Stagflation and the Fed's Catch 22
rickdugan
Verified and Certifiable Super-Reviewer
We all know how Volker handled this when we last had sticky inflation. He jammed up interest rates well above the inflation rate, which is widely understood to be the needed prescription when inflation grows deep roots. Yet times are different than they were back then. Yes the result was a deep recession, but the carnage was relatively short lived. In today's environment, the fallout would likely be much more severe, which seems to be really tying the hands of Powell.
For starters, pension plans were much less reliant on equities and riskier alt assets than they are today. They were also much better funded. If Powell jams up rates now, with so many underfunded state, municipal and private pension plans already on precarious footing, the results will be catastrophic. There will be no safe port in the storm - stocks, bonds, real estate and many other alt assets will all crash together. The resulting fallout from pension failures will be widespread. Personal retirement accounts would also be crushed.
Second, banks take on a lot more risk than they used to back then. SVB is just a small taste of what we would experience if large banks start taking crushing losses in their consumer lending portfolios (mortgage, credit card, etc.) due to underwater homes and lost jobs, all while their balance sheet assets also decrease in real value. The Fed would likely have to backstop the banking industry ala 2008-2009, except for a much longer time.
Third, our economy is much more globally integrated than it was back then. Every time we raise rates, it makes the USD stronger in the exchange rate market, which has negative consequences for U.S. firms which export good elsewhere as well as the many other firms globally who do business in U.S. dollars. A big jump in our rates would be downright crushing to our trading partners and would put a lot of U.S. and overseas companies out of business.
Fourth, the U.S. is now floating so much debt that sharp rate rises would be a serious blow to the U.S. budget in the form of debt service (interest rate payments). Back then we weren't carrying such a massive debt load as a % of our GDP. As of February 2023, roughly 12% of the U.S. spending budget was allocated to interest payments on outstanding debt. Every rate increase pushes that number higher and a serious jump would cause it to balloon.
I'm sure that others here can think of even more potential fallouts should interest rates get jammed up quickly. So Powell finds himself in a Catch 22. He must know what he needs to do to crush this inflation, but he's likely more afraid of the other potential consequences than he is of the inflation itself. In the meantime, our working class population continues to experience unabated reductions in their standard of living. IMHO at some point, someone at the Fed needs to cowboy up, devise a plan to contain the fallout as much as possible, and get this shit under control.
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In ten years almost a third of adults will be retired. The costs of Social Security, Medicare, Medicaid and government pensions will equal 100% of tax receipts according to CBO projections. Immigrant families receive more in government benefits than they pay in taxes, so our high immigration levels make the situation worse. You also have the defense budget and all the other government programs.
We can't come up with enough money to pay interest on the national debt along with everything else under such a scenario. We will either default on the debt or go into hyperinflation and pay the debt back with worthless money. It would be a good idea not to hold government debt or the dollar. Gold, real estate or other physical assets may be safer.
The thing no one seems to understand is we keep creating more and more wealth with every new generation and new problem will be solved. The next crisis will be larger than this one, even so the world will keep turning, life will go on, babies will be born old people will die.
In the grand scheme of things this is a big nothing burger.
Coming out of WWII and Korea, America decided to be consumer-based economy, and Europe a Big Nanny economy.
In the 1942, millions of workers were diverted to the war effort leaving a lot of businesses with a worker shortage; remember women in the workforce was different back then. Govt economists were alarmed businesses would jack-up salaries to compete for workers and inflation would spike coming out of the depression. Roosevelt passed an Ex-Order creating the Office of Economic Stabilization and wages were frozen – don’t ya just love how govt names stuff like “The Affordable Care Act” or “The Inflation Reduction Act”. Businesses found away around this freeze and started providing benefits like FREE HEALTH INSURANCE, and the IRS made employer-based health insurance an expense (tax deductible). Keep in mind, health care was cheap compared to our costs today. Now, govt meddles and controls today’s medical care and costs have gone ballistic since The ACA. There were better ways to provide medical care to the indigent and those needing catastrophic care rather than stomping on everyone.
In 1968, Medicare was created as part of LBJ’s “Great Society” plus in places like Chicago, Baltimore and NYC we got The Projects as part of Welfare, and those turned into Black Holes of Calcutta with drugs and gangs. At the same time, surplus Social Security tax collections were rolled into the General Budget rather than creating a real Trust Fund – taxpayers were made the “Trust Fund”. In a properly managed “Social Security” program, which is just like a corporate pension fund, it wouldn’t be the mess it is today and more could be provided to retirees. Social Security is run by people like FTX/Sam Bankman-Fried and it won’t end well. Plus, Boomers are retiring and not enough younger people are working to fund it – just like run on cash at the bank. While Unemployment is at “3.6%” the Labor Participation rate is lower too – meaning fewer people that can work aren’t as they suck off the govt tit. How is it people who don’t have two Nickels to rub together have smartphones, tattoos and decent cars? Welfare has greatly expanded.
