Austerity discusses inflation and we get a poem from C Thomas
“Rising prices or wages do not cause inflation; they only report it. They represent an essential form of economic speech, since money is just another form of information.” Walter WristonEeny meeny miney mo
Catch inflation by the toe
For when it goes up
My dollars go down
It makes my smile
Turn upside down
Less dollars now
Reside In my pants
Its going global
From Greece to France
This happened before
In the land of the French
The hungry poor
with a stomach ache
Were told by the rich
Let them eat cake
As I study my history
I realize with dread
That is how the rich
Lost all of their heads
Austerity: C Thomas, if you keep writing poems you are going to steal all my thunder.
C Thomas: Austerity Jones, are you jealous of this poet and don’t know it?
Austerity: You are clever…This week in financial news the Federal Reserve finally decided to attack the 7.9% CPI inflation by hiking the overnight fed funds rate by ¼ of a point. I would say that is pretty useless- where is G Spot when I need a good joke about uselessness?
G Spot: Hello Austerity I am right here, at your service.
Austerity: G Spot can you think of anything more useless in the fight against inflation than a hike from 0 to ¼ of a percent?
G Spot: Well it would seem to be as useless as a field mouse making love to an elephant.
Austerity: Well, I asked for that and it is true. Thank you G Spot for your colorful commentary.
G Spot: At your service, my lady, at your service.
Austerity: So the Federal Reserve finally raised interest rates and they said that they are going to tame inflation. This is good rhetoric, but it seems like it is gonna be awfully difficult to play catch up. The CPI uses this ridiculous measure called owner’s occupied rent which is a lagging indicator and with actual rents going up double digits across the nation on most private sites (rent.com has 1 br rent up 24% in 2021), this will mean that the OER portion (it makes up about a 1/3 of the CPI) will continue to go up as the rent hikes are slowly adjusted into the CPI. In addition, record gas prices are hitting America as the war in Ukraine and American sanctions against Russia are being digested, and there are more signs of Covid hitting China with major cities getting shut down yet again. This is an awful lot of negative news to be hitting prices at a time that the Federal Reserve is finally beginning to act.
So what gives? Why are they slow to act? There are a couple of different factors that are likely giving them pause. There are generational demographic forces that are deflationary as the baby boomers are retiring and spending less. There are technological factors that are replacing jobs with robotics and automation which are also deflationary. These factors haven’t changed since 3 years ago when inflation was below 2% and the Fed knows that these forces still exist. In my opinion I think the Fed hasn’t seen real inflation like this in 40 years and they just couldn’t believe what they were seeing. Yet what we are seeing now is the consequence of the massive spending bills that were approved by Congress and signed by both presidents finally hitting consumer prices.
Inflation is the expansion of the money supply and how we measure that inflation is in the change of prices. Let’s use an example of 1 billion dollars being created by the government and given to Jeff Bezos. Now the money supply has increased by $1 billion, but since Bezos spends so very little of his wealth, that money will likely sit in a bank and have no effect on prices and there will be no price changes anywhere. Now let’s say that $1 billion was given to the American people and since there are about 333 million people- let’s say every American gets $3. Now that isn’t enough to put in the bank and forget about like Bezos, no let’s say that every American goes to a convenience store and buys a couple bottles of water. Well, the convenience store owners just made a billion more dollars. They are gonna buy new cars, and the guy selling cars is gonna sell more cars, so he is gonna buy a boat and the boat guy is going to buy his wife new earrings and on and on and on. The money now is being turned over in society -which is money velocity. That velocity combined with the money expansion creates higher prices. As we have gotten more and more wealth inequality in this country in the last 20 years and the rich get richer- that money being created has been sitting in a bank or more likely the stock market or real estate. The money isn’t in circulation and being spent and is partly why we have had low inflation along with the Fed lowering interest rates for the past 40 years.
Well that all changed when Congress decided to give money away during Covid- stimulus checks, student loans didn’t need to be paid, rent didn’t need to be paid, child tax credits and loans to businesses that didn’t need them and that was like monetary crack to the system. Everybody had new money, money to spend, money burning a hole in their pocket, but all the casinos were closed, the Disneylands were closed so everyone bought Netflix watched Tiger King and bought a Peloton. Those were the only options. We were still shut down keeping money velocity very low: restaurants and hotels had occupancy limits, mask mandates and the delta and omicron variant kept us from really going out on a major scale. Now it is go time and the last of that money that was given out is being spent. It is going to Vegas and spring break and cars… if you can get them. Hence money velocity picks up and we are feeling the effects of that money supply expansion. Inflation wasn’t transitory- only our inability to go out and spend it. Look at those spring breakers party! Now combine this with geopolitical turmoil and rising energy prices and bingo- you have a recipe for inflation. We will see how successful the Fed can be, but inflation seems like it is going to be here for a while.
“Inflation is taxation without representation” Milton FriedmanWhat I am reading this week… Bretton Woods III- an opinion by Zoltan Pozsar on the unforeseen consequences of the US sanctions against Russia. Not an easy read, but very important as our government continues to jeopardize our financial future.
Also born on this date:
Fred Rogers,
Chester Bennington,
B.F. Skinner,
Carl Reiner,
Bobby Orr,
Henrik Ibsen,
Jerry Reed,
and fittingly this week, Kathy Ireland.
Happy St Patrick’s Day!
“As you slide down the bannister of life, may the splinters never point in the wrong direction.” Traditional Irish Blessing