Show me where it hurts

As we embark on a new year, I want to start with some important data points:

  • America’s GDP is at a record high of $ 23 trillion.
  • The S&P 500 is at near record levels of close to 4,700, a record high.
  • Housing prices are at a record high, along with retail sales.
  • The net worth of American households is at a new high of $ 150 trillion.
  • New business formations are at near-record levels with 440,000.
  • There are 10.4 million job openings, and 4.4 million people are sure to quit and find a new job (US non-farm quits).
  • Hourly wages have risen by 4.8%, especially for the lowest income groups.
  • Lending rates are almost record low (10-year government bonds) at 1.58%.
  • In the last 30 years, a 30-year mortgage has gone from 9.90% to 3.10%.

And yet, consumer sentiment has fallen from 100 in 2019 to 66.8. People are not happy with the current situation in the economy. Why has confidence fallen by almost 30% in two years?

  • COVID fears remain a problem for businesses and consumers.
  • Inflation is running at 6.22%, the highest level in more than 30 years ($ 100.00 cash will only buy $ 93.78 in goods and services next year).
  • Supply chain disruptions cause longer delay times (so you pay more and wait longer). Companies are worried about labor shortages.

Even with a rising paycheck, people are feeling inflation. Whether it’s the price of a can of soup or the price of petrol, everything feels (and is) more expensive. At the beginning of 2020, gasoline was below $ 2.00 per liter. gallon, and today it is more than $ 3.00. The 15-gallon filling went from $ 30.00 to $ 45.00 in a hurry and without notice. Inflation puts a dent in household budgets and a psychological dent in attitudes. While the U.S. economy may boom, the smaller economy in household budgets and spending gets a hit.

Steve Booren

Rising inflation should come as no surprise. History and basic economics tell us that low interest rates tend to give way to higher inflation. With more than a decade in which the Federal Reserve manipulated interest rates to historic lows, the real surprise is that it has taken so long for inflation to emerge. Remember that the Fed actively sought higher inflation for several years until COVID hit. Thereafter, they pumped 39% more cash into the economy in the form of “stimulus” without offsetting increase in production. The result is more money chasing the same goods and services, causing higher prices: inflation.

A simple example illustrates this monetary phenomenon. If you have an economy of 10 apples and $ 10, the price of each apple is $ 1. When you have $ 14 in the economy chasing 10 apples, the price per apple goes up to $ 1.40. Increase the money supply by 39% and inflation is the obvious result.

Inflation can also occur when supply is restricted, whether intentionally (cancellation of the Keystone Pipeline) or unintentionally (backlog in the Suez Canal), the same amount of money chasing fewer goods and services, which in turn results in higher prices. To continue our illustration, we have $ 10 chasing eight apples. How do we get out of this jam?

The typical answer is to rebalance the equation: to raise interest rates in an attempt to manipulate inflation. Mathematically, it makes sense, but it does not always work in the real world. The worst result is an environment of high inflation unaffected by rising interest rates. This is how we end up with sky-high mortgage rates similar to those in the 80s. Consumers feel the burden when everything becomes more expensive, including the cost of borrowing money.

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