“Transitory” is the New Spandex: Powell Admits it, Still Denies its Cause. Why this Inflation Won’t Go Away on its Own

Blames tangled-up supply chains but not what’s causing supply chains to get tangled up in the first place: The most grotesquely overstimulated economy ever.

By Wolf Richter for WOLF STREET.

Fed Chair Jerome Powell, during a panel discussion hosted by the ECB today, admitted again that inflation pressures would run into 2022 and blamed “bottlenecks and supply chain problems not getting better” and admitted they are “in fact at the margins apparently getting a little bit worse.”

“The current inflation spike is really a consequence of supply constraints meeting very strong demand, and that is all associated with the reopening of the economy, which is a process that will have a beginning, a middle and an end,” he said.

OK, good, he almost gets it: “very strong demand” is causing this. But where the heck does this “very strong demand” come from?

Here’s where: The most grotesquely overstimulated economy ever.

The Fed has handed out $4.5 trillion to investors in 18 months, and repressed short-term interest rates to near 0%, and long-term interest rates (via the $120 billion a month in bond purchases) to ridiculously low levels, and this has inflated asset prices, including home prices, and beneficiaries are feeling rich and flush, and they’re going out and borrowing against their assets and buying $70,000 pickup trucks, electronic devices, yachts, second and third homes, and a million other things. That’s where much of the demand comes from.

The other part of the demand comes from the government, which spread $5 trillion in borrowed money around over the past 18 months – stimulus checks, forgivable PPP loans (over $800 billion), extra unemployment benefits, funds sent to states to spend how they see fit, to airlines and other big companies to bail them out, which then used this money to buy out their employees that then spent this money.

“We see those things resolving,” Powell said. “It’s very difficult to say how big those effects will be in the meantime or how long they will last.”

When he was asked if the Fed wasn’t “overdoing” the stimulus, he just brushed it off: “The historical record is thick with examples of underdoing it,” he said. “I think we’ve avoided that this time.”

The Fed’s stimulus through asset price inflation isn’t going to “resolve” unless markets come down hard – bonds, stocks, homes, cryptos, and a million other speculative vehicles. Those markets have been inflated to a mind-boggling extent, and some of this inflated wealth is going to get spent unless it evaporates first.

So when does Powell expect this money from the markets to evaporate? There is so much excess cash chasing assets and so much asset price inflation out there now that it may take years to remove their stimulative effects – unless there’s a massive all-encompassing crash, in which case the Fed would start all over again.

So what exactly is going to stop these inflationary pressures? Divine intervention? Maybe.

And yet, despite the stars being lined up like this in favor of drawn-out heavy-breathing inflation, the Fed doesn’t see the current inflation spike to “lead to a new inflation regime, in which inflation remains high year after year,” he said.

And there’s another thing in this Spandex transitory inflation: Consumers and businesses have changed, all of a sudden. The money vaults were opened, and suddenly, price spikes are no longer demand killers – as they had been in prior decades.

People and businesses now pay whatever. Businesses do so because they know they can pass it on to the next entity in line, and finally to the consumers; and consumers do so because they’re flush with these grotesque amounts of sudden money from the heavens – Fed and government stimulus.

There are many examples of “price spikes don’t matter.” New and used vehicles are among them. Vehicles are the ultimate discretionary goods. Most people can just keep driving what they have. The average age of all vehicles on the road is 12 years. Most 12-year old vehicles are still perfectly good. Leases terminate after two or three years generally, and people can buy the vehicle at a preset price at the end of the lease. Very few people have to buy a new or used vehicle this month or next month or this year. They buy because they want to buy.

Consumers proved this during the Great Recession when they didn’t want to buy, and new and used vehicle sales collapsed, and stayed low for years, until consumers wanted to buy again.

Now, flush with money and newly inflated wealth, they want to buy. Sales were strong in March and April, but then inventories plunged, and got depleted like never before, and there wasn’t hardly anything to buy over the summer and in September, and sales plunged, but prices skyrocketed because enough consumers wanted to buy, and they paid no matter what to get that truck or SUV.

If consumers had refused to buy at those prices, dealers would have drowned in inventory in a few months. And price cuts would have set in.

That’s a mindset: to pay whatever. Suddenly price doesn’t matter. Consumers have accepted that prices will be far higher, ridiculously high: Used vehicle retail prices spiked by over 40% year-over-year this summer, and in August were up 32% from August last year, when prices had already begun to spike.

Auto dealers, including the largest one, Auto Nation, booked fantastical gross profits because consumers suddenly didn’t mind paying out of their nose for vehicles.

This grotesquely overstimulated demand, and the attitude it generated among businesses and consumers that price doesn’t matter, have created a situation where price spikes don’t cause a collapse in demand that would then pull down the price spikes.

While this has happened with some commodities, it hasn’t happened with consumer products. And this is a radically new dynamic that we haven’t seen in decades. And it isn’t going away, unless the whole shebang comes apart all of a sudden – which Powell and the rest of the Fed are certainly not predicting.

Meanwhile, they still have the foot fully on the accelerator, repressing interest rates and printing $120 billion a month.

So OK, that $120 billion a month will likely be tapered out of existence over the next nine months or so. And long-term interest rates have already ticked up in response to the expected end of QE. And yesterday, St. Louis Fed president James Bullard came out and put the beginning of the balance sheet unwind – asset levels actually dropping – on the table for mid 2022.

But short-term interest rates are not on the table yet. And even if long-term interest rates continue to rise, they will remain deeply negative in real terms – below the rate of CPI inflation – which is very stimulative.

So why would this Spandex transitory inflation suddenly end on its own, with all this stimulation still going on, with the whole mindset about pricing having changed, with all this inflated wealth still out there ready to get spent and create more of this “very strong demand?”

There is simply zero reason that this would change on its own. And from what we know, the Fed is certainly not counting on – and is not trying to engineer – a major asset price plunge to fix this inflation situation.

When the Fed acknowledges, way too late, that this Spandex transitory inflation is in fact ingrained, and won’t just go away on its own, the Fed would be prepared to act, Powell assured us. And eventually, it would, because inflation in the US, if it’s big enough and lasts long enough, becomes a political bitch.

And the Fed does have the tools to deal with it: Jacking up interest rates, for example, with 50-basis-point rate hikes 10 meetings in a row, and by reducing the assets on its balance sheet by something like $200 billion a month for two years straight. That should do it, I’d say. The tools are there. The will is not.

But until the Fed gets serious about it, inflation isn’t going away on its own, and any efforts by the Fed to persuade people that inflation will just go away, despite the ongoing stimulus, sound outright silly.

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  206 comments for ““Transitory” is the New Spandex: Powell Admits it, Still Denies its Cause. Why this Inflation Won’t Go Away on its Own

  1. otishertz says:

    It’s called gaslighting when one causes the effect that they then blame on something or someone else, usually claiming victomhood.

    If you look closely, most politics are this.

    • JoAnn Leichliter says:

      Well, shucks. I missed the line I needed to stand in to get all of that government money.

    • Morty Mc Mort says:

      Note:
      Huge Swaths of the Middle Class and up, own Homes.
      Homes have gone up in value massively.
      So.. the Middle Class Homeowner, who has a home they bought in the past has built “wealth”
      Depending on when they bought the House..
      Example – In Toronto Canada, Numerous business associates, have housed they bought 20 or Thirty years ago.. for 300k or LESS..
      Now worth 3-5 Million..
      There is NO Capital Gains Tax on the sale of Principal Residence in Canada…
      So, some of these people, nearing retirement…
      Have “Made” 3-5 Million Tax Free Dollars.. and they can cash out..
      Or borrow against this “Wealth”
      If you had 5 Million Dollars of Real Estate Wealth to borrow against..
      With ZERO Tax exposure..
      Would you feel wealthy?
      Might you spend more freely?

      • Bobber says:

        All that “wealth” was taken from Millennials and Gen Z. As home prices increase, it’s a boon to the buyer, a massive loss to potential home buyers, many of whom get priced out forever.

        Nice work, central banks. You have shifted massive amounts of wealth from one generation to another, regardless of effort, ingenuity, or merit.

        To add insult to injury, as these lucky boon riders spend their ill-gotten pot of wealth, with protective support from central banks, millennials and Gen X face higher prices across the board on everything they need to survive.

        • Nacho Bigly Libre says:

          Central planners have stolen wealth from older generation too.

          Morty,

          Don’t you see the downsides of having to sell or lien your primary residence for daily expenses?

          When you are on a fixed income and the money you have is worth less everyday, would you feel wealthy? Would you spend freely?

        • Nick Kelly says:

          The extreme price of purchased units also sets a floor under rents but not a ceiling. Whether the unit was bought to flip or to rent or even to live in, if may end up as a rental. If it has a mortgage it must be covered by income or face a loss. Years of rent increases may be baked in.

          Along with stocks there can’t be a soft landing in RE. The Fed didn’t take away the punch bowl, it spiked it. Valuations are too extreme to descend slowly if rates normalize. JP has to face the fact that there is no way out of this that doesn’t inflict pain.

          Ex rent controls, the only way to return rents to a normal % of income is a housing crash. Earlier boosts to the Fed rate or even just NOT buying MB bonds might have prevented the last year of insanity, spared renters and those buying at the top.

        • KGC says:

          LOL.

          You think that’s the biggest cross you’ll have to bear? Wait until you get taxed to pay off all the social program entitlements from the “infrastructure” trillions that will never end.

        • cd says:

          price discovery was covered up by Bernanke Put, the fed since then, Treasury and Govt, Wall Street and Banks

          its the libor fix done large

        • ru82 says:

          Japan has had zero interest rates for 25 years. The US for only 11. You may have at least 15 more years of close to zero interest rates.

          You think housing has gone up a lot in the US check out the Euro counties that have had NIRP. I believe Prices have ha ve risen faster.

      • KGC says:

        Yes, those nearing retirement, who are, or will be, on a fixed income, can “cash out” and then face the rest of their lives without a home. Or they can now pay ever higher taxes on an asset that was invested in with the hope of limiting the costs of shelter during the final years of their life when they had stopped having to work every day. Or they can move to another country, hopefully one with a medical infrastructure and lower cost of living and use that “wealth” to sustain their lives and forego passing anything on to the next generation.

        Look forward to the day you have to make this choice…

        • Petunia says:

          What the govt does to working people is a disgrace. I hate hearing people on medicare saying they are still paying thousands for medical care and premiums. It’s disgusting how they are exploited. The rich are the ones getting a free ride.

        • Tony says:

          Ah, but you forgot about the option of taking out reverse mortgages! We can now extract cash from our inflated homes to support our lifestyle and stay in them until we die. Of course, the bank then owns the property after we die. (Another way to screw our millennial heirs, I suppose, who won’t get these homes through inheritance.)

