Category Archives: Economics

Moral Hazard

Apparently Biden the inflation-fighter has another huge spending program to put away the beast. This is forgiving a portion of outstanding student loans, a program estimated to cost between $300 billion and $900 billion over the next ten years.

The Federal government should never have been in the student loan business in the first place. It has caused massive hikes in college prices, far outstripping inflation, purely because the students can borrow the money to pay whatever the colleges ask. Then the students are saddled with big debts. The right solution is for colleges to have a financial commitment to the future success of their students, with a positive return on their education investment. Colleges should accept a share of future income instead of up-front fees, encouraging them to invest in the quality and relevance of education rather than lavish facilities and top-heavy administration.

The inevitable result of this program is more moral hazard. Students will expect further bailouts, and colleges will charge more.

Government Subsidy

Biden triumphantly put a $7,500 credit out there for electric vehicles. This caused Ford to increase the price of its electric pickup by $7,000 to $8,500, while Chevy added $6,250, to its electric Hummer. Piling another $7,500 of debt onto the taxpayers for each vehicle. So there’s a double whammy of inflation. Another self-inflicted wound. And by the way these vehicles will consume huge amounts of energy due to their weight – 6,000 lb for the Ford and a staggering 9,000 lb for the Hummer. These vehicles are on the wrong side of the curve – heavy to start with, they need lots of heavy batteries which make them even heavier in a vicious circle.

Edit: According to the industry group, Alliance for Automotive Innovation, “there are 72 EV models currently available for purchase in the United States including battery, plug-in hybrid and fuel cell electric vehicles. Seventy percent of those EVs would immediately become ineligible when the bill passes and none would qualify for the full credit when additional sourcing requirements go into effect. Zero.” So, Ford and Chevy, I take it back. But I still think these massive trucks are a bad idea.

Pivot – To What?

It seems as if every financial writer has no more important subject to opine upon than the exact date of the Fed “pivot,” when the Fed will be “forced to” resume supporting wild speculation.

Such opinions may be successful clickbait, but any such pivot is economically meaningless. Just look at the last employment report. The number of jobs increased significantly, but the number of employed persons hardly moved. People are taking on more jobs in order to, as President Bush put it, “put food on their family.” This can only go so far, for obvious reasons, and it means there are insurmountable limits on the economy’s ability to grow. Production equals labor hours times productivity. Productivity is slow and hard to improve, so not any help. Labor hours are pretty close to the wall, as shown by the average workweek which has flatlined at 34.6 (FRED). This all means that the economy cannot grow in response to stimulus. Easy money and/or a return to QE will simply result in more inflation, which will do as much or more damage to the economy and corporate profitability than higher interest rates. I cannot believe that the Fed is unaware of this reality. There is no free lunch. Pain is coming, regardless of what the Fed may or may not do. Look back at the Great Depression when the Fed thrashed around, trying everything because nothing “worked.”

Kumquat?

From ECRI’s Lakshman Achuthan:

WH saying no recession & Sec Yellen saying it’s a “transition” reminds us of Carter admin economist Alfred Kahn who, when forbidden to mention “recession,” used the word “banana” instead. Banana growers protested, so he switched to “kumquat.” What’s the fruit for recession today?

The Price Of Moderation

From my last blog post of 2020:

William Greider, in his book, Secrets of the Temple: How the Federal Reserve Runs The Country, reports Nixon (’69-’74) as saying: “We’ll take inflation if necessary, but we can’t take unemployment.” The nation eventually had to take both. Note that Fed Chair Powell has indicated a willingness to let inflation “run hot” to encourage economic growth. That’s what they thought in the 1960s, too.

Well, inflation is running hot. Too hot for comfort. Discretionary spending is falling rapidly as the cost of essential goods and services takes more of people’s income. Fed Chair Powell is raising interest rates in baby steps, presumably in an attempt to quell inflation without slowing the economy significantly. People seem to think that raising rates to 2 1/2 percent will achieve this result, and are competing to time the “pivot” when the Fed returns to easy money. All I can say is good luck with that. History says that once inflation starts to surge – as it has – it is not easy to stop, as all kinds of feedback loops keep driving prices higher. Weakness now will only make the pain worse.

Perfect Storm Plus

The Perfect Storm began as an extratropical system, absorbed a tropical system (i.e., Hurricane Grace), and ended somewhat uneventfully as an unnamed hurricane. In the process it caused considerable damage on the US East Coast, and sank the fishing vessel Andrea Gail, with the loss of all hands.

We are now living through the early stages of the economic Perfect Storm Plus. The “Plus” is due to the near-simultaneous collapse of four great bubbles – China, Japan, North America and Europe. All are due to central bank monetization of government deficit spending, coupled with over-expansion of consumer and property credit. As Austrian economics teaches, there are only two paths out of these bubbles – stop the credit expansion and accept the resulting recession or depression, or continue to hyperinflation and the destruction of the currency.

The collapse of China began with the cascading failures of property developers, such as Evergrande, when President Xie’s “three red lines” reined in their ability to raise new debt. Then his idiotic “zero-Covid” policy drove a dagger into the beating heart of China’s economy, Shanghai. Then failures in a handful of smaller banks were mishandled by local governments which failed to honor deposit insurance guarantees, instead hiring toughs to beat up demonstrators. This has been followed by a wave of buyers refusing to continue mortgage payments on unfinished properties, especially where cash-starved developers have stopped working on them. A loss of confidence in the CCP government has resulted. It is attempting to stop the collapse with promises of more government funding, but so far success is elusive.

