But what about the US? Where are we headed? That is not just a question for the authorities; it’s a question for you. If we’re bound for the pampas, better pack light…and bring lots of real money; you’re going to be glad you did.
That’s the ‘inflation route’. ‘Print’ money…and pay the costs later. And we warn you: the roads are rough…and dangerous.
The deflation trip is no picnic either. But those are the two choices. When you deflate, you take the pain now. When you inflate, you take the pain, more of it, later.
And by all means, don’t get on the wrong bus.
This raggedy plane
Here’s the situation now. Prices are falling (deflation). Commentators are joyful. ‘Inflation is beaten’, they say. ‘A soft landing, after all.’
From Charlie Bilello:
- ‘US Producer Prices (PPI) increased 2.75% over the last year, the 9th consecutive decline in the YoY rate-of-change and the lowest print since January 2021. PPI peaked at 11.7% in March 2022.
- ‘Year-ahead business inflation expectations continue to fall, down to 2.8% in the latest Atlanta Fed survey. That’s the lowest we’ve seen since July 2021.
- ‘Global Container Freight Rates (cost of 40′ Containers) are now lower than they were in February 2020 (pre-covid), down 87% from their peak.
- ‘US Import Prices fell 4.6% over the last year, the largest YoY decline since May 2020.
- ‘U.S. Asking Rents are lower than they were a year ago, the first YoY decline since March 2020.’
But this raggedy plane has barely begun its descent. While some prices are falling, others are still rising. Shelter, for example, rose 8.2% in the latest reading — the biggest increase in housing since 1982. And transportation. From Bilello:
‘The average monthly payment for a new car has skyrocketed to $777, which is nearly double the average payment in late 2019 (Kelley Blue Book data). Nearly 17% of consumers who financed a new car in the first quarter of 2023 had a monthly payment of $1,000 or more (a record high), up from just 6% in the first quarter of 2021 (Edmunds data).’
Taking the most common measure — the ‘sticky’ CPI, less food and energy — price inflation is actually going up, not down. It was mostly the falling price of oil that brought the overall measure down last month. But wait, oil may be going back up.
Inflation volatility
What these numbers — some up, some down — are showing us is that inflation is far from beaten. It’s what happens when the feds spend more than they can afford year after year. And now the federal government is facing trillion-dollar deficits ‘as far as the eye can see’.
Yes, dear reader…inflation is always and everywhere a political phenomenon. And stopping it involves pain…political as well as economic. Push hasn’t yet come to shove, but when it does the pain will come with it.
From the Greed & Fear reports:
‘…a little noticed working paper by the Federal Reserve Bank of Cleveland, published in January (“PostCOVID Inflation Dynamics: Higher for Longer” by Randal J. Verbrugge and Saeed Zaman, 13 January 2023). This paper found that if the Fed really tried to reduce inflation to 2%, it would cause the unemployment rate to rise to 7.4%.’
And here, David Stockman reminds us of the pain inflicted by the Fed in 1982:
‘Volcker pushed the real yield on the 10-year UST [Treasury bond]…from -3%in late 1979 to a peak of +9.3% in August 1983, sustaining that purgative real rate at +5% through early 1986. In the process, everything else fell into place:
- ‘Unemployment…soared to 10.8% in Q4 1982, a victim of depriving the economy of unsustainable activity fueled by a decade of easy money.
- ‘Real GDP…took a deep dive to -6.2% in Q1 1982, but with the fall of inflation came bounding back to +7.9% in Q3 1983.
- ‘CPI inflation…which had stood at 14.6% on a Y/Y basis in late 1979, plummeted to 2.5% by Q2 1983.’
And now, Stockman makes our point:
‘Accordingly, reversing bad policies inherently involves purging their macroeconomic effects. The estimable phrase “no pain, no gain” is rooted in the fundamentals of sound economics.’
So today, we end up where we left off yesterday, with a question:
In today’s US, can policymakers really stand the pain of a genuine fight against inflation? Or will they cave under pressure from the rich — whose assets are collapsing in value…and the poor — whose transfer payments are threatened by tightened federal budgets?
The answer — if Argentina is anything to go by: the pain of inflation may be much greater over the long run…but the pain of deflation is more immediate. Push comes to shove; they’ll push and shove for inflation.
More to come…
Regards,
 |
Bill Bonner,
For The Daily Reckoning Australia
