The horizon is not so far as we can see, but as far as we can imagine

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Why Economists Are Wrong About How Good The Economy Is, And Regular People Are Right

Practically every day I read an economist like Paul Krugman or Brad DeLong talking about how the economy is the best ever, but ordinary people just don’t get it, and must be idiots influenced by propaganda.

Someone’s an idiot on this subject, but it’s not ordinary people.

Mish Shedlock had a good article on medical inflation. Here’s two charts from his article. First, costs:

Second, CPI for medical:

You might be noticing a—slight disconnect. The cost of medical care services (which is what you care about as a patient) are dropping, according to the Bureau Of Labor Services (BLS).

Mish has the extended explanation, and you should read his whole post.

Now, back in 2010 I wrote an article on how inflation statistics are bullshit. One example was automobile costs. Here’s the chart from that.

Yeah. right.

The inflation statistics, at the this point, are complete bullshit. Absolutely worthless in entire categories.

When it comes to how good people feel two things matter: how many people have a job, and how much money they’re making. When economists look at wages, they look at “inflation adjusted wages.”

How much your money buys. So, since the inflation numbers are garbage, the inflation adjusted wages are garbage.

A long time ago Stirling Newberry gave me a rule of thumb, which is that people are fooled in generalities but not in specifics. Which is to say, people know what hurts or feels good in their own lives, though may be completely clueless about the generalities. But when you take a survey asking people how the economy is doing, what you’re really asking is “how does it feel for you and people you know.” The answer is “shitty.”

I’ve personally seen, in Toronto, Canada, foodprices increase at least two-thirds. If I buy the shopping basket I bought for $30 in 2020, it now costs me about $50. A lot of things have doubled in price. Rent is way up for most people.

And when I talk to other people, no matter where in the US or Canada they’re from, I hear the same thing. So I’ve never believed the BS talk about the “best economy ever.”

Back in the 90s, there was a rather good book titled, “Economists are bad for your health.” Economists are clueless. North of 99% of them missed the 2000’s housing and financial bubble, for example. The advice they give on how to run economies is almost always not just bad, but terrible, at least for 96% or so of the population.

The most important requirement to understanding the world is accurate perception. Truth, if you will. If you don’t know the truth, you’re going to draw the wrong conclusions. Economists believe BLS stats, so they’re full of it. Add to that the fact that Economics as a discipline is mostly wrong about almost everything macro, and economists are out to lunch in a very dangerous way.

(Note that I predicted the financial crisis, publicly, in advance and spent years before that writing about the bubbles. All the necessary information was available, if you didn’t think nonsense like markets being self-regulating and housing prices always going up. A correspondent once did a search to find out how many people predicted the crash in advance. He found 39. Where were all the economists, who are supposed to understand the, well, economy?)

Anyway, ordinary people are right. Their wages haven’t increased enough to make up for the increases in key prices. You can skip on a lot of things, but not food and shelter, and skipping on medical services is bad too. As for autos, well, most people need them or they can’t get to work or go shopping.

We have late imperial disconnect: the elites live in a world where everything is great, while ordinary people live in the real world, and it sucks.

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Why The Rich Love To Crush Wages, Cut Pensions And So On To Fight Inflation

The majority of price increases, of inflation, right now, are driven by price increases that are higher than increases in costs. Numbers I see tend to range from the mid sixties to the seventies.

They aren’t, then, driven primarily by wage increases.

The obvious way to solve this is to put in a surplus profit tax based on 2019 profit levels and forbid other ways of withdrawing excess profits like stock buy backs and option grants. Only after doing this would you consider trying to crush wages or cut pensions or other benefits.

That is, if your primary aim was to reduce inflation.

But it is undeniable that crushing wages will will reduce inflation somewhat, even if it is far from the best way to do so and it has a great advantage.

It makes the rich even richer by reducing their wage costs!

On the other hand, an excess profits tax would make the rich not get richer nearly as fast.

