“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.
I can understand how the Fed’s largesse and stimulus spending might explain inflationary pressures in the US.
But, how does that explain the inflation that seems to be effecting every economy?
Michael, I think you have to throw largesse + stimmies into a pot along with lockdown bottlenecks, underinvestment in oil/gasoline/nat gas/industrial metals/etc. infrastructure, labor shortages, reversal of globalized supply chains, etc., then of course throw in the war. In short, freight costs and raw material scarcity have impacted inflation everywhere, not just here in US.
Other governments also supported people during the pandemic. Not to the same extent the US did but still… and, speaking of Europe specifically, they generally had lower inflation than the US, until the war in Ukraine changed the picture re. foodstuff and energy.
I am curious to get your opinion on how long you think the Europeans will willingly pay high prices for energy and food, in support of Ukrainians, before the Europeans say, “enough is enough”?
Hi, emptynester.
I honestly don’t know. I personally think we should go balls to the wall and take whatever economic hit results by declaring it war economy and re-spreading wealth to avoid the poorer amongst us suffering the most.
Clearly, French and German politicians are way less supportive. Some think it’s b/c so many were bought by/benefited from plush corporate jobs from Russia. I think it’s b/c of a instinct for negotiation. War is bad. Talking is better. So let’s talk. Always talk. This is nice and all but it ignores the issue that Putin doesn’t want to talk. He wants to win at least something on the battlefield.
So – yeah. I don’t know. But I am on the record for saying our politicians could do a better job with framing inflation as a war cost and subsequent economic adjustments (increased taxes or rationing) as war efforts.
Because the supply side roots of our inflation affect every country.
… but not inflation is particularly high specifically in the US, which was the most generous with its COVID relief.
Supply side disruptions/services to goods shifts explain part of inflation, no doubt but fiscal largesse is also responsible.
“note”, not “not”
Governments had no choice, as the economic fall out of doing nothing during the Pandemic lockdowns would have resulted in an economic depression.
There was no third option… and the path chosen was the lesser of two evils.
Let inflation stretch lagging wages, risk unrest. Let a recession push millions back into unemployment, risk unrest.
We were reluctant to question the economists along the way fearing even less morale or confidence. We will see if the polarization now is comparable to whatever political unrest there was during the GFC and how forgiving stimulus made people.
It is depressing. The ordinary person has no conception of what is going on or why. Our political leaders are either using the situation for gain or trying to hide the fact that they can’t do anything about the situation. Our little boat is sailing in stormy weather, we can trim sails and adjust rudder with only modest effect, basically we just need to hang on and make sure no-one goes overboard before the storm passes. But our passengers think they’re on some giant cruise ship and are furious that the drinks are spilling and the band seasick.
Well, our job – most of us, anyway – is to make money. We don’t have to like what is happening, just to find the opportunities and avoid getting blown up.
Bleak but a great read as usual
“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.”
Unfortunately, that is not exactly true. With right wing media having complete control over its base, they deploy spin to make every problem that exists, the democrats fault. McConnell is proof that ‘politicians who don’t facilitate’ can and will survive. The man is known as the grim reaper for having killed more legislation than he’s bothered to bring to the floor for a vote. His only interests, appointing judges and giving tax breaks. Biden will pay the price for McConnell leveraging the filibuster to deadlock government. Before we know it, McConnell will be Senate Majority Leader yet again and will again not do anything to improve the lives of Americans but still not be blamed or voted out for it. This is the crux of the problem.
+1
If gas prices rose to $40/gallon, milk was $20 and a two-pack of NY strips was $87, Mitch would be out of a job just like every other member of Congress. There is a tipping point. We’re just not there yet.
How much power will he be able to consolidate before that happens? By the time we get to that point elections won’t even matter anymore. We’ll have already left Democracy in its grave.
Inflation is definitely partly on Fed largesse but it’s also on Federal government deadlock. The Fed is the only one actually trying to do something to solve this problem. McConnel wants to see this whole thing blow up, it feeds into his power scheming. And his voter base believes every lie he tells along the way.
I don’t think the average electors know Mitch McConnel even exists. They only vaguely know there’s something called Congress. My understanding is that most people vote based on mood affiliation and their own economic circumstances. Very little else matters. Certainly not the ‘details’ such as Mitch refusing to bring to the floor laws the Dems had the votes for…
It seems the difference between humanity prospering before economics and the potential prosperity now is the challenges are as leveraged as finances. Only with human life/livelihood as valuables instead of coins or commodities. We haven’t even made it to a century of nuclear MAD looming over the globe let alone awareness of other world ending events pressing down on the scale of unrest and weighing on the public’s mind instead of just can we eat and pay taxes another day?
H
Finally, we see behind the curtain a bit. Financialization has gone beyond the ability of any one person or institution to fully understand the system we have built. Perhaps it will take a well-trained AI-based robot to figure out the results of all the outcomes in the playing field and optimize the results for us. Certainly, no economist, US government entity or individual will be able to do the job.
Second, yes, humans need food, shelter, warmth and a wage. But the whole idea of a collective civilized society of individuals is that each gets either a wage or other valuable consideration only in exchange for the contribution of that person’s valuable skills to the community. I can’t grow things for crap. I can’t make steel. I’m not a doctor, either. But I do have skills others don’t and I’m willing to provide those skills to others for reasonable valuable consideration. Read the Mayflower Compact. To get anything, each colonist was expected to give, share, and/or support the rest. Our “job” isn’t to get a wage. Rather, it is to build our own skill sets to be valuable enough to be compensated for sharing those skills with others who need them. In that way we earn credit with society that can be used to acquire what we need. Those with the best skills, and the most unique, will (expect to) get the most compensation. In a complex society such as ours we all see “free riders” who hope to get more for a smaller contribution than his or her fellows. Then, some will end up exiled, some will receive help through the altruism of their fellows. Then there are the politicians of today who do little real good as they “toil not, nor do they spin …” It would be so lovely to be able to send them off with the true “free riders.”