        • Truckman says:

          What they are doing, in the case of the Toronto homeowners at least, is cashing out and moving to the Maritimes, where they can get the same house for a quarter the money. The influx of Ontariarians and British Colombians to New Brunswick especially, but also PEI and Nova Scotia, has been huge and is continuing. Of course, this means the locals now can’t afford a house or even a rental, and the creaking healthcare system has all but collapsed. Indeed, the locals are having to move out, which is hiding the influx if you just look at the gross population figures.

    • Cas127 says:

      I think of it as committing a crime (theft) on a global scale and then *framing* somebody/anybody else for it, using the mainstream media marital aids.

      But the “all your dollars are ours” mindset is deeply, deeply entrenched in DC, to the point that they are utterly shameless about it and utterly hopeless in surviving without it.

      • VintageVNvet says:

        ABSOFREAKING EXACTLY C10:
        Very lucky encounters with junior DC fellows back in the early 1970s era made me aware that they, in general, were almost as arrogant of the boys from MIT, (not the girls in my admittedly anecdotal experience)…
        Really and truly have been trying to figure out what basis for either’s arrogance since, and really and truly have not done so for either group…
        ”Chutzpa” has nothing on those groups in my now 70+ years of trying to see why some people have this arrogance, and now many of them leading WE the Peons into another situation similar to 100 + or – years ago when they led us into the depression FKA the greatest.
        ”Public Servant” , the concept on which the wonderful advances of democracy in early USA were originally based, per Franklin, Jefferson, and many other of our founders seems only to be a quaint artefact of the era when many folks would be exactly that, and then go back to their farm.

    • Nat says:

      Thats called “projection,” not “gass lighting.” Gass lighting can (and often is) used to achieve projection, but it isn’t the only tactic to do so, and gass lighting is used as a tactic for other equally sociopathic but non-projecton means too. In short, there is much overlap on the relevant Venn diagram, but they are actually different things.

  2. J-Pow!!! says:

    Outrageous! All lies! This transitory inflation is temporary and sporadic! Will go away any day now!

    • Wisdom Seeker says:

      J-Pow needs to go to a concert… “Fear the Boom and Bust”:

      “The boom gets started with an expansion of credit
      The Fed sets rates low, are you starting to get it?
      That new money is confused for real loanable funds
      But it’s just inflation that’s driving the ones

      Who invest in new projects like housing construction
      The boom plants the seeds for its future destruction
      The savings aren’t real, consumption’s up too
      And the grasping for resources reveals there’s too few

      So the boom turns to bust as the interest rates rise
      With the costs of production, price signals were lies
      The boom was a binge that’s a matter of fact…”

      (their other song, Fight of the Century, has even better lyrics)

    • Jaime says:

      But wait! My hair loss was transitory, too, till none was left.

      • Bobber says:

        According to the government experts who compute inflation, you haven’t lost anything. New hairs found in your ears, back, and forearms have been substituted for hairs on your head. You’ve suffered no hair loss!!!

  3. Brent says:

    Spandex…

    Since Fed likes to talk about stress test more fitting analogy is Stress-Strain Curve.Here it is, in full everlasting glory,courtesy of Wiki,the only free education left:

    https://en.m.wikipedia.org/wiki/Stress%E2%80%93strain_curve

    1.Area of proportionality.Thats what Fed was doing for 60 years before becoming over-active during Ronny Reagan times.Helping banks to clear checks by adjusting reserves and fine-tuning the banking sector.Raising rates 1%,lowering rates 1.5%…

    Fed was hardly mentioned in the press.Paul Volcker was the first Fed guy who acquired a modicum of notoriety.

    2.Yield strength.Sample elongates while stress remains the same.Thats the current situation.New $TTT’s every month and nothing really changes.Everything surges,soars,skyrockets…

    3.Hardening.

    4.Necking

    5.Fracture

    I dont want to think how stages 3-5 will look like

    • Au;dyin says:

      @B
      Yup!
      The Engineers have sussed most things in life but nobody listens to them.

      • Brent says:

        Google “Global oil production in barrels 1998-2020”

        After peaking in 2018-2019 global oil production in 2020 declined by 7% (!!!)

        That Hubbert guy was right after all 50 years ago.

        Fed’s desperate antics will change nothing.

  4. Realist says:

    I wonder about the role retirement funds play in FEDs planning. By inflating equities those funds do look a lot better …

    • drifterprof says:

      I would still feel nervous about it. For example, I had a small retirement balance with TIAA-CREF. There is no option for a moderate interest investment vehicle. One has to choose almost zero interest options (e.g., money markets with big negative real rate these days), or allocate to stock (growth, global, social responsible, etc.), or bond funds. TIAA-CREF actually warned clients in 2020 that they would loose money to inflation and fees if they did not allocate into the more risky stock or bond fund accounts.

      My balance tanked after the 2008 financial crisis. Then it increased moderately over the years, but I made the mistake of pulling out and putting balance into micro-interest money market during most Trump era. Since then I played a big run-up with balance in a growth fund (late 2020 onward), then transferred balance to micro-interest money market. Overall I got an okay positive return.

      My balance is a barely significant part of my overall, which being retired now, I will withdraw part of each year (determined by minimizing tax). But I learned through the experience. I now consider organizations like TIAA-CREF to be leeches and shills for federal government irresponsibility.

      • Bobber says:

        Pension funds might be loving this hyperinflation (which I define as anything over 5%). I’m no pension expert, but I believe most pension funds have investment return assumptions of around 6.5% or higher. Real returns will come nowhere near that threshold in the next 20 years, and fund managers likely know it, so they are hoping inflation to help them out. If the Fed can keep inflation running at 5% to 10% annually for several years, while convincing people it doesn’t exist or is transitory, the pension funds can earn zero real return and still make their 6.5% return assumption. Of course, the real payout to the beneficiaries will be dramatically weakened by inflation.

        • gponym says:

          Yep, @Bobber, and don’t forget Social Security trust fund obligations, homeowners w/mortgages, plus corps and government which have waay overborrowed…and I’m sure I’m forgetting some other beneficiaries of our mighty elastic currency.

          If you spread the “wealth” widely enough, you keep both streets and boardrooms pacified, and you keep your job.

    • Steve Sovring says:

      The standard of living we know and have known is artificial and will not last because it is simply not real. React accordingly.

      • RightNYer says:

        ^This. Look at how much lower the standard of living is in Europe, for example. The average person can afford a lot less in discretionary items, even after taking into account not having to pay (directly) for health care and college.

        There’s no real reason that should be the case, especially when you consider we have a much larger third world immigrant population to take care of, and has only been because of our being the sole superpower and the reserve currency. That isn’t going to last.

        • Poor like you says:

          The standard of living is lower in Europe? Which countries, and by what metric, I wonder?

        • Wolf Richter says:

          “The standard of living is lower in Europe? Which countries…”

          Bulgaria?

        • RightNYer says:

          Poor like you,

          For one, last I researched this, GDP per capita is lower in even the richest European countries.

          Second, Europeans generally pay more in taxes and things cost more, from laptops, to cars, to gasoline, to clothes, to drinks at bars, to restaurant meals, and so forth. When coupled with a lower average income, this means less discretionary income.

          This is not a value judgment by the way, or an argument that more consumption makes people happier.

        • K-Agri says:

          I’ve lived in Europe for a couple of decades and in North America for a couple of decades; I’ve spent a fair bit of time pondering the difference in living standards between the two.

          I believe that, in the past, productivity differences played a large role. European countries historically had larger government, larger unions and more useless jobs than NA.

          In the past North America tended to have fewer useless jobs. I found a more ruthless efficiency in the American workplace. Also American governments tended to interfere less in markets, which promoted competition and delivered value to end users.

          The standard of living gap between the two has been converging over the last 15 years, especially the last 5, as productivity lowers in NA. Misallocation of capital due to ZIRP is causing the proliferation of useless jobs.

          *Obviously when talking about entire continents these are gross generalisations, based on subjective experience.

        • Citizen says:

          How much time have you spent in Europe!? Anytime I’ve been there the people I talk to easily seem much more content than most here do. Sure, we have way more superstars …. and if you enviously look at that saying that is how it should be because everyone has a chance to be a rock star…then I don’t know what to tell you. The average person however enjoys about the same level of discretionary income and slight differences in the stats aren’t very meaningful … with the one major exception that they don’t all worry about being bankrupted by medical bills or most other life changing disasters and they get to enjoy that state of mind with about 3x the amount of leisure time all while having far superior basic infrastructure in almost every way. Try to imagine that if you can because even if you are lucky enough to be rich it still is nicer going around a country with happier, healthier citizens.

          You should just go there because I feel you likely never have … which is usually the case with those of similar opinions. The “socialism is like Stalin/Venezuela” arguments are absurd….they are just modern societies and modern, 1st world countries should successfully provide for their citizens and modernize their country.

        • VintageVNvet says:

          Been many years since buying a ”sit down” cuppa tea in a diner in NE London while walking home after missing the last bus in fall of 1970: it was six pence, about $0.08 at that time…
          Now, God only knows, since I have not been back to London since Boxing Day of 1980 when I went to buy the really and truly GREAT bargains on SO many products of ”GREAT Britain” and Europe, and spent enough and ”saved enough” to justify the air fare…
          After England, Wales, Ireland, back to England, I took the train to Amsterdam and was shocked by the high prices for food there compared with London, similarly Paris, and went back to London ASAP…
          Anecdotal far shore,,, but thinking the same trends will continue until all of world is going to experience the ”global leveling” reported by many, though anecdotally SO FAR.

        • RightNYer says:

          Citizen, did you read my post before going off on that rant?

        • K-Agri says:

          If you take 2 people with regular jobs (teacher, policeman etc), one in the UK and one in the US. The person in the UK will have a smaller house, a smaller car and less stuff. Whether or not this is good or bad is irrelevant for this conversation. The fact is the person in the UK, on average, has a lower standard of living than the person in the US based on what they can afford. Or more accurately, I should say “had” as these metrics are converging between Europe and NA.

          Differences in healthcare and tax policies do not explain the gap. Canadians are more similar to Europeans on these policies and still enjoy a “higher standard of living” based on metrics listed above. Maybe not in the future?

          I’m not an economist, I don’t know how productivity is measured and I don’t even know the difference in measured productivity between European countries and North America. But after a long time working on both continents, my theory is the North American workplace is (or was) more productive, leading to cheaper products and services, and a higher standard of living. If you talk to enough people who’ve worked in both places for long enough, you will get similar feedback.

      • Bobber says:

        “The standard of living we know and have known is artificial and will not last because it is simply not real. React accordingly.”

        I’m not sure the standard of living has increased for anybody except the top 10%. Some people are spending more money, but they aren’t getting anything for it because inflation has increased prices of everything. In my network, I know very few people who are buying more products or service, although they are clearly paying more for their traditional level of spending.

        Therefore, standard of living is dropping gradually, in line with Federal Reserve policy goals to support 5-10% hidden inflation. It will likely end with a whimper, not a bang. Spineless creatures prefer to do their work under a rock, out of sight, and not in daylight. There will be no clear opportunity to “react”, and that’s how they want it.

        • Paulo says:

          I always appreciated the cliche question, “How thick does your steak need to be”?

