Inflation and money illusion

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.cnn.com/2024/04/26/economy/pce-inflation-spending-march/index.html

The Fed’s preferred inflation gauge just moved in the wrong direction

By Alicia Wallace, CNN, April 26, 2024

The Personal Consumption Expenditures price index — a closely watched inflation gauge favored by the Federal Reserve — accelerated to 2.7% for the year ended in March, according to data released Friday [today] by the Commerce Department. …

While rising gas prices played their role, the biggest bogeyman to lower inflation has been shelter costs and overall services, where price hikes tend to be more “sticky.”…

The core PCE index held steady in March on both a monthly and annual basis, 0.3% and 2.8%, respectively. …[end quote]

The Fed is looking at high sticky core price inflation and Nowcasting Quarterly annualized percent change of both CPI and PCE inflation over 3% in 2Q24.

Fed officials are commenting that it’s too soon to cut the fed funds rate. The options market is now predicting the first cut by September…maybe. Or even later. This will keep interest rates higher for longer.

With Inflation This High, Nobody Knows What a Dollar Is Worth

Strong reactions to rising prices and misunderstandings about the value of money are rampant, our columnist says.

By Jeff Sommer, The New York Times, April 26, 2024

…
There’s a fancy name for the common human failure to see past the gaudy prices [including stock prices] largely created by inflation. This widespread inability to recognize what money is really worth is known as money illusion…

Consider that a March 2021 dollar is worth less than 85 cents today, according to the government’s Consumer Inflation Index calculator. When I keep that number in my head, the dollars in my bank account look especially unimpressive. (And I’ve been working full-time since the summer of 1977. The calculator says that every dollar I earned in my first job is worth only 19 cents in 2024 money. Yikes!)… [end quote]

This excellent link shows many economic and market statistics with inflation adjustments. Real Treasury yields are currently the highest since 2008, in the range of the pre-Greenspan historical yield of 2.0 - 2.5%. This is normal and not restrictive as shown by the strong economy.

However, about 80% of Treasury debt is short-term. The Federal Reserve is already calculating the additional cost of rolling over Treasury debt at higher interest rates.

Why Are We Gambling With America’s Future?

by David Brooks, The New York Times, April 25, 2024

…
Interest rates have risen. According to The Wall Street Journal, America is expected to spend $870 billion, or 3.1 percent of gross domestic product, this year on interest payments on the federal debt. According to the Committee for a Responsible Federal Budget, the government will spend more on interest payments than on the entire defense budget. Within three years, if interest rates remain high, payments on the debt could become the federal government’s second-largest expenditure, behind Social Security…

Pretty soon, you’re staring at Ferguson’s Law. This is the principle enunciated by the historian Niall Ferguson that any nation that spends more on interest payments on the debt than on military spending will slip into decline. It happened to Hapsburg Spain, the Ottoman Empire, the British Empire and prerevolutionary France. Will it happen to us?.. [end quote]

Wendy

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That is what the starve the beasters have wanted, for years. Force a financial crisis, then cut off all the social spending, SS and Medicare.

Steve

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Or the opposite. Starve the beast to inhibit government growth, thus avoiding the situation where interest debt grows larger than military spending.

DB2

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@steve203 @DrBob2

None of the above

We did not invest in factory output. Everything flows from there.

@WendyBG

That includes economies of scale and negotiating utility prices.

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I have mentioned before a conference I saw on C-SPAN, nearly 20 years ago, that was put on by the Concord Coalition. There were several juicy tidbits said, like the one panelist who noted that, while there may have been a stimulation argument for the first round to tax cuts to help pull the US out of the 2001 recession, there was absolutely no economic argument for the second round of tax cuts.

Another panelist said he had a conversation with one of the “starve the beast” proponents. He summed up the “STB’s” argument. words to the effect “what you are saying is you intend to do nothing (about the deficit) until there is some sort of financial crisis. Then you are going to tell all these elderly people, who have few financial assets, ‘sorry, we can’t do it anymore’ And you don’t think there will be economic, moral, and ethical, consequences?”

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It is somewhat astonishing to me how fast housing costs have risen. The Upper Midwest is not Cali, or NYC, housing costs have been low and affordable in relation to prevailing income, and versus the rest of the country. I purchased my house for less than $150k in the depths of the financial/housing meltdown ( 2010 ), and it could probably sell in the $450-$500k range today. That is an average increase of approximately 8%/yr. But it has been the last few years in which the price has gapped up. Wages in the area have gone up, but nowhere near enough to keep pace with purchase prices. Rents have also gapped up in the last few years. I read online about working class folks searching for affordable rentals, and the starting point seems to be $1500- $2000 per month for a very, very average home, out in the sticks.

I have no idea how people can reconcile what their monthly take home pay is, versus what shelter costs are. I feel for the young people. They are in demand, job wise, but the job wages do not support these type of costs.