Least we forget the inflation issue in the 1970s. Long story short -1971: Nixon did Wage and Price controls for 90 days, and people LOVED IT. Nixon created a Pay Board and Price Commission that would eventually go away after the 1972 election. Nixon blew-out McGovern. Inflation was around ~6%. Friedman predicted this would be a disaster. Nixon did another freeze in 1973. The Price Controls didn’t work. Ranchers stopped sending cattle to market and killed off chickens as they couldn’t afford to raise and sell them. Consumers craped their pants and we had runs on grocery stores. Then it gets better: the Arab Oil Embargo and we have gas shortages: consumers could only buy gas on days with odd/even license plates – gas lines were huge. Carter said we need to be energy independent. That was 45 years ago.
Now we move into the 1980s, and inflation was blistering. To control inflation Fed Chair Volker raised interest rates, and I mean he RAISED THEM. Certificates of Deposit (CDs) at the bank were yielding around 16%. Mortgages were 14%. The main difference between what Volker did and what Fed Chair Powell is doing by raising rates is Raegan cut taxes (giving people more money to take home) and cut some govt spending – yeah I know he went Big on military spending, USSR did collapse. We did have a Stock Market and Savings & Loan collapse that was horrible in the mid-1980s. Again, I look at govt being the arsonist who tries to put out their fire. The Resolution Trust Corp was put in place to deal with the Savings and Loan mess plus handling bankrupt properties. RTC had a $200B budget, and it was all paid-back over about 10 years.
In the 1990s during Clinton, he pressured banks to stop Red Lining or face the wrath of AG Janet “Waco” Reno to loosen up lending with the Community Reinvestment Act Carter passed back in ~1978. So now we have Sub-Prime lending with ARMs and teaser rates backed by the govt – Fannie Mae and Freddie Mac.
Then in 2007 Jim ”Mad Money” Cramer did his spontaneous Federal Reserve “They know NOTHING” Rant live on CNBC and he was right. In 2009 Rick Santelli did a rant on CNBC on the stock room floor about Obama’s mortgage-bailout plan. These financial disasters were caused by the Sub-Prime Mortgages with govt (taxpayers) backing. Once again, the govt was the arsonist and fire fighter. So rather than letting bankruptcy take care of the idiots who took out loans they had no business having like was done back with the RTC in the 1980s, taxpayers footed the bill.
So today we’ve had 0% fed rates for way too many years. Govt spending is totally out of control – BY ALL IN GOVT. The Federal Reserve has like $8T on their books (not part of the govt $31T debt). The way the Fed gets money back is via interest rates. Raise interest rates, bond prices go down and junk banks like Signature, Republic and SVB who had crappy fiduciary management blow-up with runs on cash, and Biden says FDIC will cover ALL deposits, not just $250K, taxpayers won’t pay a dime as banks pay into FDIC. Well, FDIC will just raise their fees to banks and banks will raise their fees to customers – taxpayers. BOHICA
Inflation is primarily caused by 2 things: printing money and excessive govt spending. Think of Green Backs like Stock Shares. Simple math: You issue 100 shares valued at $100/shr so total value is $10,000. Now, issue (not sell) 100 more shares and the value of each share is now $50. Printing money is the same thing.
One thing govt doesn’t think or care about is spending money. It isn’t theirs, it’s TAXPAYERS.
PM Margret Thatcher summed it up perfectly: "The trouble with Socialism is that eventually you run out of other people's money."
Tucker Carlson also had a great quote just 18 months ago: “Never has a better country been run by worse people,"
History is repeating itself over and over and over. It's really up to voters to break this Politburo we have in DC. States need to convene a Constitutional Convention - last one was in 1792 w/the 10th Amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.
If you read all this, congratulations.
Dude we need more immigrants, legal or otherwise, not less. We are aging and we just don't have enough workers for our current needs or to support the future crop of retirees. The U.S. birth rate per woman is 1.64 and declining rapidly.
Replacement rate is 2.1. Immigration is the only reason why we don't look like Japan or some of the aging European countries. Sadly in the 90s we made changes which limited family pull through, which has made it nearly impossible for Latin Americans to come here legally anymore.
I get the population problem, 100% & what is happening in Japan.
Legal/merit-based, immigration is one thing. Open borders, the 14thA (it needs to be updated that at least one parent needs to be a legal citizen for the baby born on American soil is an automatic "citizen"), Chain Migration (started back in 1968) are real problems with millions pouring in with no skills to generate the income needed to support the welfare state.