          Seriously, people are apparently unhappy when they compare their lot to people immediately around them and see that they rank below, as opposed to what other people enjoy in another country. Which goes back to the question, “What do you really need”?

          It isn’t more stuff, or consumer bling. Housing, food, healthcare and health, relationships, and safety would get my vote. Air travel, vacations, a new car, clothes, new furniture, dining out….all the stuff people are supposedly running out and buying with stimmies, is meaningless in our home.

          I actually know just one person who has received the Canadian version of Covid benefits and he runs a dojo that is shuttered because he does not have the square footage deemed necessary under our health orders. As for reaping the benefits of increased asset values, my kids will get it all one day. (They are millenials and have their own homes, anyway.) But using asset appreciation for additional consumption is BS. One, I would never ever borrow against my RE for anything, much less stuff I don’t need. And two, we aren’t moving from our home unless it’s feet first. As for leaving Toronto or Vancouver after reaping the rewards of asset appreciation? I thought that was always the point of living there, to one day leave. :-)

        • KGC says:

          Actually the standard of living has drastically improved for the lower class more than anything else. In 1950 almost 80% of the world population lived in extreme poverty. That metric is now around 15%. Wealth has moved down.

          The problem with this is that people’s hopes and expectations have risen as their situations have improved. The prevalence of media shows those who have not just what the rest of the world considers normal.

          If you’re in a hut in Ecuador and see the “normal” family on a USA television program that’s what you’re going to want. If you’re in rural Afghanistan and see what American Soldiers and contractors consider a minimum of life support that’s what you’ll yearn for. But the fact is we cannot support the entire population of this world consuming at the level of a 1950 television family.

          So yes, the standard of living for those in the middle will be impacted by the rise of those less fortunate at a greater level than that of the wealthy, simply because the biggest concentration of consumption is in the middle class.

        • Bobber says:

          Kgc, I’m talking about the past few decades, not the stone ages.

        • K-Agri says:

          KGC- “But the fact is we cannot support the entire population of this world consuming at the level of a 1950 television family”.

          I frequently see comments along these lines, the world can never support X many people at Y living standards. I never see it backed up by proper evidence. I imagine a wise man in 1900 looking out across a field at a Clydesdale pulling a single furrow plough, proclaiming “this world will never support 1 billion people!”.

          KGC, does your statement apply before or after the following: we use the hundreds of years of confirmed reserves of fissile fuel that can support current energy usage? How about after we confirm the presence of thousands of years of fissile fuel we strongly suspect to be fairly easily accessible, but it’s so abundant we haven’t even bothered to measure it? How about after we crack nuclear fusion? How about after we start mining asteroids? How about after we manage to build a Dyson sphere?

          We live in a universe of abundance. We have amassed enough knowledge to know what we need to do to provide for the worlds population. We have all the resources we need at our fingertips, yet we have been conditioned by the education system, media and governments to think we live in a universe of scarcity. People don’t appreciate just how big the earth is, or the solar system, or the milky way. The hubris of man I suppose…

  5. 2banana says:

    Shortages are real.

    And are getting more wide spread.

    It may come down to the “we all got lots of free government cash but there is nothing to buy” economy.

    • LK says:

      There’ll always be a market. Whether that market wants the same things as before isn’t something I think most free market capitalist advocates comment on. Seems to me they want an unchanging, stable, ever-growing market.

      I mean, the policies we have into place seem to be less about rolling with the punches and more about a white-knuckle grip on a status quo in denial of reality and change.

  6. Seneca’s Cliff says:

    The delivery side of the supply chain has taken a dramatic turn for the worse. I have two of my main suppliers that deliver to my business via FedEx. Some speciality metal blanks I needed for a order due yesterday were supposed to arrive last Monday ( nine days ago) but they are still stuck in a warehouse being shuffled around with the ( in transit) label. Every other day I get tooling etc. from the big yellow catalog. I am a preferred customer so if I order by 5 , I get it by 10:00 am the next day. This has been like clockwork for the last 8 years, with the Fedex Express man showing up exactly the same time. Yesterday my order did not arrive till 4:00. And today it did not arrive at all. A couple more days of this and I will have hang a “gone fishing” sign on the door.

    • 2banana says:

      I think America is going to go back to having lots of stock on hand, much larger inventories and becoming more vertically integrated.

      Not efficient but, then again, nothing is more inefficient than shutting down the line due to lack of parts.

      • Anthony A. says:

        Another thing that’s going to happen is people are going to stop buying stuff they don’t really need since you can’t get it anyway. They will just figure out how to do without or just substitute.

        • Boomer says:

          Anecdotally – some neighbors already putting up huge, elaborate, garish, expensive Halloween decorations in their yards before we even turn the page to October. 10 Billion spent on containers full of Halloween crap this year.

      • james wordsworth says:

        Our firm is currently holding far more inventory than normal. If I can find something, I buy it. I can no longer rely on short lead times. If I am missing one part of the product I can not finish or ship it … so I want extra of everything. At some point this is going to unwind as all this pull forward demand evaporates.

        • Brant Lee says:

          Looks like this should be a fantastic time for smaller-scale production in the states if you’re geared up, have employees and material. Especially for localized areas of business if you have your own means of delivering.

          But I suppose it’s easier and quick-buck for an owner to sell his company to a corporation, invest in the stock market while the corporation sends production overseas.

        • Tanstaafl says:

          Sounds a lot like the beer game. It’s been a classic even 30 years ago. And this time, it’s not just one small change, but a series of unfortunate events.
          https://en.wikipedia.org/wiki/Beer_distribution_game

          I guess we all now live in interesting times.

      • LK says:

        Maybe. But I suspect we’ll be back to this point, given capitalism is prone to crisis and filled with individual actors engaged in market competition with little regard for social or greater goods.

        We got here before, and, assuming we survive it, we’ll be back here again. History rhymes.

    • VintageVNvet says:

      Not to denigrate your recent experience in any way SC, but WE the Peons in the construction industry have been putting up with and ”allowing for” similar experiences since at least the 1970s, when SO many of our fave products became ”unavailable” on time, and then at all…
      Not to say anything more about my total disregard for what is now called ”just in time”… it was called functional dis ability back when I started as the assistant to the superintendent, whose job was to complete a ”total” bathroom remodel in one week, keeping the toilet and shower function every day after 5 pm for the folks who had to go to work showered, etc…
      WE insisted every component would be in our warehouse BEFORE each project began, except kitchens where it was mandatory to measure carefully before the cabinets were fabricated,,, those kitchens took 2 weeks.

  7. Don says:

    ‘When he was asked if the Fed wasn’t “overdoing” the stimulus, he just brushed it off: “The historical record is thick with examples of underdoing it,” ‘

    The historical record are also thick with examples of overdoing it.

    I think Powell is suffering from confirmation bias–he ignores evidence that doesn’t support his case.

    • NJB says:

      Agreed. And you don’t have to look too far back to see one of the biggest and worst examples of overdoing it: 2000 to 2007. It destroyed Greenspan’s legacy. Draghi also deserves a lot of criticism for unnecessarily increasing QE and dragging rates further into negative territory at the end of his tenure. History will not look kindly on any of these central bankers.

    • RightNYer says:

      And continuation bias.

      This is Powell to a tee.

      “the tendency of people to continue with an original course of action that is no longer viable. An example would be an airline pilot who unexpectedly encounters bad weather at the scheduled destination but decides to land anyway rather than divert to another location. Plan-continuation bias appears to be particularly strong toward the end of the activity and has been theorized to result from the interaction of such factors as cognitive load, task demands, and social influences. See also entrapment.”

      • LK says:

        See also Bryant, Kobe.

      • 91B20 1stCav (AUS) says:

        RNY-we are all pilots, carrying a higher innate propensity for error than we ever like to admit…

        may we all find a better day.

    • Citizen says:

      They just say whatever makes them sound good. If we were to really ask what could be done differently if we had citizens in mind instead of corporations … everything would be different. QE and all the rest of this just bails out corporations. I wish the average person wasn’t so mystified by finance thinking these guys are magicians and know so much they don’t because if they understood what they are doing and why they would be out with pitchforks. There are dozens of other steps that could have been taken to guarantee citizen’s bank accounts and employment/prosperity instead of just unleashing a river of money to corporate America….but citizens’ well being wasn’t the priority.

      • p coyle says:

        “it is well enough that people do not understand our banking and monetary system, for if they did, i believe there would be a revolution before tomorrow morning.” –Henry Ford

        “corporations are people, my friend.” –RMoney

        they don’t teach kids how to balance a checkbook anymore for two reasons:

        1. nobody uses a checkbook anymore

        2. since they stopped teaching kids how to balance a checkbook in school, and for some reason those kids parents never complained about it, henry ford can rest comfortably in his grave knowing that, a century on, the people have less of a clue as to that whole banking and monetary system thing. just because your checkbook is on a smartphone is no reason to not teach kids how to balance it.

  8. MCH says:

    If the economy is not dead, we can keep stimulating. Then the economy can reach new highs… just like a drug addict.

    Once it’s dead however, we can stop all stimulus, because… well, dead addicts can’t get high.

    Now shut up, and hit me with another dose of QE, and more stimulus.

    • roddy6667 says:

      I have a mental image of EMT’s standing over a dead horse named Economy with defibrillator paddles yelling “Clear” for the umpteenth time.

      • Petunia says:

        MCH,

        They can keep the 1T coin in the same file cabinet they keep the worthless treasury securities they issue to the social security trust fund.

    • p coyle says:

      unless the economy is nikki sixx…

  9. cb says:

    Wolf said: “The Fed has handed out $4.5 trillion to investors in 18 months”
    ———————————————
    Not doubting, but how so?

    • drifterprof says:

      Irrationally exuberant foaming stock asset bubble caused by “The most grotesquely overstimulated economy ever.”

      Economy swimming in money due to low interest rates. Many big investment players borrowing money cheap to invest.

      • drifterprof says:

        (so I think he means that the investors’ assets are worth about 4.5 trillion more than they were 18 months ago)

        • Wolf Richter says:

          No, the Fed handed out $4.5 trillion in cash (credits) to investors, via the primary dealers, in exchange for securities. People who sold the securities to the Fed and got the cash then invested that cash and thereby created buying pressure and chase for yield which helped drive up asset prices by a LOT More than $4.5 trillion.

        • drifterprof says:

          “No, the Fed handed out $4.5 trillion in cash (credits) to investors, via the primary dealers, in exchange for securities. ”

          Okay, thanks! This is weird — in addition to the mosaic of stimmies handed out to average persons, the Fed buys securities from organizations / people who already had extra money to invest. It seems like those people decided that they could make a lot more from in stocks, etc. than holding onto the securities. Couldn’t they have just sold the securities on their own without Fed involved?

          I’m wondering how the Fed thought throwing gas on the fire that fueled the stock market bubble was helping economic stabilization.

          Now I better understand that part of how the response to cv-19 has become the “most grotesquely overstimulated economy ever.”

