Highlights for Children has a popular segment called “What’s Wrong With This Picture?”
I give you my economics version of “What’s Wrong With This Picture?” It features The Federal Reserve’s M2 Money year–over-year compared with Real Average Weekly Earnings year-over-year.
Yes, M2 Money growth has “slowed” to 12.8% YoY while US Real Average Weekly Earnings YoY is now -1.6%. In other words, while M2 Money is still growing at a rapid pace, real weekly earnings growth is NEGATIVE.
The Fed continues to pump money into a bottle-necked economy while The Federal government pays people NOT to work.
The US Senate has a plan to fix the problem: Biden has nominated Saule Omarova, a dingbat law professor from Cornell (alma matter for The Office’s Andy Bernard), who proposes the following:
(1) Moving all bank deposits from commercial banks to so-called FedAccounts at the Federal Reserve;
(2) Allowing the Fed, in “extreme and rare circumstances, when the Fed is unable to control inflation by raising interest rates,” to confiscate deposits from these FedAccounts in order to tighten monetary policy;
And Ohio Senator Sherrod Brown (D-of course) thinks there is NO MORAL HAZARD PROBLEM with The Fed confiscating bank deposits for its own use?????
If I was attending Omarova’s confirmation hearing, my verdict would be ..
Nothing has been the same since the housing bubble of the 2000s, the resulting banking meltdown and the takeover of the economy by The Federal Reserve.
And since the 2000s housing bubble and financial crisis, The Federal Reserve has taken control of the economy resulting in M2 Money Velocity crashing to historic lows.
Policy blunders perpetrated by the Biden White House have made a bad problem worse.
For instance, oil prices are higher for two reasons. First, U.S. production has declined by about two million barrels per day since 2019, even as demand has recovered from the COVID-19-induced downturn. Oil markets are global, so the fall-off in output would not necessarily jack prices up, but our declining output needs to be offset by an increase elsewhere.
Enter OPEC, which has not restored output to the level necessary to bring down prices, despite repeated pleas from Biden.
Meanwhile, Biden has done a lot to discourage a resurgence in U.S. drilling and production. He has cancelled pipelines, threatened oil and gas producers with higher taxes, taken promising acreage out of play, such as the Arctic Natural Wildlife Refuge, slow-walked leasing and new drilling permits and, most recently, imposed new methane-curbing rules that make drilling more expensive.
What sensible person would invest in the oilfield in the face of such unrelenting hostility? Drilling activity is up, but nowhere near where it should be at $82 per barrel oil.
Another boost to inflation came from housing. With “shelter” accounting for some 40 percent of the CPI, economists have warned that fast-rising home prices would eventually seep into higher inflation readings. In October, we saw this occur, with the increase in the cost of shelter accelerating to 0.5 percent from September, an annualized rise of 3.48 percent. The CPI owners equivalent rent of residence rose to 3.13% YoY. Too bad home prices are increasing at almost 20% YoY.
One reason home prices have been increasing at nearly 20 percent per year is that the Federal Reserve has continued to buy up $15 billion worth of mortgage-backed bonds each month, keeping mortgage rates artificially low. The result has been a booming market, driving home prices, and now rents, higher.
At long last, the Federal Reserve has announced it will begin to throttle back its bond-buying program, including the purchases of mortgage-backed bonds. Critics think the Fed is behind the curve, having seriously underestimated price pressures.
Biden does not control the Fed, but he has made no secret of his preference for the easy money policies that have helped prop up the economy, and the stock market. Fed Chair Jerome Powell’s term ends in February; Biden has recently interviewed not only Powell but also Fed Governor Lael Brainard, a known dove and Obama appointee, for the position.
That these are the only two candidates he seems to be considering sends a clear signal. He will choose growth over stability, even if it means that inflation continues to accelerate. Unhappily, Powell is listening.
Finally, Biden has not only encouraged monetary excess, but has also endorsed big-spending packages that have put money in consumers’ pockets but also kept workers on the sidelines. The biggest shortage we have in this country today is labor. The labor participation rate is mired at 61.6 percent, 1.7 percentage points below the level in February 2020.
