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BA Deere
Honored Advisor

Coming soon, too many Goods Chasing ..

.. too few dollars.  The "punch bowl" is empty this year ie no PPP, no covid relief, ect .   The containers are getting off loaded at the ports and hauled to the stores ..... where the goods sit waiting for buyers.   Buyers, who`ve already bought too much car than they can afford (car repo rates are sky rocketing) the last thing on their minds is to buy another purchase for their credit cards. 

The Fed is raising rates during a looming recession?  Crazy!  Rates should`ve been raised 12 years ago.  Congress spending over $700 Billion  to "fight inflation"?  Crazier yet.   Government spending, especially at those levels actually creates inflation, if anything.

But here is the government trick, inflation was measured at 9% over last year.  One year from now there`s a 90% chance we won`t be up another 9% over this year (if we are it`ll be a helluva mess hyperinflation) .  So politicians can brag (during a recession) that their "Inflation Reduction Act" stopped inflation cold.   Even though many of the items in the act don`t even take effect until 2026.  

This from Economic Ninja:

https://www.youtube.com/watch?v=AlfNmN6EpWE   

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7 Replies
erikjohnson61y
Senior Advisor

Re: Coming soon, too many Goods Chasing ..

This is deja vu all over again for those of us who remember the 1970's.  There were actually 2 inflation spikes during that decade into the early 80's, and they also started with energy quickly doubling in price during the Arab oil embargo in 1973. I was in Junior High then, but I remember gas going from 25 cents a gallon to 55 cents, IF you could find a station with any. Energy affects everything, so higher prices rippled through the economy. But after the Arab Israeli war was over, things calmed down, and energy stopped getting more expensive, so inflation cooled down too.  Nixon had recently taken the USD off the gold standard in 1971, so Congress discovered it could spend more than it took in in taxes without (immediate) consequence, so they did. Inflation started creeping back up again, then really took off with the Iranian revolution  and a second big spike in oil prices, all the way up to $79/barrel if I recall. Then Volker (who was actually appointed by Carter, not Reagan) decided enough was enough and squished it for good. 

The "neutral" interest rate is about 2.5 - 3 percentage points above inflation, so Volker had to kick rates up into the mid to upper teens to knock out the inflation rate that was over 10%.  The thing that is different now is that due to the above-mentioned lack of tether to gold, we have $30 trillion in debt to contend with now, over $20 trillion of which is subject to interest payments outside of government (i,e, not internally "borrowed" from another department like social security). If inflation is 8% now, that suggests that the "neutral rate" would be 10 - 11%, not the 2.5% we have now. Unfortunately, most of the US debt is short term that would roll over to new rates within about 30 months. If Powell raises rates to 10% to REALLY combat inflation, debt service could go to, say, 5% on average rather quickly, which on $20 trillion would be $1 trillion, which is over 20% of government revenues vs. 10% now.  The entire 10-year $433 billion tax increase that they are trying to pass now would be completely eaten up just with that increase in debt service costs in one year. 

So my thesis is that that the Federal Reserve is hamstrung. They cannot raise interest rates to the level required to really fight inflation because it would accelerate the bankrupting of the US government (although they could keep printing money for many more years). Therefore Powell is trying to "talk inflation down" by talking the US economy into a slowdown rather than doing it with interest rates.  He seems to be having some success in the short term, but I doubt he'll be able to keep it up without some help from some real leadership in the country.

Economist Erik's prescription is work. We have a labor shortage with labor participation rates at 1977 levels. STOP with the paying people not to work, STOP with the expecting their to be products on the shelves if you don't participate in the economy. And for the government, STOP with the antipathy towards energy. Modern economies are built on abundant affordable energy.  I get that you want to transition to renewable, but you can't just stop using what we have  now until the renewable is built out because you'll need LOTS of the current energy in order to even construct the new energy infrastructure. Then finally, if we can get back to energy development and people working productively, the final step would be to get the idiot politicians of both parties in Washington to live within their means.  If they want to fund all these social programs (which I think largely don't work), then have the guts to raise the taxes required to fund it. And if you don't have the guts to raise taxes, then cut the spending to match the level of revenue like 49 of the 50 states are legally required to. (Vermont is the exception). I believe these three things (work, energy, thrift) are necessary and sufficient to keep us from becoming Argentina or Venezuela (both of which I have been to). Of course, I realize that is no small ask.

rsbs
Senior Advisor

Re: Coming soon, too many Goods Chasing ..

kudos....post of the year.

you nailed where we are....what needs to be done....etc.

only problem is that the current group of clowns will not go there.

lsc76cat
Senior Advisor

Re: Coming soon, too many Goods Chasing ..

There's an election in a few months - throw da bums out!!

Congress was a big part of the reason George couldn't wait to get home to Mount Vernon.

sdholloway56
Senior Advisor

Re: Coming soon, too many Goods Chasing ..

KGBA flunked out of the remedial FFA program that his parents paid the sheep judging coach to let him into.

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Hobbyfarmer
Honored Advisor

Re: Coming soon, too many Goods Chasing ..

there is that darn pesky ***** fly again.

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k-289
Esteemed Advisor

Re: Coming soon, too many Goods Chasing ..

2014 fancy  new  pickup  $51,000.oo

2019  fancy new pickup  $62,000.oo

2022  fancy  new  pickup  $71,000.oo  - le$$  than  rocket  science  to  figure  the  inflation -maybe ????????  

BA Deere
Honored Advisor

Re: Coming soon, too many Goods Chasing ..

One thing about it, if John Deere isn`t selling $200,000 tractors (I suppose that could happen one day  🙂  )  John Deere closes the factory and lays off workers, the same for the General Motors plants selling pickups.   They ain`t like farmers who rent more land to increase volume.   But who am I to question the farm business model, so far, so good.

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