Inflation and economy watch

 

When it comes to figuring out what our economy is doing, most of the high mucky-mucks of politics and finance are simply not to be trusted.  They insist that things are all wine and roses, running along quite splendidly . . . and meanwhile they're making sure they won't be affected by the downturn they must surely know is coming.

I've been accused of being a financial alarmist, of issuing warnings that never seem to be realized in reality.  Well, they mostly have already been realized, as regular observers of our economy will realize:  and they continue to be realized, on almost a daily basis.  To reinforce the message, here are five inputs from different sources that you can read and research for yourself, to figure out what's going on.  I highly recommend that you take the time to do so.

First, from Quoth The Raven, interviewing Chris Martenson:

The US Is A "Runaway Train"

"We clearly have a runaway monetary fiscal train at this point in time, and it's just headed towards what I call the nuclear reactor critical mass runaway moment,” Chris told me. “Higher interest payments beget more borrowing, which begets higher interest rates, which begets higher interest payments. And you're on that spiral. That's the death spiral, which happens to companies, but it can happen to countries too.”

He continued: “We could have probably kicked the can another cycle or two, but now you have the rest of the world backing away, if not trotting away from the U.S. dollar, and people don't get it yet. China's negatively hoarding their treasuries, they're dis-hoarding right now. So China's selling. Japan's in a world of hurt. I don't know if you see, but the yen's here banging around at the 160 level again. So they're selling, and their big bank has to probably sell some treasuries. Russia, obviously not buying any of our crap—they kicked that habit in 2018. But Saudi Arabia now not buying treasuries, dis-hoarding.”

And he raised questions about where, exactly, treasury demand is coming from, telling me: “So who's buying? Well, you go to the Treasury International Capital Report. You find out, oh good, the Cayman Islands stepped in. Dude, we need an audit of the Fed right away. I don't think it's always suspicious to see it, no, because every time we need the Cayman Islands and the UK to step up and buy just hand over fist treasuries, somehow they do.”

Finally, Chris — like most of us watching flawed policy unfold — says we’re definitely going back to QE: “But listen, here's a prediction. It's very easy to make for me. The Fed's going to have to go back to QE. It's not just lowering interest rates—that's going to do dick all for us at this point. They're going to go back to QE because we can't risk a treasury failure. We have $9 trillion of debt, new and existing, rolling through the auction market this next calendar year. And so the Fed's going to have to step in and start buying that stuff. Full stop. That's inflation."

Next, from CNN:

The world is sitting on a $91 trillion problem. ‘Hard choices’ are coming

The International Monetary Fund last week reiterated its warning that “chronic fiscal deficits” in the US must be “urgently addressed.”

. . .

Tackling America’s debt problem will require either tax hikes or cuts to benefits, such as social security and health insurance programs, said Karen Dynan, former chief economist at the US Treasury and now professor at the Harvard Kennedy School. “Many (politicians) are not willing to talk about the hard choices that are going to need to be made. These are very serious decisions… and they could be very consequential for people’s lives.”

. . .

In the United States, the federal government will spend $892 billion in the current fiscal year on interest payments — more than it has earmarked for defense and approaching the budget for Medicare, health insurance for older people and those with disabilities.

Next year, interest payments will top $1 trillion on national debt of more than $30 trillion, itself a sum roughly equal to the size of the US economy, according to the Congressional Budget Office, Congress’s fiscal watchdog.

Debt is a problem in itself, right enough, but it also boosts inflation, which is something affecting far more of us.  Here's Jeffrey Tucker, who reminds us about "The Many Faces Of Inflation".

There is clearly no chance that inflation has been running 3 to 5 percent. Once you do all the corrections to the data, you can easily generate a number 3 times that level or perhaps even 4 or 5.

No one knows for sure.

It’s not just higher prices for the same goods and services you used to buy.

Tucker goes on to list numerous inputs to overall inflation:

• Shrinkflation;
• Substitution of cheaper ingredients for more expensive ones;
• Service costs;
• Increases in taxes and fees;
• Shipping and delivery charges;
• Confusing and misleading charges and additions to your phone and utility bills;
• Increased insurance costs (Tucker notes that "Neither home nor auto insurance are included in the calculation of the Consumer Price Index");
• Higher interest rates;
• Increases in home rental and purchase rates.

He concludes:

All of this stuff is complicated for a reason. It’s because all companies today are hiding their charges from the customer for fear of a revolt. If they are hiding them from the customer, they obviously and easily hide them from the data mavens at the Bureau of Labor Statistics.

. . .

When you add it all up ... we find something approaching what used to be called hyperinflation. And this is taking place even as the business press is celebrating the end of inflation, and has been for fully two years!

Strange times indeed: the dollar is being gradually wrecked domestically while growing stronger internationally, and it’s never really been in the headlines.

This is why you feel so gaslit these days.

In another article a few days later, Tucker asks "Wait, How Much Have Groceries Gone Up?"