Studies have shown that the slew of benefits contained in the Cares Act and subsequent relief bills, including incremental unemployment benefits, expanded child tax credits and rent moratoriums, have offered Americans up to $100,000 per year while not working. These payments may have been necessary early in our recovery from the pandemic, but no longer are needed.
And then people are surprised that grocery prices are getting so f&^*ing high???
The Federal Reserve continues to JOLT markets with excessive monetary stimulus despite numerous reasons why they should back off.
For example, today’s JOLT report (US job openings) revealed that 10.4 million jobs were open in September. This is the fourth consecutive month of 1 million plus job openings, yet The Fed refuses to raise their target rate.
At the same time, the University of Michigan survey revealed that buying conditions for houses dropped to 66 (baseline of 100). To show how bad this is, buying conditions for houses was at 144 this time last year.
UPDATE: UMich revised their number downward to 62, the lowest since 1981.
In The Fed’s mind, they are still chasing at least 3.5% unemployment, the lowest rate under President Trump prior to COVID. But with perpetual million plus job openings GOING UNFILLED, trying to get to pre-COVID unemployment rate of 3.5% is a fool’s errand.
Of course, with The Fed helping to pump up house prices to largely unaffordable levels, it makes sense that enthusiasm for buying expensive homes has crashed.
Meanwhile, The Fed continues to JOLT the economy with excess stimulus.
Overall inflation fears are leading to lowest consumer confidence since 2011.
Wu-Xia employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. It can be used to summarize the macroeconomic effects of unconventional monetary policy (ZIRP + QE). The Shadow Rate is now -1.7021%.
And you wonder why we have inflation and house prices going into orbit?
With inflation also going into orbit, we see that breakeven 10 year inflation rate rising above the 5Y5Y (nominal forward 5 years minus US inflation-linked bonds forward 5 years). In other words, the US has abnormally high inflation and is expected to grow and NOT be transitory.
The Shadow knows … that the US is hyperstimulated. And inflation isn’t going away anytime soon.
Combine vaccine mandates that lower the workforce and the flood of economic and monetary stimulus by the geniuses in Washington DC, and we have a Thanksgiving problem.
Supplies of food and household items are 4% to 11% lower than normal as of Oct. 31, according to data from market-research firm IRI. That figure isn’t far from the bare shelves of March 2020, when supplies were down 13%.
For grocery shoppers this holiday season, it means that someone with 20 items on their list would be out of luck on two of them.
Although U.S. supermarket operators started purchasing holiday items early, aiming to avoid shortages, many holiday essentials are already in short supply.
Turkeys are very low in stock. By the end of October turkeys were over 60% out of stock—lower than the same time last year by more than 30 percentage points. A spokesperson for Butterball LLC, one of the largest U.S. turkey processors, said the company has been experiencing similar labor and supply challenges as other organizations and industries.
Even if you can find a turkey, prices on foodstuffs in general are up 36% from last year.
And to get to the grandparents’ house of Thanksgiving, gasoline prices (regular) are up 24.5% from last year.
Biden could lower inflation by 1) stop mandating vaccines, 2) stop shutting off energy pipelines and oil exploration, 3) stop spending trillions of dollars other than Social Security, Medicare and defense.
Frankly, Thanksgiving has gotten so expensive due to Biden’s Reign of Error that I am thinking of alternatives to turkey. Like a Jersey Mike’s turkey and provolone sub.
How insanely overstimulated in the US economy by The Federal Reserve? Today’s red-hot inflation report of 6.2% YoY implies a Fed Funds Target rate of … 14.94%!! According to the Taylor Rule model, The Fed Funds Target rate should be almost 15%.
If we use CORE inflation (that is, CPI less food and energy), The Fed’s Target rate should be “only” 11.10%.
I feel like I am watching re-runs of Gilligan’s Island with Biden as the Skipper and Powell as Gilligan. Thurston Howell III and his wife lovey are the US Congress and Janet Yellen is the Professor. Case in point? REAL average hourly earnings YoY fell to -1.2% under the Gilligan’s Island leadership in DC.