You can see why governments controlled by the rich (yes they are, let us not be tedious) would prefer to crush wages as opposed to limit profits.

For the elite to support the sort of policies which would not crush wages and which would appear to reduce their profits, they would have to be like a good chunk (but not all) of the post-war elites. Having seen what happened when demand collapsed in the Great Depression, they knew they needed wages to rise and were thus willing to share and to pursue some policies which they didn’t like.

After all, while the fastest way to deal with inflation is an excess profits tax, the structural way is breaking up control of industries and re-regulating anything that even sniffs like an oligopoly or monopoly, plus slamming on huge estate taxes, wealth taxes and 90% top marginal tax rates, while putting a Glass-Steagall analogue back in place and re-nationalizing key parts of the economy.

Now, as it happens, the post-war economy was the best we’ve known since we were keeping records. High growth, reducing inequality but still plenty of profits. The rich had to live with only getting 20X or so as much as the middle class, though, and that’s just unacceptable to them.

Now never let it be said that the rich don’t learn: they do have a dim understanding of “demand collapse bad” and they have a solution, which they’ve been trying since 2008.

“What if we just print tons of money!?” Trillions and trillions of dollars were produced and are currently being produced out of thin air, with no increase in the underlying economy, and given to rich people to bail them out and even when they don’t need bailing out.

Who needs to actually grow customers and have customers having increased real incomes when you can just give yourself money?

This is why things will only improve when current elites lose power wholesale.

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The Inflationary Consequences of Friendzoning and Decoupling

During the rise of China and the “One World/Free Trade” period, one good thing which can be said for offshoring is that it helped reduce inflation.

It, indeed, drove much of the inflation reduction, with most of the rest of the inflation reduction being concerted efforts to keep wages low, with a strong assist from the Bureau of Labor Statistics to use methods like hedonics to pretend that inflation was lower than it actually was.

The new mantra is “friendzoning” — not so much bringing industry back to the US but moving it to friendly countries. Vietnam and Bangladesh are mentioned often, and Mexico will benefit as well. But friendzoning has limits, these countries don’t have the capacity to quickly take on all the production done for the US and Europe, nor do they really have the technological ability in the medium run.

This means that the determination to have a new cold war, and possibly a hot war with China will drive inflation higher for years to come.

The solution would be to, more than friendzone, re-shore: bring production back to core nations. But that would require reducing the cost structure: and I don’t mean wages so much as I do predatory finance and driving rent and housing prices down massively — about two-thirds at a minimum, along with no longer health-care predation. Do those things and wages don’t have to rise nearly as much, and the US (and Europe to a lesser extent) become much more competitive.

But to re-shore, you have to, in effect, give ordinary people a decent deal and not treat them as assets to shorn, but rather as productive assets to be cared for. (Note you don’t have to do this out of the goodness of your heart, our elites don’t have any of that.)

For the time being, this seems unlikely, so don’t expect inflation to go away. All the Federal Reserve can really do to stop it is push the economy into the dirt, but that’s not going to be a long term solution unless it stabilizes at “you’re a third world nation”, which, actually, probably won’t solve it either.


When Is the Next Oil Driven Inflation Spike In the US? December to March.

Recently read a smart lad who noted a few simple things:

  1. Biden’s been releasing oil from the Strategic Petroleum Reserve (SPR).
  2. The SPR has basically two types of oil: sour and sweet.
  3. Biden has been releasing almost all sour since that’s what most US refineries need.
  4. At the current rate of release, the SPR runs out of sour crude to release around March.

A Bloomberg article from June noted the same issue (just prior to Joe’s begging visit to Saudi Arabia.)

OilX, a consultant, estimates that by the end of October, the SPR will hold only 179 million barrels of medium-sour crude. To put that into perspective, during the period June 2021 to October 2022, the US is likely to sell about 180-190 million barrels of medium-sour crude from the reserve. Clearly, Washington is running out of firepower to repeat that exercise.

