The Safer Haven

We've talked about how bad the stagflation was during the late '70's and early '80's, but don't take it from me. Here's what Federal Reserve history has to say: [bold added]

The economy was already in weak shape coming into the downturn, as a recession in 1980 had left unemployment at about 7.5 percent. Both the 1980 and 1981-82 recessions were triggered by tight monetary policy in an effort to fight mounting inflation. During the 1960s and 1970s, economists and policymakers believed that they could lower unemployment through higher inflation, a tradeoff known as the Phillips Curve. In the 1970s, the Fed pursued what economists would call "stop-go" monetary policy, which alternated between fighting high unemployment and high inflation. During the "go" periods, the Fed lowered interest rates to loosen the money supply and target lower unemployment. During the "stop" periods, when inflation mounted, the Fed would raise interest rates to reduce inflationary pressure. However, the Phillips Curve tradeoff proved unstable in the long-run, as inflation and unemployment increased together in the mid-1970s. While unemployment trended down slightly by the end of the decade, inflation continued to rise, reaching 11 percent in June 1979 (Federal Reserve Bank of St. Louis).

(WSJ graph)

In 1971 Richard Nixon canceled the convertibility of dollars to gold under the Bretton Woods system, which had been in place since 1944. The delinking of the dollar from gold and the combination of inflation and unemployment unprecedented since the Great Depression made it a period of maximum economic uncertainty. The gold price spiked from the $35/oz. under Bretton Woods to a high of $850 by the end of the decade.

The gold market is spiking again. In fact it Hasn’t Rallied This Much Since 1979. [bold added]

A modern-day gold rush is stretching from Costco store aisles to underground vaults in London to the flickering screens of Wall Street. Old jewelry now glimmers with potential dollar signs.

Gold’s value has ballooned by 40% this year, putting it on track for a greater annual price jump than during the depths of the Covid-19 pandemic or 2007-09 recession, according to Dow Jones Market Data. Futures for the precious metal haven’t surged so much in a year since 1979, when a global energy crisis fueled an inflationary shock that thrashed the world’s economy.

Costco 1 oz. buffalo gold piece

These days, it isn’t a financial meltdown that is drawing people to one of the original market refuges. The recent run-up to record prices—reaching $3,682.20 a troy ounce on Monday—instead stems in part from the White House, with investors big and small rushing to shield themselves from an uncertain outlook for the U.S. economy and its role in the world.

A lot has changed in the past 50 years. What hasn't changed over the centuries is that people flee to gold in troubled times.

SNAP Judgment

One welfare program where cuts are being strenuously resisted is SNAP, the Supplemental Nutrition Assistance Program, aka "food stamps." Your humble blogger agrees with those who want to keep the program intact (after eliminating waste, fraud, and abuse, of course).

Economists say that letting recipients choose what they buy allows them to achieve maximum utility for themselves. Handing out cash allows them to do that.

Pop-Tarts: on the naughty list? (Guan/Bloomberg/WSJ)

However, distributing cash is a bridge too far for those in charge of welfare programs. Preventing starvation, on the other hand, is a program that nearly everyone can get behind.

Food stamps still afford a wide range of choices. Food stamp rules and restrictions prevent beneficiaries from using welfare funds to purchase undesirable goods like beer and cigarettes.

Over the years the list of items that food stamps cannot be used for has grown:

Hot Food

Beer/wine/other alcoholic drinks

Cigarettes/cigars/other tobacco products

Gasoline

Dog food/cat food/other pet foods

Vitamins/medicine

Baby bottles/diapers/wipes

Forks/spoons/knives/coffee filters

Toilet paper/paper towels/napkins

Tampons/feminine pads

Soap/detergent

Mobile phone cards

Food manufacturers, in addition to revising their forecasts downward in anticipation of SNAP cuts, now have a new worry: [bold added]

The pain could be even worse for manufacturers of sugary and processed foods if efforts to restrict SNAP purchases of soda gain traction and spread to other indulgences. In the past, states have pushed to exclude soda from food stamp eligibility, but the Agriculture Department has historically rejected such proposals.

Trump Agriculture Secretary Brooke Rollins has signaled she might grant waivers allowing states to impose restrictions.

The narrative is taking hold that sugar is poison; sugar is to health as CO2 is to global warming. Your humble blogger draws the border of the nanny state here. Warn people about the dangers of eating too much sugar, but let them consume what gives them pleasure.

Meanwhile, have a look at the Netflix comedy Unfrosted about the invention of Pop-Tarts. To those of us who lived through the Fifties it's a hilarious remembrance:

A tale of ambition, betrayal, sugar, and menacing milkmen, Unfrosted stars writer-director Jerry Seinfeld.