The most startling moment in the CNN debate last week between President Joe Biden and former President Donald Trump was not from the candidates. It was from moderator Jake Tapper, who said with a straight face as if it were just the science that grocery prices were up by 20 percent since President Biden was elected.

. . .

The trouble is that this fits with no one’s experiences. People on social media are posting receipts showing grocery prices up by anywhere between two and 10 times that rate.

In one viral video that offered receipts, a man bought 45 items (he says a full month of groceries) two years ago for $145. WalMart’s software allows him to reorder that now. He tried it just as a test. The new price: $414.

That’s an increase in two years of 185 percent! If we stretch that to three years assuming no inflation in the first, that’s an annualized increase of 61 percent. Over two years, it’s 92.5 percent.

Adding in some inflation in the first year, we can round it to 100 percent annualized, which is hyperinflation by any measure.

Commentators offered corrections that this is just one person’s experience. Maybe there was one item in there that went up vastly in price, changing the entire basket. All that is true. However, I tried looking at a few items that I bought in 2021 and found price increases of 54 percent. That’s just one item but a very normal one: lemon juice.

When all the anecdotal evidence points one way and all the official data points another way, we’ve got a problem. The distance between real experience and the official data is gigantic. And it raises the eternal problem first articulated by Chico Marx: “Who are you going to believe, me or your own eyes?”

. . .

What about the CPI? It excludes interest rate increases on everything: taxes, housing, health insurance (accurately), homeowners insurance, car insurance, government services such as public schools, shrinkflation, quality declines, substitutions due to price, or additional service fees. In particular, on the last point, a basket must compare prices in two periods. A new service and convenience fee or a simple charge for processing is not included because it is new.

People often ask: Is this all a deliberate obfuscation or is it the limits of data collection? I tend toward the latter explanation while granting that reports of a lower rate are politically advantageous. People loathe inflation. No one wants to report bad news, and that might be true of data collectors themselves.

The data collectors are sticking with systems that seemed to work in the past, but the way in which inflationary pressures have boiled through production and consumption structures this time, which is without precedent, has simply outrun the ability of old-fashioned systems of calculation to keep up.

In essence, the real world is blowing up the models.

. . .

My suggestion: Dig through your receipts. The good old days live in your digital archive. Do your own calculation and see what you come up with.

Finally, Vox Day mentions an example that I've heard from several other people over the past few weeks.

A reader notices that the credit card companies are rapidly reducing the amount of credit available to their more conservative cardholders.

My husband and I run a small business and have noticed an unusual practice by credit card companies over the last 4-5 months.

Our business is seasonal, and during our ramp up in from February to April, we usually max out 6 cards on supplies and improvements for the coming season. And then the profits from May and June pay those down, before we start making real profits July-October. We’ve been doing this for over ten years, and typically the result of the max-out and quick pay down has been an increased credit limit. 

This year, as we have started the pay down, each large pay down amount, say $2000 on a $10,000 card for example, has come with a credit limit reduction of 50% – 100% of the amount paid. One card, upon paying it off in whole dropped from $2500 to $350 as the limit. 

We have no personal reasons that our limits in particular would be getting slashed after so many years of increases. So I am wondering if this is a systemic attempt to use debt deflation to slow the rate of inflation without further interest rate increases. 

More generally, if what I’m seeing is systemic, is this a correct understanding of debt deflation? 

This is 100 percent debt deflation. And in some ways, it’s more worrisome than the leadup to the 2008 contraction. Whereas in 2008, there was a dearth of people willing to borrow, now it is apparent that the banks simply can’t afford to offer the credit if there isn’t a sufficient amount of interest to be gained.

Which suggests that the 2024 credit cruch and subsequent financial institution failures will be bigger and more consequential than we witnessed in 2008. It’s even possible that the federal government will not be able to bail out most of the failing institutions.

I had something similar happen to me during the 2007/08 financial crisis.  At the time, I had a high-limit credit card on which I was carrying a large balance.  Out of the blue, when I made a large payment to reduce the balance, my credit limit was slashed by more than 50%, to equal the remaining balance.  When I protested, the card issuer informed me that they were reducing everybody's credit limit "due to the financial crisis", despite the fact that I'd never defaulted on a payment and was in good financial health.  They then informed me that I would lose my favorable interest rate and have to pay a greatly increased one on my outstanding balance, and would be required to further reduce my balance within a few months.  I closed my account rather than adhere to their ridiculous restrictions.

Unfortunately, it looks like more than a few people today are encountering similar policies.  Apart from Vox's correspondents, I've heard similar reports from at least a dozen sources.  If credit card issuers are being that cautious and restrictive, what does that say about their perspective on current and future economic conditions?  They're clearly preparing for something not very good.  Shouldn't we do likewise?

Food for thought.  I can only suggest that we all take these factors into account now, while we may still have some financial "wiggle room".

Peter