Mega-policy decisions to boost demand. Now mega-consequences.
By Wolf Richter. This is the transcript of my podcast of last Sunday, THE WOLF STREET REPORT.
The story being propagated by the Fed is that the supply-chain nightmare caused this burst of inflation, the worst in decades.
Inflation is taking off in other countries as well, with multi-decade highs in Germany, in Europe generally, in Canada, and other places. This has spread across big parts of the globe.
But the Fed and the US government have refused to take responsibility for this bout of inflation and have blamed the supply chain snags and labor shortages, and have called this inflation “temporary” and “transitory,” denying that their reckless money-printing and interest-rate policies, and the immense deficit spending have anything to do with it.
But the Fed has lost control of the narrative.
In the 20 months since March 2020, the Fed has increased the assets on its balance sheet by $4.2 trillion, having nearly doubled its total assets to $8.6 trillion. This is a huge amount of money-creation. And this money went everywhere. It ballooned asset prices, which made asset holders a lot richer. Real estate, stocks, cryptos, a bunch of other assets. It’s the Everything Bubble.
The Fed did this to create what it calls the Wealth Effect. This has been spelled out in official papers by the Fed. The idea is that when these folks get richer, they’re going to spend some of this new wealth. And when interest rates are low, they can cheaply borrow against their assets, rather than having to sell them, and they can spend this borrowed money.
This happened via cash-out refis of home mortgages, it happened via leverage in the stock market, which has ballooned to records, it happened via outfits that allow crypto-owners to borrow against their crypto-holdings. Leverage surged across the board. And this money was spent, and will get spent, providing lots of fuel that didn’t come from labor.
Then there were the government stimulus programs, not just for the unemployed and for people under a certain income level, but for businesses, such as the PPP loans which went largely to people who didn’t need them, as we now know. The rules were loose, and folks didn’t need to break the rules to get this money. Over $800 billion in PPP loans were given out, most of them forgivable. And some of this money was spent on fancy cars and other stuff and provided more fuel that didn’t come from labor
Big companies too got lots of stimulus money, and it was spent and invested. And states and municipal governments got lots of stimulus money, and this is being spent, and all of it will provide more fuel that didn’t come from labor.
Nothing was designed for this type of burst of demand. But that demand didn’t come out of nowhere.
It was purposefully fired up by $4.2 trillion in money printing in 20 months in the US alone, and by $5.4 trillion in deficit spending, based on how much the US national debt has soared over the period – by $5.4 trillion in 20 months.
Combined, nearly $10 trillion in total stimulus. And it’s still going on.
Every major company is now talking about current price increases, and about future price increases, and surging costs of materials and components and labor. And they’re increasingly saying that these cost increases and price increases aren’t a brief episode but are getting baked into the economy.
This is another sign that the whole inflationary mindset has changed.
Consumers have undergone a revolution of their mindset over the past 12 months. What’s happening with new and used vehicles shows how.
But vehicles are the ultimate discretionary purchase for most people. Most people can drive whatever they already have another year or two. But no. They have to buy now, and they’re willing to pay an arm and a leg for it, and they’re no longer even trying to get a deal – they’re just paying whatever.
That shows how the inflationary mindset has changed. And it’s not going to revert very easily.
Despite all the shortages out there, and despite all the supply chain problems, total retail sales in September were up by 14% from September last year, and by 20% from September 2019. These are huge historic increases in retail sales.
Retail sales include only goods. But the biggest part of consumer spending is for services. And the biggest portion of services is housing, which weighs one-third of the overall Consumer Price Index.
This housing component is based on two types of rent factors. While CPI inflation figures for rent have ticked up, after having been pushed way down during the pandemic, they remain very low – below 3%.
But market-based data shows an explosion in asking rents. These are advertised rents of apartments for rent. Asking rents run ahead of actual rents, and they run ahead of the CPI for rents. But asking rents are eventually filtering into actual rents and thereby into CPI.
