The Scourge of the Middle Class
How inflation is hollowing out the central pillar of America's economy...
Bill Bonner, reckoning today from Dublin, Ireland...
Yesterday’s big news was not news at all. ABC News:
Fed raises interest rates 0.25%, escalating inflation fight amid banking woes
The Federal Reserve on Wednesday raised its short-term borrowing rate another 0.25%, escalating the central bank's attack on inflation just two days after the forced sale of First Republic Bank.
The Fed’s 10th consecutive rate increase arrives less than a week after fresh government data showed that U.S. economic growth slowed over the first three months of this year.
"Inflation pressures continue to run high," Powell said. "The process of getting inflation back down to 2% has a long way to go."
How long is the ‘long way?’ We don’t know. But it is possible that the Fed has already hiked about as far up as it is going for this season. Traders are awaiting the jobs report out later today. Rumors – ‘early data’ – tell us that unemployment claims are moving up fast. That, along with other signs of an approaching recession, may cause the Fed to ‘pause,’ and await developments.
On Their Way
Another bank failed last week – First Republic Bank – the second biggest bank failure in US history. Pacific Western (PacWest) may be next.
M2, measuring the money supply, is down more than 4% – the biggest decline on record.
Rents are still going up, but only at a 1.7% rate.
House prices are up 2% – the lowest rate in more than 10 years.
Lumber has fallen 80% from its May 2021 peak.
Pending home sales are down 23% since last year.
30% of San Francisco offices are vacant…7x the rate at the end of 2021.
We are still in the ‘deflation’ stage. The foam is leaving the beer. Stocks are down about 10% from their peak at the beginning of last year, 16 months ago. But we still haven’t seen the big sell-off…the crash…or even the recession. We presume they are on their way.
And when they arrive – or we get a sudden, nasty political shock – the Fed will likely turn around completely and high-tail it back to deeply negative real territory. Then, we can move from the ‘deflation’ stage to the ‘inflation’ stage…which will probably lead to the ‘hyper-inflation’ stage.
Ultimately, the Fed only has two choices: ‘Inflate or Die.’ Either the authorities print more money to keep the jig up…or they let the beer go flat, the lights go off, musicians pack up…and the party’s over.
The Cost of Empire
This week, we focused on why the deciders will continue to print money. They run an empire. And empires have life cycles of their own. Once underway, even a clownish, losing empire…like our own Empire of Debt…is hard to stop.
We’ve seen that the empire makes us all poorer; ours costs about $1.5 trillion per year. That’s about $17,000 per family of four, annually.
US tax receipts are only enough to cover domestic spending, including “transfer” payments – Social Security, unemployment comp, etc. We are just in the opening chapter of America’s Decline and Fall, and already it is politically impossible to balance the budget. So, the entire cost of America’s overseas misadventures must be borrowed…or printed. You can inflate without an empire, but it’s hard to have an empire without inflating.
This practically guarantees higher consumer prices.
We saw too that inflation is the scourge of the middle class. Real wages go down. Prices go up. And housing – the emblem of the middle class – becomes a debt trap. Families borrow to buy houses. Then, they refinance. And then they must have low rates, or they will lose their homes. The Fed ‘prints’ to keep rates low…drawing them further and further into debt.
When the Empire Dies
The shrinking of the middle class also dooms representative democracy. The elites use their access to ‘printing press money’ and their control of the federal budget to squeeze as much wealth and power, as fast as possible, from the rest of the society.
The poor, meanwhile, become dependent on the feds. The government pays for their indoctrination and education…it provides ‘affordable housing’ and subsidized mortgages…it gives out food stamps (‘Independence’ cards)…and it forces employers to pay ‘minimum’ wages. The elites even tease the poor – like a stripper at an old man’s birthday – revealing promises of ‘reparations’ and a ‘universal basic income.’ Why do demagogues target the poor? Because there are more and more of them, and their votes are relatively cheap.
With fewer independent, middle class voters…political power ends up in the hands of those who are best able to manipulate the poor. Then, they must reward the poor with free stuff, requiring more printing press money, while continuing the policies that make the poor poorer and the rich richer – including keeping the empire in business.
Yesterday, we saw what inevitably happens. The empire dies. The US, said Madeleine Albright, is ‘indispensable.’
But the graveyards are full of poor people, broken banks and indispensable empires.
Regards,
Bill Bonner
I saw the millions, if not billions of taxpayer dollars change hands during my 12 years in the US Army and four combat tours in Iraq and Afghanistan. Reflecting on the experience, it has to be one of the bigger boondoggles the United States has ever participated in. Neither country is better off in any form or fashion while expenditures topped $20 trillion over 20 years. I have no reason to believe that $32 trillion dollars of federal debt could ever be fully repaid.
I call it "death by government". It starts relatively innocuously. In a period of optimism and prosperity (1950s), the government, through its words, and even more by its actions, tells the voters that government can replace pesky virtue: initiative, hard work, frugality, saving, responsibility, accountability, and the people want to believe it. Government begins to expand (1960s), and both parties join hands down the primrose lane of centralization and bureaucracy (1970s+). It works until it doesn't: government gets bigger than the enterprise supporting it, producing failure. Best always. PM