Monday, May 10, 2021

Inflation is Blowing Up

Inflation is Rearing Its Ugly Head The annual inflation rate was 1.4% in January, 1.7% in February, and 2.6% in March. The Producer Price Index measuring wholesale prices rose 4.2%. The trend line is ominous. Financial sages are warning us. Warren Buffett said at his annual meeting “We are seeing substantial inflation…. We are raising prices. People are raising prices to us, and it’s being accepted.” Sam Zell, the legendary 79 year-old billionaire Chicago “grave dancer,” is known for buying troubled real estate, holding and developing, and then often selling at a high profit. He is now hedging with gold – for the first time. He sees inflation everywhere. Former Treasury Secretary Larry Summers warned in March of the Biden trillion dollar proposals: “The data flow tends to bear out inflation fears. Relative to a couple of months ago, there is much clearer evidence of labor shortage, there are more and more pervasive supply bottlenecks, commodities and future commodities prices are rising …. Housing is on fire, and market inflation expectations are trending upwards. None of these are inherently transitory factors, so to my mind, grounds for concern are increasing.” The CEO of Kellogg’s said “We haven’t seen this type of inflation in many, many years.” The first sign was President Biden’s election. Gas prices started shooting up. California is now over $4.00/gallon and climbing. The rest of America is reaching $3.00/gallon. So much for American energy independence as the Biden Administration is progressively shutting down fossil fuels in the name of climate change. The Biden New Deal is but a varnished crippling Green New Deal. $5/gallon gas near the end of the Bush Administration was devastating to the economy with the Great Recession. It will be again. Oil rose to $65/barrel. Transportation costs jumped 19% in March. Rising transportation costs drive up the price of all products, whether transported by car, truck, boat, train, or plane. Detroit is still dependent on slightly less gas guzzling SUV’s. Corn futures are up 50%. Soybeans up 50%. Chicken products soaring. Seafood 18.7% Grain Turkey products Peanut Butter Pork Paper products: paper towels, toilet paper, diapers, tampons. Construction Materials: lumber, drywall, steel, aluminum Lumber futures 543% since pandemic low. Iron and Steel Resin, pulp Cardboard and corrugated boxes in short supply And computer chips! Food companies in recent years have reduced the size of their products and the numbers in a package, another form of foood inflation. Warnings are everywhere, but in the eyes of the Biden Administration. Jerome H. Powell, Chairman of the Federal Reserve, views price bumps as temporary with the economy reopening. The Fed views the increases as “transitory,” forgetting that price increases get baked into the ongoing base price of products. The Fed and Treasury officials may actually be worried, but they don’t want to admit failure of the Biden economic plan only 100 days into his administration. They are praying behind closed doors that the inflation is only transitory. He’s vowed to maintain interest rates near zero for two more years. He added that the Fed will respond when the inflation rate exceeds 2% over a period of time, which leaves a lot of slack. The rate lagged 2% the past 13 years. The Fed will be reactive – not proactive Treasury Secretary Janet Yellen on Tuesday said: “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it.” The two major tools of the Fed and government to control inflation are raising interest rates and imposing taxes to drain money out of the economy. Both are devastating tools to be effective. Leftist economists advance the modern monetary theory (MMT) that posits sovereign nations such as the United States can monetize their debts by borrowing money in a fiat currency they control. They can thereby print money without worrying about budget deficits or funding programs. They send the printed or electronic money into circulation at low interest rates. MMT defies basic economic, history, and common sense. Most Americans were not around during the last period 4 decades ago of runaway inflation. President Carter’s 4 years in office were a disaster. 1980 saw a 13.5% inflation rate. The consumer price index almost doubled in 4 years. Banks in 1980 charged a prime interest rate of 21%. Short term interest rates were 18% in March. The Fed’s prime rate reached14%. Mortgage lending collapsed. Today’s mortgage rates are inching back up to 3%, a far cry we faced in May 1980 in buying a house. We were quoted 15½% with 4 points. Fortunately the bank lowered it to 14% and 1 point the day before closing. We refinanced later. Fed Chair Paul Volcker and President Reagan tamed the inflation monster 4 decades ago, but the Biden Administration is risking unleashing it onto the American people. The lessons of 40 years ago have been forgotten or more likely never learned by today’s leftists. The Fed does not control interest rates. The market controls interest. The hubris of the Fed is that it controls interest rates. The federal government went deeply in debt over the past 12 years. The federal debt was $9.2 trillion in 2008 at the end of the George W. Bush Presidency. It tripled to $28 trillion after 12 Obama-Trump years. The estimated deficit for this year is $2.3 trillion, not including the next $4 trillion in Biden spending. Debt has a cost. The federal government borrowed money to pay $345 billion in interest last year, 1.66% of the nation’s gross national product. The debt and interest payments compound. Inflation is a hidden tax which falls most heavily on the poor. The $6 trillion Biden spending coupled with the Trump payouts are popular. Money, money, money! America is on a sugar high! Then comes the crash! Parents understand the sugar high with children. Always remember President Obama’s admonition about Joe Biden: “Never underestimate Joe’s ability to fuck things up.”

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