Part of the genesis of Unfrosted was the simple fact that a serious boardroom meeting about cereal is, well, not very serious. “We love the idea of grown-up men in suits talking about cereal all day,” Seinfeld said. “The silliness of how they look and what they talk about just seemed like a fantastic world to be in.

SFO: the Bounce is Gone

(WSJ photo)

During my working years I flew on United Airlines dozens of times (nothing compared to the marketing guys who were members of the million-mile club), and I grew very familiar with the moving walkways in Terminal 3 at San Francisco International Airport. The 400-ft.-long rubber coverings will soon be replaced with metal plates, and, surprisingly, there appear to be more than a few travelers who will miss the rubber bands:

The bouncy walkways at SFO’s Terminal 3—three are inside the passenger connector to the building—have been around for at least 30 years—even airport officials aren’t exactly sure when they were put in. Unlike the ones more common with movable metal plates, these are made of a long, continuous piece of rubber, and sit on rubber wheels.

Kids like to hop and skip on the "bouncy," and the padding is easier on aging hips, knees, and ankles. However, these modest benefits do not outweigh the economic costs.

The bouncy has been no fun for mechanics, though. At the three other terminals at SFO, which all feature more conventional walkways, [SFO spokesman Doug] Yakel said those belts are made with metal modules that can be swapped out if one breaks. But since the bouncy is made from one continuous section of rubber, he said a malfunction often means the entire belt has to be replaced.

“There’s only one outfit that makes these and there are very long lead times, and these are very expensive to procure,” he said. “It’s simply not a cost effective moving walkway anymore.”

Of all the places and things that have bowed to the ravages of time the rubber-band walkways are far down the list, IMHO, of items that will be missed. For the vast majority of travelers who do not have mobility problems it's better that they walk and do not ride anyway.

An Economist's Approach to Immigration

2023 millionaire migrations. (Visual Capitalist)

Economics professor Richard Vedder and Matthew Denhart of the Coolidge Foundation want to allow immigrants to buy their way in: [bold added]

One way to modernize our immigration laws would be to allow market forces to decide who should become new citizens. Consider America like a club, with initiation fees required for admission. Instead of choosing immigrants based on where they are from, admit them based on likely contributions to America.

An example: Sell 8,000 visas to the highest bidders for 250 days a year. Suppose the average price is $30,000. Of the $60 billion in annual visa revenue [blogger's note: 250 days x 8,000= 2,000,000 immigrants per year. 2MM x $30,000=$60 billion], devote one-third to more-intense border enforcement, one-third to income-tax reduction (an “immigration bonus” to taxpayers), and one-third to increasing the anemic defense budget. Or apply the money to debt reduction, helping delay the fiscal armageddon threatening the pensions and healthcare of elderly Americans.

Those buying visas could get access to huge labor and capital markets. Productive potential newcomers would avoid years of waiting to enter the country, and America would gain largely productive citizens.

Once we set aside the romantic notion that all immigrants must be hard-working, law-abiding poor who just need a break, this proposal makes a lot of sense. Immigrants who can buy their way in are unlikely to claim welfare benefits but become immediately productive members of society and not run afoul of its laws. [This concept is already contemplated--but not explicitly with a price tag--through the EB-5 Immigrant Investor Program.]

Think of it as a fast track lane through airport TSA where "only" two million can get through. There's still room for many more to enter in the traditional, terribly inefficient way. This proposal is worth a try.

Another Piece of Disappearing Americana

Rare upgrade: the San Francisco Greyhound bus depot is on the
3rd floor of the new $2.3 billion transit center.

In the early '70's I frequently rode the inter-city buses. I'd spend hours waiting to transfer at the bus terminals in New York, Boston, Chicago. Detroit, and small towns in between.

Taking the bus was part of the culture, like joining the military, that is experienced by fewer people nowadays and by hardly anyone in the middle class. It's not a surprise that Bus Stations Across America Are Closing:

The potential closure highlights a plight confronting millions of travelers, many on lower incomes, that attracts far less attention than passenger rail or aviation.

Intercity bus stations are closing throughout the country. At least eight cities have lost their stations so far, including Philadelphia, Ohio’s Columbus and Tampa, Fla. Passengers have had to wait on street corners and parking lots, causing tensions with local officials...Chicago would be the largest city to lose its terminal. It isn’t clear where passengers would wait.

With bus terminals situated in inner-city property, the real estate is worth more to a developer than it is to a bus company, even if the surrounding area is run down.