Of course, when Biden stops releasing oil, either because he’s out or because he chooses to stop after the election or the holidays are over, then prices are going to spike if sanctions are still in place against Russia and/or Russia is unwilling to sell to the West. As a bonus, the government will need to buy oil itself to stock the reserve back up.

This means you have to ask yourself whether or not the Ukraine war will still be going on thru the winter. It’s hard to say, but unless the US tells the Ukrainians to give Russia enough of what it wants to get peace, the answer appears to be yes, especially as winter is the best time to wage war in Ukraine, as it is when the ground is most solid and many rivers are likely to iced over. Putin needs a decisive, obvious win and if he can’t get it diplomatically, he has to get it on the ground.

Putin’s happy with slowly grinding forward militarily in part because he’s also aware of what sanctions are doing to the West. The most rabid anti-Russia country outside of Eastern Europe has been Britain, and energy price increases which are often 500% or more are taking Britain apart. More of this later, and I want to see what new PM Truss’s plan is, but if Britain doesn’t get its act together soon, this could be the year its descent into 2nd world status becomes unstoppable.

Russia can get most of what it needs from sources other than Western nations, but energy and inflation issues are kneecapping much of the West. Why not drag things out and see how much damage is done?

Remember that the entire previous post-war order was essentially destroyed by stagflation caused by oil price shocks back in the 70s (that gave us neoliberalism.) This order can be destroyed the same way.

What this means for Americans is that there’s a very good chance of a big inflation spike after the election. It might hold off for as long as spring, it might start a few weeks after the election. It won’t just hit gas prices, oil is important for much more than driving cars, so it’ll rip thru the entire economy. Stock up on what you need before the election if you can.

And let this be a lesson that GDP means very little when the chips are down. Who cares if you have Hollywood and lots of fast food stores and Google and FaceBook? What matters is what you grow, dig up, refine and make.

Russia has enough energy and food and can buy the manufactured goods it needs from India and China.

The West, with a few exceptions, does not have enough energy and the primary manufacturing power is China. In certain ways we’re in a weaker position than we were during the last oil shocks.


The Fed Wants To Crush Wages So Corporations Can Price Gouge

There are multiple sources of inflation. As a friend once said, one man’s inflation, is another man’s pricing power.

Right now we have a situation where inflation is caused by (non exhaustively):

  1. Disruptions to the supply chain.
  2. Lots of dead and disabled workers (over a million dead in the US, who knows how many disabled) leading to a tight labor market in some countries.
  3. Sanctions on Russia (food, fuel, minerals, which feeds into other things, plus disruption of the dollar hegemony system.)
  4. Massive price increases by corporations above their costs, to increase their profits.

I’ve seen estimates of about 50% for corporations simply increasing prices because they can, even though their costs haven’t risen that high.

What does the Fed think should be done about inflation?

Chair Powell keeps mentioning the relationship between the high level of job openings and wage/price inflation,” Nicholas Colas, co-founder of DataTrek, wrote in a newsletter on Tuesday. “He’s not talking to investors. He’s talking to corporate America, and his goal is to have companies essentially institute a hiring freeze and end the cycle of paying up for new hires.”…

…“The Fed’s goal is to convince corporate America to enact a short-term hiring freeze, and it will keep raising rates and talking about aggressive monetary policy until that happens,” Colas wrote. “Lower stock prices are his way of convincing C-suites and boards to do that.”

“Chair Powell mentioned the ratio several times at last Wednesday’s press conference,” said Colas, who said job postings need to drop from 11.5 million to around 8 million to get to normalcy.

The only way to get there would be some sort of freeze from companies.

Since 1979 the only type of inflation pressure either the Federal Reserve or legislatures have been willing to recognize is wage-push inflation.  (See HERE for a long explanation of how the Federal reserve crushed wages with wage push inflation measures.)

