A Confluence of Pain – Post-Pandemic Demand, Putin’s War & the Fed’s Missteps

 

As new residential mortgage rates effectively doubled – from an average of 2.67% up to 5.08% in early April – as the government reported the highest inflation rate (8.5%) since 1981 and as Vladimir Putin’s war took large swaths of grain fields in Ukraine out of production, with a boycott of Russian fuels to boot (kicking a sizeable increase in oil and gas prices without any offsetting increases in exports from other producers), consumers across the globe were sent reeling.

From nations unable to afford fossil extract-dependent fertilizer to grow crops and further unable to afford the soaring costs of agricultural imports – where the real cost is mass starvation as we are seeing in parts of Africa – to a slam to the Democratic Party controlling both houses of Congress and the presidency, people are demanding solutions to their struggles with rising costs. Except for those in combat zones, the cost of living is the number one issue on Earth. But in the developed world, American inflation is a tad higher. Why?

Despite the massive increase in wages and job growth, a Joe Biden home run, his successes are eclipsed by “It’s the economy, stupid,” governing political axiom. Rising crime, which appears to track expanding gun ownership, and excessive expected waves of immigrants, are secondary but important domestic issues as well. But there is justifiable blame for American governmental missteps, according to the prestigious British journal, The Economist, in its April 23rd cover story: Why the Federal Reserve has made a historic mistake on inflation. The Economist also believes that the Biden overstimulated the US economy with a $1.9 trillion pandemic fiscal package in March of 2021. Hard to tell that to the people who were kept afloat by that award, but to fiscal conservatives, often the hardship imposed on average workers is simply the cost of weathering fiscal storms. The post-pandemic pent-up demand did not help the inflation situation.

Here is how The Economist views that blame that must be placed on our Federal Reserve, the American equivalent of a “central bank”: “Central banks are supposed to inspire confidence in the economy by keeping inflation low and stable. America’s Federal Reserve has suffered a hair-raising loss of control. In March consumer prices were 8.5% higher than a year earlier, the fastest annual rise since 1981. In Washington inflation-watching is usually the preserve of wonks in shabby offices. Now nearly a fifth of Americans say inflation is the country’s most important problem; President Joe Biden has released oil from strategic reserves to try to curb petrol prices; and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.

“It is the Fed, however, that had the tools [to tighten money supply and raise interest rates] to stop inflation and failed to use them in time. The result is the worst overheating in a big and rich economy in the 30-year era of inflation-targeting central banks. The good news is that inflation may have peaked at last. But the Fed’s 2% target will remain a long way off—forcing agonising choices on the central bank. Apologists for America’s policymakers point to annual price rises of 7.5% in the euro area and 7% in Britain as evidence of a global problem, driven by the soaring price of commodities, especially since Russia’s invasion of Ukraine. Nearly three-quarters of the euro zone’s inflation is attributable to rocketing energy and food prices.

“America, though, benefits from abundant shale gas, and its higher incomes mean that staples have a smaller effect on average prices. Strip out energy and food and the euro zone’s inflation is 3%—but America’s is 6.5%. Also, America’s labour market, unlike Europe’s, is clearly overheating, with wages growing at an average pace of nearly 6%. Recent falls in the prices of oil, used cars and shipping probably mean that inflation will fall in the coming months. But it will stay far too high, given the underlying upward pressure on prices.

“America, though, benefits from abundant shale gas, and its higher incomes mean that staples have a smaller effect on average prices. Strip out energy and food and the euro zone’s inflation is 3%—but America’s is 6.5%. Also, America’s labour market, unlike Europe’s, is clearly overheating, with wages growing at an average pace of nearly 6%. Recent falls in the prices of oil, used cars and shipping probably mean that inflation will fall in the coming months. But it will stay far too high, given the underlying upward pressure on prices…

“As the White House hit the accelerator [that stimulus package noted above], the Fed should have applied the brakes. It did not. Its hesitancy stemmed partly from the difficulty of forecasting the path of the economy during the pandemic, and also from the tendency of policymakers to fight the last war. For most of the decade after the global financial crisis of 2007-09 the economy was hung over and monetary policy was too tight. Predicting inflation’s return was for those who wore tinfoil hats.

“Yet the Fed’s failure also reflects an insidious change among central bankers globally. As our special report in this issue explains, around the world many are dissatisfied with the staid work of managing the business cycle and wish to take on more glamorous tasks, from fighting climate change to minting digital currencies. At the Fed the shift was apparent in promises that it would pursue a ‘broad-based and inclusive’ recovery. The rhetorical shift ignored the fact, taught to every undergraduate economist, that the rate of unemployment at which inflation takes off is not something central banks can control.” Simply: Too much cheap money for too long. Probably exacerbated by the explosion of the stock market from the “let’s use the 2017 tax cut” to buy back our own shares, a massive increase in demand for stocks.

Whether you agree or not with The Economist’s assessment, we are going to see a powerful impact on staggering mortgage rates on home prices. Also pushing against that moderating trend are remaining supply chain issues, the continuing impact of Putin’s war and a severe continuing higher-end job shortage that will continue for most but negatively impact those at the bottom of the economic ladder. There is little the Democrats can do before the mid-terms to counter this tsunami of bad news. The need to push interests higher faster will further shock the system.

I’m Peter Dekom, and too many agendas, a gridlocked Congress and our addiction to cheap money have combined to motivate the Piper’s demand finally to be paid.