        • RightNYer says:

          drifter, the Fed mostly bought treasury bills and RMBS. But since the credit market was seizing up back in March of 2020, the Fed paid much more for those treasury bills than the market price would have been without the Fed as a buyer. This dramatically lowered the yields for “risk free” investments, and all other bonds’ yields went down accordingly.

          The investors (in many cases, large banks and other institutions) took the cash and bought other things.

          Classic confidence game.

      • sailorgirl says:

        Including many Federal Reserve Bank Presidents and Judges. At some point major holders of speculative stocks are going to want their profits. Watch out for the good, bad and the ugly. It will not be pretty.

      • Bull&Bear says:

        Thanks Wolf!
        A question to you:
        When FED reduces balance sheet, does it sell at face value or at market price?
        For example, it decides to sell 10B in bonds, will it receive $10B or actual market price of say $9.5B?

        • Wolf Richter says:

          Bull&Bear,

          The Fed doesn’t need to sell securities at all unless it wants to get radical. It has $8.5 trillion in securities of different maturities, some of which mature all the time. It also receives large amounts of pass-through principal payments on its MBS holdings.

          The Fed would simply let the maturing bonds mature without replacement, meaning the bond gets redeemed at face value, and that is the amount the Fed gets.

          The MBS pass-through principal payments are huge every month. As mortgages get paid off or refinanced, and as mortgage payments are made, the principal payments are passed through to MBS holders. For the Fed, this is about $30-$60 billion a month. It would simply not replace those pass-through principal payments with new MBS and allow the MBS balance to shrink.

          The Fed could probably shrink its balance sheet by $100 billion to $150 billion per month just by allowing securities to roll off and by not replacing MBS pass-through principal payments.

          If the Fed gets radical and actually sells securities that are not yet maturing, it would get current market value for them, not face value.

      • RP says:

        Perhaps the fed is actually trying to let inflation run hot to deflate the national debt. But it can’t tell the public because inflation hurts so many people

        • Citizen says:

          Yes, that is exactly what they are doing and what they meant to do the whole time. It all just inflates assets and corporate wealth while hoping for inflation also….either or both is fine. If they wanted to help people they could do so many other things that would cost less and have much more beneficial effects instead of just flooding corporate America with money to juice stock prices.

          …and since companies use buybacks to pay for executives stock options pay … all this whole thing really does is saddle the country with debt in order to shower executives with their increased pay.

          It’s just so absurd we accept it and they can get away with it because their is a small amount of truth to the fact that higher stock prices are good for some people. In reality they are giving us crumbs.

        • RH says:

          Partly true but remember that “coincidentally” the banksters’s liabilities (including your life savings in bank accounts, CDs, bonds, etc.,) are also being inflated away.

      • p coyle says:

        wolf,

        you forgot the out the wazoo addition on that chart. maybe twice (mania, inflation).

    • Wisdom Seeker says:

      cb: Federal Reserve balance sheet increased by $4.5 trillion in 18 months.

      Translation for “balance sheet increased”: the Fed created, from nothing, $4,500,000,000,000 in “central bank credit”, using their legal super-power.

      They’re allowed to spend that new money just like cash, provided they only buy federally-guaranteed bonds (more or less).

      So they spent $4,500,000,000,000 (yes, that many zeroes, you can’t make this up – and don’t forget they got all of that from nowhere by making it up). The spent it to “buy” oodles of Treasury bonds and federally-guaranteed mortgage-backed securities from the investors that owned those bonds.

      That’s how they “handed out $4.5 trillion to investors in 18 months”.

      But there’s more to the story.

      Wolf maybe left out the part about what happened to the $4,500,000,000,000 that the Treasury and other bonds raised for the government (and mortgages for ambitious homebuyers). Those bonds bought by the Fed financed all the government stimulus spending and a good deal of residential spending. That created so much demand in the economy that prices of everything have gone crazy. That’s what Wolf’s article is about.

      But there’s a third chapter in the story, about what happened next to that stimulus spending: much of it got siphoned into the wallets of investors, via ultra-high “profit margins”, each time someone spent their stimulus. “High profit margins” sound great in principle, but in practice the phrase translates to “companies overcharging customers and then paying workers very little, thus keeping a bit extra for the owners”.

      You see, for every transaction the government stimulated, a fair slice went to someone’s profits. What didn’t get sliced off went to someone who needed the income, they used it for another transaction, and another slice was taken there… If companies’ investors collect 25% of every transaction as profits, it doesn’t take too long for all the money to end up in investors’ pockets. All those profits drove stock prices to the moon, drove up the prices of every other “investment” as well – and made the wealthy even wealthier.

      So the whole picture: Fed hands out $4,500,000,000,000 to finance government stimulus, the little guys each got a few thousand dollars and some rent relief to keep from starving, and the rich guys got trillions and trillions of dollars from all those “profit margins”.

      And that, boys and girls, is how today the 400 wealthiest Americans “own” more financial wealth than the poorest 150 million.

      The stimulus would’ve been much more effective if the economy had more competition, which lowers “profit margins” but results in both lower prices AND better wages for workers. That competition would deliver much higher living standards for the middle class AND reduce wealth inequality since individual companies wouldn’t siphon so much to their owners so fast. (Overall the wealthy could still be better off in an absolute sense, because all those middle class spenders would aggregate to more total revenue and profits, even with lower margins.)

      • drifterprof says:

        “So they spent $4,500,000,000,000 [on government securities like Treasuries] … and don’t forget they got all of that from nowhere by making it up.”

        So is would seem logical that when it finally becomes Fed balance sheet reduction time:

        The money the Fed gets from selling the government securities (including previous pass through interest payments on those securities), will inversely vaporize back to nothing. And everything balances out.

        Right? 😁

      • RightNYer says:

        It would have also been more effective if the “stimulus” was a) targeted at people who actually lost income (discretionary spending tends to be much higher profit margin than the necessities). Printing money and handing it out to people so they could buy iPhones and Chinese stuff from Amazon was the height of stupidity.

        • p coyle says:

          especially during a mismanaged pandemic. thus, the supply line fiasco mr. richter has been so good at covering.

      • lenert says:

        “Profits of domestic financial corporations increased $52.8 billion in the second quarter, compared with an increase of $1.3 billion in the first quarter.

        Profits of domestic nonfinancial corporations increased $221.3 billion, compared with an increase of $133.2 billion.”

        www DOT bea.gov/sites/default/files/2021-09/gdp2q21_3rd.pdf

      • CJH says:

        Adam Smith said a nation with high profits is on the road to ruin.

      • FED lends, Government spends

        • Wisdom Seeker says:

          Cute but inaccurate. It’s a print-and-spend system, not a borrow-and-spend system. The Fed has nothing to lend except credit … created from nothing … so it has nothing to lend.

          The system would be much more balanced if, say, the Fed lent the government actual gold (or whatever, but something real, from an actual reserve) in exchange for Treasuries, and then the government actually owed a repayment.

          Instead the Fed lends “credit”, gets “Treasuries”, but then remits the Treasury interest (less expenses…) back to the government. So the Fed doesn’t lend at all. And the Treasuries “held” by the Fed aren’t even owed by the government – they’re just bookkeeping entries at the base of the fiat money system.

  10. drifterprof says:

    I’ve never understood American willingness to go into long-term debt for an emotional gratification car instead of sticking with pragmatic cars. If you have the money, the sure, go for it. But I never felt that flush in money. I always tried to buy some older vehicle that a relative or acquaintance was getting rid of. Plus focus on DIY maintenance and conservative driving habits.

    From lendingtree.com:

    The average monthly car payment in the U.S. is $563 (70 months, $34,635 borrowed) for new vehicles, $397 (65 months, 21,428 borrowed) for used vehicles, and $450 (37 months) for leased vehicles.

    Overall, Americans owe nearly $1.4 trillion in auto loan debt (about 5% of American consumer debt). Gen Xers are the most likely to have a car loan, and they carry the highest auto loan balances with a median of $19,223.

    The average auto loan APR was 9.46%, with 8% of outstanding auto debt at least 90 days late, and another 5.8% is 30 days overdue.

    If I had to pay 10% interest on anything in life, then something has gone very very wrong. A lot of these people paying big auto loan interest are not beneficiaries of the wealth effect (in some cases, they pay over 20% interest with worst credit rating). How many of them grabbed an emotional gratification car with stimmie bucks enabling down-payment, and then the stimmie bucks evaporate quickly into the hands of the rich?

    Maybe the debtors will luck out though, if inflation is so high that the cost of their loan is greatly reduced compared with if they had just saved the cash.

    • MonkeyBusiness says:

      Most Americans deny this, but America is a class based society, and most Americans aspire to join the upper class, hence the willingness to get into all sorts of debts.

    • Old School says:

      Some of it is that people can’t come up with $7500 to pay cash for a used car, so it’s easier just to go get a monthly payment on a new ride.

    • p coyle says:

      “the borrower is slave to the lender, and the debtor to the creditor.” –ben franklin

      i don’t think inflation will work out well for the borrowers. or the debtors. well, at least the poor ones. as we all know, the rich get a different set of rules to play by, and they will be fine up until pitchforks and torches become popular, and the way things are going that will be after no poor people can afford even a torch, let alone a pitchfork.

      serf’s up!

  11. Meh says:

    Meh, for all the charged dialogue here, I wonder if you present the data the way you do for viewership, or if you really believe it.

    Namely because I think you’re clearly very intelligent, and it’s great to read sources that don’t drink the same kool aid.

    Thus, it’s not that you’re wrong about how insane the world we live in is. It’s just that Central Banks have their own playbook, and this has very intentionally been the predictable Fed playbook since April 2020. So far, they haven’t deviated even a little from that playbook. This is their chance to both devalue the currency as much as possible, claim it’s transitory as much as possible, and reload with higher rates ultimately when the facts play out “differently than expected”. That’s in quotes because no one in their right mind really expects anything different than what we’re experiencing today with inflation IMO. Yes, the exact cause is surprising (I imagine they figured it could come from a number of causes), but it’s really not that surprising from a macro perspective. Wage inflation is IMO incredibly strong and that’s been an excellent outcome. As the founder of a tech company, we are seeing US employees expecting massive 20-30% pay raises, and we can hardly fill the positions.

    Now, I do think they will lose control. When? Not entirely sure. I think they haven’t lost it just yet, but they very well could I suppose. And the devaluation may help turn an otherwise horrendous crash into a milder downturn, requiring less response. They aren’t getting away without some of this bubble deflating in certain places, but I think they will get away with a lot.

    • drifterprof says:

      Not contesting your analysis, but I don’t understand why the main motive of central banks be to “devalue the currency as much as possible” as an excuse to raise the rates?

      Why not just raise the rates?

      • Sea Creature says:

        The objective of devaluing the currency as much as possible is to get rid of as much national debt as possible.

        Currently, the debt is so high that if they raise the rates now, they wouldn’t be able to make the interest payments on the debt we now have. Most western countries are in this situation right now.

