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.