It's different this time...?

[JohnRoberts]

It is generally a laugh line when a young wet behind the ears stock analyst says "its different this time". Some youts working on wall street haven't seen a normal market (before 2007-2008) during their work lifetime. Economic cycles tend to have a rhythm and follow patterns. I have seen quite a few. Right now the news is focussing on a coming recession. Technically a recession is defined as two sequential quarters of shrinking GDP. The final numbers for the second quarter are not in yet but preliminary numbers are indicating that we are already in a technical recession.

This recession signaling may explain the recent softening in commodity prices (king copper but including oil). Short term traders always try to make a dollar from betting on the near future market moves eroding commodity prices.

I have laid out this background to make one point. From where I sit I see one significant difference about this time. Recessions, by definition involve a shrinking economy and are typically correlated with high unemployment and a weak job market. Right now we have a strong job market and low unemployment. This means it will be hard for employers to reduce wages. Wage inflation will be a driving factor for more manufacturer cost inflation, making the Fed's task of managing inflation harder.

I would expect to see some softness in employment caused by the threat of recession, but haven't seen it yet.

Caveat, if I knew how to profit from this speculation (and was correct) I could be rich and not living in nowhere MS.

 

[JohnRoberts]

I find it interesting how some political leaders propose to manage inflation/gas prices. Issuing (free) gas cards to residents, and/or lowering the gas tax will only increase demand for the already scarce commodity (hint we need more supply).

The SPR (strategic petroleum reserve) is for emergency use.... not to buy votes. I have heard estimates that the SPR has been drawn down to roughly 50% of previous levels. What are we supposed to use if we have an actual energy emergency, windmills? Ask Germany who is now burning more coal to fill up gas reserves before the winter that could get dicey without Russian gas.

Good luck to us all.

JR

 

[JohnRoberts]

Today's unexpectedly strong jobs report means a wage inflation cycle may be harder to manage. To prevent an inflationary cycle from getting embedded we need to act strongly early in to avoid accumulating inflationary expectations.

The strong jobs market with high inflation is unusual.

JR

 

[Rusan]

While things may differ on the national scale, in my town practically all the manufacturing facilities are on a hiring freeze, with several having even downsized and terminated many employees, and a few have recently shut their doors forever. My son works for a large global company's facility here, and they've went from mostly 60 - 70 hour work weeks over the past several years to 4-day weeks for several months now. He was just told they're gonna eliminate certain departments (including his), and will eventually shut down permanently unless the corporate honchos restructure the facility for other purposes. Even sadder is the fact that my son has good pay and excellent benefits there.

I work for a very large global manufacturer, who has likewise downsized and is axing people right and left at the local facility. Though mismanagement has undeniably been a major contributor as well, the economic downturn, inflation and high fuel prices have impacted our sales on a scale not previously seen during my nearly 13 years of service there.

The only places presently hiring locally are restaurants and food processing plants. People have left both in droves due to well known and widely documented reasons over the past two years, and they're having difficulty hiring and retaining replacements as a result. These industries have been advertising their job openings here via billboards, signs and radio commercials on a nonstop basis for over a year now.

Actually, for whatever reasons, many long-time local restaurants have recently closed. Ditto for many stores and shops, some of which have been in business for several decades to almost a century. The downtown business district is starting to look like a ghost town. At least here locally, it already doesn't look very good, to say the least.

 

[JohnRoberts]

My small town (Hickory, MS) downtown town business district has been a ghost town for decades.
===

Business is generally still having trouble hiring skilled workers so is slower than expected about laying off workers in anticipation of the (?) recession. Some businesses in cities experiencing street violence are having trouble getting workers to return to the office. Labor wage inflation may persist.

====

I just read in the newspaper that Macron (France) is proposing to distribute EU 1B to low income citizens to help them deal with inflation. That is like using gasoline to put out a fire.

JR

 

[john12ax7]

I just read in the newspaper that Macron (France) is proposing to distribute EU 1B to low income citizens to help them deal with inflation. That is like using gasoline to put out a fire.

Giving money to poor people does not cause inflation, printing money does. The money is expected to come from "better than expected tax revenues". So returning tax money to citizens is now bad? Can we please stop blaming poor people for the misdeeds of others?

 

[JohnRoberts]

Giving money to poor people does not cause inflation, printing money does. The money is expected to come from "better than expected tax revenues". So returning tax money to citizens is now bad? Can we please stop blaming poor people for the misdeeds of others?

Please refrain from putting words in my mouth. I am blaming clueless leaders of fueling inflation with bad economic policy.

Is tax revenue is found money? Taxpayers might disagree.

Wealth redistribution is a different subject than inflation or energy policy, at least it is to me.

JR

 

[john12ax7]

How am I putting words in your mouth? You said "distributing 1B to low income people is pouring gasoline on the inflation fire."

 

[JohnRoberts]

How am I putting words in your mouth? You said "distributing 1B to low income people is pouring gasoline on the inflation fire."

giving consumers money to spend will increase inflation not decrease it...

JR

 

[john12ax7]

giving consumers money to spend will increase inflation

Milton Friedman would disagree.

 

[Rusan]

Though I have an IQ of 138, I'm not an educated man and definitely not a student of economics, just a small town redneck that grew up on a cattle farm. I know I don't understand a lot of things, but to me it seems that believing you can spend yourself wealthy is like believing you can drink yourself sober.

 

[JohnRoberts]

Inflation is caused by too much money chasing too few goods. Generating more demand without increasing supply will lead to higher prices.

'The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.','I do not know if the people of the United States would vote for superior men if they ran for office, but there can be no doubt that such men do not run.', and 'Democracy extends the sphere of individual freedom, socialism restricts it.