        Once there has been enough currency / debt devaluation, then they will raise the rates at the end to return back to normalcy again.

        • drifterprof says:

          Yes, but the “they” that wants to get rid of as much of the national debt as possible is the government. Why would the Federal Reserve, which is a cartel of private banks, would have as their priority getting rid of the government debt. Their priority has always been maximizing their own profits.

        • RightNYer says:

          Yeah, the problem with that is that keeping rates low is used as an excuse for government (and corporations, for stock buybacks) to borrow more. It’s like trying to empty a swimming pool with a cup. The debt devaluation is more than outweighed by the new debt created. Look at troll-faced (Thanks Depth for that one!) Yellen’s “go big because rates are low” garbage.

          Additionally, you do that long enough, and no one wants to hold your currency for any prolonged period of time. In the long run, it’s a losing strategy.

        • Bobber says:

          “Once there has been enough currency / debt devaluation, then they will raise the rates at the end to return back to normalcy again.”

          Uh, that plan won’t work when debt levels are increasing faster than the inflation rate. Government debt increased 10% last year.

          In order deflate the debts away, they need to keep interest rates low and inflation high, while putting a cap on asset prices and related debt levels, while avoiding a recession. Good luck with that Jerome Powell. I suggest you put down the Federal Reserve studies and start reading the adventures of Peter Pan, which accurately describes the amount of fiction you’ll need to create.

        • Meh says:

          This is correct.

          The Federal Reserve does have its objectives to Congress, and I generally don’t believe in the alternative.

          Bobber, this is reality. No one said they will succeed. If they fail, they may fail as horrendously as Japan has, with a 30+ year bear market.

          Good luck to the Fed, indeed. The only “good” thing for the Fed is that no one seems to be in a great boat right now.

      • Old School says:

        History tells us once you have an easy money central bank it all ends in a big tragedy. Reason: printing money stimulates the economy, but once you stop printing the economy falters and so more printing must be done. Eventually central bank has to destroy currency or stop printing to stop inflationary spiral.

        • RightNYer says:

          The part that frustrates me the most is that people think that for some reason, America is so exceptional that we’re immune from the fate that has fallen on every other nation that has tried uncontrolled printing.

    • Al Loco says:

      Meh,
      You’re a founder of a tech company and think a 20-30% increase in labor cost is a good thing? I assume you have already cashed out of this company?

      Inflation isn’t the driver of wage increases from what I see in manufacturing. It’s years of wage suppression followed up by them getting beat down during this huge spike in demand. Sprinkle on extra unemployment benefits for those “Netflix and chilling” and you have a huge part of the work force much closer to saying pay me more or I’m taking and extended vacation.

      • Person X says:

        It is years of wage suppression! Corporate America has gotten away with it for much too long ….. which is why many are demanding raises to the minimum wage and corporations to both pay their share of taxes and pay people better….but some people think that is un-American and that corporations should just get to have all the benefits of our country.

        • p coyle says:

          corporate “america” has paid a lot of money (campaign donations &c.) to make this our reality. and one way or the other, if you voted, you voted for it.

      • ru82 says:

        Exactly. The minimum wage in my state is the same as 10 years ago but we have had a good deal of inflation. why would someone want to work for 7.95 an hour with no benefits and health insurance. Better off staying at home unless your a teenager whose parents are paying you medical benfits.

    • Auldyin says:

      @M
      “we are seeing US employees expecting massive 20-30% pay raises, and we can hardly fill the positions.”
      You hit the crux!
      If wages match inflation it won’t be transitory, but if they don’t, transitory could turn to recession very quickly when stimulus runs out and supply gets back to normal.
      Fed has been betting on this all along IMO and still betting.

  12. LordSunbeam says:

    Powell will be the hero that brought Covid inflation under control after valiantly battling 8%,10% etc persistent inflation over a few years like Volcker.

  13. Mark says:

    Making supply and demand excuses for inflation being transitory is like a pilot blaming gravity as the reason why his plane is nose diving.

    Powell is piloting the USD straight down in value.

  14. Michael Gorback says:

    I’m going to take a very unpopular stance here. The inflation won’t last. The underlying problem is supply chain disruption. That will not last forever, just like traffic jams don’t last forever.

    Initially we saw an inversion of sales of durable goods vs services. That burned out. Everybody got their stimmie checks ans has a new refrigerator, flat screen TV, and additions to their house.

    There are giant flotillas of cargo ships parked at ports around the world. Eventually they will be unloaded and their products will be delivered. Chips will be produced, new cars will appear on the dealership lots.

    I see a bottleneck in trucking. Truck drivers used to make good money but when trucking was deregulated pay got worse and worse for what is a really crappy job. The truckers aren’t coming back until pay improves. But that is not a permanent problem either.

    There’s been so much blather about the Fed’s expanding balance sheet but where was the rampant consumer price inflation? That’s recent.

    I was watching an interview with Lacy Hunt, who IMHO is one of the smartest economists in the world. He came up with an explanation why QE failed. Falling velocity of money. Now I’ve been down this road before with Wolf saying that’s a dead concept, but not for Lacy Hunt (or Jim Rickards).

    He mentioned how Milton Friedman said inflation is always a monetary problem. Now, here’s the genius of Lacy Hunt. He went through Friedman’s paper and noted that Friedman assumed a constant velocity of money in his calculations. He then showed the exact same chart of the steady decline in velocity to which I referred previously. Velocity of money x M2 = GDP, so if you increase M2 while velocity is falling, you’re not going to get anywhere.

    So enough of the money printing talk. Very little of that money gets into the hands of consumers and this is, after all, a consumer driven economy. Note the significant burst of buying when the executive branch directly injected money into the pockets of the little guys.

    So the inflation is transient, although it is a lagging indicator that trails economic improvement significantly. In fact, once supply chains are restored the US domestic high cost producers will have to deal with cheaper foreign competition that had been snagged in supply chain problems and there will be price wars. I would not be surprised to see deflation by this time next year.

    I have also read that corporate profits have been flat for the past 10 years, so the growth in stock prices has been P/E expansion. This is not good. Markets revert.

    We are currently in a situation never seen before. There have been tech bubbles and real estate bubbles, but never a situation with bubbles in stocks, bonds, real estate, and commodities all at once.

    Then I watched an interview with Jeremy Grantham, who predicted the dot com bubble, the housing peak, and the exact day that the market turned around in March 2009.

    As opposed to the “cash is trash” meme he recommended being 30% in cash. The other 70%? Emerging market value stocks. He said they tend to move inversely to US stocks.

    Then on to Robert Kiyosaki, who said, “You make your profit when you buy, not when you sell”. He said he loved market crashes because that’s when you buy and make your profit.

    Hunt also went on to a lengthy discussion of how initial debt can give you a boost, another dose can give you a boost but not as much, until you reach a point that increasing debt not only doesn’t help, but starts to drag. He also predicted deflation as a result.

    Anther point, I think by Hunt. He mentioned he was being interviewed on Zoom and asked what are the implications of that for airlines? Business travel is their bread and butter. There will be disruptions in the service sector.

    It was either Hunt or Grantham who said the Fed will never raise rates. The spread between junk and the 10 year yields is very narrow. What would happen if the 10 year rose above junk? Total devastation throughout the bond market. He didn’t go into what if the Fed lost control over rates. Frankly, I didn’t want to know.

    Winter is coming, and I wouldn’t be surprised to see it last a decade.

    • Sams says:

      The inflation might be transitory, at least the CPI one. The moneytary part
      I doubt will be transitory. Only large amounts of defaults will deflate the amount of money.

      Cheaper imports may not arrive in the USA if the US dollar is devaluated.

      Even with the CPI inflation down again, the prices may remain high.

    • RightNYer says:

      I hear your point, but even if CPI inflation is transitory, asset inflation is not, and it’s just as insidious.

    • cb says:

      Michael Gorback said: “There’s been so much blather about the Fed’s expanding balance sheet but where was the rampant consumer price inflation? That’s recent.”
      ______________________________________

      Money expansion (inflation 1) and rising prices (inflation 2) have been continuous for decades.

      CPI numbers are a joke at best, more likely a pure fraud.

      Inflation manifests itself beyond consumer prices. Rising asset prices measures inflation, all while increasing wealth and income disparity and contributing to a rentier society.
      ————————————————

      Michael also said: “There have been tech bubbles and real estate bubbles, but never a situation with bubbles in stocks, bonds, real estate, and commodities all at once.”
      ————–

      That’s what happens when you digitize large amounts of money and suppress interest rates. You get asset inflation to the extent of what some call bubbles. The larger the money expansion and manipulations, the greater the expectations on continued manipulation, the broader the capacity for inflation and bubbles.

      • RightNYer says:

        Exactly. For a comfortable, secure retirement, people need to be able to buy assets like shares of good public companies. Putting those shares out of reach of the people who need them is just as bad as putting the cost of food out of reach.

        • Sierra7 says:

          RightNYer:
          “Putting those shares out of reach of the people who need them is just as bad as putting the cost of food out of reach.”
          That couldn’t have been better stated!
          That concept rode high for many decades following the Great Depression, but alas, with the new “neoliberal economics” and globalization that idea has been trashed.
          “Free Market Capitalism” cannot live in a world where the “commons” can feel secure.
          That kind of capitalism depends of total chaos and “competition” scrabbling for the scraps maintaining a low cost atmosphere thereby larger and larger profits.
          Myself I don’t believe that kind of economic system can survive long term only because of its destructive effects on society (and the environment).
          Momentous changes are on the horizon.

        • sc7 says:

          What is putting them out of reach? Share prices? Buy index funds. Mutual funds you can buy at fractions. Many brokers allow fractional share purchases of ETFs and some stocks now, too.

          In lieu of all of that, we could also require stock splits after a share reaches a certain dollar value too.

          Pretty much anyone who can put together $100 can participate. Last I checked, Fidelity and Schwab have no minimums. Vanguard needs to get with the times.

        • RightNYer says:

          sc7, you’re not getting it. When I say “putting those shares out of reach,” I don’t mean in absolute terms. I mean in terms of out of reach at a reasonable price.

          All asset inflation does is benefits those who got in earlier (disproportionately, the older generations). Unless you are convinced the ponzi can last forever, and that multiples can continually expand, raising the P/E of index funds from 15 to 40 doesn’t benefit the younger people who have to buy in at those ridiculously inflated prices.

    • Old School says:

      Lacy Hunt has a pretty convincing presentation. Steve Hanke takes other side and says it is eventually money supply.

      I like Warren Buffet’s logic of not wasting time about worrying about economy and buying necessary businesses like property and casualty insurance, pipelines, home builders, utilities and railroads during recessions and then never sell. I like his saying that one economist on the payroll is one employee too many.

      In realty, Buffet was trained old way that a business is long term investment that has to endure good and bad times so don’t fret where you are in the business or political cycle. Watch the data come in and size the business accordingly.

    • COWG says:

      “ There’s been so much blather about the Fed’s expanding balance sheet but where was the rampant consumer price inflation? That’s recent.”