All of this is not good for the vast majority of the population. Yeah, many people can now proclaim: I’m a millionaire, when including home equity ( I do not use home value in net worth calc. ). But that is fool’s gold. If a person sells and goes to buy another home, they just pay the much higher price. And if a person stays, they just pay higher property taxes, higher home insurance, higher maintenance costs, etc.

As a retired person, it is very obvious that retirees need to keep substantial percentage amounts invested in the stock market. And that is a precarious tightrope to balance on. Young investors just buy more shares as they relentlessly dollar cost average into the equity markets, old people are likely not investing new cash into the markets to take advantage of drawdowns. ( not METAR folks, pretty sure most have surplus dollars that they are still investing ).

It’s gonna be a rollercoaster until we all take that final long dirt nap. Strap in, and buckle up that helmet, lol.

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That, of course, is influenced by the extraordinary conditions around your purchase date. We had a house for 33 years (a third of a century!) in an upscale Chicago suburb. The price of the house doubled. Inflation also doubled over that period. (Cook County property taxes quadrupled, but that’s a different story.)

DB2

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“That, of course, is influenced by the extraordinary conditions around your purchase date.”

Yup, totally aware of that. I’m not happy that housing costs have jumped like they have, would gladly go back to previous low price points across the board., but the market don’t give a rip what I think or want, lol. The people currently in the market for a home do not have the advantage of being “lucky enough” to be able to buy during a crash. This all feels “fake” to me. Gut intuition is that housing prices will take a fall, but if people sit it out, they are paying inflated rental costs. None of this is good for anybody, except county prop tax coffers, insurance companies, builders,etc. I’ve gotten bids on having work done on property, another source of sticker shock, although that isn’t a recent trend, it’s always been expensive. Very good to have the time and tools to take on projects.

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The Mayor of Detroit is always talking about various parties building “affordable” housing. Can’t help but wonder if the housing industry is doing the same thing as the auto industry: going “upmarket”, to make more profit, without a concern for people who cannot afford their new, escalated, prices. In the burb I live in, I don’t think anything moderately priced has been built in over 20 years. All the newer houses are mcmansions. All the newer condos and apartments are styled as “luxury”.

Yes, I realize, the housing of working stiffs is not the concern of the “JCs” who are building “luxury” accommodations, with an extra fat profit margin, for insecure status seekers, but having an entire industry increasingly focused on a narrowing segment of the market does not look right, somehow.

This old house, on a large lot, in my neighborhood, appeared to be rented out by the room, judging by the age of the occupants, and the number of cars parked at it. A year ago, a “for sale” sign appeared on the lot. A couple months ago, the house was torn down. I bet a dozen, or more, mcmansions, or “luxury” condos, will be crammed onto that lot. Cheap housing gone, replaced by housing only affordable for people with above average income.

House1ed
House1ed1366×768 234 KB

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@steve203 how to go about reducing deficits is a political question so it isn’t on-topic for METAR. Reducing expenditures, increasing taxes or a combination have been used in the past. “Starve the beast” is only one side of a two-sided coin. The 2017 tax law will come up for reconsideration in 2025.

Regardless, it doesn’t change the fact that exponentially increasing government deficits have caused the financial and political collapse of nations and empires in the past, over and over. That is an unpleasant reality that shouldn’t be dismissed casually.

The book, " The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000," by Paul Kennedy, is essential reading for anyone with a long-view Macro approach. The author concludes that excess military spending was the cause in almost every case. But there was no such thing as a government-supported safety net in those time periods. In America, guns ‘n’ butter spending combined to cause inflation in the 1970s.

As Macroeconomic long-term investors we need to prepare for the non-negligible potential of gradual (or perhaps sudden) loss of the value of our money and the loss of U.S. superpower status.

Wendy

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Ah, yes. Prepare. But how? There are a myriad of possibilities, but none necessarily better than another.

And as with any impending recession, I also believe we in the U.S. of A. will experience an end to our Great Age, possibly in the coming decade or the next, if not in the next 75 or 150 years.

Pete

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They are building what sells. With higher interest rates fewer people can afford starter homes, and people with existing homes are excited about a new mortgage with double the interest cost. On the other hand, at the higher end people have more flexibility to stretch their budget. In addition there are the all-cash buyers. For the last couple of years those sales have made up one-third of the market.

DB2

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I put a post on an automotive group a week ago, that drew plenty of laffs. What instigated the post was a sticker a car dealer is putting on all the cars on his lot, promoting nitrogen fill for tires. I have seen tire stores advertise N2 fill either free, with the purchase of new tires, or, maybe $7-$10/tire. The greed of this dealer, trying to squeeze this amount of money out of people is breathtaking.

I see plenty of smaller cars on the road. Somehow, enough people have been convinced that they “need” a 5,000lb truck with all wheel drive, to drive on paved, suburban streets, that the automakers can say “see? no-one wants these little cars (in spite of the millions of them on the road) so we aren’t going to make cheap little cars anymore”. As in my post “marketing”

Screenshot 2024-04-28 at 11-36-08 Because Cars. Facebook
Screenshot 2024-04-28 at 11-36-08 Because Cars. Facebook571×558 230 KB

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I’ve been in your neck of the woods, work used to send me down there to a training center. I call it Ann Arbor adjacent,lol, I imagine that housing has always been expensive. And that lot in your pic is a big, green space for a large urban area, bet it sold for a lot of money.

