Until Something Breaks

No magic... no genius... and no common sense

(Source: Getty Images)

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

Last week came more evidence that inflation is not going away. Today, we explain why. MarketWatch:

In data released Friday, U.S. producer prices rose 0.3% in November versus the 0.2% median forecast from economists polled by The Wall Street Journal. The increase in producer prices over the past 12 months slowed to 7.4% from 8.1% in the prior month, and was down from a 11.7% peak in March.

The report, which came in above expectations, indicated that there’s less moderation in price pressures than analysts had expected for last month.

Foretelling much worse inflation sometime in the future, prices for finished consumer goods actually went up at a 16% rate – the highest in 48 years.

Three Major Busts

But that’s the trouble with a ‘sea of lies;’ it inevitably gets stormy. Ships run aground. 

The Fed gave out the lie that it could manipulate the economy and make us all richer. It claimed to be “smoothing” the economic cycle. No more bubbles. No more busts.

But thanks to the Fed, we’ve seen 3 major bubbles in the last 22 years. And three major busts. We’re still in the 3rd one. 

The Fed had no magic…no genius…and no common sense. All it was really doing was ‘printing up’ money…and handing it out to its friends on Wall Street…and to the government itself. As long as the money kept coming – they could refinance old debt with new, cheaper debt, and the economy looked stable and healthy.  

But it was actually getting weaker and more vulnerable to inflation. The debt, public and private, ballooned by more than $60 trillion since the beginning of the century.

And who will pay it? The same people who will pay higher prices for everything. The same people who have been losing income for 20 months in a row…and who will lose their jobs in the next recession.

And this time, the Fed won’t come to the rescue.

Facing US policymakers right now, for the first time in 4 decades, is a headwind that won’t go away: inflation.   

That’s the big difference between the 1982-2020 period and today.  

The Fed can no longer support the stock market, and the economy, with cheaper and cheaper lending rates. That is not a detail; it’s fundamental to understanding what comes next.  

Demand Boosters

In short, neither the government, corporations, nor households are going to be able to rollover their debt at lower rates. Instead, interest rates will be higher. And many debtors won’t be able to refinance at all. Here’s the latest on the debt market, from MarketWatch:

U.S. bond yields rose on Friday, giving the 10-year rate its biggest weekly advance in five weeks, after data showed that wholesale price inflation picked up in November by more than expected.

The yield on the 10-year Treasury was up 7.5 basis points at 3.567% versus 3.492% Thursday afternoon. It rose 6.5 basis points this week for the largest weekly gain since the period that ended Nov. 4.

The proximate cause of this inflation is the federal government’s over-spending during the Covid Panic…along with a long history of the Fed lending money at rates that are far too low for far too long. And though the Fed has begun a ‘tightening cycle,’ its key rate is still about 370 basis points BELOW the inflation rate. 

The lawmakers make things worse, too. Spending for 2023 is expected to reach about $5.9 trillion, or more than 25% of GDP. That will leave it with a projected deficit of $1 trillion, which will surely go up as the recession begins to bite.  

All of these are ‘demand’ boosters. They give consumers (or at least the government) more money to buy things, pushing up prices.

But there are two sides to prices – supply and demand, bid and ask. On the ‘bid’ side, the feds’ money adds to the money supply. But on the supply side, too, there are some nasty rocks in the sea of lies. Supplies of goods and services depend on labor, investment, innovation, transportation, energy, and a host of other in-puts. When those become more difficult to acquire, distorted by phony price signals, or just more expensive, prices for goods and services rise.  

Real goods and services are mostly produced by the middle class in the private sector. They drive the trucks…keep the books...run the factories…and make sure the work gets done.  

But the middle class is working less and less. The labor participation rate has gone down this entire century. Today, there are nearly 100 million adults who don’t work at all. 

Covid-era Hallucinations

To make matters worse, those who still work are often beset by busybodies. The private sector is ruled by the public sector. And the public sector aims not to increase output, but to stifle it.

During the Covid Panic, for example, the public sector actually shut down much of the private sector. Factories were closed. Restaurants and bars were shuttered. Airplanes were grounded. Much supply was lost to bottlenecks and inventory mistakes made under the influence of Covid-era hallucinations.

But even more output is lost to the steady and unrelenting, day after day, growth of laws and regulation. More restrictions…more lawyers…more accountants…more administrators…

….and every one of them rocking the boat.  

Everyday, The Wall Street Journal brings more examples.

“FTC Sues to Block Activision Deal,” says the main headline 

Friday.

Then, over in the left hand column:

“Pressure is mounting on the SEC to step up enforcement of key hubs of the crypto industry…”

This followed an announcement on Thursday:

“Federal lawmakers dealt a setback to Boeing, proposing a defense bill that didn’t exempt…”  blah, blah…

These, of course, are just the big items. Behind them are thousands of pettifogging rulings…directives and diktats…each of them making output more expensive.

So, don’t count on a quick return to the Fed’s inflation target – 2%. More likely,  inflation will be stubborn…forcing the Fed to keep raising rates “until something breaks.”

Regards,

Bill Bonner