Alexis de Tocqueville wrote "Democracy in America" in 1835.. A smart guy for a frenchman.

JR

 

[john12ax7]

Inflation is caused by too much money chasing too few goods. Generating more demand without increasing supply will lead to higher prices.

In a sense yes. But by just looking at it like that would imply cutting taxes also causes inflation (it doesn't). So the specifics matter.

Inflation is really about the imbalance in the quantity of money vs the quantity of productive output. It's ultimately a monetary supply issue. Governments can spend / distribute money. They can get the money through 1) taxes 2) borrowing 3) printing more money. Only 3) is inflationary.

France appears to be doing 1). So no, it is not inflationary. The talk of low income people, wages, and now socialism are all just red herrings.

I would suggest reading Money Mischief. Friedman even warns about the scapegoating we are now seeing.

 

[living sounds]

Inflation is just a symptom of the crisis we are constantly trying to postpone. Because of Corona and the war we now have a supply side shortage, but inflation had been happening in other asset classes long before that (real estate, rent, the stock market etc.). We just don't call that inflation, but it was, of course, a problem of too much money and too low interest rates. The ultimate effect of the policies were additional redistribution from the bottom and middle to the top. Deregulation, tax evasion and regulatory capture have largely caused the problem and giving some more money to the poorest is just another band aid.

There are massive personell shortages in many industries and civil services now, but at the same time I hear from industry insiders that certain sectors (like furniture) have had massive drops in orders. There's also the issue of a glut of zombie businesses caused by the policies.

Zooming out to the bigger picture there should come a point when the long-term debt cycle ends and massive deleveraging occurs. The question is if that will be very soon or if there's still ways to kick the can down the road for some more time.

 

[JohnRoberts]

In a sense yes.

econ 101 there are two flavors of inflation "demand pull" and "cost push", Distributing free money to consumers creates demand pull. Taxing business to fund that government largess will raise manufacturing cost creating cost push... a twofer.

But by just looking at it like that would imply cutting taxes also causes inflation (it doesn't). So the specifics matter.

Cutting taxes is not increasing money supply, but literally allowing citizens to keep more of their own money. Lower taxes generally stimulate business investment, leading to more "goods", so reduces inflation. President Biden has proposed increasing taxes 4% to fight inflation in new spending legislation.

Inflation is really about the imbalance in the quantity of money vs the quantity of productive output. It's ultimately a monetary supply issue.

we agree

Governments can spend / distribute money. They can get the money through 1) taxes 2) borrowing 3) printing more money. Only 3) is inflationary.

Increasing taxes will damp the private economy (reducing goods). Increasing taxes generally influence businesses to raise prices (businesses don't pay taxes themselves, they pass those costs along to customers). Literally printing money is a tired cliche, these days money supply is modulated by sundry other levers (injecting liquidity). The federal government buying their own debt to manipulate interest rates, distorts the debt market realities. I am still waiting for that tide to go out. Debt markets have been distorted for well over a decade.

France appears to be doing 1). So no, it is not inflationary.

we'll see... Frances inflation rate 5.8% is highest since 1985, of course it's Putin's fault.

The talk of low income people, wages, and now socialism are all just red herrings.

don't forget vote buying

I would suggest reading Money Mischief. Friedman even warns about the scapegoating we are now seeing.

I suspect my college economic text back in the 60s was Friedman. I was not a good student and that was one of the courses I slept through. I crammed the text the night before the final, but when I showed up they had changed the date /location for the final exam so I failed that class. I didn't bother to chase down the professor to take a make up exam.

I very much believe in free markets. My favorite economic text is Adam Smith's "the wealth of nations". Not an easy read.

JR

 

[ccaudle]

1) taxes 2) borrowing 3) printing more money. Only 3) is inflationary

I do not believe that is correct. Low interest mortgage loans have allowed people to bid higher prices for real estate than they otherwise would, causing inflation in real estate prices. Wider availability of student loans is at least correlated with large increases in prices of higher education (which increased much faster than general goods inflation over the last few decades).
Government spending on infrastructure and military personnel and equipment using borrowed money will create increased demand for labor and goods, which can have an inflationary effect.

Considering borrowing to not be inflationary may be correct in a long term average sense, if you consider that inflationary effects in the short term would be balanced by deflationary effects in the long term as that borrowing was paid down, but so far in my lifetime I have not seen that paying down part occur.
I live in the USA, so possibly there is some example somewhere of responsible short term borrowing followed by paying that debt back down, but doesn't seem to be here. My lifetime has only been about a half century so far, so I guess there could be hope in the future that I will see the second half of that cycle. I'm not going to bet my own money on that.

 

[living sounds]

I do not believe that is correct. Low interest mortgage loans have allowed people to bid higher prices for real estate than they otherwise would, causing inflation in real estate prices.

Yes, and higher real estate prices eventually result in higher rent and higher prices for goods and services as well as higher wages of those paying the rent.

This was very noticeable in my old neighbourhood during the 2010's just looking at restaurant prices, long before the current crises.

Of course, long before the financial crisis of 2008 and it's aftermath the middle and lower classes already got drained considerably not by inflation but by legalized rent-seeking behaviour.

 

[boji]

Was it not believed in Milton's day that emerging 1st world nations continually increase their export of goods out of self interest? With respect to China, that appears to no longer be true when reviewing shipping container tracking apps.

 

[Matador]

Deregulation, tax evasion and regulatory capture have largely caused the problem and giving some more money to the poorest is just another band aid.

I'm still eager to understand how a $600 check 18 months ago caused such lasting worldwide economic damage.

 

[living sounds]

I'm still eager to understand how a $600 check 18 months ago caused such lasting worldwide economic damage.

Me too.