Regulators cannot reverse the closure of bus terminals, they can only delay it. There will continue to be demand for low cost, if very slow, ground transportation to smaller communities across America, but at this point it's unclear how that demand will be met.

Of Bullwhips and White Tails

B-School Professor Hau Lee with teaching aid

Stanford Business School Professor Hau Lee's paper on the bullwhip effect was "voted one of the 10 most influential papers in the history of Management Science":

When you are a cowboy and you crack the whip, you move the handle 60 degrees and the tip will move more than 360 degrees. Sometimes, a signal can move a little bit from consumer to retailer to distributor to wholesaler to manufacturer to supplier. Everyone adds something to the signal, and it results in a big surge, up and down.

The pandemic is a great illustration of this. Even the media used the term “bullwhip”: bullwhip of toilet paper, bullwhip of hand sanitizers, bullwhip of everything. We were relying on short-term data and then we produced a whole lot more. Consumers panicked, too. They didn’t realize there was ample supply coming in. Some students told me they’re still using the toilet paper that they bought in 2020.

Small imbalances in supply and demand can manifest in upstream surges and shortages. Every link in the supply chain "adds something."

Your humble blogger saw this boom-bust phenomenon when he worked in commercial aviation, when an uptick in summer travel, reinforced by low interest rates and an economy coming out of a recession, resulted in a surge of aircraft orders.

Aircraft require at least two years between order and delivery, and later new airplanes came off the line when the economy was softening. If the glut was bad, buyers even preferred to lose their deposits by canceling orders, and new airplanes were "white-tailed" (painted without an airline's logo).

Boom and bust cycles have been studied for over a hundred years, and Prof. Lee's vivid metaphor helps to bring the concept home.

It Won't be a Chinese Century

1975: "Practicing family planning is conducive
to protecting the health of mothers and children"

China's one-child policy may have provided economic benefits over three decades, but it has turned out to be a long-term disaster: [bold added]

The Chinese family is about to undergo a radical and historically unprecedented transition. Extended kinship networks will atrophy nationwide, and the widespread experience of close blood relatives will disappear altogether for many. This is a delayed but inescapable consequence of China’s birth trends from the era of the notorious one-child policy (1980-2015). The withering of the Chinese family will make for new and unfamiliar problems, both for China’s people and its state. Policy makers in China and abroad have scarcely begun to think about the ramifications...

A “kin famine” will thus unfold unforgivingly over the next 30 years—starting now. As it intensifies, the Chinese family—the most important institution protecting Chinese people against adversity in bad times and helping them seize opportunity in good times—will increasingly falter in both these crucial functions.

By a grim twist of fate, China’s withering of the family is set to collide with a tsunami of new social need from the country’s huge elderly population, whose ranks will more than double between 2020 and 2050.... By 2050 living parents and in-laws will outnumber children for middle-aged Chinese men and women. Thus exigency may overturn basic familial arrangements that have long been taken for granted. The focus of the family in China will necessarily turn from the rearing of the young to the care of the old...

Owing to the surfeit of baby boys under the one-child policy and declining cohort sizes, growing numbers of men in decades ahead will enter old age without spouses or children—the traditional sources of support for the elderly. By our projections, by 2050, 18% of China’s men in their 60s will have no living descendants, twice the fraction today.

The thinning of family trees has significant societal implications:

China’s coming family revolution could easily conduce to a rise in personal risk aversion. Risk aversion may in turn dampen mobility, including migration. Migration is a risky act that requires knowledge of opportunities and trusted people who can help obtain them. Without the ability to stay on a cousin’s couch, so to speak, migration will become riskier, harder, and, almost certainly, rarer. Less migration means less urbanization, which means less growth—and possibly still more pessimism and risk aversion.

The change in Chinese family structure also promises political reverberations. If the waning of the family requires China to build a huge social welfare state over the coming generation, as we surmise it will, Beijing would have that much less wherewithal for influencing events abroad through economic diplomacy and defense policy.

Further, our simulations suggest that by 2050 at least half of China’s overall pool of male military-age manpower will be made up of only children. Any encounter by China’s security forces involving significant loss of life will presage lineage extinction for many Chinese families.

If China's hegemonic ambitions can be contained over the next decade, then the inexorable reality of its demographics will cause expansionist looking outward to become contractionist turning inward.

China is and will continue to be a great power, but it won't be a Chinese century.

Off the Tendon Train

2021: beef tendon was $6.99 / pound at 99 Ranch

Economists say that changes in the Consumer Price Index overstate inflation:

[the CPI] omitted consumer substitution [bold added], did not fully account for quality change, and failed to properly reflect the addition of new goods.