Across the 100 largest markets, the median asking rent for 1-BR apartments spiked by 11% in October from a year ago, and by 12% compared to pre-Covid levels in early 2020, according to data in Zumper’s National Rent Report. In 16 of the 100 largest cities, including in New York City, the median asking rent spiked by 20% or more.
There are some exceptions. In only 11 of the 100 cities, rents declined. In San Francisco and some other Bay Area markets rents are stagnating well below their pre-pandemic levels. In the city of San Francisco, rents are down 25% from July 2019. But those markets are the exception.
Construction costs of singled-family houses have exploded amid widespread shortages that range from windows to appliances and small items that you’d never expect to run out of. The Commerce Department’s index of construction costs spiked 12% year-over-year, the most since 1979, and is up 18% from September 2019. This excludes the cost of land and other non-construction costs.
Builders cannot finish construction projects because they can’t get the windows or whatever. The number of unfinished houses for sale – so houses where construction hasn’t started yet and houses still under construction – accounted for 91% of total inventory for sale in August and September, by far the highest ever.
These shortages are everywhere. And a lot of the products are imported. As we saw in the GDP data last week – and this is adjusted for inflation – the total trade deficit in goods and services worsened by over 5% in the third quarter to a record worst ever.
The largest ports are hopelessly backlogged. They’re putting through more containers than ever, they’re setting records, but they’re hopelessly backlogged. Year-to-date through September, the Port of Los Angeles has handled 18% more loaded inbound containers than during the same period in 2019.
The Port of LA could handle more, but there isn’t enough capacity to take the containers away because the trucking industry is backlogged, and railroads are backlogged, and railyards are backlogged, and warehouses are backlogged.
A few months ago, Union Pacific and BNSF stopped taking away containers from the Port of LA for a week because their own railyards inside the country couldn’t accept more containers because there weren’t enough trucks to haul containers away from those railyards, and trucks were tied up at warehouses because the warehouses were backlogged.
With containers, part of the problem is the chassis shortage, which are the specialized trailers to haul containers. This chassis shortage is everywhere, and even smaller container terminals, such as at the Port of Houston, have complained about it.
So if one bottleneck gets resolved, it’ll make the downstream bottlenecks even worse.
The reason is that nothing was designed for this sudden burst of demand.
But that demand didn’t come out of nowhere. It came because of that nearly $10 trillion in total stimulus in the US alone in 20 months – the $4.2 trillion in money printing and the $5.4 trillion in deficit spending.
Those were policy decisions made to boost demand, and now we have the consequences.
These shortages don’t mean less production. For example, the semiconductor shortages: Global semiconductor sales have hit records over the past few months, according to the Semiconductor Industry Association, and are up by 16% from two years ago.
So it’s not that they aren’t making semiconductors. They’re making more than ever. It’s that there is blistering sudden demand, and the industry cannot ramp up fast enough.
Sure, there were also temporary issues – as there are always somewhere. This time, it was the Big Freeze in Texas in February that temporarily closed some plants near Austin. And around that time, there was a fire at a Japanese chip plant. But those issues were fixed months ago.
There were sporadic problems with individual plants in Asia that shut down for two weeks at a time due to Covid outbreaks. All of this made the shortages worse. And these are temporary problems.
But there are always problems that are temporary, and that get resolved without tangling up global supply chains.
What’s different this time is that production is higher than ever, and everyone is at capacity, and any disturbance cascades through the system and makes everything a lot worse because of this blistering demand.
It ultimately comes down to demand, and demand is huge, and it’s global, and it came very suddenly, due to stimulus, and the stimulus continues globally, though some central banks have started to raise rates and others have ended QE, but they’re still only lowering the amount of stimulus, and they’re not anywhere near neutral, and they’re far from putting their foot on the brake. They still have the foot on the gas pedal, just slightly less than before.