This is why, for going on 43 years now, workers wages have not kept up with GDP, most people can’t afford to buy a house, rent is thru the roof, and people die due to medical care costs.

But the way to deal with companies increasing prices faster than their costs isn’t to stop employers from hiring, it’s to institute an excess-profits tax, where companies that are making a lot more than they did before the pandemic simply have it taxed away. Granted, that would take legislative action, but the Fed isn’t even calling for it, and the Fed has a powerful bully pulpit.

You could also aggressively act on anti-trust concerns and break companies up so that they have competition: they can raise prices in large part because they are unregulated oligopolies who raise prices in lockstep.

Those are legislative actions, but the Fed is the main regulator of banks and brokerages and could stop loans from being given to firms buying up the housing and rental supply and jacking up prices. It could encourage the government entities which guarantee housing loans to put conditions which disallow rent increases beyond a few percentage points, and not allow large numbers of homes to be owned by corporations.

There are certainly other steps which could be taken, but the point is that the Fed isn’t pushing anything but “don’t hire and don’t give raises”.

In tight labor markets wages should rise. That’s good. If every time there is a tight labor market you squeal about inflation then hammer the economy into the ground to kill wages, of course people’s wages will fall behind, and if that’s substantially the only thing  you ever do to deal with inflation for over 40 years, of course wages will be hammered.

If, at the same time you run policies which cause massive inflation in housing, rent, and medical care (and now food), well then, ordinary people will be screwed because those are things they must have, no matter the cost, so if they can pay they have to.

What the Fed is doing, in other words, is class warfare, the same as everything of significance it has done since 1979. People will die because of this and become homeless.

As for Congress, well, increasing taxes on corporations is unthinkable to them, so I guess people dying and becoming homeless and so on is their preferred outcome.

Might want to go demonstrate at the houses of key Congress members and Fed Reserve members too.

And remember, much of why the labor market is tight is because they let a million people die and probably millions be disabled by not handling Covid, It was noted near the beginning that the Black Death caused an increase in wages and that Covid might do the same.

It has. Now, on top of letting you die, they want you to not get wage increases, so that corporations can make huge profits and the rich can get even richer.


Ukraine and the Coming Inflation

Brief post. Articles about inflation have been coming out, and they’re right, inflation is going to get a lot worse because of the sanctions on Russia, especially when Russia retaliates. If you can afford to stock up now, do. If you want big ticket items other than, perhaps real-estate, you should buy now. If you have a business which needs certain key goods or processed items, buy what you can now.

Russa isn’t really an industrial power, except for arms, but it provides not just energy but an array of minerals that are key to industrial production. While there will be workarounds to sanctions, you should still expect this to hit costs. Russia is also the largest exporter of wheat in the world, with Ukraine as #2, and you can expect food prices in general to keep rising.

Further, it’s hard to say how attempts at enforcing sanctions with China (who will resist), and perhaps with India and other countries, will cause unpredictable inflation spikes in other products.

As for real-estate, the affect is hard to entirely predict. So far, the British have resisted urging to truly sanction Russian money (because it would collapse London real-estate and hurt the City badly), but we’ll see if that continues. Whatever the case, a lot of Europe may be subject to real-estate price reductions due to sanctions, and this might be true in New York. I lack enough expertise to be sure, you should look into it if it concerns you.

Then there is the issue of Chinese money. China won’t be subject to serious sanctions yet, the West can’t afford it. However, the Chinese themselves may be wary of future sanctions, seeing them coming and that may dry up some of their massive foreign investment. Others might increase their investment and seek second passports, so they can flee when the time comes, but I think that’s less likely to be massive than it would have been pre-Covid. Whatever the advantages of living in the West, they are outweighed by, “won’t control the plague” for most, especially older Chinese who control most of the money.

