It’s no secret that the last four decades haven’t been especially kind to Main Street.
Sure, the pandemic and, now, inflation, were outright cruel to “regular” people, notwithstanding the extent to which stimulus programs of various sorts temporarily reduced poverty. Like every other sort of hardship, the scourge of the virus and, later, the weight of inflation, were borne disproportionately by those least able to handle them.
If the question is whether a hypothetical poll of every person in the developed world would produce something like unanimity around a desire to live free from disease and runaway inflation, the answer is obviously “yes.” But if we focus on the economic side of the equation and conceptualize of the inflation question as something other than a straw man where “inflation” means ruinous price growth that makes almost everyone poor, the answer is less clear.
For decades, moribund growth and subdued inflation worked out well for the affluent, especially when you consider that some of the structural factors which contributed to low inflation in advanced economies were the product of profit-maximization efforts on the part of corporate “persons.” When growth is low, and the return on capital is high, inequality tends to get worse. This is just your standard Piketty. Labor income (so, wages) is the purview of the masses, while capital is concentrated in the hands of the relative few. If economic growth is tepid, wage growth will be too, especially in the context of labor’s diminished role as an economic actor with bargaining power and leverage. If, at the same time, the rate of return on capital is high, inequality will increase. In the US, Main Street unwittingly acquiesced to a version of this conjuncture, accepting a Faustian bargain along the way: Lose your good-paying job to offshoring and in return, the cost of the goods you want to buy will be low enough that you can afford them with the paycheck from your new, bad-paying job.
Consider the inflation debate through this lens. “Nobody but Wall Street wants to go back to 2019 anyway — nobody wants a return to low nominal pay, low demand and low inflation,” Rabobank’s Michael Every said, in a Thursday note, editorializing around the US CPI report which sparked a rollicking rally in equities on Wednesday. “True, nobody wants low (or negative) real pay, low demand and high inflation either, but those are our two choices, and only one of them offers central banks the chance of retaining even a shred of their tattered credibility,” he added. And then, in parentheses: “And, arguably, perhaps of the West retaining developed market status.”
Earlier this week, one analyst (at Saxo Bank) compared the UK to an emerging market without a currency crisis. Dark jokes about the US marking a transition to EM status aren’t new and America isn’t doing itself any favors in that regard by letting a former president run roughshod over the rule of law 18 months after he left office. Before anyone gets angry, please note: I’m not making a political statement. All I’m saying is this: Either prosecute him or don’t. Establishing culpability (or even what some people might think looks like culpability) and then not doing anything about it, is immeasurably worse from a rule of law perspective than letting it go.
More germane for this discussion is the fact that the ongoing spectacle of hearings, trials, depositions and, now, FBI raids, keeps Donald Trump in the news cycle. It serves as a constant reminder of everything that’s wrong, including and especially the root cause of the Trump “problem,” which I still contend is 40 years of Main Street malaise. A malaise characterized by, among other things, moribund wage growth, under-education, the decline of civic mindedness exacerbated by the hollowing out of communities built around industries that were offshored and so on, all of which sowed the seeds for populism. In a country where “success” is measured by the perception of wealth and chintzy fame, who better to capitalize on a disaffected populace than a reality TV show host pretending to be a successful real estate mogul?
All of America’s populists (the “good” ones and the “bad” ones) argue for a run-it-hot economy and a dramatic pickup in wage growth financed by, if necessary, fiscal spending which, in turn, may need to be financed by the central bank. Of course that’s an emerging market. Central banks in developed markets are trying to lean against that without conceding their role in it, but, as Rabobank’s Every wrote Thursday, there’s an under-appreciated geopolitical angle.
“Higher Fed funds would push commodities down, punishing Russia and innocent bystanders too, who would then need to turn to Fed swaplines, with strings attached,” he wrote, adding that higher US rates also turn the screws on Beijing, “whose huge trade surpluses are perhaps being matched by massive outflows of foreign capital,” money which finds its way back West. “Quite the way to keep the dollar top dog versus any new world order whipper-snappers,” Every said, in an allusion to “someone’s” “New World Order” framework.
He joked about the counterproductive reaction to July’s CPI report in the US which, you’ll recall, triggered a stock rally and a plunge in the dollar. I argued that the Fed will push back — hard. Officials don’t want speculation in risk assets, especially not when it’s predicated on what “efficient” markets believe a single month’s CPI report presages for policy.
For his part, Every posed it as a question: “Is the Fed really going to pivot to help stocks and oil go up? Or are they going to lift rates higher, and stay higher, to try to repress inflation, and remain top dog globally, despite the collateral damage?”