Last year the skyrocketing price of steak prompted me to experiment with cheaper cuts, such as brisket, and even specialty cuts like tendon and tripe.

Tendon itself had increased from $5 a pound to $6.99 (pictured), but on a relative cost basis it compared very favorably to $12 steak. Buying tendon instead of rib eye is a textbook example of consumer substitution.

I went to the store last month intending to cook and freeze another batch of tendon, which can not only be delicious when prepared properly but is also a source of collagen that strengthens aging joints.

The $10.99 price, 57% higher than last year, stopped that plan in its tracks.

And so it was that I got off the tendon train and switched to steak. Substitution circled round; I wonder if economists have a name for that.

Benefits and Costs

A traditional life has benefits:

Inflation Widens Married Couples’ Money Lead Over Their Single Friends
[bold added]

The median net worth of married couples 25 to 34 years old was nearly nine times as much as the median net worth of single households in 2019, according to the most recent data from the Federal Reserve Bank of St. Louis.

In 2010, married households’ median net worth was four times as much. And now, after a spell of rapid inflation and more than two years of pandemic living, single people are getting left further behind, say economists at the Fed and elsewhere.

A traditional life has costs:

It Now Costs $300,000 to Raise a Child

The cost of raising a child through high school has risen to more than $300,000 because of inflation that is running close to a four-decade high, according to a Brookings Institution estimate.

It determined that a married, middle-income couple with two children would spend $310,605—or an average of $18,271 a year—to raise their younger child born in 2015 through age 17. The calculation uses an earlier government estimate as a baseline, with adjustments for inflation trends.

The multiyear total is up $26,011, or more than 9%, from a calculation based on the inflation rate two years ago, before rapid price increases hit the economy, the Brookings Institution said.

Note that the cost does not include college tuition and expenses, which currently total $142,000 for an average four-year degree. A private college diploma costs over $200,000.

The benefits are in doubt while the costs are certain. Married-with-children may be tradition, but it is likely to be the life led by fewer Americans.

It's Very Clear

Consumer sentiment, which tracks inflation, and consumer
confidence, a jobs-based indicator, both fell in 2022 (WSJ)

Following up on yesterday's post on the prices I've been seeing at the store and at the pump, this morning's inflation report confirms that inflation is "easing":

U.S. Inflation Eased Slightly to 8.5% in July

U.S. inflation eased slightly but remained close to a four-decade high in July despite cooling energy prices.

The Labor Department on Wednesday reported that the consumer-price index rose 8.5% in July from the same month a year ago, down from 9.1% in June. June marked the fastest pace of inflation since November 1981. The CPI measures what consumers pay for goods and services.

Core CPI, which excludes often volatile energy and food prices, held steady in July, increasing 5.9% from the same month a year ago, a sign that broad price pressures remain in the economy.

Because these reports are based on recent historical data, they don't necessarily capture what is going to happen.

There are moderating trends in real estate. In June we pointed out the dramatic negative effect that interest rate hikes can have on housing prices. In the Bay Area we have seen seller markdowns, fewer bids on listings, and houses being pulled from the market.

We're hopeful, but don't break out the bubbly. Barring a severe recession, the overall price level will not be dropping. In fact, Fed Chairman Powell's goal is to get inflation down to "the Fed’s 2% target within a couple of years." With apologies to the Gershwins, it's very clear high prices are here to stay.

Sinking on Cinco de Mayo

WSJ graphic: the peak was yesterday's close

As of 10 a.m. PDT the stock market has given back all yesterday's gains (which were posted about below):

“The market yesterday was a relief rally,” said Seema Shah, chief strategist at Principal Global Investors. By Thursday, she said, the realities of a more challenging environment for stocks were starting to settle in.

Using a cliché--with expletives if you desire--is warranted: what goes up must come down, the market giveth and the market taketh away, etc.

Before Chairman Powell spoke yesterday, the outlook was gloomy but IMHO not apocalyptic. We're just back to where it was.

Inflation: Everywhere You Look

Through most of the past 40 years there have been periods where it appeared that 1970's-style inflation was back. Each time, thankfully, the tide subsided.

But how long could we keep pushing our luck? Was everything we thought we knew about government debt and the printing of paper money wrong? (Hint: no)

At the beginning of the COVID-19 emergency two years ago we were alarmed:

Now the Fed is buying corporate debt--even some risky pieces that pension funds won't touch--and the debt of state and local governments. It has crossed a line and can't go back. ("Why are you letting [State name] go bankrupt?")

