As Americans labor under the burden of inflation, the Biden administration keeps telling us the economy is just fine. White House press secretary Karine Jean-Pierre recently said we are “transitioning” to “steady and stable growth.” As a result, she claims the American people are in a place where they can “take on inflation.”
Americans aren’t buying it. In fact, they’re buying less of everything as rising prices squeeze their wallets. Consumer confidence has plunged to historically low levels. But as bad as things are, the worst could still be yet to come because the proposed solutions are worse than the problem.
In the first place, it’s important to understand that the impacts of inflation are far worse than the official numbers indicate. The government uses a cooked CPI formula that understates rising prices. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were “sweeping.” Measured using the old formula, CPI would be running closer to 17%.
For instance, we’ve seen a staggering increase in housing prices over the last year or so. The average price of an existing home topped $400,000 for the first time ever in May. Rent has also gone through the roof. But the CPI doesn’t capture the full impact of rising home prices. The government uses a made-up number known as “owner’s equivalent rent” to calculate housing prices. This number understates the cost of housing and it makes up about 1/3 of the CPI calculation. Actual home prices are up about 20%. Rent is up over 15%. The CPI calculation for shelter is only up about 5.5%. It simply doesn’t reflect reality.
No matter how the talking heads spin it, we know the economy is a mess. We live it every day. More distressing, it’s probably going to get worse because the plans to tackle inflation are more of what caused it in the first place.
Solutions Worse than the Problem
So, what is the plan to tame inflation?
Senate Finance Committee Chair Ron Wyden (D) plans to introduce legislation to impose a surtax on “excessive” oil company profits. According to one popular narrative coming out of the Democratic Party, oil company price gouging is causing inflation. But this doesn’t stand up to scrutiny.
And while punishing “greedy” oil companies certainly has populist appeal, it won’t do anything to solve the problem. You could confiscate all of the oil company profits and hand them out to the American people and they would hardly notice the difference.
Furthermore, if you take the profit out of drilling for oil, nobody will drill for oil. It would ultimately create an even bigger supply problem than we have right now.
The inflation-fighting plan announced by the White House mostly involves spending more money. In a Wall Street Journal op-ed, President Biden claimed, “We can lower the cost of child and elder care to help parents get back to work.” Lowering the cost of childcare is a code for government-subsidized childcare. He also alluded to the stalled “Build Back Better” bill, which is basically a $2.2 trillion spending plan. Biden wrote, “We can also reduce the cost of everyday goods by fixing broken supply chains, improving infrastructure…”
But government spending isn’t the solution. It’s the problem. The White House press secretary lauded the “American Rescue Plan” as the first step toward recovery. But in reality, Americans need rescuing from that rescue plan.
In effect, governments shut down the economy and handed out money for people to spend. Supplies were squeezed because nobody was producing goods and services. But demand never dropped because everybody had their pocket stuffed with stimulus money. In effect, the government flooded the economy with money even as it starved it of goods. Of course, prices went through the roof. This was entirely predictable.
Now the Biden administration wants to spend more – the exact policy that got us in this inflation mess, to begin with.
The Federal Reserve appears equally feckless. It took a more aggressive stance during the last FOMC meeting, raising interest rates by 75 basis points. But it remains so far behind the inflation curve that it can’t even see it.
To truly tame inflation, real interest rates need to rise above the level of inflation. Paul Volker raised rates to 20% in order to slay the inflation dragon. The current 1.5% rate is spitting into the wind in the face of an 8.6% CPI (which is understating inflation.)
Given all of the debt in the economy, the Fed can’t possibly raise rates to that level without popping the bubbles and toppling the house of cards economy. The Fed is at a crossroads – either continue the inflation fight and plunge us into a deep recession or surrender to inflation and destroy the dollar.
Neither scenario is particularly desirable. So brace yourself because things will likely get worse before they get better. – Peter Schiff’
How Fed Rate Hikes Will Impact Your Wallet
The Federal Reserve recently delivered the largest interest rate hike since 1994 in an effort to combat inflation that turned out to be not so transitory.
Economists and policy wonks continue to debate the effectiveness of these rate hikes in the face of historically high inflation, but what do they mean for you? Should you care about rising interest rates?
Here are three ways Fed rate hikes will impact your wallet.
Your Credit Card Bill Will Go Up
When the Federal Reserve raises its rates, credit card interest rates rise right along with them. That’s not good news for American consumers who are turning to credit cards to make ends meet.
