Something Else To Worry About

Many of us have good reason to worry.  It is terribly bad out there.  Putin is doing nuclear saber-rattling, Trump is still bitching about losing, DeSantis is illegally kidnapping migrants and illegally shipping them to Martha’s Vineyard, Sinema has perfected her imitation of a Republican, Manchin is screwing over the conservationist wing of the Democratic Party, and COVID continues to mutate faster than we can develop vaccines.  California and Arizona are running out of water.  By the way, California accounts for 46% of the U.S. fruit and nut production and 62% of the national value of fruit and nut crops.  California leads in fresh market vegetable production, accounting for 44% of the U.S. harvested area and 49% of the national production.  The war in Ukraine continues to produce more Russian atrocities, and Puerto Rico once again got demolished by a Hurricane.  As I write, a category 4 hurricane is headed to Tampa/St. Pete.

So, because I am a kind and caring guy, let me add to your list of concerns.

Jerome Powell and his buds at the Fed are trying to fight a myriad of economic issues: supply chain issues, the concerted effort to negotiate livable wages, corporate greed (e.g., unwarranted price increases for gasoline, chicken and beef) and a combination of pent-up demand and depleted inventories precipitated by the pandemic.  They are doing so by rapidly increasing interest rates which will, presumably, make it harder to borrow and thus decrease demand for stuff like homes, automobiles, all the stuff you buy on installment credit, as well as all of the personal borrowing you used to engage in, like borrowing against the equity in your home.  The result, the Fed pundits hope, will decrease demand

“Decreasing demand” is Fed-speak for, throwing people out of work, and causing a recession, thereby and crushing the increase in prices we call inflation.

They may be right, but I don’t think it’s going to work out that way.  Let us consider how much demand has to drop to overcome shortages caused by supply chain issues due to the pandemic, the current saber rattling with China, the strong dollar (which gets stronger with higher interest rates), pent-up demand, crop shortages due to weather, COVID, the war in Ukraine, and corporate greed (yes, I know I am repeating myself, but it bears repeating).  The answer is a shitload and that will cause a lot of people great pain.

Take for example, automobiles and refrigerators.  Sure, you can cut down on the really wealthy people buying for style and/or speed and cute technology as well as the car nuts but when your car or refrigerator no longer works you have no choice but to buy a new one.  A majority of autos and refrigerators are bought on credit by middle class or lower-middle class working people.  Congratulations, Mr. Powell, you have just increased the cost to those who can least afford it.

Oh, and by the way, how does increasing interest rates help with rising fruit, vegetable and nut prices due to the lack of water in California?

Besides, you have now enriched the mortgage lenders and bank lenders for autos by forcing these buyers into long-term debt at much higher rates than the past 15 or so years and likely lower rates in the future.  By the way, the most popular mortgage is a 30 year, and the average car loan is 69 months for new cars and 65 months for used cars (that’s about 5.5 to 5.75 years), but many car loans today are being offered at 72 and 84 months (that’s 6 or 7 years).  Virtually everyone is upside down on an auto loan of 72 or 84 months.

Who will this help?  First of all, it’s going to help all those companies bitching about not being able to find workers to do their shitty jobs at less than a living wage.  That problem will be fixed by all the higher wage workers tossed out of their jobs by “reductions in force” (i.e., layoffs and firing) produced by the magic of decreased demand.

It will help people with savings accounts.  Of course, with the median savings per household at $5,300, the increase of $200-$300 per year will be nice, but hardly enough to outweigh the increased risk of losing their income to layoffs.  It will crush their retirement balances as well, as the stock market takes a big dive.

Also note that raising interest rates does nothing to stop the price gouging practiced by the oil companies and others under the pretext of supply constraints and “inflation.”  Facts:  the Producer Price Index (less food and energy) has gone up by 3.55% since the first of the year and the year-to-year maximum increase this year has been 7.1% for March and current stands at 5.0% year-to-year for August.  I just heard from a colleague that their commercial development contract, which would normally have an inflation escalator of 3% a year has gone to 1% per month.   I’m fairly sure that is well above current and anticipated inflation as it  translates to almost 13% for a 12-month period and 27% for a 24-month period.  This is price gouging under the guise of being “conservative.”

Who gets hurt the most:  working class people and middle management.  And the minimum wage workers who won’t get the living wage they deserve.

I call bullshit.  Since the Fed has only one weapon, they are using it indiscriminately.  Where is the legislation around minimum wages, incentives to correct fragile supply chains, improvements in our infrastructure to ease the pressure on overloaded electric grids, transportation networks, and ports of entry, retraining to fill the millions of open jobs, etc.?

It is nowhere.  It is tied up in a Congress more interested in genitals than governing, more interested in being pro-birth than pro-child, more interested in who does what to whom in the bedroom rather than who does what to whom in the workplace, and finally, more interested in flying immigrants out of their state (and others’ states) than filling the millions of jobs going wanting.

I am not optimistic about the results here.