Inflate or Die

Earnings are off, incomes are down and housing is soft... what's a Fed Head to do?

(Source: Getty Images)

Bill Bonner, reckoning today from Baltimore, Maryland...

The news this morning, from Bloomberg:

Walmart Sinks as Inventories, Thrifty Shoppers Hit Outlook

Walmart Inc. cut its profit outlook again in a surprise warning weeks ahead of its earnings report, sending retailer shares tumbling and raising new questions about US consumers’ ability to sustain their voracious spending habits with inflation at a four-decade high. 

Adjusted earnings per share will fall as much as 13% in the current fiscal year as US shoppers spurn big-ticket items and focus on buying less profitable groceries with consumer prices soaring, Walmart said in a statement Monday. Two months ago, the world’s largest retailer said earnings per share would only dip about 1%. In February, the company had predicted a modest increase. 

Walmart is where ordinary households buy stuff. But they’re not buying as much as they used to. Because the stimmies have stopped coming… refinancing is no longer an easy way to get more money… and wages aren’t rising as fast as consumer prices.

The Other Leg

Yesterday, we looked at one of the two legs that hold up American family finances – houses. Homeowners can no longer count on ‘taking out equity,’ because there won’t be any excess equity to take out. Nor can they refinance at lower mortgage rates – because mortgage rates are going up. Already, refinancing applications are down 80% and new house plans are being canceled. Soon, house prices should go down too.

But today we look more closely at the other leg – income. In short, real incomes are falling… and they can’t get up.

Wages are said to be going up at a 5% annual rate. Prices are rising at a 9% rate. That leaves a 4% gap – which is the rate at which real incomes are falling.

Workers will, of course, push employers for wage increases to keep up with inflation. But (thanks to years of Fed-induced malinvestment) productivity is sagging… so the only way employers can pay more is by passing along the costs to consumers – further pushing up prices.

This is the ‘wage-price spiral’ that troubles central bankers’ sleep. Wages go up to keep the working stiffs from losing ground. Then, the extra labor costs force up prices. The higher prices cause workers to plead for higher wages.

Wages tend to be ‘sticky,’ say economists. Once a raise is given, it is hard to take it away. So, wage-driven price increases ratchet upwards with no easy way to bring them down.

Vociferous Kibitzers

So, the pressure mounts. The Fed must ‘do something,’ say the kibitzers.  

But what?  

In yesterday’s news, Senator Elizabeth Warren came forward with a typically blockheaded comment. The Washington Examiner:

Sen. Elizabeth Warren (D-MA) tore into Federal Reserve Chairman Jerome Powell, accusing him of threatening to undermine the economy with his efforts to curb inflation by raising interest rate targets.

Warren, one of Powell’s most vociferous opponents, argued against the Federal Reserve’s increasingly hawkish monetary policy in a Wall Street Journal op-ed. She pointed out that the economy has experienced a robust labor market for the past year or so and said that the central bank’s aggressive rate hikes could trigger a “devastating recession.”

Uh oh.

The Fed is coming up to its “Decision of the Century.” It’s the most important decision ever made by a central banker… one that will shape our investments, our economy, and even our government for decades into the future.

Recently, news items have focused on the challenge. One said it will test “Jerome Powell’s skill” as a central banker. Another noted that avoiding a recession will ‘require careful management’ by the Fed.

The Critical Choice

But it’s all nonsense. The Fed has no skills. It doesn’t manage anything. It just inflates… or it doesn’t inflate.  

And now it faces the critical choice: inflate or die.

An economy based on increasing supplies of credit (lower and lower interest rates) can only survive as long as the credit keeps coming. When interest rates rise and credit gets tight, it dies.  

Ms. Warren is already wearing black; she’s complaining because the Fed is tightening up credit. And she’s right; it has probably already put the economy in recession. That’s why Walmart shoppers are pulling back. It’s why stocks and bonds are down worldwide – with a total loss of (fake) wealth of $35 trillion. And it’s why the frothiest part of the market – cryptos, NFTs, money-losing techs – has gone flat.  

But there are no tricks or skills that the Fed can use to bring back the good ol’ days. Inflation is no longer a risk; it’s a fact. And the Fed has only two choices. Inflate or die.  

The Fed now judges the risk of inflation as greater than the risk of a collapsing economy. It has resolved to protect the US economy from inflation… and remains steadfast in its  purpose.  

For now. But our guess is that the collapse has a lot farther to go… and that the moans of the dying will get louder and louder… until the Fed – driven mad by the braying of jackasses like Ms. Warren – changes course.

More to come…

Bill Bonner

Joel’s Note: Speaking of real income (that is, adjusted for official inflation), Dan Denning sent over the following chart earlier this morning. It shows income basically going nowhere for the 35 years since 1979, when this particular series began. Then, writes Dan, it went “up like a rocket ship… and down like a stone.”

That’s the gimmie-stimmie bonanza Bill’s been writing about… and the subsequent hangover. See for yourself…

(Source: US Bureau of Labor Statistics)

Any wonder discretionary spending - and company earnings at places like Walmart - are down. Workers are getting squeezed by go-nowhere wages on the one hand… and a four decade high in inflation on the other.

The Fed will no doubt have more to say about this when it meets tomorrow. Stay tuned…