Eventually the tidal wave of government debt and paper money will cause an inflation that will dwarf that of the 1970's. Thankfully, with a life expectancy of perhaps 20 years, I won't have to suffer through much of it.

I was thinking about a ribeye roast for Super Bowl
weekend but I couldn't get a 2nd mortgage in time.

Well, we were wrong, not about inflation but that it's years off in the future. It's here now, and it's everywhere. [bold added]

inflation is increasingly widespread across the U.S. economy. Economist Mickey Levy of Berenberg has scrutinized data for more than 200 individual goods and services for which the government tracks prices. An increasing number of individual items are subject to higher rates of inflation, he warned on these [WSJ] pages in December.

His update based on last week’s data suggests the problem is growing worse. Some 73% of the items saw annual price rises of 3% or higher in January, and some 55% of items saw inflation of 5% or higher. Keep in mind the Federal Reserve’s inflation target is 2%.

This is the pattern that typified the inflation of the 1970s. The oil crisis was the “supply-chain disruption” of its day—the go-to, single-item political excuse for inflation. The OPEC cartel was blamed. But the oil-price surge was a response to monetary policy blunders that let inflation loose in the late 1960s and then fed it across the 1970s.,,

The lesson of the 1970s is that once inflation appears, it needs to be corralled with urgency, or it will become embedded and increasingly hard to rein in. We are long past the point where the Fed should have been tightening policy, and the task will be more painful now because of the delay. The evidence of the inflation mistake is everywhere you look.

In the late '70's and early '80's inflation was licked through a change in the political party that ran government, a change in Federal Reserve policy, and a lot of economic pain. Given the quality of our political leadership, a repeat of the '70's and '80's is the optimistic outcome.

Peggy Noonan: What Democrats Ought to Do

(WSJ graphic)

WSJ columnist Peggy Noonan starts with the pandemic, segues to economics, and finishes (where else?) with politics. She imagines what an idealized Democratic politician would say (in other columns she role-plays Republicans):

in what really would have been the most consequential political statement of 2021—did anybody stand up and say,

“My friends, big ambition is admirable but we don’t have the margins. We don’t have FDR’s House and Senate, our control is razor thin. The path for us is easy does it, day by day, smaller bills and plenty of outreach to Republicans, whose increasingly populist base doesn’t mind spending as long as it doesn’t seem insane.

The progressives won’t like it, the Squad will hate it, but we can use them as a foil, as a useful illustration of what we’re not. We’ll use their criticism to underscore our centrism. We don’t need them. All we need to be popular is

a) not to be Donald Trump,

b) to provide steady leadership that delivers modest but regular improvements, and

c) to do this in a way that leaves people saying, ‘My God, someone made Washington work again.’ That’s the path.”

Did anyone inside say that?

Is there still time to change tack?

Peggy Noonan is asking if President Biden, Speaker Pelosi, or any grey eminences of the Democratic Party will admit their mistakes, moderate their rhetoric and policies, and possibly avoid losses in the mid-term elections. Such an admission would require strength of character, and based on what we have seen so far, I would not bet on a 2022 outcome different from what the prognosticators have stated.

Character is destiny.

A Time for Hunkering Down

In February your humble blogger, admittedly sensitized by the experience of the 1970's, saw the warning signs:

Today's gargantuan deficits in the $trillions and near-zero interest rates have not resulted in inflation...yet; but now may finally be the time when history repeats.

Speaking of the 1970's, the approaching train wreck had grown more apparent by May:

The economy is warm if not hot, the Administration is proposing $trillions in additional spending, and the Federal Reserve is promising to keep rates low...It is possible that the economy will not experience inflation if high government spending on the wrong things (unemployment insurance extensions that keep workers home), high taxes, and high regulation results in stagnation. But an economic boom and low inflation? No way...and I hope my pessimism is wrong.

Policy mistakes are now obvious in December, and the economy is experiencing the highest inflation in 39 years: [bold added]

U.S. inflation reached a nearly four-decade high in November, as strong consumer demand collided with pandemic-related supply constraints.

The Labor Department said the consumer-price index—which measures what consumers pay for goods and services—rose 6.8% in November from the same month a year ago. That was the fastest pace since 1982 and the sixth straight month in which inflation topped 5%.

Inflation: no more semi-annual sales of Spam
and prices are up by 8%

We're just going to have to hunker down as best we can while the Federal Reserve slows the growth of the money supply by tapering its bond purchases.

Meanwhile, I'm glad I stocked up on Spam when it was on sale before COVID-19.

