‘We Don’t Live In A Society That Pays You What You’re Worth’

It still feels like there’s a bit of cognitive dissonance out there around inflation.

Everyone acknowledges the cost-push element. It’s impossible to avoid. Just ask corporate management teams or any small business owner struggling to hire workers. Or go visit a large port complex.

“Labor was a big focus this earnings season, along with supply chains,” BofA said, in a recent recap of Q3 earnings calls. “Mentions of labor during earnings calls [were] +250% YoY [and] +360% for supply chain.”

Note on the right (figure above) that margins held up nicely, in part due to robust demand.

In a piece dated Thursday, Bloomberg captured the interplay between supply frictions, demand and environmental concerns. Beginning next week, ships waiting to anchor at the ports of Los Angeles and Long Beach will need to wait 150 miles off the coast versus just 23 miles currently. “The shipping industry is responsible for almost 3% of carbon emissions worldwide [and] overwhelming volume generated by pandemic-induced consumer demand has seen record numbers of ships moving through Los Angeles and Long Beach, which brings more trucks into the area to pick up and drop off containers,” the linked article explained.

Policymakers are staring at a moving Venn diagram. It’s easy to criticize. Anybody can do that. Coming up with solutions is a bit harder. Fortunately, you can make a good living just by being a critic.

It’s certainly true that central banks are responsible for pushing up asset prices and when it comes to home affordability, there’s a relatively straightforward dynamic between the Fed’s MBS purchases and affordability (figure below). Although even there, you have to account for the offsetting effect of lower financing costs.

Of course, it was the pandemic which stoked excess demand for housing in the first place by triggering a flight to the suburbs. That demand bumped up against supply chain frictions to push up prices.

Housing is a chicken-egg problem, just like every other vexing quandary associated with the pandemic and subsequent policy response. It’s very difficult to know where to start when it comes to assigning blame.

Every time you point the finger at supply-side issues, you’re compelled to acknowledge some corollary related to demand. And as inescapable as the pandemic is when it comes to pointing fingers for rising prices in developed economies, the policy response (both monetary and fiscal) is part of the problem, even as it was also part of the initial solution. Confounding the situation further is the ambiguity around whether reducing stimulus would actually do more harm than good on balance.

So, we don’t know much, really. Hence pervasive cognitive dissonance around the causes and cures for the current inflationary predicament in developed economies.

What we do know, though, is that if you read first-hand accounts from real people, they typically cite a broken system as the main culprit for precarity even as the pandemic and hurdles to upward mobility (e.g., surging home prices) are clearly making things worse.

For example, The New York Times ran a piece this week called “Dream of Buying a Home Gets Harder for Single Mothers.” The first few paragraphs recapped familiar dynamics.

“Women have borne the brunt of the job losses over the last year and a half, while also shouldering most of the child-care responsibilities — an acute challenge for single mothers, especially those with young children,” Tara Siegel Bernard wrote. “At the same time, the housing market has grown highly competitive: Prices of single-family homes rose nearly 20% in August, the latest data available, from a year earlier, according to S&P CoreLogic Case-Shiller’s National Home Price Index.”

And yet, when you read further, you discover the nuance. The Times detailed the plight of a 27-year-old single mother with two young children who worked full-time as an associate producer for a production company and part-time as a social media director for a music website. The side job was aimed at helping her save for a downpayment.

She ultimately lost both jobs, filed for unemployment and started to apply for new positions sitting for 40 (!) interviews. Ultimately, she decided to just do it on her own, but as the Times wrote, that “adds the stress of running a business.” She has $140,000 in student debt and $8,000 in an account designated for a downpayment on a house.

As you can imagine, she didn’t blame the Fed for pushing up housing prices because with only $8,000 in the bank, it’s really a moot point. Once she gets, say, $50,000 (if she ever does), it’ll be time to complain about how $50,000 “ain’t what it used to be.”

Some readers might scoff. This young woman has a master’s degree in television, radio and film. “What did she expect?”, the condescending among you might ask.

But let me ask you this: When was the last time you watched TV? Or a movie? Now, when was the last time you used the services provided by a hedge fund manager? See what I mean?

You could plausibly argue that somewhere along the way, banks and financiers are needed to fund movies and television series, and you need highly-paid tech personnel to make sure they can be seamlessly streamed on Netflix, but you get the point: Regular people are concerned about a system they believe doesn’t give them a fair shot, and that grossly underpays them for doing valuable work that contributes something to society.

