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November 19, 2021 | What to Expect When the Government Ignores Consequences

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

Fish gotta swim

Birds gotta fly

Rain gotta fall

And it’s gotta go somewhere

– Bill Bonner, with apologies to the writers of Showboat

BALTIMORE, MARYLAND – When you see someone setting fire to a federal building, shouldn’t you say something?

And what if the matches and gas can are in your own hands?

The Federal Reserve printed up nearly 5 trillion brand-spanking-new dollars between August 2019 and today.

Surely, there must have been at least one alert economist among the 1,000 Ph.D.s on the Fed’s payroll who noticed that they were about to cause the whole economy to go up in flames.

But what was he thinking? Was he thinking at all?

This was classic monetary inflation on an unprecedented scale. Never before had any government “printed” so much money in such a short period of time.

But nowhere in the history of the economics profession is there an instance where such prodigious effort on the part of the money-printers led to genuine prosperity.

Instead, many centuries of history show us that monetary inflation leads to price inflation… which then leads to bubbles and busts… confusion… and finger-pointing.

And if it’s not stopped, it can lead to hyperinflation, depression, hunger, poverty, riots, and revolution.

Obvious Question

The finger-pointing was on display on the front page of The Wall Street Journal yesterday:

President Calls for Inquiry Into Price of Gas.

Biden, in letter, alleges wrongdoing by energy firms.

There will be a lot more finger-pointing… as the real culprits try to divert attention from themselves.

But… our aforementioned Ph.D… Shouldn’t he have asked the obvious question back when it started?

“Uh… Chairman Powell… I hate to be a Debbie Downer… but we’re, like, pumping $5 trillion into the economy. That’s, like, nearly a quarter of annual GDP.

“Uh… What is supposed to happen? I mean, isn’t it likely to cause some… well… distortions?”

Fish gotta swim. And dollars gotta buy something. And therein hangs the answer to the one question Fed economists should have asked…

…along with another they should be asking now.

Obvious Outcome

Supply chain disruptions were relatively unknown back in March 2020, when the spree of money-printing began in earnest. Now, they’re as common as strip malls.

How came they to be?

When the offices, restaurants, and bars closed, people turned to their home computers… found that they had stimmy money from the feds in their accounts… and determined to spend it.

Some ordered consumer goods. But since America doesn’t make much anymore, these had to be shipped from the other side of the world.

And in a few months, the ships were backing up in the harbors… docks were stacked with containers… and trucks labored night and day to deliver them to every Middlesex, village, and town in the country.

Hence, the “supply chain disruptions.”

It seems so obvious, now. Shouldn’t our man at the Fed have seen it coming?

Deadly Combination

Then, shipping rates soared. Trucking costs, too.

And so did prices on some items that were in short supply… as well as on other items that were plentiful. Milk, eggs, bacon… gasoline… houses.

The supply of houses doesn’t change much, month to month. But by September of this year, new house prices in the U.S. were up 18% over the year before. And as prices bubble up… so do mortgage rates, a deadly combination for new homeowners.

Prices for investment assets also caught a bid. Zombie companiesmeme stocksNFTs, cryptos, options – people who didn’t know an option from a hole in the ground a year ago are now seasoned “day traders.”

Tesla (TSLA) has doubled since this time last year. Grant’s Interest Rate Observer tells us that on November 5, the price-to-earnings (P/E) ratio of the S&P 500 went over 40 for the first time in 21 years.

And at the beginning of the month, Grant’s reported that there were some 528 special purpose acquisition companies (SPACs) with blank checks, looking for acquisitions.

Wasn’t that, too, completely predictable? After all, the money had to go somewhere.

Shouldn’t our man at the Fed have said something?

Big Quit

Perhaps less foreseeable… but with so much liquidity weeping from the clouds, many people just decided to stay home permanently.

In what came to be known as the Great Resignation, some 4.4 million workers went AWOL, in September alone.

And then businesses, eager to meet the increased demand, found they had to pay higher wages and benefits to keep their workers happy. Our friend David Stockman tells us that the latest Employment Cost Index figures show labor costs rising at a 6% annualized rate.

Compensating workers is the number one expense of U.S. industry. So, any rise in labor costs is important… and must be passed along.

It is also the most “sticky” of cost increases. Prices for raw materials may go up and down, but once an employee gets a raise, it is hard to take it back; there’s nothing “transitory” about it.

Benefit of Hindsight

And thus it was that prices rose… not for any mysterious reason, but for an obvious one – people were buying stuff.

But not with real money that they earned (which would have increased the supply of goods and services as well as the demand for them). They were spending fake money delivered unto them by the Fed.

It would have taken years of advanced study… and perhaps at least a master’s degree in economics… not to see it coming.

And so, we’ll prompt our Ph.D. friend at the Fed. Here’s a question to put to your comrades now:

“Well, what did you expect?”

Regards,

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Bill

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November 19th, 2021

Posted In: Bill Bonner's Diary

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