      Mike, I might take a different stance…

      I think it’s been there, just hidden… and willingly paid by those that wanted…

      An example would be Thor Industries ( the RV people ) buying up their competitors , capturing market share and the ability to price at will for a purely discretionary purpose…basically any company that has done that… I don’t think this type of inflation can be measured in the traditional sense…

      I might agree with you on a deflationary cycle, but for different reasons… namely population shift…

      I think we are going to see the bottom 30% ( who gather the lions share of gov assistance ) increase to the bottom 40%…

      I think the top 30% will shrink to the top 20% ( from 30%) yet retain asset accumulation and transfer within themselves…

      There will be a shrinking pool of buyers of discretionary items until the balance of buyers and sellers even out…

      When this happens , you will indeed see a deflationary cycle…

      • COWG says:

        I also think m2 is slightly skewed because it can’t count the underground economy , drug ( illegal) trade, services for cash, money laundering, and the unbanked…

    • Robert Hughes says:

      One only has to look at the ratio of new Gov debt to GDP. in 80’s it was close to 1:1, now closing in on 5:1. Now add in state, local debt, corporate debt and personal. Constantly increasing debt is the real factor that has kept GDP growing and made it seem to the sheeple thru their watching of the MSM that everything is ok.

      Local Italian restaurant ( quality food ) closing today. Asked manager. Food costs sky rocketing, help difficult to get and keep even with competitive rising wages. Prices raised but volume declines so it’s a losing game. Time to close her up and say goodbye. Loss for community also, let alone building owner and employees. This situation is happening in so many places but it lays below the surface of wide recognition of the rot that is going on in the country.

      • Petunia says:

        Saw a sign yesterday on an ice cream shop, “Closing after 8 1/2 years.”

        That’s what the govt did to them, for no good reason, just incompetence.

    • Auldyin says:

      @MG
      QE was a desperate response to a desperate situation just like mr na was an emergency response to a desperate situation.
      In human history desperate responses very rarely end well. If we can get a permanent end to QE out of all this, IMO we will have got rid of much of the danger to traditional economics and finance as we have known it for years. The theory of QE appeared benign but in practise it turned into an abomination which has caused more harm and distortion than could ever have been imagined. If it was done deliberately in knowledge of the results, people should go to jail. But I think it was much more like the road to Hell being paved with good intentions.
      I’ve never known such a dramatic time and I’ve lived through the 70’s et al.

      • Petunia says:

        I lived through the 70’s too and it wasn’t as bad as this. It was easy to get a job, even if wages were low. Rents weren’t out of control. Food was affordable, we ate out every day, mostly pizza, chinese, and diner food. The music was better too.

        • COWG says:

          And 2/3 or less of the population we have now…

        • 91B20 1stCav (AUS) says:

          COWG-aye, the result of population expansion/resource consumption to the limits of its-one contemporary technology that rarely husbands its natural resource base sustainably. Generally followed by hard times-there’s humanity’s age-old rub TANSTAAFL or the Laws of Thermodynamics, you can takes yer pick…

          may we all find a better day.

    • Tony says:

      Dr. Gorback—
      The “fly” in the ointment of the deflation scenario is energy prices. We have been the beneficiary of cheap oil for a long time. Due to years of underinvestment (and other factors, such as financial stress for the shale producers), those days will be over. $100++ per barrel oil will be coming next year and may be here for a while. It’s hard to have deflation in goods with high energy prices.

    • ru82 says:

      Well thought post.

      At some point prices return to the mean. The downturn will be fast and you have a short time to buy. Since 1950 the US has at the most had 3 quarters in a row of deflation or negative GDP. Over the last 100 years we have not had deflation last more than 4 or 5 quarters. The Great Depression deflation was only 4 or 5 quarters long. The dust bowl and trade war kept the economy from rebounding back then. Basically every deflationary event since the Great Depression has been shorter and shorter as the Fed gets smarter. The housing bubble lasted 3 quarters before we did a V recovery and COVID was maybe 2 or less and had a sharp V recovery. The Fed has perfected the money from helicopters.

      We just had a stock market crash and the Fed would look sort of silly if another stock crash within a couple of years. I think that is why they are slow to tapper and will put up with higher inflation. People complain about high prices during inflationary times but put up with inflation but they get mad when they don’t have a job during deflationary time. Plus they have too much time on their hands to go out and riot….etc.

      If we have minimal tapering and they keep interest rates low….I possibly see high inflation lasting longer than people think. Maybe not at the 2021 supply chain challenges rates but inflation none the less

  15. BuySome says:

    No great need for a national identification card anymore, another giant order of toe tag$ should cover this. (When deciding where to site the ER in a hospital, one should always locate it close to the elevators which lead down to the morgue rooms. Keeps the other patients calm when the deceased can be removed from view efficiently.)

  16. historicus says:

    It is remarkable to me that the Fed INTENTIONALLY hurts savers, by pushing inflation and keeping rates well below, and there is little blow back.
    Saving is how generations got on their “financial feet”, and now that is impossible. Remarkable.
    The upper class elites are pulling the ladder up on the rest of America.
    Who could save for a new car, save for a house? No one, and by design.
    Is Powell this ignorant or is he that evil?
    He pretends to concern himself about unemployment numbers, yet the reasons he lists for the current condition have NOTHING to do with any benefits from low interest rates. Instead, the inflation he has delivered is PUNISHING America. And the Fed, who is allegedly bound to stable prices, does not lift a finger.

    This is the financial comparison to the Afghanistan withdrawal. Just like trading….going in is easy, its the getting out. And Powell seems never to have considered the ramifications and seems paralyzed.

    • Karen says:

      Powell knows exactly what he’s doing. In speeches in 2012 he warned his fellow Fed governors of precisely of this scenario – the addiction of markets to stimulus, and the Fed’s consequent inability to withdraw it. He took the top job anyway, and talked tough at the beginning. Then 2018 happened, and it was a wake-up call. I think he saw a prospective collapse of the financial system and, like his predecessors, decided it wouldn’t happen on his watch.

      • historicus says:

        Powell took fed funds all the way to 2%! With 2% inflation!
        and the markets couldnt handle it…
        and Trump jawboned him…
        and somebody threw their arm around Jay and said “It’s going to be THIS WAY.”
        And he hasnt been the same since.

    • phusg says:

      But youngsters priced out of the housing market and without a pension fund don’t need to save because they are making their fortunes on crypto.

      When crypto crashes big time they may wake up from their slumber, but maybe they are also just hoping that their wealthly parents won’t burn all their wealth and will bail them out in the end.

      Maybe this generational anger was partly why so many people didn’t care to observe covid rules? (as covid mainly kills the older upper class elites)

      • Petunia says:

        If you knew how these millennials are really faring you wouldn’t be bashing them. A too large percentage work with no benefits and this includes the ones with “good” jobs. They buy crypto because it’s just as legitimate to them as the rest of the economy.

        • phusg says:

          I don’t understand why you think I was bashing millennials.

          I do wish they would give the political establishment a big kick up the **** and force it to change course from the inflation targeting, consume like there’s no tomorrow course we’ve been on for far too long.

  17. CJH says:

    “But short-term interest rates are not on the table yet. And even if long-term interest rates continue to rise, they will remain deeply negative in real terms – below the rate of CPI inflation – which is very stimulative.” Pssssssst. The sound of bubbles deflating. The Fed is experimenting with a bastardization of MMT principles. Wolf is right about one thing. It won’t be pretty.

  18. Swamp Creature says:

    Better watch what you put in the bank. The IRS will now be downloading all your bank records to a gigantic server farm and running algorithms to check if you’ve made too much money. The government needs your money now to pay for all their boondoggles. This provision is in the new reconciliation bill to fund the government.

    • Bobber says:

      The IRS shouldn’t have the tools it needs to catch tax cheaters? Why do you say that?

      • COWG says:

        Bobber,

        Because he’s saying you are assumed to be a tax cheater unless/until you can prove otherwise…

        The IRS has to prove income, you have to prove deductions… this makes it tons easier for the IRS by giving them first position and putting you on the defense…

        • Bobber says:

          If a person’s income shown on their tax return isn’t reasonable when compared to the inflows and outflows of that person’s bank account, the risks of that person being a tax cheater increase significantly. These things need to be checked out so that the IRS doesn’t have to bother a much larger group of people with audit procedures that are less targeted and less efficient.

          If I were selected for audit because my bank account flows were unusual, I would not complain because it would take 5 minutes to explain the discrepancy, and the IRS would walk away. Tax cheaters would have a harder time with it because they would have to make up some nonsensical explanation and make prison arrangements.

          The end result of smarter IRS enforcement is that honest taxpayers get less scrutiny, not more. There is really nothing to complain about if you are an honest taxpayer.

        • Swamp Creature says:

          Bobber

          One of the stupidest comments I have ever read on this post. If they do that then I will take all my money out of the bank and put it in a safe. They don’t give me any interest anyway, so why should I keep my money in the bank so the IRS can monitor everything I’m doing. Screw them. A lot of people will do the same thing. I work hard for the money I earn and they can go kiss my a$s. They tried that in Japan and it didn’t work. Sales of safes went up.

        • Bobber says:

          Swamp, paying tax is not stupid. It’s required by law. Plus, failure to pay your tax is what free loaders do. I’m done talking about it because it’s about common sense and courtesy. Either you have it or you dont.

        • Bobber says:

          Cowg,

          That’s hyperbole. Nobody is “assumed” to be a tax cheater.

          It’s about complying with basic reasonable checks.

          For example, people review their bank statements on a regular basis to make sure there weren’t any mistakes. Your mortgage lender verifies your income. Employers verify resumes. Police officers check your breath when they see you swerving on the road. You ask your kids where they went last night. People do title searches when they buy houses. Even Ronald Reagan said, “trust, but verify”.

          It’s common sense for the IRS to perform a reasonableness check on the income people report. Taxes are probably the biggest transaction people make on an annual basis. It’s not a good idea for the IRS to take peoples’ word, given all the scammers out there?

          Basic checks are part of life. Only criminals should be afraid of them.

        • Swamp Creature says:

          Bobber,

          Why don;’ you just send the IRS all your bank statement for the last 5 years and have them look it over.

  19. Random guy 62 says:

    Months into this mess and we are still being pummeled by shortages and price hikes.

    Supplies that typically show up like clock work are now weeks and months late. It’s everywhere. Prices are still rising, but at a slower rate than earlier in the year.

    If our business is an example of what is going on in others, it feels like output is approaching a peak. Bottlenecks in steel and aluminum production, semiconductors, and port shipping are limiting the ability of businesses to ship their record-breaking backlogs. At some level down the line, most of us depend on a few core industries that cannot boost output overnight like these.

    The mentality has shifted on ordering from suppliers. No longer are businesses counting on standard lead times. Instead, we are being forced to order a year in advance or risk being left out altogether.

    It feels like we are all overreacting and building toward another mess. When demand finally cools, everyone will have stockpiles of raw materials and too much in order. The backlogs will drop like a rock, with pricing will again be in turmoil as we continue to price products to turn a profit amid volatile input costs.

