January 13, 2022

Inflation and other factors mean Sour Times in America

Prepare for a period of sour times in America. The 12-month percentage change of inflation was 7% for December.   Think about that.  The target rate according to the Federal Reserve Board's target rate is 2%. Instead we've had the Let's Go Brandon administration and the monetary establishment give us this:

That chart is scarier than I had predicted.  I thought 2023 might be year we see steep increases in inflation. Nope. 2021. Energy alone was up 29.3%. I recently said it was going to be bad, repeating what I've said many times in fact. If energy is up that much, and it continues to be up, it will have a downstream effect of food prices, and everything else. Energy is the lifeblood of everything. It takes energy to get food to your door. Energy costs are embedded in everything. But with the Fed having trillions of dollars (almost 9 trillion in fact) on it's balance sheet, effectively money printing (which takes a bit of explaining - for a decent explanation check here -- and ignore the incorrect conclusion).

Now The Fed has to do something and it appears they will. Slowly. They'll start running off some of the 'assets'  on their balance sheet along with decreasing the pace of increasing it in the interim. Yeah, they're that late to the party. And Let's Go Brandon plans to re-nominate Jerome Powell to his current role. This is more of the same, more "nothing to see here", from the same crowd that told you almost a year ago that this inflation would be transitory.

Meanwhile, while the reported unemployment rate and the more telling U6 unemployment rate are returning towards pre-COVID levels, they have not reached Trumpian levels. Neither has the labor force participation rate, where we were seeing a turnaround of a decades long macro trend for the first time in decades: 

Things do not look normal by any stretch. Given the inflation, given the soft stance on trade deficits by the Let's Go Brandon administration, expect to see offshoring return. Perhaps due to energy prices affecting transportation costs, it might move to Mexico instead of China. The effect is the same. Unemployment. Rising costs mean rising prices. Businesses have few levers to pull, but one of the biggest is labor. Shifting to part time and offshoring are two options but ones that hurt American workers.

This is good news for Republicans but unfortunately at the expense of the economy.  But if they can win the House and Senate this November, which is looking very possible, perhaps they can work on turning the situation around.

The medicine is going to be painful, but it's something that is necessary.  Higher interest rates.  Much higher interest rates.  That has it's own costs and fallout including bankruptcies, a soaring government debt burden, and mortgage foreclosures. But if the bleeding can be condensed to a 12-18 month period, it could halt inflation and return us to a normal growth economy fairly quickly.  Then underlying macroeconomic issues like the trade deficit and the Debt-to-GDP ratio could be a little more easily addressed. Of course that demands a return to normalcy from the COVID-aided mass psychosis sweeping the globe.

Are America's best days still ahead?  At this point I am not optimistic about the current state of the union. There's still a light of hope, but it keeps getting further away. It's a very different feeling than during the Trump years. What we need is more people to wake up and demand change. 

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