Return of the Greedy Corporation....Excuses

Gerald Ford's pleas to Whip Inflation Now failed,
as did his 1976 election campaign. (Ad Age)

As predictable as the sun rising in the East, Democrats are blaming inflation on corporate greed.

White House officials said Mr. Biden would continue publicly calling out industries that he believes are raking in large profits while raising prices for consumers, amid calls from some of Mr. Biden’s outside advisers to respond aggressively to inflation to counter mounting criticism from Republicans.

Sen. Elizabeth Warren adds her two cents:

Wondering why your Thanksgiving groceries cost more this year? It’s because greedy corporations are charging Americans extra just to keep their stock prices high. This is outrageous.

Through the Bush, Obama, and Trump Administrations inflation ranged between negative 0.4% and 3.8%. For the past several months inflation has run above 5%. [bold added]

The Labor Department said the consumer-price index—which measures what consumers pay for goods and services—increased in October by 6.2% from a year ago. That was the fastest 12-month pace since 1990 and the fifth straight month of inflation above 5%.

The core price index, which excludes the often-volatile categories of food and energy, climbed 4.6% in October from a year earlier, higher than September’s 4% rise and the largest increase since 1991.

(GIF from rebloggy)

Not only have "greedy corporations" failed to raise prices significantly for the previous 20 years, boardroom avarice has been dampened by the growing emphasis on "stakeholder capitalism" and Environmental, Social, and Governance goals. In my humble opinion--and I'm no economist--business is not to blame for high prices.

And inflation is not the fault of the government, as those in charge of government have said.

It's truly a puzzlement.

Inflation: Making Do With Less

At Costco Peanut M&M's crept to $12,50
over the past year, then Boom! $19.99 but
"marked down" to $15.99. C'mon, man!

Eighteen (18) months ago this humble chronicler saw the warning signs of inflation:

Now the Fed is buying corporate debt--even some risky pieces that pension funds won't touch--and the debt of state and local governments. It has crossed a line and can't go back. ("Why are you letting [State name] go bankrupt?")

Eventually the tidal wave of government debt and paper money will cause an inflation that will dwarf that of the 1970's. Thankfully, with a life expectancy of perhaps 20 years, I won't have to suffer through much of it.

Five (5) months ago a repeat of the 1970's seemed inevitable, though the experts resisted that conclusion:

The economy is warm if not hot, the Administration is proposing $trillions in additional spending, and the Federal Reserve is promising to keep rates low.

Now everyone sees it.

One bright spot: liquor prices are about the same,
and there is plentiful supply.

WSJ, 10/13: Accelerating Inflation Spreads Through the Economy

U.S. inflation accelerated last month and remained at its highest rate in over a decade, with price increases from pandemic-related labor and materials shortages rippling through the economy.

The Labor Department said last month’s consumer-price index, which measures what consumers pay for goods and services, rose by 5.4% from a year earlier, in unadjusted terms.

WaPo, 10/15: Uncomfortable inflation is here, and it’s changing the economy

News this week that U.S. inflation is running at a 13-year high of 5.4 percent confirmed what many Americans already know as they juggle their budgets: Food, energy and shelter costs are all rising rapidly, adding to the strain Americans were already dealing with from the higher costs of hard-to-find goods such as cars, dishwashers and washing machines...

Workers are demanding pay increases because they can see their wages aren’t buying as much with so many everyday necessities costing more, including rent. That leads companies to hike prices more, then workers turn around and demand another pay raise. Economists call this phenomenon a “wage-price spiral.”

The evidence is especially noticeable in the items we buy weekly. Where I shop, prices for beef and gasoline are more than 50% higher than in 2019.

I don't drive much these days, and I've learned more chicken and pork recipes. Like the 1970's, we're making do with less.

Nobel Economists: They Opened Their Eyes

(From nobelprize.org)

Economics has been nicknamed the "dismal science", but this year's Nobel Prize winners have not only published insightful studies with real-world policy implications but also have injected creativity into a profession which seemed to have been destined to a future of endless number-crunching. [bold added]

The Nobel Memorial Prize in Economic Sciences was awarded Monday to David Card of the University of California, Berkeley, Joshua Angrist of the Massachusetts Institute of Technology and Guido Imbens of Stanford University.

The prize committee cited Mr. Card’s “empirical contributions to labor economics” and praised Messrs. Angrist and Imbens for “their methodological contributions to the analysis of causal relationships.” Messrs. Card and Angrist have contributed by running “natural experiments” in economics, and Messrs. Angrist and Imbens have contributed to the theoretical basis for these experiments.