The Fed has refused to even see the issues for months. It now is partially acknowledging the issues but still has its foot all the way on the gas pedal, blowing through every red light at every intersection.
It may start to ease the pressure on the gas pedal a bit in November, but it’ll still be blowing at near full speed through every red light at every intersection.
Millions of people have left the labor force, including three million people that are estimated to have gone into early retirement. Many others have not returned to the labor force for all kinds of reasons.
Millions of people sit on hefty gains in their real estate holdings, stocks, cryptos, and other assets, and they’re thinking that they’re going to make 20% or 50% or 100% a year, every year going forward, and that they don’t feel like they need to work.
We had some of this in the late 1990s, but to a much lesser extent because the bubble in stocks was limited to some stocks, and there wasn’t a housing bubble in 1999 and there wasn’t any kind of crypto insanity. But lots of people made a ton of money in stocks without having to work for it, and they quit their jobs and did other stuff and focused on day trading or whatever. But as the Nasdaq crashed 78%, they wanted their day job back.
We know how that works, been there, done that. When asset prices sag, instead of endlessly going up, some of those people that left the labor force will rejoin the labor force.
There are over 11 million unfilled jobs. Companies are now forced to respond, and for the first time in decades, wages are jumping. This started in the spring and took off in the summer, and hit new records in the third quarter.
Wages across all private industries jumped by an annualized rate of 6.4% in Q3, by far the largest jump in the data going back 20 years, according to data from the Employment Cost Index, published by the Bureau of Labor Statistics.
Wages made big gains across all industries. In banking, at the higher end of the incomes scale, wages shot up by 12% from a year ago, by far the fastest increase in the data going back nearly two decades.
At the other end of the wage spectrum, the hotel and restaurant industry, wages shot up 8% year-over-year, the fastest increase in the data. And they were up nearly 14% from two years ago. In retail, wages jumped by nearly 6% year-over-year, also by far the highest in the data.
These wage increases were the missing element early this year when inflation began to surge. But they’re now being baked into the economy. And it shows how the whole inflationary mindset has changed.
The Fed is still trying to blame shortages that suddenly came out of nowhere. But they didn’t come out of nowhere. The Fed engaged in a huge amount of money-printing to inflate asset prices so that the people who’d made those gains would spend some of them and would further stimulate demand. And the government had a massive bout of deficit spending to boost demand.
It wasn’t just in the US but globally. In the US all this was magnified, with nearly $10 trillion in stimulus, that $4.2 trillion in money printing and $5.4 trillion in deficit spending. And it shows up everywhere.
Those $10 trillion are circulating, and they’re causing all kinds of things to happen, all kinds of distortions, and excess liquidity, and asset price inflation. The record amount of leverage multiplies all of this. And people react.
There are an infinite number of moving parts. But the only thing that came out of nowhere was the explosion of money printing and deficit spending. And the moving parts began to react in countless ways. Some of those ways were very predictable, such as a surge in demand. That was planned even.
So now we’ve got that, and central bankers and government officials are surprised that for the first time in decades, after nearly $10 trillion in monetary and fiscal stimulus in just 20 months in the US alone, inflation has exploded?
What is happening is that the Fed has lost control of its narrative that it had nothing to do with this inflation, that it’s just some supply chain issues that came out of nowhere. The Fed is still telling one story, when reality has already taken off to go its own way.
But the Fed can crack down on inflation. With its $8-trillion balance sheet that it can unwind and its policy rates at near 0% that it can jack up, it has lots of ammo to combat inflation. They would all boil down to reducing demand.
But changes in monetary policy take something like 18 months before they have any effect on inflation, and even after that initial lag, battling ingrained inflation is a long hard process. The longer the Fed waits, the deeper this inflation will be ingrained, and the harder it will be to dislodge. This situation – meaning the Fed’s efforts to dislodge ingrained inflation – is something that most Americans have never experienced as adults.
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