Sobering News on Inflation

And A Solution

This give and take is pretty good.

I use the video to set the table. The Biden Administration is going to do all it can to deflect blame to Putin when it comes to inflation. However, because the Biden Administration, and Covid bailouts from Biden and Trump’s administration before that, along with Quantitative Ease forever from 2009-2016, we have created lots of US bucks and that’s what is causing inflation.

The buck now stops with Joe Biden and he is about as sharp as a marble. He is so dumb, he couldn’t spell the word cat if you spotted him two letters and drew a picture.

Biden has an agenda that doesn’t lower costs for American families. He is clueless when it comes to economics and how to operate a business.

President Biden @POTUS

My message to the companies running gas stations and setting prices at the pump is simple: this is a time of war and global peril. Bring down the price you are charging at the pump to reflect the cost you’re paying for the product. And do it now.

Gas stations operate in a very competitive market. Their profit margin on gasoline is a smidgen of their total profit. They make money by having you come inside and buy sundries.

We can get into a “he said she said” argument if you want but the lessons of the past are when the government ramps up spending, inflation increases. We can also trade stories, but there are iron laws of economics and the world follows them.

I remember an accounting class I had at Chicago Booth. My professor Daniel Bens said in accounting you can float errors along for a while and even bury them in schedules and notes to financial statements, but eventually, they all come out to play. We are seeing that in real-time right now.

Professor Craig Pirrong wrote a fantastic blog post on inflation that you should read.

Read Craig’s whole post but I wanted to highlight this:

The argument, in a nutshell, is that due to transactions costs (interpreted broadly) not all goods and services are traded in auction markets or auction-like markets in which prices respond immediately to shocks, including nominal shocks. Prices (including wages/salaries) are set by contracts, including implicit/informal ones. Different contracts have different degrees of flexibility. Prices (and other terms) in some respond quickly, others not so much.

So when there is a substantial nominal shock (e.g., a surge in the money supply) which in a frictionless, classical world would not affect relative prices, some prices adjust more rapidly than others. This leads to changes in relative prices that are artifacts of the nominal shock, and which distort resource allocation.

Craig links to another article that is worth your time to read as well.

The article starts,

Inflation has been ramping up for more than a year after gigantic government spending during the COVID-19 pandemic led the Federal Reserve to print trillions more dollars. Consumer prices rose 8.6 percent year-over-year in May, with prices of some necessities, such as gasoline, housing, and food, rising particularly sharply.

Americans are now quickly realizing the economic consequences. This is stage two, with stages three and four still expected to come, according to Ross McKitrick, a professor of economics at the University of Guelph in Ontario.

Now for the solution to this problem. However, I will tell you right now that Biden won’t do it, and my guess is many of our elected officials from both parties do not have the intestinal fortitude to undertake it.

1. Stop spending government money. Cut spending or freeze it at a minimum.

2. No more new government programs.

3. Take the corporate tax rate AND capital gains rate to 0%. The government doesn’t make much revenue off both of these rates and putting them to 0% will stimulate investing activity. The other great effect is long term or retired assets that are tied up and remain unsold because of taxes will be sold to people that think they can make them productive.

   a) Corporations will be able to pay employees more, or cut prices.

   b) Investors will be incentivized to invest in new and existing businesses

4. Don’t lay a finger on individual income tax rates for now. Do nothing.

5. Deregulate industries and make them more competitive. We have massive companies that dominate every business vertical. Make it easy to compete with them and that will force every business to become more efficient at delivering goods and services to people, driving down prices.

6. Right to Work for the US is a good idea. Unions will hate it, but having competition for labor will have the same effect as deregulation. Businesses have to compete for labor, so the wage paid won’t go to zero and probably won’t be close to the minimum wage.

The net effect of doing those three things will be a big bump to GDP growth. The only way to beat inflation is through growth. If you have 20% inflation, but can sustain 23% GDP growth, the average Joe can digest it all.

Right now, we have double-digit inflation and negative GDP growth. It’s a recipe for a huge disaster.

The Fed is late at raising rates as usual. But, frankly, even if all we did was have interest rate increases, that wouldn’t cure inflation.

America’s economy isn’t isolated either. For decades now, Japan has had artificially low-interest rates which have led to a corresponding decrease in the value of the Japanese Yen. There are rumors they might let interest rates go higher. The Yen will go higher in value relative to other currencies, including the dollar.

If Biden does nothing and Democrats propose more spending or more government programs you should buy puts on stock market indices and roll them quarterly for a couple of years. Going to cash isn’t so good since inflation will eat up all the value you think you have.

We haven’t seen the bottom in the stock market. It’s gonna get ugly.