Sunday, January 15, 2023

Claims Of A Lower CPI Cannot Inflate Away Reality

Yes, we have a problem, and claims of a lower CPI cannot inflate away the reality that inflation hurts consumers. To start with consider the argument inflation is much higher than the government reports. That said, Jay Powell is most likely very serious about ending the Fed put which has been a huge contributor to the wealth effect and inequality. This has also been a big driver of financial and economic growth.

If Powell accomplishes his goal it is expected to result in a more "responsible" and less speculative financial system. As things stand, most Americans are watching their wages falling behind the price of goods. As people are forced to buy less economic growth slows. This would of course extend down to falling prices as the wealth effect slams into reverse. All this brings with it risk and probably a lot of pain. This issue is intensified because the ability to simply roll over debt and refinance has been greatly diminished. Both liquidity and rates reduce this possibility. Trends are not friendly to growth anywhere in the world.

Lower CPI Does Not Signal Growth Ahead
Even if inflation drops like a stone, that does not mean it will not return with a vengeance or signal growth will pick up. Feeding into this is that many people today do not want to work. The five-day service sector office work week became a thing of the past when people were told to stay home during the pandemic. Mediocre production on the part of workers coupled with the potential that Geo-political issues may soon create a slew of new commodity shortages. Supply chain problems and disruptions tend to limit the supply side of growth.

Powell's decision to risk driving the economy into the dirt to create a more sustainable economic future conflicts with the priority of politicians. Their main goal is to get reelected, and if this means handing out free money to stimulate the economy, so be it. The big question is how big the next wave of checks will be, $2,000 maybe $3,000? An issue we cannot ignore is that each stimulus has less effect than the one before. 

A matter that should overshadow the liquidity/interest rate argument is rooted in the importance of savers being rewarded and not punished over time. Lowering interest rates because inflation drops a tad does not address the need of savers to be able to earn a safe return on their savings. This means allowing them to benefit even after both taxes and inflation. Bogus promises by the government to meet this need by selling Treasury Inflation Protected Securities (TIPS) fall short. Anyone wishing to protect a substantial nest egg will find the government greatly limits such purchases.

Flipping back to the stock market and the idea people should buy stocks because we are in a bear market and they have had a big pullback could be flawed. If indeed we are in the process of a stock market bubble popping, they could continue down a lot farther. So far we have not seen a total capitulation where investors come to a place where they want nothing to do with stocks. 

Consider the famous John Maynard Keynes quote; "Markets can remain irrational longer than you can remain solvent." This is true for both the upside and downside. Flawed is thinking stocks will come soaring back. History shows following such a fall it can take several decades before this happens.

Trying to put together all the opposing views being thrown out there into some kind of order, is a mind-boggling task. The notion all currencies are about to be debased may have more to do with governments than central banks. This feeling of distrust in the future value of so-called "paper money" may spur inflation higher as people swap it for real assets. One thing remains certain amongst all this noise and that is protecting our buying power and wealth will continue to tax our ingenuity. 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)


  1. Good article. I remain perplexed that the stock market continues to do quite well despite the much higher interest rates. The Dow is only 5% below its all time high. There is still a lot of optimism out there, albeit IMO irrational and unfounded. I think a lot of people still believe that as soon as we fall into recession the Fed will pivot and lower rates. Perhaps they will.
    Society has become so used to near zero interest rates and trillions in money printing for the past 15 years, so I expected there to be real economic pain once the money printing stopped, tightening started, and interest rates rose significantly. However, I don't see very much negative economic consequences - the restaurants are still crowded, rents and housing are still extremely expensive, and people are still taking vacations and flying around on the unreliable airlines. A lot of this is fueled by credit and spending down savings, not to mention the welfare and govt sunsidies, but I wonder how much longer it can go on.
    The housing market is in a lot of trouble and will only get worse, especially if rates continue to rise. I have a hard time believing that the Fed will hold firm and let the housing market suffer too much.
    The inflation measure is totally bogus. Not only does the so-called core PCE exclude food and energy costs(how convenient), but the way it is measured was changed in the 90s to make the number lower than it is in reality. The govt. needs the constant inflation to support their borrowing.
    I'm happy that now I can put my cash in a very safe short-term money market fund or CD and collect 4.5%, but I wonder how long this will last. The system is designed to reward the spenders and debtors, which unfortunately also punishes savers.
    I hope the Fed holds the line.

  2. A fella that lives in Western Pa. on about 100 Acres of Land, Gives his take on inflation and its toll on our purchasing power. His thoughts on this subject is inline with what many of us think. See the video below.