By MN Gordon of Economic prism
“I want to talk about happy things, man.” – President Joe Biden, July 2, 2021
The prices of certain commodities have fallen. But not enough to proclaim price inflation dead.
Wood futures, for example, fell more than 40 percent in June. This marked the biggest drop in lumber price since the 1970s. But after rising from roughly $ 495 per thousand board feet in October 2020 to more than $ 1,423 in April 2021, the current lumber price of $ 718 is still nearly double its 30-year average.
Lean hog futures have also retreated lately. After hitting an interim high of 121.95 cents per pound on June 9, they are currently priced at 110.10. Still, even with this recent decline, lean hogs have risen more than 57 percent since early 2021.
Just a year ago, raw sugar futures were priced at 11.76 cents a pound. In February, they hit a four-year high of 18.49. At the time of writing, raw sugar futures are priced at 17.45. Apparently, part of this price increase is attributed to concerns about dry weather impacting the Brazilian sugarcane production. You should sweeten your portfolio?
What’s going on with these wild price swings? Has the lawsuit yielded? Has the offer increased? Have the broken links in the supply chain been reconnected? Should we blame the weather?
It may be so. And perhaps prices will fall back in line with pre-pandemic levels. But probably not …
The economy, thanks to the extreme intervention of central planners, is very different from what it was before the pandemic. Government blockades made an abrupt mess of things: they disrupted production, supply chains, and capital flows.
However, the solution to the locks – free money – has created a lasting disaster that will never go away. This is why …
The federal government ran a deficit of $ 3.1 trillion in fiscal year 2020 … more than triple the deficit in fiscal year 2019. The 2020 deficit amounted to more than 15.2 percent of GDP. This marked the largest deficit as a percentage of the economy since 1945. The fiscal year 2021 deficit will likely also exceed $ 3 trillion.
Much of these deficits have been financed with money from the printers. That’s through credit created out of thin air by the Federal Reserve. In February 2020, the Fed’s balance sheet was $ 4.1 trillion. Now it exceeds 8 trillion dollars. Almost double in less than a year and a half.
And the Fed continues to expand its balance sheet by roughly $ 120 billion a month, with $ 80 trillion in US Treasuries and $ 40 trillion in mortgage-backed securities. All this money from the printing press has, in fact, created a lasting disaster.
Inflation, in its truest sense, is inflation of the money supply. When the money supply increases rapidly and dramatically, strange and unpredictable things happen.
Zombie companies are kept on life support so they can consume capital in perpetuity. Individuals are paid for not working. House prices skyrocket. The NASDAQ, after a 10-year bull market, doubles in 16 months.
Companies like Apple and Microsoft have offerings of up to $ 2 trillion in market capitalization. Non-fungible token (NFT) digital collage art auctions for $ 69 million. And a huge divergence persists between people claiming pandemic-related unemployment benefits and a record number of job openings.
Also, these price distortions move quickly and erratically. The prices of wood and food, for example, rise and fall like the tides of the ocean when the sun, the moon and the earth are aligned. These sudden price changes create uncertainty for physical suppliers and wholesalers.
The Wall Street Journal reported This week, supermarkets are stocking up on frozen meat, sugar and other items to stay ahead of projected price increases. This rational hoarding behavior is self-reinforcing, as apparent shortages and unwarranted tensions in the supply chain drive prices higher. It also leads to overproduction to meet unjustified demand, followed by oversupply and a rapid drop in prices.
Is the great post-pandemic boom a great failure?
Prices, remember, are information. And when that information is falsified by an abundance of counterfeit money, companies and individuals are forced to do things that would otherwise be absurd. Of course, the market with the most falsified prices, the credit market, is also the most prone to convincing destructive behavior.
As noted above, the Fed is pumping $ 120 billion a month of print money into the Treasury and mortgage markets. The price distortions resulting from ultra-low mortgage rates are absurd. Here in the land of fruit and nuts, 1,200-square-foot homes built in the 1940s, and with the architectural aesthetic of an upside-down shoe box, sell for a million dollars.
And this week, the yield on the 10-year Treasury fell below 1.30 percent. Considering that consumer price inflation was recently recorded at 5 percent, in inflation-adjusted terms, the yield on the 10-year note is negative by a wide margin. What’s going on?
Are people exiting the stock market and stacking in treasuries for their perceived safety? Is the great post-pandemic boom a great failure? Is the reflation trade dead?
No one really knows … because the treasury market has been hijacked by Fed intervention. What is known is that artificially low Treasury rates allow Washington to more easily pay off its gigantic debt.
In short, through the Fed’s policies of financial repression (that is, setting short-term interest rates below the rate of inflation), Washington can extract wealth from its bank account and future profits to indirectly pay for the public debts. The government steals the growth of the economy through zero interest rates and printing money to inflate public debt.
The consequences, however, are disastrous for wage earners and savers. According to our estimate, as a general rule, add a zero – or two – to the back of current prices, and that’s roughly what goods and services will cost by the end of the decade.
Surely a 10-year Treasury note yielding 1.30 percent won’t get you there.