Meanwhile, we (and I’m including myself here) are fortunate. We don’t have to trouble ourselves which such matters, so instead, we look at things in the abstract, using economic and monetary aggregates to make sweeping assertions of questionable validity.

On Thursday, Ray Dalio took to LinkedIn to weigh in on inflation, where he squarely put the blame on money creation. “Wednesday’s inflation report showed inflation raging, so you are now seeing inflation erode your wealth,” he said.

Note that Ray, for all his well-meaning pretensions to virtue, can’t make it through a single sentence without accidentally sounding out of touch. The young lady interviewed by the Times has no “wealth.” Based solely on her student loan and the $8,000 she saved for a downpayment on a home, her net worth is negative $132,000.

Ray continued. “That is no surprise. At this time the government is printing a lot more money, people are getting a lot more money, and that is producing a lot more buying that is producing a lot more inflation.”

Again, somebody forget to tell folks like the two women interviewed for the Times piece about how “people are getting a lot more money.” The unemployment benefits Republicans insisted were incentivizing workers to remain on the sidelines didn’t even cover household expenses for the woman mentioned above. There’s a reality check for you.

Dalio when on to say that “some people make the mistake of thinking that they are getting richer because they are seeing their assets go up in price without seeing how their buying power is being eroded.”

There again, regular people aren’t worried about that because they don’t have any “assets.” People like Ray hoarded all of them and didn’t leave any for anybody else (familiar figure below).

In a (possibly accidental) nod to that stark situation, Dalio correctly noted that “the ones most hurt are those who have their money in cash.”

I’m compelled to come back to the same generalized (and admittedly nebulous) argument I employ time and time again. Regular people simply don’t have time or the mental bandwidth to contemplate this.

Yes, surging grocery bills are a veritable death knell for a single mother already struggling to feed her children. But, as the Times piece makes clear, everyday people conceptualize of this quite differently from how the fortunate among us imagine they view their own circumstances.

Nobody who wakes up every morning (or, more aptly, in the middle of the night) pondering how they can possibly make it through the month on a meager budget, is waxing philosophical about what inflation is doing to their “cash.” They don’t think in terms of “cash” where “cash” is an asset class (i.e., how Dalio means it). For regular people, “cash” is the $46 in their wallet or purse and the $324 in their checking account.

Does it hurt that the grocery bill is getting more expensive all the time and that gas prices are so high that a quarter of a tank is all many people can afford for a week? Yes! It hurts like hell. But what you’ll find out if you talk to regular people (and that doesn’t mean asking your neighbors if you should consider an Audi Q5 instead of your Mercedes GLC) is that soaring inflation is just another gut punch — the latest insult on a list of grievances they stopped updating once it filled up eight sticky notes.

There’s lots of talk about wage inflation and the notion that labor has regained some of its clout after decades in decline. That’s a crucial discussion and will in many ways shape the inflation debate going forward. Key questions include, “Are wages growing fast enough to keep up with inflation?” and “If wages grow faster than inflation, do we risk a wage-price spiral.”

What countless articles like the Times piece suggest is that the real problem with America’s hyper-capitalist system is that the vast majority of people who help produce the things we all enjoy — from television programs to your morning latte — are treated like dirt, while a thin stratum of people who produce nothing of value get to live like kings and queens, dropping nickels into the square, plastic Starbucks tip receptacle bolted to the drive through window.

I’ve been on about the perils of exponential wealth creation and the existential threat posed by a scenario where a half-dozen people end up controlling almost all the wealth and data in the world.

But I have to admit, on some days it gives me great satisfaction to know that a few eccentric centibillionaires — as objectionable, crude or even dangerous, as they sometimes appear to be — now have the financial power to treat the multi-millionaires, centimillionaires and “small”-time billionaires of the world with the same utter disregard that those folks have been demonstrating towards everyone else for the past five decades.

To quote the young woman interviewed by the Times, “We don’t live in a society where they pay you what you’re worth.” That was her concern.

And she didn’t mean it in the sense that wages need to rise more in order to balance the labor market. She likely doesn’t care about such things given the inherent urgency of the concerns she’s compelled to cope with on a daily basis.

Rather, she meant it in a more general sense. She likely meant to suggest that maybe — just maybe — it’s time to reconfigure the system so that someone with a master’s degree in television, radio and film, makes the $250,000 they deserve for entertaining all the folks out there who currently make $250,000 (or vastly more) for doing absolutely nothing.

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