The Dreaded D-Word

Plus, everyday high and higher prices, from the Federal Reserve to you...

(Source: Getty Images)

Joel Bowman, surveying the situation today from Buenos Aires, Argentina...

Welcome to another Sunday Session, dear reader, that time of the week when we gather at the virtual saloon to solve the world’s problems, one copa de bonarda at a time...

We jest, of course. It takes a humble public servant to actually believe he/she/they can make the whole world a better place... and to do so at everyone else’s expense. 

The best we mere citizens can hope for is to put one pant leg on at a time and one foot in front of the other. Small victories. Speaking of which, we hear our American readers are readying for the big game later today, baking quail egg cookies and such, if we understand Dan correctly...

We have no idea who’s in the match, what the pitch conditions are like, or which team is favored to score the most runs, but we wish everyone a fair contest all the same. (Just kidding. Go team!)

Meanwhile, the cost of this year’s Super Bowl party might come as something of a shock. Analysis by the serious-sounding team at GoBankingRates.com warns us to “get ready for the spending equivalent of being sacked for a 15-yard loss.”

Umm... what? Oh, here’s the bit we understand...

U.S. consumers are expected to spend a total of $16.5 billion on food, drinks, apparel, decorations and other items this Super Sunday, according to Statista. That’s nearly $2 billion more than in 2022. Food and beverages take up a huge part of this share, with Americans expected to pay around $85 per person. 

According to Wells Fargo, the cost of a Super Bowl party is up 11.8% from last year; 8.3% higher if you choose to head to a restaurant or bar for the festivities. 

We take a look at the central bank’s promise of everyday high and higher prices in today’s column, below...

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Everyday High and Higher Prices
By Joel Bowman

"Too many factors must be known, and no one can know them."
~ Henry Hazlitt

Everyday low and lower prices. That's the free market's promise to you. And if the free market were allowed to operate properly, that is to say, if it were left to function as the name suggests, freely, lower prices are precisely what you would expect to see.

Lower prices at the grocery store... at retail outlets... at the gas pump and online...at the game and at the wing bar. 

And yet, as inquiring minds fairly recognize, that's simply not the case. Rather than enjoying a cornucopia of hyper-abundance, brought about by the turbo-charged purchasing power of the dollar, the average working stiff has witnessed his greenbacks plummet in value. 

In real terms - that is, adjusted for inflation - household net income has gone virtually nowhere in the U.S. over the past half a century. This despite the fact that most households now send two warm bodies off to the daily production line...

How could this be?

Road to Nowhere

With all that extra input... with a growing population... mechanized machinery... Moore's Law... the ubiquitous wonders of the digital age... cryptos... EVs... NFTs... ChatGPTs... and all the rest... shouldn't we expect the price of production and, therefore, the cost of associated goods and services, to fall... or, dare we utter the dreaded D-word... "deflate"?

Price deflation is progress, after all. Lower prices – ceterus paribus – are a surefire sign we're getting better at "making stuff." It means we're becoming more efficient. This happy outcome is the result of increased competition and scale in the marketplace. It’s the glowing, cherub-cheeked lovechild of Schumpeter's "creative destruction" and the compounding effect of "learned processes." Standing on the shoulders of giants, and all that.

In this way, lower prices ought to serve as a "kind of dividend for the working man,” as Jim Grant, editor of the venerable Grant's Interest Rate Observer, once (ahem) observed. 

“Not so fast!” cry the know-it-all federales. 

After a year of grinding, multi-decade high inflation, consumers are growing weary of watching the price of their favorite goods ticking up every time they visit the store... or disappearing from the shelves altogether. See everything from baby formula to toilet roll... eggs to prescription medicine... cement to champagne.

As we pointed out earlier in the week, the prices of real world goods, paid for by real world people, satisfying real world needs and demands, are through the roof. Flour was 23.4% more expensive in dollar terms in 2022… lettuce was up 24.9%… butter by 31.4%… and margarine by 43.8%. Then there’s airfares, eggs and school lunches, up 28.5%… 59.9%… and  305%, respectively, for the year.

Whatever happened to “price stability”... one half of the Fed’s own so-called “dual mandate.” (The other half being “maximum employment,” a subject for another Sunday Session...)

The Price of Money

The Fed claims 2% as its “optimum” rate of inflation. That is, it aims to steal exactly 2% of the purchasing power of your savings each and every year, give or take. They don’t always get it right, of course. Sometimes it’s more. 

With rates still “behind the curve” – which is to say, lagging inflation – Mr. Jerome Powell warned last week that we were entering the “very early stages of disinflation,” a sentiment that no doubt struck fear into the dark hearts of the “Print, baby, print!” bankster crowd.  

We heard last year from the likes of Cathie Wood and Elong Musk dire warnings of dastardly deflation...

But what's so deadly about discounts? Do producers really suffer under a deflationary episode, as we're constantly assured they do? After all, aren't producers also consumers? Do they not, therefore, also stand to benefit from lower costs?

In a now classic interview with Steve Forbes, Jim Grant provided an illuminating walk down memory lane...

"We've seen this before," Grant told Mr. Forbes some years ago, "in many different ages of American economic history. The late 19th century was a time of persistently dwindling prices. Some people resented it, of course, and there was a progressive movement - so called - that mobilized itself in opposition. But, on the whole, Americans rather enjoyed a great generation of progress. In the 1920s, prices were stable or dwindled. In the early 1960s, the same.

"As recently as 1954," continued Grant, "there were 12 consecutive months of falling prices, as registered by the CPI. If you go back and look at the newspapers, you will search in vain for expressions of hysterical concern about that as we certainly see today."

What, if anything, has changed during this past half century or so? When did "high and higher prices everyday" become so en vogue?

"I think what has changed is not so much the behavior of prices," concluded Grant, "but rather the attitude of our central bankers towards prices. They feel they must control them and they must raise them up. The Fed has moved to substitute price administration for price discovery."

And just how does the Fed achieve this dubious end, you may be wondering? Henry Hazlitt explained the process in his artfully titled column penned back in 1946, "The Fetish of Low Interest Rates."

When interest rates are kept arbitrarily low by government policy, the effect must be inflationary...The natural rate of interest is the rate that would be established if the supply and demand for real capital were in equilibrium. The actual money interest rate can only be kept below the natural rate by pumping new money and new credit into the economic system. This new money and new credit add to the apparent supply of new capital, just as the judicious addition of water may increase the apparent supply of real milk.

~Henry Hazlitt, The Fetish of Low Interest Rates

Through "watering down the milk," to borrow Hazlitt's metaphor, the Fed has successfully spared us the immeasurable inconvenience of lower prices. In other words, the Fed is diluting the value of the currency in which our favorite knickknacks and gizmos are denominated, thus offsetting the gains made through productive efficiency and the market's natural downward pressure on prices.

Hazlitt's musings might well have been written yesterday. And yet, more than half a century later, his words have barely touched a central banker's ear.

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And that’ll do us for another Sunday Session, dear reader. We’ll leave it there and let you get to the game/couch/bar.

Until next weekend…

Cheers,

Joel Bowman