Natural experiments have led economists to conclude that an additional year of education substantially raises one’s lifetime income, that small increases in the minimum wage don’t have much effect on employment, and that Medicaid has little effect on people’s physical health.

Why do natural experiments matter? One of the toughest problems in economic research is figuring out whether a relationship between two variables is causal or coincidental. So, for example, economists find that the lifetime earnings of people who go to school for 12 years are higher than those of people who go to school for 11 years. But what if those who stay in school longer are more motivated or smarter than those who are in for only 11 years? Then the earnings of the more-schooled would be higher even if schooling per se doesn’t add much to earnings. What one would ideally like is to compare the earnings of people whose motivations and intelligence don’t differ.

Enter compulsory schooling. In 1991, Mr. Angrist and the late Alan Krueger noted that under compulsory-schooling laws, students born in the first quarter of the calendar year would be able to leave school earlier than students born in the fourth quarter. Sure enough, they found, those born in the fourth quarter had an average of 0.15 year more in school. And the earnings of those in the fourth quarter were 1.4% higher than the earnings of those born in the first quarter. Extrapolate that to a full-year difference in schooling, and you can conclude that one extra year of schooling raises earnings by about 9%.

Messrs. Card and Krueger conducted a famous natural experiment by studying employment at fast-food restaurants in New Jersey and Pennsylvania before and after New Jersey raised the minimum wage while Pennsylvania didn’t. Contrary to what one might expect, employment in New Jersey’s fast-food restaurants rose slightly relative to employment in Pennsylvania’s.

Economist Alex Tabarrok discusses why the approach used to answer the minimum-wage question was so brilliant:

The obvious way to estimate the effect of the minimum wage is to look at the difference in employment in fast food restaurants before and after the law went into effect. But other things are changing through time so circa 1992 the standard approach was to “control for” other variables by also including in the statistical analysis factors such as the state of the economy. Include enough control variables, so the reasoning went, and you would uncover the true effect of the minimum wage. Card and Krueger did something different, they turned to a control group.

Pennsylvania didn’t pass a minimum wage law in 1992 but it’s close to New Jersey so Card and Kruger reasoned that whatever other factors were affecting New Jersey fast food restaurants would very likely also influence Pennsylvania fast food restaurants. The state of the economy, for example, would likely have a similar effect on demand for fast food in NJ as in PA as would say the weather. In fact, the argument extends to just about any other factor that one might imagine including demographics, changes in tastes and changes in supply costs. The standard approach circa 1992 of “controlling for” other variables requires, at the very least, that we know what other variables are important. But by using a control group, we don’t need to know what the other variables are only that whatever they are they are likely to influence NJ and PA fast food restaurants similarly. Put differently NJ and PA are similar so what happened in PA is a good estimate of what would have happened in NJ had NJ not passed the minimum wage.

Thus Card and Kruger estimated the effect of the minimum wage in New Jersey by calculating the difference in employment in NJ before and after the law and then subtracting the difference in employment in PA before and after the law. Hence the term difference in differences. By subtracting the PA difference (i.e. what would have happened in NJ if the law had not been passed) from the NJ difference (what actually happened) we are left with the effect of the minimum wage. Brilliant!

Indentifying control variables is tricky, as Prof. Tabarrok points out, and the more control variables one has the more statistical noise is created, and the less powerful the results. With a control group, researchers need not be concerned with control variables.

The Nobel winners aren't superhuman, however. The minimum-wage study likely wasn't error-free:

Unfortunately, Messrs. Card and Krueger’s data weren’t so great—they gathered it by phoning restaurants.

Nevertheless, once the idea was originated, the data could be obtained and analyzed.

At the dawn of the age of artificial intelligence, Professors Card, Angrist, and Imbens, and the late Alan Krueger, have given us hope that human ingenuity is not dead:

Card and Krueger revealed to economists that there were natural experiments with plausible treatment and control groups all around us, if only we had the creativity to see them. The last thirty years of empirical economics has been the result of economists opening their eyes to the natural experiments all around them.

The Ultimate Example

I still believe that eventually President Biden, Speaker
Pelosi, and Majority Leader Schumer will do the right thing.

The Wall Street Journal opinion page sheds a little more light on the process of budget reconciliation . [bold added]

The parliamentarian has already said that Democrats can use reconciliation to raise the debt limit, so why won’t they do it? As it happens, Mr. Biden gave that game away when he was asked Monday why Democrats aren’t using reconciliation.