    • Old School says:

      Peter Schiff made argument that because government locked down part of the economy that Fed should have ran a tighter policy than looser policy. If you are producing 5% fewer goods, why should you throw 10% more money at them. The way the Fed did it we know wage earners and savers got less in real terms.

  20. Engin-ear says:

    – “But where the heck does this “very strong demand” come from?

    Here’s where: The most grotesquely overstimulated economy ever.”

    Why the reopening of the economy doesn’t equally enter this causes analysis?

    It is reasonably to expect a temporary catching of the demand.

    • Engin-ear says:

      (Catching up of the demand)

    • RightNYer says:

      Because the idea of “reopening” is a meme. The economy has largely been “open” since May or June of 2020, outside of restaurants and theaters. Using “reopening” as an excuse for inflation makes it sound as though the economy has been shut down completely for 18 months. That just isn’t even close to the case.

    • Wolf Richter says:

      Engin-ear,

      “It is reasonably to expect a temporary catching of the demand.”

      No. You’re caught up in a numbers-free fantasy. Look at the numbers. I’ve been reporting on this phenomenon from the beginning. Sales of goods exploded during the Pandemic, particularly sales of durable goods. After two months of declines (Mar & Apr 2020) came a historic spike in demand. The drop in Mar & Apr 2020 was caught up by summer. By the end of 2020, total durable goods sales for the entire year were already 12% higher than in 2019. And so far in 2021, durable goods sales have spiked 33% from the same period in 2020. There is no “temporary catching up.” They’ve been way ahead all along. This “reopening” meme is BS.

      • SocalJim says:

        A big chunk of that spike is not due to the stimulus. It is due to consumers expecting inflation to continue so they are rushing out and buying many items in advance. This phenomena is common when consumers expect extended inflation.

        • COWG says:

          Disagree, Jim….

          Amongst the lower 40% it’s going to be spend it before something else takes it from you…

      • Engin-ear says:

        I am Ok with the idea of monetary overstimulation.

        But I am not sure that the other factors palyed a minor role – work from home, tourism on hold, loans in forbearance, eviction bans…

        The income that is not spent on services, should go into Stock exchange and durable goods, that is my theory.

        In other words, the new normal for solvent demand for durable goods could be higher post-pandemic.

  21. Brant Lee says:

    Wolf is right. It used to be “a chicken in every pot on Sunday”, now it’s a new 70k pickup in every driveway. People are mortgaging their inflated home prices to buy a double inflated priced truck.

    Here in the south, there are countless examples where the vehicle is worth more than the shacks and trailer homes they sit in front of.

    Tuco: There are two kinds of people, amigo. Those who have used this period of opportunity with stimulus and ultra unemployment benefits to pay off, or down their debt. And those who have dived ever deeper into financial oblivion to never be capable of clawing their way out.

    • Douglas Stout says:

      We are kind of having a real estate and remodel boom where I am. A lot of people are using 3/4 ton and 1 ton pick ups to make big money right now. Might not last. You need something that will pull a trailer with a bobcat or backhoe.

    • COWG says:

      “Here in the south, there are countless examples where the vehicle is worth more than the shacks and trailer homes they sit in front of.”

      Warm when it’s cold, cool when it’s hot, dry when it rains, if I don’t give a damn what it looks like, why should you…

  22. Dave Mac says:

    Do cycles exist in stock markets?

    If they do I’m expecting a re-run of 1973-1974 in the near future.

    The massive debt situation has to be resolved somehow.

    • historicus says:

      The NEO CENTRAL BANKERS deny cycles….

      they prevent corrections and cycles, normal free market activities…because they know better, just ask them.

      Corrections are call “corrections” because they “correct”. The overleveraged and poorly financed are flushed (not saved), and the result is a healthier market/economy. The Neo Central Bankers dont apparently think this is necessary. Thus, excesses are pent up, and the eventual flush becomes systemic in nature.
      Enter the problem maker/solver….all wrapped in one…the Central Banker. And with each “emergency” comes the broadening of powers and scope of the Federal Reserve, self authored of course.

    • Old School says:

      If you listened to J Yellen and J Powell and congress geniuses recessions are bad and we shouldn’t have them anymore.

  23. Winston says:

    If our American idiocracy could suppress their lust for “games and circuses” just a bit and avoid buying Made in China items unless absolutely needed and with no other nation of origin, it would do two beneficial things: it would thank China for their egregious violations of the WHO’s epidemic reporting requirements which led to a worldwide pandemic and it would reduce the supply bottleneck.

    • Brant Lee says:

      Even T wouldn’t tell his supporters to walk into retail stores and demand USA-made products, then walk out. It would have been a game-changer (no pun).

      You won’t ever hear a politician (our leaders) saying it

  24. David Hall says:

    Opel closed an auto mfg. plant. Automakers may not roll out autonomous driving features due to chip mfg, testing, packaging and shipping bottlenecks. COVID is causing temporary disruptions.

    College/university tuition inflation has been about 7% per annum over the past 20 years.

    • David Hall says:

      That inflation rate is too high, however recent college cost inflation is higher.

  25. fred flintstone says:

    After serving 14 years in the armed forces, working in jobs for nearly 60 years…..I can say with an honest voice….
    I don’t think Al Capone would have done a worse job at running the government than the current group. Its all about stealing whatever is not nailed down and transferring it to your friends. Dems and Republicans….it don’t matter. They are all in the same game. Government contracts paid for by middle class mom and pop savers. Stimulating at a time when unemployment is nearly full employment (4%) and job openings are everywhere. Demanding more spending with inflation at 5% plus.
    Manchin said it….fiscal insanity…..but more correctly……the thieves are in charge……and their fathers held hearings to jail mobsters…..they should be jailing their own sons/daughters.

    • Old School says:

      We have been riding on the 40 year bond yield slide Bumping into the zero bound ground now. The easy ride is over. Who is getting screwed first savers? Tax payers are next on tap.

      • CJH says:

        The tax hikes will hit the top 5% of wealthy folks. You know, the ones who own 80% of America’s assets. Most of them got wealthy the old fashioned way, they inherited it, or married into it.

    • lenert says:

      2.8m continuing claims, doe. And the party of fiscal and personal responsibility voted largely, if not unanimously, to default on the debt, and not for the first time, while the other party didn’t vote against it and never has especially during the past 20 years of wartime.

    • Swamp Creature says:

      I would vote for Al Capone over these gangsters and liars that are running the country now.

  26. Nemo 300 BLK says:

    “and they’re going out and borrowing against their assets and buying $70,000 pickup trucks”

    Believe it or not, some of us write checks for $70,000 pickups and $80,000 SUVs. I’ve done it once this spring, and Ford willing, I will do it again this fall. Some of us have busted our asses, went without, and saved for a long time so we don’t have to live off other people’s money.

    Interest was meant to be made, not paid is how I have lived my life.

    • COWG says:

      Full boat or trade difference…

      I’m only asking because I might be related to you and could possibly use some help…

  27. B.A.C.A.H. says:

    I was skeptical about the inflation earlier this year as did it not show up in my grocery basket. But that changed in the past few weeks. You know it’s real when Trader Joe raises some prices. And yesterday, In and Out!

  28. SocalJim says:

    SP500 price to sales is north of 3.0. Before COVID, it was always below 2.

    People are paying up for equities because they want exposure to assets on the balance sheet … this is a classic inflation hedge.

    They are paying for the inflation hedge because many believe globalization has failed for a number of reasons.

    Personally, I cashed out of equities at the end of the first quarter, because I have a hard time deciding how to play this one.

    • SocalJim says:

      Also,

      My base case is super slow growth with inflation. The world has changed.

  29. Nick Kelly says:

    As soon as I saw JP blaming inflation on supply lines, I remembered an earlier story of his: about two years ago when the good news about vaccines hit the news, he said that caused the surge in stock markets.
    As I recall he didn’t mention stimulus money because of course that was supposed to cover necessities, not to buy GameStop etc.

    When his latest runs out of airtime, I have a new one he could try out: ‘the persistence of inflation may be influenced by a belief that the Fed is never going to allow a significant decline in asset values, even from historically inflated levels. ‘

  30. Xavier Caveat says:

    J-Pow: Does this address make the economy look fat?

  31. Depth Charge says:

    “When he was asked if the Fed wasn’t “overdoing” the stimulus, he just brushed it off: “The historical record is thick with examples of underdoing it,” he said. “I think we’ve avoided that this time.””

    This guy wouldn’t know history if it kicked him in the yellow teeth. History is littered with examples of failed currencies due to money-printing. F*** you, Weimar Boy. F*** you straight to hell you SOB.

  32. Depth Charge says:

    “And there’s another thing in this Spandex transitory inflation: Consumers and businesses have changed, all of a sudden. The money vaults were opened, and suddenly, price spikes are no longer demand killers – as they had been in prior decades.

    People and businesses now pay whatever. Businesses do so because they know they can pass it on to the next entity in line, and finally to the consumers; and consumers do so because they’re flush with these grotesque amounts of sudden money from the heavens – Fed and government stimulus.”

    Please be careful with the sweeping generalizations, Wolf. As a self-employed contractor, I forwent the purchase of a piece of equipment I had planned on adding. I could have really used it, but the 60% price markup did not pencil out. Further, I LOST a lot of jobs because of the materials price increases. Customers are INDEED balking.

  33. Depth Charge says:

    “Meanwhile, they still have the foot fully on the accelerator, repressing interest rates and printing $120 billion a month.”

    Has anybody ANYWHERE asked Weimar Boy why he’s still doing this, and what the justification could possibly be? It’s like a serial killer who is telling everybody that he has learned the error of his ways while he’s in the middle of decapitating another victim, telling us the killings are going to stop. Would you believe him? This guy is a dangerous liar who needs to be fired.

  34. Depth Charge says:

    By the way, I am hearing complaints from people from all sorts about the massive inflation and the fact they cannot afford life anymore. Many of these people are strangers who don’t understand what’s going on but are feeling the squeeze. It will not take a while for inflation to become “a political b!tch.” That time is already here.

    • RightNYer says:

      I’ve said it before and I’ll say it again. The current zeitgeist is exactly why Americans won’t and shouldn’t give up their AR-15s.

      • LK says:

        Because those work so well against drones and nukes.

        Love how central the idea is to that statement that Americans don’t see other Americans *as Americans.*

        Intimidation and fear through threats of violence is what terrorists and small men do to make a point and assert themselves and/or their authority. It exacerbates the zeitgeist, not addresses it. The failed coup on Jan 6th might ring a bell here.

        Maybe stop saying that lest we get into a patriot / terrorist bullshit dialectical where, either way, people kill and die for lost causes against insurmountable odds.

  35. He was addressing the Europeans who are addressing inflation in their own disingenuous way. The Fed already said they can let inflation run above target, so chill. I also think Treasury can price their bonds at auction skewed lower and get away with that. ( I also think they are willing to sell discounted paper and pay up front, if the cost of servicing the paper offsets the charge) .Unless GDP rises significantly higher bond yields are transitory. The US needs a small business initiative like China, otherwise these trillions are just going to multinational corporations and not to growth.

