Apparently, the PhD economists within the Federal Reserve believe that with their limited tools – controlling money supply, setting government lending interest rates, quantitative easing, etc. – they can control US inflation, as if that global economic malaise can be controlled within a single nation. Unfortunately, as academically rigorous as they believe themselves to be, they continue to falter in the turmoil of the post-pandemic world. They have focused on the unleashing of pent-up consumer demand, rising wages, and a continuing low unemployment rate. Notwithstanding fuller employment and higher wages, cost increases have continued to outpace income increases. But there are so many unrelated aspects of inflationary accelerants over which the Fed tools can only have marginal and indirect impact.
An avian flu raked US poultry farms in January sending prices for eggs and chicken soaring. Supply chain problems settled down for a bit, but as I will point out, we are about to see a big change in that reality this year. While home prices are contracting, the offsetting increase in mortgage rates, now the highest in decades, have more than dimmed the number new home starts and sales of exiting housing. The pull back on home buying has pushed more people back into the rental market, with an obvious slam to renters as rents skyrocket.
Fossil fuel costs in Europe, from gasoline to natural gas for heating, have increased – sometimes by double or triple – as the result of sanctions against Russia (a fossil fuel producer on the order of magnitude of Saudi Arabia). While those price rises impacted the US inflation rates, they were hardly as horrific as those seen in Europe, eventually moderating across the US. But there are so many aspects of inflation over which Fed interest rate setting will have little or no material impact on resetting inflationary costs… but the Fed to continue rate hikes does promise one severe outcome if not slowed, stopped or even reversed: recession replete with a significantly higher unemployment and homelessness.
To follow recent related posts with more detail, see my January 6th Trade Wars, Pain and the "Pass-Through Rate" blog (showing how business pretty much passed almost all the inflationary pain from US sanctions on to American consumers), my December 20th Stacking the Deck - A Pox on Younger Homebuyers blog (discussing how younger demographics are bearing the brunt of most of the price increases, from housing to consumer [including student] debt and supply chain increased costs) and my October 29th Home, Hearth and Mortgage Payments Adjustable, Unaffordable or Lucky blog (where the rise in interest rates has forced the greatest cost increases on those younger homeowners or renters).
As the ad man often says, “but wait there’s more…” And the more we are waiting on is antithetical to every major US international policy: as my recent blog calls it, The Giant Petri Dish with Territorial Ambitions: China. China is focused on making up for its recent productivity losses from excessive lockdowns from it imposed during its “zero-COVID” policy days, and while in the short term, China is indeed dealing with a new outbreak of the virus, the same pent-up demand that defined our post-pandemic recovery is about to explode in China… but perhaps bigger.
If you want a preliminary metric on exactly how big that demand is likely to be, just look at the skyrocketing demand from PRC nationals for vacation travel (some call it “revenge travel”), now that Beijing has lifted most of the COVID-related restrictions. Restrictions at traditional Chinese border crossings (including semiautonomous districts) have been lifted, and travelers are now crossing in droves. The January 9th Associated Press reports: "Hong Kong media reports said about 300,000 travel bookings from the city to mainland China have been made, with a daily quota of 60,000.
“Limited ferry service also was restored from China’s Fujian province to the Taiwanese-controlled island of Kinmen just off the Chinese coast… The border crossing with Russia at Suifenhe in the far northern province of Heilongjiang also resumed normal operations, just in time for the opening of the ice festival in the capital of Harbin, a major tourism draw.
“And at Ruili, on the border with Myanmar, normal operations resumed after 1,012 days of full or partial closure in response to outbreaks blamed partly on visitors from China’s neighbor, also known as Burma.
“So far, only a fraction of the previous number of international flights are arriving at major Chinese airports… Beijing’s main Capital International Airport was expecting eight flights from overseas Sunday. Shanghai, China’s largest city, received its first international flight under the new policy at 6:30 a.m., with only a trickle of others to follow.” Bookings for overseas flights are rising fast, even as overseas destinations are still requiring passenger COVID testing.
But once China settles down, likely to occur this year, her GDP will rise significantly, factory output will increase and sustain. Internal consumer demand is on a parallel course for more, more, more. Prior to the pandemic, China was the largest importer of fossil fuel on earth, a status likely to be repeated as her economy speeds forward. That increase in demand, particularly over fossil fuel, will send a massive inflationary spike that could increase prices at the pump by 20% or more… with a concomitant ripple across the global economy where shipping remains a major cost component. China’s increase demand for food stuffs and natural resources, as well as sophisticated technology (which the US is fighting) will only add to that inflationary pressure.
Yet somehow, the Fed seems hell-bent on continuing US rate hikes that cannot possibly influence such international realities, will not stop the Russian invasion of Ukraine, cannot stem rising Chinese demand and will not repair our supply chain disruptors. It can increase homelessness, raise unemployment numbers and continue to slam the youngest and other vulnerable demographics least equipped with deal with inflation or the ravages on their lives imposed by Fed rate hikes. It’s time for the Fed to wake up and recognize that it lacks the tools to deal with the kinds of cost increases we have all around us today. It’s not just about US policies and US demand anymore.
I’m Peter Dekom, and the all-powerful Federal Reserve needs to understand that it really isn’t all-powerful and cannot make up for its earlier missteps by insisting on radical solutions that fly in the face of global issues over which they have no control.
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