World Affairs Brief, May 20, 2022 Commentary and Insights on a Troubled World.
Copyright Joel Skousen. Partial quotations with attribution permitted. Cite source as Joel Skousen’s World Affairs Brief (http://www.worldaffairsbrief.com).
PROSPECTS FOR AN INFLATIONARY RECESSION
The US economy is at an unlikely tipping point where the common person feels the hurt of stagflation with rising prices, but no more increased income to keep buying at the same pace, while the burgeoning upper middle class and wealthy are still feeling flush with the false perception of increased wealth that higher prices brings initially—only to find out later how little it can really buy. For decades now, low interest rates have driven new business growth including in speculative startups, digital currency and stocks with only marginal value. The easy money has created dramatic levels of perceived new wealth, but only some of it is real—created or spent in the real economy where it contributes to actual growth and helps small business. Most has gone into highly speculative stocks and investments or crypto currencies, since there’s been no incentive to put it in savings at less than 1% interest rates. Thus the economy is booming in some sectors and hurting in others. 15% real inflation has ravaged ordinary people’s budgets but the well-heeled are further up the supply chain where the real effects of inflation are delayed. They still feel like they have huge amounts of money to spare and can afford the bid up prices to get what they want—except where manmade supply problems are slowing down most company’s ability to fulfill sales.
Forget about Covid or the war in Ukraine as the “cause” of these supply problems. 90% of them are caused by China which is using the Covid excuse to crackdown on their own people. In reality, there are almost no real Covid victims anymore—just bogus testing, and even that is barely able to keep the false narrative alive. China is using the excuse to lock down whole cities and port facilities, in part to throttle back their dependence on the US and stifle the US economy which is about 80% reliant on Chinese imports. Large numbers of commercial merchant vessels are still tied up in waters outside Chinese ports, waiting for cargo to load.
Meanwhile the US is economy is getting soft and showing signs of sagging under the effects of rapid inflation. There are two factors out there that have accelerated inflation into harmful territory:
1) The massive inflation of the money supply through trillions in free money to all from the government and Walls Street Bank bailouts by the FED. The individual Covid stimulus payments are responsible for the steep increase in consumer spending (the same thing happened after the 2009 bailout checks) and the free money to Wall Street insider banks has flowed into stocks creating the huge bubble that is now deflating.
2) The second factor affecting the economy is the supply shortages. Initially, these shortages mostly impacted new housing lumber and materials that was driven by the combination of monetary inflation and high demand because of people fleeing the controlling blue states and creating shortages in new areas where they were relocating. After housing starts leveled off, prices started to drop. But then large builders and developers started buying in advance to avoid future shortages, which reignited building material inflation and shortages again.
When Chinese artificial supply restrictions hit the markets, prices went crazy, but only because some buyers would still buy at the steeply inflated prices. Normally such dramatic price increases would have resulted in stagflation—where the majority stops buying because prices outstrip their ability to pay. But so much excess wealth has been created in the last few decades by thousands of new millionaires and their partners and employees, that there is a huge unseen bubble of excess cash building, which has now been unleashed on the economy. The result: a whopping 10-20% inflation rate (which the government understates to 5-6%).
Despite having a Cost of Living Allowance (COLA) mandated by law, inflation has eroded 40% of Social Security’s purchasing power since 2000. That’s because the US regularly tells SS participants there is little inflation, which is untrue. Social Security would need to increase by $539 per month to offset inflation, even according to the understated CPI. …
In summary, I think the state of the US economy will continue to decline slowly—mainly because the FED will continue to intervene and prop it up. But persistent inflation will keep people from benefitting from a slower economy. The negative forces are growing and the FED will only exacerbate inflation if it pours too much monetary fuel on the fire to “solve” any weakness.