Revolving credit, primarily reflecting credit card debt, rose by $17.8 billion in April. That was up a sizzling 19.6%. This follows on the heels of a record 29% gain in March. Revolving debt now stands at $1.103 trillion, just slightly above the pre-pandemic record.
Average annual percentage rates (APR) currently stand at 16.8, with many companies already charging in the 20% range. Analysts say the average interest rate may well rise above 18% by the end of the year, breaking the record high of 17.87% set in April 2019. With every Federal Reserve interest rate increase, the cost of borrowing goes up, putting a further squeeze on American consumers.
According to one financial consultant, if you budgeted $397 a month to pay off $15,000 over 60 months on a credit card with a 19.9% APR, you would need to up your payments to $423 a month to clear the balance in the same amount of time.
Adding to the pain, credit card companies may up minimum payments as interest rates rise.
It Will Cost You More to Buy a House
Like credit card rates, mortgage rates will follow Fed interest rates higher.
Mortgage rates are extremely sensitive to Federal Reserve manipulation and we’ve already seen a hefty increase in the cost of borrowing to buy a house.
The average 30-year fixed mortgage rate has spiked to 6.1%. It’s the first time we’ve seen mortgage rates over 6% since the crash of 2008. Until mid-April mortgage rates were in the 4% to 5% range. Just one month ago, rates were 5.49%. At the peak of the pandemic, rates were in the 2.6% range.
We’re seeing the impact of rising mortgage rates on the housing market. Existing home sales tumbled to a two-year low in May.
Rising mortgage rates also close the door to a potential source of cash for American homeowners. Refinancing become a less viable option as borrowing costs rise.
Refinancing not only provides a lump sum of cash to spend but also lowers mortgage payments, taking some strain off the monthly budget.
There was a wave of refinancing in 2019 after the Fed’s monetary U-turn started pushing mortgage rates lower. But over the last several months, the refi market has collapsed.
Finally, as higher mortgage rates depress the housing market, home values will begin to fall. This unwinds the wealth effect of loose monetary policy.
And don’t think you’ll be unaffected if you rent. Rising home prices also drive rents higher. As the cost of buying a house rises, more people are priced out of the market. That increases the demand for rentals, driving up prices. On top of that, owners paying more for rental property will ultimately pass those costs on to their tenants.
The Recession Risk Will Rise
The Federal Reserve created a massive economic bubble with its extraordinarily loose monetary policy. As it tries to tighten that policy, it will begin to pop those bubbles. That means the likelihood of a recession is on the rise.
In simple terms, this economy was built on easy money and debt. Taking away the easy money will pop the bubble and collapse the house of cards economy.
Nevertheless, after last week’s FOMC meeting, Federal Reserve Chairman Jerome Powell claimed that a “soft landing” was still possible. In other words, he thinks the central bank can slay red-hot inflation without tipping the economy into a recession.
Economist Daniel Lacalle said this is “impossible.”
After more than a decade of chained stimulus packages and extremely low rates, with trillions of dollars of monetary stimulus fueling elevated asset valuations and incentivizing an enormous leveraged bet on risk, the idea of a controlled explosion or a ‘soft landing” is impossible.”
In fact, the modest rate increases delivered by the Fed so far may have already tipped the US economy into a recession.
The Atlanta Fed has revised its Q2 GDP growth projection to — zero. That follows on the heels of a -1.5 GDP print in the first quarter. For the last several months, sanguine pundits pointed to “strong” retail sales as proof the consumer remained healthy. But retail sales unexpectedly tanked in May. Consumer sentiment is at historic lows. Stocks have plunged into a bear market.
Powell and other pundits point to a strong labor market as a sign the economy is strong enough to handle rate hikes. But employment is a lagging indicator and it is starting to look shaky as well. Hiring slowed in five out of eight sectors in May.
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A large chunk of the inflation is due to elevated food and fuel prices. Powell has already admitted that high interest rates is unlikely to tame food and fuel prices - nor is it going to boost housing supply. It is hence essential for Biden and Congress to act bring down inflation by first capping gas and diesel prices to ensure a very good margin for refineries (say $20 to 25 instead of the extortionate $50). Furthermore, to boost housing supply, Congress can introduce a tax deduction of say 20% of the price of a newly built home for the buyer of a single family home. This will boost housing construction and address the huge gap between supply and demand and thus help bring down rents...Like 1