Hindenburg coming into Lakehurst.

    This economy is headed for Weimar like a rocket sled on rails. It has nowhere else to go.

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  3. I also enjoy Bill Bonners musings. It will be interesting to see what happens when the "Full Faith Of the US Government" is crushed by their own massive fiat creations. The British Empire pretty much suffered the same sort of economic crash (But was SUPPORTED by the USA) and had their decades of suffering known as the "Winter of our Discontent" when the Pound Sterling became trash.

    Aesop please add EBT cards that despite all money "Printing" cannot buy Food, Social Security dependent deciding if Food OR Medicine OR Heat is going to happen and Military (ALL Retirements in general) being FALL of the Soviet Union Useless.

    A meme I saw was the voters popping the "Woke Bubble" full of Donkeys well over the cliff but the PUNCH LINE was "Pity WE ARE ALL INSIDE that Bubble" and will suffer equally as well.

    Short US Dollars, Long Trusted Friends, Garden Seeds, Garden SKILLS, and consumables well hidden from rapturous, angry and hungry Neighbors. The Gov.com isn't going to be robbing your supplies and chickens, MUCH more local Uniformed Tugs with Guns and Neighbors betraying for a "Share" in the loot will.

    THAT Is the Result of Weimar Economic Collapse WITH Near Total LOSS of Public trust and support.

    How did you go broker, Sir?

    Slowly then suddenly.

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  4. When a car runs out of gas, it doesn't explode in a fireball like in the movies, it quietly coasts to a stop. The less effective power-projection groups like the military get, the quieter the coast to a stop will be. I think the army needs more blind soldiers in wheelchairs, and more vehicles with Windows in the powertrain.

    If the government fires a bunch of productive workers in two weeks, I'm sure they'll all just dry up and blow away. Those people wouldn't do anything else with their new free time besides sit and watch TV while they get evicted and starve to death.

    When the centrally planned economy stops working, the real economy will come roaring back. What do you think the new, private, untraceable cell phone system should look like? Or the new, private, untraceable replacements for amazon, ebay, and paypal? Get ready to take the license plate off your car so you can have some travel privacy again.

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  5. I wish I knew what to do. I have paid off my house. Have less than $1000 in credit card debt, a vehicle loan that's up in 48 months. I am in a communist left coast blue state which also happens to be where my 22 year state job is located. I am hoping to sell in April and get my grandchildren out of this state. I have a feeling my pension and annuity will be wiped out as will be my savings.

    This administration is doing everything they can to destroy this beautiful country. Why? Are we actually being controlled by China? Are the current members of the administration communist themselves? How did so many successful American business owners become traitors to America and America?

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    1. Government employees told you in their government schools that the average political setpoint of Americans is individual liberty. This is false. The average instinctual political setpoint of most humans, from any time and place, is the monkey troop; this is communism. These instincts were genetically inherited from their great ape ancestors, and are not flexible enough to allow molding most humans into either new Soviet man or new libertarian man.

      If you want individual liberty then you'll have to invent a military defense against communism which are you willing to apply to your own family members, most of whom are instinctively communists. I think cryptographic ways of defending privacy of banking and trade are good candidates. "No, you may not look in my wallet." "No, you may not inspect my bank statements, or have the keys to the gun safe."

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  6. Inflation is deliberate. It gives power to those in control. They can always give themselves as much money as required to insure their standard of living remains plush. The rest of us whoare lucky to get a 2% pay raise every other year have to suck hind tit. Inflation also damages the economy and thus the health of a nation. The criminals in power hate us and hate America. Inflation is just ONE of the weapons they are wielding against us. They get away with their assaults on us and freedom because we allow them to. And until they are stopped....by force....the will NEVER cease.

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