Biden Starts To Freak Out About Soaring Inflation, Orders Economic Council To “Reduce Energy Costs”
Now that President Biden is interviewing Lael Brainard for Federal Reserve Chair, I am really getting a peaceless, uneasy feeling that The Fed will NEVER raise rates and inflation will be perpetual. To whit, …
Prices paid to U.S. producers accelerated in October, largely due to higher goods costs, fueling concerns about the persistence of inflationary pressures in the economy.
The producer price index for final demand increased 0.6% from the prior month and 8.6% from a year earlier, matching forecasts, Labor Department data showed Tuesday. The annual advance was the largest in figures back to 2010.
Excluding the volatile food and energy components, the so-called core PPI rose 0.4% and was up 6.8% from a year ago.
More than 60% of the headline increase was due to goods, which jumped 1.2%. Higher energy costs, including that for gasoline, drove the gain. The cost of services rose a more moderate 0.2% for a second month, reflecting a further pullback in the cost of securities brokerages and investment advice.
The report underscores how transportation bottlenecks, materials shortages and increasing labor costs have sent prices soaring across the economy in recent months. Trucking freight costs jumped a record 2.5% from September.
Inflation is a tax created by printing too much money and stupid Federal economic policies (or follicies).
Lael Brainard? Discussing the chairmanship with Brainard could signify that the Biden team is weighing how a break with Powell might help advance their goals for the central bank. Brainard and Powell work closely together on multiple issues and are viewed as holding similar views on monetary policy, but she’s favored a tougher stance on big banks.
Remember, The Federal Reserve is a privately-owned entity independent of The Federal Government. A Brainard appointment would make The Fed the financing arm of the Democrat Party.
With The Federal Reserve leaving its target rate at 0.25%, but hinting at a tapering (slowdown) of asset purchases, I thought it would be good to present where The Fed sits at the moment.
You can see the rise in the effective Fed Funds rate from 2016 to early 2020, then KABOOM! COVID struck, the effective Fed Funds rate crashed while The Fed dramatically increased their purchases of Treasuries and Agency MBS. Both Treasury and Agency MBS purchases are projected to decline by mid-2022. The Fed’s target rate (purple line) is project to rise to 1% after 2023.
Where SHOULD The Fed Funds Target rate be? How about 8.80% instead of 0.25%.
So we still have over-stimulypto with The Fed projected to raise rates at a snail’s pace.
Face it, Wall Street wants interest rates low, even if inflation burns out of control.
From The Land of 1,000 Excuses, The Federal Reserve Open Market Committee (FOMC) will announce … no rate increases and a slight reduction in their assets purchases (Treasuries and Agency MBS). The announcement will be at 2pm EST (not at The Midnight Hour).
The Federal Open Market Committee is all but certain to hold rates near zero after a two-day policy meeting and announce a $15 billion monthly reduction in bond buying from the current $120 billion pace, judging that the test for tapering has been met as the economy heals from Covid-19.
There are two rate increases baked into the Fed Funds futures data as of today.
But a troubling aspect of The Fed’s monetary policy is that M2 Money Velocity is near the lowest in history and The Fed has been binge printing. What this means is that money printing has had little impact on GDP growth.
When The Fed mentions the post-COVID recovery, I hope they mention that REAL hourly wage growth is NEGATIVE.
And REAL S&P 500 earnings yield is also negative.
The Fed will likely to blame TRANSITORY effects such as the backed-up port traffic in Long Beach for rising prices rather than their flooding the markets with too much money.
But The Fed will continue to print, even though they will blame bottlenecks for inflation rather than their haphazard drowning of the economy in money.
Given that The Fed is monetizing the reckless spending by The Federal government, particularly Pelosi’s latest budget, we will see coordination between Chairman Powell and Treasury Secretary Janet Yellen (aka, Mustang Sally).
Call Jerome at 634-5789 to tell him to raise rate to normal levels.
Confounded Interest - Anthony B. Sanders 
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