SS and Medicare are not welfare program, American citizens paid into them and expect them to be there when they retiree. Even Cesar Chavez was against illegals back in the 1960s as farm workers. Low-income/indigent won't problem the tax flow to support the SS & Medicare Ponzi Scheme. Had these been properly managed, we would be what we are facing today. Medicare has gone to a monthly premium that rises each year as you age, it has "contacted" rates with medical providers, covers 80% after you pay you your annual $215 Part B Deductable and you need a Supplemental Plan that covers the other 20% Medicare doesn't pay. Medicare at $150/month*12=$1,800 + Supplemental $150/month*12=$1,800 + $250 = $3,850/per out of pocket, and retirees getting SS have Medicare deducted each month . As you get older, the cost increases - I managed my mother's finances.
Medicaid, welfare payments, cash to homeless, SNAP/EBT/FOOD STAMPS, Section 8, subsidized ObamaCare, subsidized mobile phones and other programs for the low income/indigent are welfare - redistribution of wealth. Even Bono (U2) who was (keyword=WAS) a staunch socialist has changed his view to more capitalism. Even Sweden is slowly nudging socialism back (keyword=socialism). I get we will also have those in need, we just have too many addicted to govt handouts.
Americans are numb to taxes and the associated fees and costs as they don't shell these out each month.
What we have is a govt spending problem and morons who get voted into office recycle after cycle to run govt. Sure, do term limits, Lobbyists are the ones in-charge - follow the money. Now we have The Biden Family that operates like one of the Five Sicilian Families in NY only Brandon enjoys a good young girl hair sniff to get off. The only decision Biden makes is what socks to select each morning, and I even doubt he does that alone.
You can't tax a country into prosperity.
Since unemployment is near a 50-year low and there are no strong indicators of a coming sharp rise, the case for stagflation is weak at this time.
The Fed is carrying around $8T on their books which is highest ever adjusted for inflation and economic growth.
One big problem aside from moronic govt spending is inflation is running higher than wages/raises so people burn saving and run up their credit cards with interest rates that are rising - this is highly volatile.
The other thing is a lot of people are inheriting Boomers & The Greatest Generation estates and choose early retirement over the Woke BS at companies.
As far as the supply of fresh workers goes (I've raised three boys to adulthood. I know this ain't their friends getting after school jobs):
https://www.detroitnews.com/story/busine…
The way to fix all this is to go back to the spending levels we had pre-CoVid, encourage energy production ( drilling, nuclear ), and incentivize bringing manufacturing back to North America. Do all that, and our economic problems would be quickly solved.
Tesla is building a mega factory in Mexico ( because regulations allow the credit for vehicles made in North America ) which will produce 2 million electric cars with a price of $25,000 within 2 years. At that point, consumers will have a choice between a $30,000 American-made gas car and a $17,500 ( $25,000 minus $7,500 ) Mexican made electric car.
That’s happening right now. We are spending untold billions to kill the American auto industry. All, in the name of climate change. It’s insane.
Our government at work.
But, yes, Chairman Powell, we need you to fix this inflation problem.
This crisis ain’t left wing or right wing, it’s just a periodic point of the cycle.
Bill Clinton showed no interest in a balanced budget until Newt Gingrich took control of the House in the mid terms. Newt’s Contract with America promised a balanced budget. So, let’s not be too quick to give Bill credit for it.
“One of the progressive liberal politicians pushing for reparations in cash-strapped San Francisco also wanted to defund the police, and believes some Honduran fentanyl dealers are human trafficking victims who should be protected rather than prosecuted.
“Hillary Ronen is one of the 11 supervisors who will decide on a wide-eyed reparations plan for the city’s black residents that would pay them each $5 million, promise them $97,000 salaries and wipe away personal debt.”
They’re from the government. They are better than us. Thank goodness they are looking out for us.😏
It’ll take years at the ballot box and getting our education system away from indoctrination and grooming. What is being done creates continual devolution.
Trump was the fly in the ointment. His policies were excellent his communications sucked. The persecution he and his associates are getting is character assassin. The ends justify the means and the end is the Global Liberal World Order.
Look I’m not an economist I’m a carrier engineer/architect analyst who looks for solutions. And I happen to like strip clubs as a fun adult activity.
In ‘86 President Ronald Reagan said, “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.’” 😎
If San Fran wants to be an object lesson in how to destroy a city, let them have at it. As long as the state and fed tell them "you're on your own--you want to jump off a cliff, we're not going to hold your hand." Of course, progressives have raped Detroit, Chicago, Baltimore, and many more, and we haven't learned, so...
A US-based developer of small nuclear reactors, Last Energy, has signed a deal to sell 24 of its power plants to UK customers.
The £100m modular units, which are two-thirds the size of a football pitch, can output 20MW of electricity, enough to power 40,000 homes. They will be deployed in 2026 with no government funding required.
That works out to a one time cost of $3,000 per house ( plus ongoing operation cost ) for reliable, clean electricity for 30+ years.
If government would just get out of the way, we could have lower cost energy independence, bringing the cost of everything down.