All of this is complicated by the fact that the real-estate market is changing, structurally. Covid was used by private equity and other institutional investors to snap up real-estate, including single family homes and other types that traditionally have not been institutionally controlled. If there is a drop in demand, they will simply hold as much off the market as necessary to adjust supply and demand and allow them to over-charge. Their real risk is financing, but even as the Fed increases interest rates, it will continue special operations to give the rich and large corporations essentially free loans and money, so I don’t think they’ll actually be paying market rates. (We need an article on how this sort of action vastly increases the odds of collapse, and I’ll try to get to it soon.)

Times are going to get worse, not so much because of the Ukraine invasion, but because of its fallout. By itself, it would have changed as much as the Iraq war did (some important things, yes), but because it is being treated as existential and a cause for massive economic war, even centrists have realized that it is the “End of the End of History” (which, of course, never ended).

Welcome back to history and to interesting times.


Sneering that there is no runaway inflation misses the point

A lot of people though that unconventional monetary policy (aka. printing huge amounts of money) would lead to runaway inflation.

They were wrong, and the fact that they were wrong is a cudgel used to beat them.

But the reason they were wrong is important, as I noted last week: they thought that all that money would get to ordinary people rather than virtually all of it going to the rich and corporations.

In retrospect, and perhaps even at the time, naive.  But what the critics are castigating them for is believing in the good faith of policy makers: thinking that those policy makers actually wanted an economy that worked, if not for all people, then for more than the top one, five or ten percent.

They were wrong because they weren’t cynical enough or weren’t realistic enough to realize that developed world elites are so depraved that they are willing to print trillions of dollars to give almost exclusively to people who are already wealthy, in order to ensure they stay wealthy.

Monetary policy, at this point, has no other actual aim in most countries. It is meant to bail out indebted securities firms, to keep the rich rich, and to make them richer. If it happens to do anything else, that’s most likely an unfortunate side effect, since poor governments sell off crown assets cheap; and poor people work for almost nothing.

One can (and did) point out this a short-sighted policy likely to rebound on the rich, but they do not really believe it, nor do they really believe any one else deserves money.  They are the “value creators” and they are worth what they are given.  They, after all, bought up government fair and square.  Now they want a return on their investment.

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Yes Virginia all that money printing did show up as inflation

One of the great “mysteries” of the last 7 years or so is why all the money from unconventional monetary policy hasn’t shown up as inflation.  Many analysts thought that printing that much money must surely increase prices, but inflation indices in most of the developed world are barely up, and in many cases are flirting with deflation.

The answer is obvious, but you’ll hardly see anyone point it out.

First, who was the money given to?

Rich people and corporations.

Ok then, what do rich people and corporations spend their money on?  Stocks, and real estate—high end real estate.

In America as a whole, let alone New York, housing prices have not returned to pre-financial crisis values.  But luxury apartment prices now exceed pre-financial crisis pricesReal estate prices, period, in London, are now higher than pre-financial collapse.

Meanwhile, the Dow Jones Industrial Index is up about 175% off its lows of 2009. The annualized gain is therefore about 29% a year.  GDP has not risen anything like that, neither have wages.  Corporations, however, are flush with money, and they have spent a great deal of it on stock buy-backs, while rich people, of course, have bought stocks.

Inflation has, then, shown up exactly where one would expect, in the assets bought by the people who were given money.  Ordinary people did not receive the largesse from unconventional monetary policy, rich people and corporations did.

This is not hard, this is not difficult, this is not complex.  The fact that mainstream analysts and pundits do not connect the dots on this is because they do not want to.

That inflation has not shown up in much (though not all) of the rest of the economy is simply based on the fact that no one else except the rich and corporations has received (I can’t call it “earned”) more money.  Nothing more, nothing less.

This economy is entirely artificial. It is based on giving money (in various ways) to those who already have a lot of it.  This is in no way a competitive market, certainly not a free market, and barely deserves to be called a market at all.  It is pure oligarchical abuse of the power of printing money in all its modern guises.

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