It’s the Squeeze That Causes Panic
Posted July 25, 2022
The Biden administration is now saying that stopping high inflation is now its number one priority. That’s this week.
Last week, it was guaranteeing the territorial sovereignty of Ukraine, a country Americans cared nothing about until they were told to. Before that, it was infrastructure. Before that, it was maximum vaccination rates.
So many top priorities!
What precisely is Biden doing about inflation? Absolutely nothing, beyond denouncing companies for raising prices, as if that makes any difference at all. That rhetoric only encourages producers to hide it as best they can by cost shifting, shrinkflation, and service reduction.
And it is very likely that the Biden administration knows this. Indeed, I’m sensing panic in the halls of power. And this in turn is a reflection of their internal polling, which must show rising public fury.
Let’s take this apart and ask the key question: just how unprecedented is this? We have at least seven issues roiling public and economic life today:
- High taxes
- Very high inflation
- Falling financials
- Recessionary environment with labor shortages
- Massive border immigration
- Deep political fissures
Any one of them we have dealt with at any one time. Two even. But all seven together are what generate the panic. Looking back at history, the only period I find that can compare is the second half of 1974. Even that might be a mild version of what we are going through.
Back then, we had inflation briefly at double digits rates. Financials were under pressure, with the DJIA falling 20% over six months. Political bitterness was everywhere. The US had pulled out of Vietnam a year earlier. Nixon resigned in August 1974. So yes, it too was a toxic period, a time when it truly seemed like everything was falling apart…because it was.
How do we compare now to then? The analogies are pretty darn close. The inflation is shocking enough, but to deal with a relentless downward pressure on financials at the same time creates a sense of the walls closing in. For average folks, there seems to be nowhere for the money to go. You try to hide from inflation in financials and get a double hit. You stay in cash with full knowledge that you are losing 10%.
Real estate has been the best bet around if what you are looking for is rising asset values. Combining all housing costs, including rent, prices have risen 12.2% year over year. That is completely unsustainable and it seems highly unlikely that this boom will continue for much longer, which is why the National Association of Homebuilders is already pleading with the Biden administration for help.
The Inflation Drill Down
By now, most people have stopped believing the official inflation numbers, and rightly so. The CPI tomorrow will likely clock in at between 8 and 9 percent year over year and all reports will pretend like this is gospel. And yet every consumer knows that this is nonsense.
The Department of Labor collects this data by hiring nearly 500 price checkers to go store-to-store and ask. This method doesn’t come close to providing a comprehensive look. The employees are earnest and so on but the method is essentially medieval. We have other tools that clock price increases in real-time, day to day, using APIs that run all day and night.
Here is what they show for now:
- Food: 10.8%
- Housing: 12.2%
- Transportation: 20%
- Medical: 2.9%
- Education: 1.6%
- Personal items: 5.4%
Overall, depending on the weighting, the real-time inflation rate right now is 11.4%. Keep in mind that this is consumer goods. Producer prices are much higher.
The real-time CPI is being helped here by relatively low increases in education and medical services, but these are not categories that people consume all the time, unlike food and rent. By these standards, then, we are at about the same levels as we briefly saw in 1974, but remember that this was an inflation of relatively short duration. The current depreciation of purchasing power has been ongoing for a full year.
The housing-price index reveals very similar numbers, though slightly higher. What’s curious is the rental problem right now. Prices are soaring but inventory is reaching lows that we haven’t seen since 1984: 5.8%. That likely reflects the shutdowns of 2020-21, when building materials were hard to get and the labor force was seriously disrupted. In addition, investors were squeamish about taking on grand new projects.
What’s the one tool that politicians have right now to deal with this chaos? The most immediately accessible one is to cut taxes at the state level. That’s what several states are doing right now, and rightly so. Florida is, of course, leading the way here but other states are following and the movement seems to be cutting across party lines.
At the same time, this is causing the usual crowd to freak out. The New York Times just wrote the following rocks-for-brains commentary:
But while the policies are aimed at helping Americans weather the fastest pace of inflation in 40 years, economists warn that, paradoxically, cutting taxes could exacerbate the very problem lawmakers are trying to address. By putting more money in people’s pockets, policymakers risk further stimulating already rampant consumer demand, pushing prices higher nationally.
Letting people keep more of their own money is inflationary because they might spend it, whereas letting government steal it and spend it is not? Apparently so. What they do not get, because they don’t know basic economics, is that economic growth that tax cuts MIGHT inspire exercises downward pressure on prices, all else equal. Regardless it does slightly lessen the burden on taxpayers, and that is surely a good thing.
In other words, there is no “paradox” here. Things are exactly as they look. Let people keep more of their money and they have more money. That helps mitigate declining purchasing power, the same as getting a raise.
Many investors have turned to crypto in these times as a safe haven, expecting it to thrive as everything else dies. But crypto has a way of defying all expectations. As a result, we had a very hard week, with institutional investors actually favoring cash over anything perceived to be risky, including crypto. Consequently, the market has been hit pretty hard.
Why are the old gangsters in the space not panicking? Because they have been here before, many times. They see this as an opportunity to scarf up more and prepare for the long term. Based on my ten years of experience in this market, that strikes me as wise.
The Panic Intensifies
Six months ago, many people were willing to believe that this mess was short-term. That no longer seems true. And it is no longer believable to blame all this on Putin, or whatever the latest excuse is. The American ruling class did this. They took a relatively healthy and completely fixable economic environment and turned it into a disaster. That growing realization is combustible: politically, economically, and for personal finances as well.