“Humans need food, shelter, warmth and a wage,” BofA’s Michael Hartnett declared, in his latest weekly missive.
He’s right. And that’s a problem currently, because the cost of eating, keeping a roof over one’s head and staying warm (or staying cool, whichever the case may be) is rising significantly faster than the rates at which humans are compensated for their labor.
Someone, somewhere has to do something about that, lest a growing number of people for whom staying alive is becoming an increasingly onerous financial burden become restless, angry and prone to expressing their discontent in ways not conducive to societal cohesion.
That, in a nutshell, is the situation facing the US, the UK and other developed economies in 2022. Of course, things are considerably worse on the inflation front in some emerging markets, and some observers have preemptively blamed Fed largesse for prospective unrest in the developing world, just as they did during the Arab Spring. I focus on advanced economies not to downplay the plight of EMs, but rather to underscore the scope of the problem. No economy is safe.
The figure (below) shows the 12-month increase in US home values, along with the YoY change in a Bloomberg energy gauge and the UN’s food price index.
As Hartnett wrote, everything people need is getting much more expensive, very rapidly.
I’ve talked and talked and talked some more about how politically unpalatable this is. I think it’s important to mention, while being cautious not to lapse too far into hyperbole (that comes later), that it’s also perilous and untenable. As alluded to above in the most euphemistic terms I could conjure, there’s a threshold beyond which people will become fed up.
Crucially when it comes to the developed market discussion, people’s happiness tends to be at least partially a function of their expectations. Yes, some people in advanced economies are far less fortunate than others. And yes, entire groups of people in rich nations are systematically marginalized. And in America, the richest country in the history of the world, there are pockets of Third World-style poverty. But generally speaking, Americans, Canadians, French, British and so on, expect to be able to afford fuel, food and electricity. If those expenses become even a semblance of onerous for large numbers of people in wealthy nations, the juxtaposition with expectations is viewed as totally unacceptable by the electorate.
At various intervals over the past year, analysts have suggested measures adopted by US politicians to keep gas prices low (for example) are counterproductive. That forestalls demand destruction, after all. We shouldn’t be incredulous, though. It’s a matter of political survival. Americans expect to be able to afford basic necessities. Politicians who don’t facilitate that won’t be politicians for long.
And so it falls to the Fed (and other central banks) to fix the situation, ironically by triggering a recession to bleed demand. This discussion is maddeningly recursive. Since the late 80s, the Fed has been blamed for creating bubbles, each one larger than the next in an effort to “smooth out” the business cycle. Macro volatility has generally been lower, but the busts are becoming larger. The Fed’s tools are conducive to asset price inflation, not necessarily real economy inflation, which explains why the post-GFC period was defined by spiraling inequality born of higher stock and bond prices with little to show for it in terms of wage growth or any other kind of growth that didn’t involve the rich getting richer. Then, the pandemic gave the Fed another excuse to deploy massive monetary stimulus, only this time around, in conjunction with fiscal stimulus and against a macro backdrop that ended up being highly inflationary for the real economy. The Fed waited too long to pull back, and the persistence of low rates and bond-buying acted as a demand accelerant in a supply-constrained environment. Now, in 2022, the Fed is dealing with the legacy of the post-GFC inequality spiral and terribly corrosive Main Street inflation, with the latter throwing the former into even starker relief. In the final absurd twist, their only option is to create a recession which, as Neel Kashkari conceded, will hurt lower- and middle-income families the most.
Again, it’s maddeningly recursive. It’s easy to cast aspersions and posit conspiracy theories, but a more honest assessment might just be to admit the impossibility of micromanaging macroeconomics. As I put it several months ago, rather than waste time maligning individual economists, maybe we should start asking ourselves whether the entire discipline is fruitless — a misbegotten offshoot of philosophy accidentally elevated to the status of a new discipline by a pedigree of thinkers that went extinct nearly a century ago.
We’re all delusional. It’s ludicrous to expect small cadres of technocrats armed only with policy rates and printing presses to control the behavior of large numbers of people all with free will and their own ideas about how they’re going to transact with one another on a daily basis.
It probably made sense to take a pseudo-scientific approach to this 200 years ago when things were far, far simpler. In the 21st century, treating economics as a science that can be mastered and marshaled through monetary policy in the service of herding hundreds of millions of irrational, wild-eyed cats, all with credit cards and their own individual agendas, is insanity.
When you consider the sheer scope of the financialization that’s taken place over the past two decades, each iteration (every securitization) taking us further and further into the realm of abstraction, the whole endeavor appears as little more than madness.
With every layer of complexity, this becomes still more unwieldy. The simpler the system, the easier it is to map the effects of an exogenous shock. The global financial system and the global economy have never been more complex. And we’re now dealing with multiple, overlapping exogenous shocks.
We often employ nebulous soundbites. “The Fed will need a lot of luck,” is popular currently. We’re all going to need a lot of luck, frankly. Because if the best we can do when faced with a Venn diagram of existential threats to the species is appeal to a discredited branch of philosophy that’s younger than Thomas Jefferson, we’re in a lot of trouble.
Remember: Humans had food, shelter, warmth and wages millennia before Adam Smith published The Wealth of Nations.