    • gametv says:

      Ambrose – All markets are determined by supply and demand and the Treasury markets are no different. The Treasury has had six months where it was using money in the general account to fund deficit spending, but that time is over. So the balance between supply and demand gets hit on two fronts – much higher supply after they clear the debt ceiling limit and lower demand as prices on bonds fall (as yields rise). So the market goes into a real death spiral. The only way to “manage” this is to continue to use really short duration bills and notes, but this creates a great deal of hazard, since short term debt must be rolled over and if rates are rising, that means paying higher interest in the future. It is more conservative to sell longer term debt while we still have relatively low interest rates.

      If there were no inflation the Fed could step in and add demand by buying even more debt. The huge problem with that is that inflation is running hot and there is simply NO WAY the Fed can announce an increase in bond purchases with inflation so hot. So the Fed has to sit on the sidelines.

      The Treasury can price bonds at auction any way they want, but the demand will determine at what price they actually sell the Treasuries.

      Watch for Treasury to have some auctions with few bidders and that will set interest rates running much higher (or bond prices much lower). I say we will hit higher interest rates by end of year than we had at the peak in February.

      Bonds have been in a 30 year bull market (in prices) and once bonds begin to break down through the support/resistance lines that have formed over decades, watch out below! All those bond investors who stayed in bonds as long as they were investing with the trend will suddenly realize that the trend is no longer their friend.

  36. Federal debt is dangerous, for debt puts the power in the hands of creditors, and if power is in the hands of creditors, it could not be in the hands of the people.

  37. GSH says:

    Things are getting a bit chaotic.
    1) The Fed was/is the most prolific printer the last two years, yet, the dollar is rising (Euro at $1.15 this morning). This will make foreign $ loans difficult to repay.
    2) China is deliberately deflating their housing bubble (three red lines). (20+ % of their economy).
    3) Industry in China forced to shut down because of power shortage. (Self inflicted)
    4) Nat gas prices in Europe through the roof

    Economy just like weather seems to enter a chaotic regime. This means, policy inputs will not produce the expected result.

  38. wkevinw says:

    Reasons/excuses for the economy we have today.

    1. Liberal economists, business and politicians: Macroeconomic indicators, such as GDP are maximized by “free trade” (read- shifting costs of regulation to other countries). (mostly big corporations benefit).
    2. Conservative economists, business, and politicians: yes! all of this GDP growth will be great for businesses (mostly big corporations)

    WOOPS!- “income inequality”!!! (better description is that the lower ~50% got poorer because they depend mostly on (globalized, depressed) wages).

    Liberals- hand out all sorts of welfare- modern monetary theory!, universal basic income!
    Conservatives- as long as our profits are OK, we’ll go along with the social welfare (and we also “care”, of course!)
    Free market proponents: this is a nightmare. markets destroyed and social/political/economic incentives destroyed (see crime/riots, substance abuse, mental health problems, lack of job skills, lack of community/responsibility- )

    Just in time manufacturing/globalized trade- woops! we didn’t invest enough in the real economy!!! (better to move money around in the financial markets…) woops!! – demand pressures …inflation!

    Pretty simple to diagnose. Cures will be difficult.

    • drifterprof says:

      Pretty good overview.

      But not simple to understand for most concerned people, who are engaged in constant cultural warfare and saddled with emotional political biases. (Tower of Babel)

  39. Michael Gorback says:

    I suggest we mark our calendars and revisit this in one year. The wager will be whether or not inflation is >2%.

    Losers buy winners a beer mug. We need a way to pair bettors unless we want to keep changing the odds. I like the idea of winning but I don’t need 15 mugs.

    BTW, I’ll take the under.

  40. gametv says:

    The interesting thing about this economic cycle is how very little we have bought in terms of expanded business with the money spent by the Fed and government.

    Have we invested in infrastructure? No.

    Are banks lending tons of money out to businesses to grow the economy? No (there are not alot of credit-worthy borrowers).

    Have we invested in productive capacity in the United States? No.

    All this money has gone into buying crap from overseas and driving asset prices higher. That doesnt create a sustainable economic boom in the future.

    Which is why I think that Powell is actually accurate. We wont have long term inflation because all that money thrown into the economy was wasted. And we are on the brink of a major market breakdown that will last for the better part of the next year. Bonds, stocks, real estate, cryptos, all headed lower. It wont be a huge plunge like 2020, it will take time to unfold, possibly a whole year or two. And in the end, inflation wont be a problem, because the economy that has been built – a speculator’s economy which doesnt actually make anything here in the US, will have been decimated by lower asset prices, the bursting of the asset bubble.

    It all starts with falling bond prices, as the debt ceiling is cleared and supply of Treasuries to the market is a flood of debt that is met with no bids. Mortgage rates will rise to 4% within the coming six months, or less, and all those speculators who bought up residential housing will be getting clobbered by falling asset prices. Once housing prices are headed down, the supply of homes for sale will skyrocket, as all the owners who thought prices could only go up put their homes on the market. But the demand for homes will be a pittance, as people realize that a home is an expense, not an asset, when prices are falling and mortgage rates are rising after 30 years of home price support due to falling interest rates. This is the type of generational shift that will devastate the primary asset of many Americans, at a time when the ability of the Federal government to borrow more money comes under extreme pressure from rising interest rates.

    That is the core problem that will turn our economy south and will eventually cause inflation to moderate. Future lack of demand as all the stimulus money has been spent and the “wealth effect” that was generated by increased home values and increased stock portfolios gets destroyed.

    Powell, as bad as he is, is better than the potential replacement, Lael Brainard. She is a complete partisan hack, who is willing to say and do anything at all to gain the Fed Reserve chair position. She will go along with the insane ideas of the progressive wing of the democratic party, which will further destroy any semblance of economic sanity at the Fed.

    • K-Agri says:

      Gametv – nice write up, I have a similar take.

      “All this money has gone into buying crap from overseas and driving asset prices higher. That doesnt create a sustainable economic boom in the future”. I would even go a step further, it has made the country less productive than previously, increasing the chance of a future correction.

      The civil service needs to out in a lot of hard work and preparation to spend money productively. Identify the most beneficial projects; conduct high quality, fair and transparent public tendering processes. Tried and true approaches.

      For COVID, western governments directed their civil services to spend as much as they could, as fast as they could. Success was measured on how quickly they could spend it. It was all done for political gain, or perhaps “to save the economy” in some twisted way. But for sure, there was absolutely no consideration for value or efficacy.

  41. I don’t understand why CDS spreads are not widening. Powell reversed policy in 2019 because of the implied trade war, which is nothing compared with the real trade and supply disruptions we have right now. The Fed has the banks by the balls, with a trillion dollar a day RRPO. Reverse is the harshest form of financial repression but it keeps effective rates from going to zero, and maybe that’s the problem. Liquidity is a great financial drug until you overdose.

    • gametv says:

      I think Powell reversed course in 2019 due to the overnight debt markets nearly freezing and then the stock markets falling by 20%ish. He realized that the house of cards was built on sand, but just decided to add another floor onto the whole thing to “support” it.

      The reverse RPO is just a way to prevent money markets from going negative, which causes major problems. It allows the Fed to push Treasuries to the banks, who have excess balances. It is like plugging the holes in a dam with your fingers, it might get the job done, but it doesnt make it a safe dam.

      I think there is a real financial storm coming rather soon in the form of all debt markets. The Chinese are very smart to pull back on specualation of credit in real estate before the bubble bursts. They have big problems but they can manage it. The big unwind is going to hurt alot.

  42. cd says:

    transitory, hilarious…..
    1.6 trillion in repo today
    they are losing control is my take….
    fed governors resigning, the fed has been gaming their own stock accounts….this will not end well
    more blows coming for sure….

  43. Auldyin says:

    I think it is useful to keep in mind that Powell is the PR Figurehead for 400 Econ Phd’s running data through their super-computers. We get to see some of the data thanks to W’s generosity.
    They are basically running traditional economics which says that a ‘supply shock’ will cause ‘transitory’ inflation
    which will cause a recession which will cause prices to fall back to their original level unless the higher prices are accommodated by an increase in monetary demand. This is probably a bigger supply shock than Pearl Harbor, so it’s a question of scale but not principle.
    What prices are doing now, was caused by what happened 18months ago when lock down was starting, therefor what is being done now will lead to what happens in 18 months time. The shortages have got worse therefor higher prices, but stimmies are falling off therefor less demand therefor lower prices. The balance between them is difficult to predict, could go either way. Maybe the computers have nailed it.
    The Fed has taken $1.6Tr out of the economy via RR which is a very severe tightening partially offset by $120Bn of continuing QE.
    The ‘transitory’ inflation could become permanent if wages rise enough to accommodate the higher prices displaying now. This is an incredibly difficult situation to call even with 400Phd’s and a super-computer.
    It can only be a bet, but I would say the Fed could get away with it by ’23 at best if they end QE once and for all.
    There’s no way I’m putting good money on any of this.

  44. Petunia says:

    I’m seeing the fashionista community transitioning to cheaper brands because the high end is now in fantasyland price wise. Handbags are experiencing shrinkflation, getting smaller to control the price increases, which are completely out of control. Lots of complaints about quality too.

    I think the luxury brands are heading for a crash, especially with China now experiencing problems in their economy, Evergrande, etc. They were probably the biggest market for luxury goods.

    Lots of mid price brands are now being promoted as better values. That’s a big shift.

    • COWG says:

      P,

      I actually think it started when “ made in Italy” changed to “made in Italy, by Chinese workers”…

      At least according to my fashionista girlfriend…

      • Petunia says:

        Luxury goods are now mostly mass market products with stratospheric prices. When the fashion houses became global corporations, that’s when the business changed.

    • Depth Charge says:

      The thirty thousand dollar a year millionaire crowd who largely benefited from the enhanced UE bennies, in conjunction with stiffing the landlord, went absolutely apech!t buying clothing, electronics and cars that they never could have dreamed of affording prior to the newfound riches bestowed upon them. It led to a shortage of expensive clothing among other things.

  45. coboarts says:

    I believe that due to a lack of, whatever – all US Government policies should first be run through the “Bikers Forum.” By that I mean, I would like to see the Fed Chair, General Milley, et al. stand in front of the current Hells Angels leader and proclaim ( I’ll substitute the once grand, Sonny Barger) “Sir – “The historical record is thick with examples of underdoing it,…”” I’d like to see how far that would get – the fool

  46. makruger says:

    Perhaps the fed sees inflation as transitory only because the fed senses that when the economy finally blows up, it could result in an event of great depression like magnitude (or worse).

    Such an event would most likely be deflationary and since that’s always been the bigger boogie man for the fed, they’re overcompensating by driving the economy so hard that the wheels finally do fly off.

    Hmm…that’s like causing to happen, the very thing you fear the most.

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