Japan is, so far, following the path of currency destruction. Even though Japan’s central bank now owns virtually all government debt and a very large chunk of the stock market, it continues its path of yield curve control – at zero. This has led to a downward slide in the yen as the US Fed has reacted to inflation, well a little bit anyway. Japan is short of natural resources and must import many commodities, especially energy as the Fukushima disaster has constrained the use of nuclear power. One could easily see a return of the yen to dollar valuations like the pre-1989 mid-200s, compared to 140 today and the 2012 high in the 70s. Needless to say, this would kick off serious inflation in Japan.

North America’s asset bubble, in property and financial assets of all kinds has finally been joined by rapidly inflating prices of consumable goods and services. While Alan Greenspan started the Fed’s monetization addiction around the turn of the century, rapid growth in outsourcing to China, India and numerous other countries kept consumer prices and wages under pressure. Finally the combination of supply chains ruptured by Covid and government payments that put large sums directly in the hands of consumers started to drive up prices, and also allowed large numbers of people to withdraw from the labor force. The coup de grace was Biden’s decision to follow the urging of the climate fanatics and cut off investment in future fossil fuel supply. Anecdotally, a farmer of 1,800 acres in Canada reports that his annual diesel fuel bill has doubled from $40K to $80K, and nitrogen fertilizer (made from natural gas) has gone from $270/tonne to $900/tonne. The Fed’s reaction has been a minor increase in interest rates. A recession is either already underway or set to begin anytime now.

Europe (including the UK) is a basket case. It shares many of the same problems as North America, but in addition climate fanatics and the Russian attack on the Ukraine have conspired to leave it desperately short of energy. EU inflation is running high (8.8%) but the real problem is yet to come. Germany continues to shut down its remaining nuclear plants, while Russia has just notified Germany that it is terminating natural gas deliveries. Germany lacks the terminals needed to import LNG.

A key component of the coming confluence of these storms is the climate mania. This mania is based on bad science, but socialist politicians and activists see an opportunity to disrupt the status quo.

Quo Vadimus?

We are either in recession already or about to enter one. Lakshman Achuthan of ECRI thinks we’re in a Roadrunner moment – we’re off the cliff but  haven’t looked down yet. It sure feels like that – too many analysts are supremely confident that inflation will fall away, the Fed will pivot back to money-printing and everything will be back to the way it was – the “new normal.” It just sounds too good to be true.

Powell isn’t fighting inflation. Dinky little increases in interest rates are an attempt to build confidence that the Fed is doing something. This excellent article makes a good case that he’s channeling Arthur Burns, not Paul Volcker.

The massive government deficit hasn’t gone away. Sure, it has moderated somewhat, but the Biden administration still firmly believes that it can spend whatever it wants without consequences. Biden is channeling Nero.

The “climate change” idiocy continues. No need to repeat previous posts on this subject, other than to observe that reducing the availability of fossil fuels without providing a new base load infrastructure is economic suicide.

Tight labor markets mean that the wage/price feedback loop can – and will – be sustained.

The housing market continues manic, despite rising mortgage rates. Of course the individual first-time buyer is affected, but institutional buyers with cash have moved in. Shelter is the largest component of CPI and is a lagging indicator.

This spring and summer’s crops were planted with last year’s fuel and fertilizer costs. These costs will bite with the fall harvest. And by the way the west of the country is in severe drought.

Other than that, Joe, how’s it going? Joe? Anybody home?

Dr. Copper

It is generally held that the price of copper, otherwise known as Dr. Copper, has a PhD in economics. It is interesting to note that unlike, say, energy, the price of copper is slipping.

Historically this has implied a slowdown in economic activity.

Reality Check

Everywhere I read the pontifications of eager interpreters of yield inversions, and other signs and portents, predicting smooth sailing for the economy until a possible recession in 2023.

All I can say is you have to be kidding me. First of all, markets are still at unprecedented and artificial extremes. It seems to me to be a trifle naive to assume that scenarios from the past apply here. Markets have never been here before and hopefully will never return again. Secondly, there are major and poorly understood economic disruptions underway:

China: The world’s largest asset class, real estate in China, is in trouble. March sales of new homes are down 29% y-o-y. Lockdowns in Shanghai and other large cities in China are stalling production and shipments of many goods.

Ukraine: The Russian invasion and its corollary sanctions are negatively impacting agricultural and commodity exports. Restricted supply and high prices of fertilizer will reduce agricultural production around the world.

United States: Historically high consumer price increases have resulted from years of low interest rates and massive expansion of the money supply. Measures announced so far to deal with this issue are unlikely to have much effect. The 10-year Treasury yield has doubled since the beginning of 2022, with direct impact on mortgage rates and thence real estate prices. “Green” policies have driven up energy prices by restricting supply.

EU: “Green” policies have left the EU (and the UK) without reliable domestic sources of energy, leaving the group dependent on imports from the rest of the world, but without adequate LNG terminals to replace Russian pipelines. The EU is expected to announce an embargo on Russian oil immediately after the French election, which will drive prices higher.

Japan: The third most traded currency, JPY, the Japanese yen, is falling rapidly, now down more than 10% since the beginning of 2022 against the US dollar. The Bloomberg Commodity Spot Index rose 8.2% in JPY terms over just the past week. It’s up 29% since end of Feb., more than 48% ytd and 177% over the past two years (all in JPY terms). The possibility of intervention is being bruited about. Currency wars are the nuclear option for financial markets.

Look out below.

Fed “Hawk”

St. Louis Fed President James Bullard, considered a “hawk” on the Fed Board, believes that a 3.5% Fed Funds rate should be enough to counteract inflation. All I can say is ROFLOL. I didn’t know that a hawk was a particularly stupid kind of dove.

The Fed should have taken the punchbowl away years ago. It is too late now for anything but the strongest of measures. The punchbowl must not only be taken away, it must be destroyed so that it never appears again. Just diluting the contents a tiny bit only makes matters worse, because it keeps the party going while providing an illusion of adult supervision.