Are we feeling what the people who were retired in the 1970s experienced ? I wasn’t driving yet in the 1st oil embargo, but I do remember gas prices skyrocketing up. Remember a whole lot of complaining from the older people that I knew, as it wasn’t just gas prices going up, of course.

Can you imagine the fallout if TPTB cut SS and Medicare ? A lot of people are just barely scraping by now, they sure don’t have surplus income to deal with cuts in SS and Medicare.

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It’s something like if supermarkets decided to sell only bananas. People have to eat so if all they can get is bananas they’ll buy them. If somebody mentions “Hey, what happened to all the real food? The other stuff?” The supermarkets will say: Hey, look at our sales figures? It’s shown over and over again. People want bananas. Everywhere you go all they buy is bananas. So, we’re just responding to market forces.

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For those who did not understand the “Tru-Coat” reference in my post about the $299 N2 tire fill, it is from “Fargo”. Another instance of a car dealer extracting a large amount of money from a customer, for little benefit to the customer, but a nice margin builder for the dealer. The Sube dealer’s sticker I posted about also offers paint sealer, for $600.

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Don’t forget to leave out costs. As you may have noted, interest rates have risen and that has a big impact on monthly payments, particularly with small down payments.

DB2

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iirc, the “JC” tax cuts of 17 are permanent. Only the cuts for Proles will expire. I am pretty sure the cost of a temporary renewal of the Prole tax cuts will be more permanent tax cuts for “JCs”. And so will it go far into the future: more permanent JC cuts, for each temporary renewal of cuts for the Proles.

Or, maybe " The Shock Doctrine: The Rise of Disaster Capitalism". That is the basis of the “starve the beast” agenda: wait until there is a collapse, like the dollar suddenly crashing. The narrative has always been that debt service and defense spending are inviolate. Debt service, because the US has never defaulted. (I remember a column by Jim Jubak, normally one of the more rational talking heads, insisting the government had to make all the Fanny and Freddie paper good, otherwise no-one would buy Treasuries) And “defense” is inviolate, because there is always something to threaten the mob with: “Godless Commies, Islamic boogyman, yellow peril”. Raising taxes on the “JCs” has it’s own protective narrative “job killing”. That leaves the Proles, to bear the cost of a sudden necessity of eliminating the deficit. I have posted, several times, how Michigan, unable to print to infinity like DC, paid for multiple “JC” tax cuts by cutting funding for education, cutting funding for road maintenance, and cutting funding that cities and counties use to provide services for residents, while raising taxes on retirees and the working poor. And yet, Michigan is only the 34th most regressive state in the union.

The only way to survive the boom dropping is to be so rich that SS and Medicare are immaterial to you.

Steve

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Reminds me of the time I worked for a former Fortune 500 company that had a sunglass division. The division had quarterly sales we used to call hockey stick sales; they were flat for the first 12 weeks of the quarter and then shot up the 13th week, looking like a hockey stick. Why? Because they trained buyers to wait for the 13th week knowing the company would be desperate for sales and offer great incentives.

Of course, this distortion created other issues. Demand was higher for model A, but all they had in stock was model B, so the B’s flew out of the warehouse in the last week of the quarter. The manufacturing guys would look at the sales figures and say, hey, we need to build more B’s. People are buying them like hotcakes! An endless loop of stupidity.

Eventually, sales were lost because B’s weren’t deemed fashionable enough. So they sold the division (the brand was very famous) and a couple of execs took home ungodly amounts in retirement-inducing bonuses (not so much the workers).

Me, I left the company, cashed out my stock options and moved on to greener pastures.

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And it was probably bought by a “JC”, who intends to put up mcmansions, not anything “affordable”, to maximize his ROI.

A while back, I laid out a draconian plan to “save” SS and Medicare: impose a work requirement for able bodied people, regardless of age, to be on Medicare (similar to what the (L&Ses) in Lansing tried to impose for Medicaid) and end the SS old age pension for able bodied people, regardless of age. That has the two prong benefit of forcing boomers to keep working, or reenter the workforce, to relieve the shortage of Proles, and cut SS expenditures, while increasing FICA revenue. The (L&Ses) can congratulate themselves for “saving the social safety net”, while people are forced to work until they are so feeble and broken up the “JCs” don’t want them anymore. Then they could collect SS and Medicare without working.

Recall, in 2020, TFG suspended the “JC” part of the FICA tax, while keeping the tax in effect for Proles. TFG was also dropping hints he might cancel the “JC” part of the FICA tax permanently. With FICA revenue cut in half, my draconian cuts in SS and Medicare would become immediately necessary.

Steve

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