“There is a process” that “would require literally up to hundreds of votes,” Mr. Biden explained. “It’s unlimited number of votes having nothing directly to do with the debt limit; it could be everything from Ethiopia to anything else that has nothing to do with the debt limit. And it’s fraught with all kinds of potential danger for a miscalculation, and it would have to happen twice.”

In other words, Mr. Biden admits that Democrats could raise the limit via reconciliation, but then they’d also have to take difficult votes on many issues on the Senate floor. Some of those votes might be unpopular. Mr. Biden is admitting that the reason is political—that Democrats want Republicans to spare them from having to take those tough votes.

Republicans have been hinting (actually some have been shouting) that President Biden is out-of-touch and even senile. From the above quote he doesn't sound senile to me. His handlers should let him speak more--I like this truthful Joe.

But back to the issue at hand: the editorial does communicate more information about Democrats and Republicans' respective motivations and the what of budget reconciliation ("difficult votes on many issues"). Just why these votes have to be taken through this still-mystifying procedure is not something that has been explained clearly to John or Jane Q. Public.

It's often been lamented that nothing works in Washington, and if these inside-the-Beltway rules crash the U.S. dollar and the world's financial system, the American people will view this as the ultimate example of dysfunctional government.

If you thought Donald Trump was bad, wait till you see what comes next.

Unlike Other Experts, Bond Traders Know What They're Doing 😉

Bond traders: the guy is just there to keep the
algorithms' screens clean (joke). (Reuter's image)

We started worrying about inflation in February.

In May the recovering economy combined with stimulative fiscal ($trillions) and monetary policy--looked like we were headed for a reprise of the inflationary 1970's.

However, one group of very smart people is keeping us from making an unequivocal declaration about future inflation: the bond traders. WSJ columnist James Mackintosh: [bold added]

The core of the problem is that as inflation soared, bond yields fell, creating an instant contradiction: Inflation is poison to bond investors, so they would normally be expected to sell. I have an explanation, but it isn’t perfect.

My take: Investors came to the realization that the huge post-pandemic debt burden will keep rates lower than in the past, while they kept faith that inflation will be manageable. There is little to indicate investors fear a recession-inducing mistake by the Federal Reserve, and they aren’t expecting runaway inflation either.

More conundra:

it is deeply strange that stocks should reach new highs both when bond yields were falling (and stocks were driven by Big Tech) and when bond yields were rising (and stocks were led by cyclicals).

And there is one more oddity that is far harder to understand: By Aug. 3, yields on 10-year Treasury inflation-protected securities, or TIPS, reached minus 1.2%, the lowest point for inflation-adjusted yields in history. It could only make sense if investors were expecting stagflation, or weak economic growth combined with higher inflation. But if the risk of stagflation were rising, investors should be buying gold—which usually rises when TIPS yields fall—and dumping the junkiest corporate bonds, as defaults would be sure to rise. Instead, the relationship between gold and TIPS broke down, while junk bond yields rose only a little from what had been close to record low spreads over Treasurys.

As for your humble blogger-investor, my fear of losing purchasing power due to inflation outweighs my desire for outsized gains from hot stocks.

So I'm nibbling just a little on hard assets, and taking some profits off the table (not enough to push us into a higher tax bracket).

So not much buying or selling this year. Through sad experience I've found that making big moves in confusing times--and I'm not just talking about financial markets--doesn't work out well.

Inflation Fears Spreading

Though Hawaiians are used to high prices, even they're noticing the increases.

In February I was concerned enough about inflation to shift some of the portfolio into traditional hedges like real estate and precious metals.

By May the alarm bells were ringing loudly as the Administration's trillion-dollar deficit spending plans took shape, despite signs of recovery, while at the same time the Federal Reserve committed to keeping interest rates low. (The Fed will buy up government debt and release cash into the economy; this combination of actions is what people mean when they say that the government can spend away because it can "print money.")

Now awareness of inflation is hitting Main Street. Consumers see it everywhere in car, food, gas, and housing prices.

U.S. inflation continued to accelerate in June at the fastest pace in 13 years as the recovery from the pandemic gained steam and consumer demand drove up prices for autos, airline fares and other items.

The Labor Department said last month’s consumer-price index increased 5.4% from a year ago, the highest 12-month rate since August 2008. The so-called core price index, which excludes the often volatile categories of food and energy, rose 4.5% from a year before.

The Fed still holds that the spike is temporary, and to be sure, there are influential voices that hold to the rosy view. As for me, I'm pessimistic but I hope I'm wrong.

Regardless, millions see their pocketbooks being hurt now, and inflation is going to be a hot topic for the 2022 elections.