He was inclined to answer his own question in a way that conveyed faith in the Fed, something he conceded felt “uncomfortable.” “I haven’t agreed with anything the Fed has said or done in so long that I can’t remember when I last did,” Every wrote. Right now, though, he believes them — albeit while doubting they “know what they’re doing.”
“Maybe I just want to believe that when push comes to shove, at least some of our institutions are still fit for DM status because of the geopolitical implications if they aren’t,” Every said. “Yet I must share that some of the people in markets I hold in highest regard think soft data, a pivot, stocks-a-go-go, and a shift to EM status loom.”
The problem in America has been the poor government social safety net. This a result of greed, foreign adventure spending, and too much baseline spending on defense. Public goods are far underfunded. As a result, risk of very poor outcomes are shifted to those that can least afford it and when there is economic structural change instead of adapting it is seen as a major threat (which it is for those without the adequate safety net). Want to make the USA strong and resilient? Build up public goods and make sure there is more opportunity for those in the bottom 2/3 income strata.
Yes
Before you bash US military spending- the untold truth is that the US military provides one of the best opportunities for low income and uneducated people to improve themselves financially, gain work experience and get educated.
Military spending I am talking about is on weapons primarily. But if we did shrink our standing military, there is a lot of other ways to emply people that is a lot more productive for society than toting a rifle. (Building bridges, roads water and sewer systems, teaching in poor areas, health care for poorly covered, you get the drill). Military spending is one of the most capital intensive enterprises around. If you spent government funds on other things, you would get more not less employment opportunities. And lower inflation when productivity went up.
Been alive in Main Street for 4 decades and this sham of a meritocracy is all I’ve ever known.
Agree with RIA here. The government should maintain a baseline of decent support for folks living on the brink.
In general, people are proud and few actually want to get paid to sit on the couch all day. Let them sit I say. Proctor and Gamble doesn’t care.
The problem is that powerful charlatans rule on fear. A baseline of support obviates a life in fear.
There are many opportunities for government to help and this will also help get folks off the couch.
The inflation rate for consumer prices in the United States moved over the past 61 years between -0.4% and 13.5%. For 2021, an inflation rate of 4.7% was calculated. During the observation period from 1960 to 2021, the average inflation rate was 3.8% per year.
The above is copied and pasted from Google, perhaps this is where we are going?
USA USA is NOT an E-merging Market……it is SUBmerging
One thing this post brought to mind is the question of what happens next. Real wage growth has been in the basement since the early eighties for sure. But more recently in response to the sudden bump in inflation and the shortage of workers, nominal wages have surged, especially at places like Walmart, McDonald’s and other previously low wage havens. Overall the trend in rising wages hasn’t created much, if any, net real wage growth. Cut to 2023 or 2024 when inflation has started to fall, mostly a result of pushback from consumers, In my econ classes I was always taught that wages tend to be “sticky downward.” Once WMT has raised its starting pay it’s unlikely to turn around and cut it in two years. That means those rising labor dollar costs will stay there, raising costs and hitting profits, especially when inflation goes to 2 or 3 percent.
If inflation doesn’t peak and start dropping and if the Fed doesn’t at least pause on further rate hikes, I think the coming or current recession is going to be far worse than anyone anticipates. The consumer is just starting to feel the pinch now, I know from what I see with friends and family around me right now, their mortgage rates have already gone up hundreds of dollars and then the added cost of food and fuel is putting a lot of them under water already. I live in Vancouver Canada and most mortgages up here are variable rate.
God help us if there’s a credit event or black Swan geopolitical event (think China).
I’m sure H is familiar with her and possibly most his subscribers but Pam Martens writes excellent articles, Mostly exposing FED and politicians unethical or corrupt behaviour.
Worth a read, make sure to use “reader view”.
https://wallstreetonparade.com/2022/08/astonishing-charts-from-new-york-fed-show-the-dire-straits-of-u-s-consumers-during-the-2008-crash-and-its-aftermath-versus-today/
+1. Thank you for the link to Pam Martens. I had not heard of her. Her Aug 9 article on China was precious. Thanks again!
Few generalized comments here…1) I’m anticipating moribund growth and elevated inflation for the foreseeable future. 2) I believe Powell succumbed to Trump’s intimidation and kept QE way too high too long given that Congress had enacted significantly expansive and multiple monetary stimuli. 3) I am thankful and comforted that Janet Yellen is an influential person at present. 4) I remain forever shocked and terrified that Trump was allowed to meet privately with Putin, and now there’s reports that highest level classified nuclear information and technology were the basis for the FBI’s raid. 5) I find Every’s commentary eloquently brilliant here…thanks so much, H., and GLTA…