US stock prices and President Biden’s acceptance rating continued to fall, as inflation dumped household incomes. Only 39% of Americans approve of Biden’s performance, and only 33% of Democrats think the country is heading in the right direction. And that’s not surprising, given that retailer stock prices have collapsed nearly 40% this year. The S&P 500 is teetering on the edge of a bear market – a drop from peak to trough of 20% or more.
Biden’s stimulus – compounding the Trump administration’s mistakes – was a Ponzi scheme that dumped $6 trillion in purchasing power for American consumers while simultaneously restricting supply. That’s like giving out 10,000 coupons for 5,000 sausages available at a baseball game.
The result is an inflation rate of 12%, not the 8% reported by the Bureau of Labor Statistics. Hourly earnings are only rising 5% per year, so real income is collapsing. Americans have been accumulating credit card debt to make up the difference, but the collapse in retail stocks suggests the post-COVID consumer boom is over.
U.S. consumer prices rose 8.3% in the year to April, according to official data, but that includes inflation estimates for shelter inflation of just 5% annually. Rents are up 16% in the twelve months through April 30 according to both Zillow and Apartmentlist.com, the most comprehensive private indicators. Shelter is a third of the CPI, so private sector shelter numbers based on actual transactions add another 4 percentage points to CPI.
The Asia Times adjusted inflation rate of 12% indicates that the decline in real earnings during the first quarter of 2022 was the worst ever, and worse than the 1979-1980 recession – the last time inflation was in the double digits. After-tax earnings have fallen further because inflation pushes workers into higher tax brackets and increases the effective tax rate.
The Trump administration bears some of the blame. Massive federal aid to counteract the economic impact of the Covid pandemic began under the previous administration. Biden made things much worse.
This explains why the retail sector is driving the market lower, following warnings from Walmart and Target that the retail giants cannot pass on increased costs to their customers.
Inflation crushes capital investment as well as consumption. The Philadelphia Federal Reserve’s monthly manufacturing survey, which is closely watched as an early indicator of economic activity, showed a sharp decline in overall activity. Prices paid for raw materials as well as labor continued to rise, while planned capital expenditures fell.
The Philly Fed chain is a penetration indicator, so a reading of 80 for the prices paid means that 80% of survey respondents are paying higher prices than the previous month. Higher input costs mean lower revenues and diminished profits, and less money for capital spending.
Too much extra demand but no extra supply, too many hot dog coupons but not enough hot dogs, is causing Biden’s hyperinflation. The Federal Reserve instigated the bonco game by expanding its balance sheet by $6 trillion, in effect printing money to pay for consumer stimulus.
But the problem comes from the supply side. American companies invested as much in 2021 as they did seven years ago, leaving a massive production capacity shortfall. This is why raising interest rates will have no effect on inflation – except perhaps indirectly by taking some air out of the house price bubble – as I wrote here on April 6 (“Inappropriate Directions in US Monetary Policy”) .
The underinvested US economy could not satisfy the tsunami of demand unleashed by the stimulus. Biden’s Bonco money could not find enough American goods, so it bought goods from China. This underscores the failure of Trump’s tariffs on China: between August 2019 when the tariffs went into effect and April 22, China’s exports to the United States rose 55% seasonally adjusted. The only reasonable suggestion the Biden administration made regarding inflation was made by Treasury Secretary Janet Yellen, who noted that removing tariffs would reduce inflation modestly.
The collapse of corporate capital will only exacerbate inflation. Nonfinancial US corporations invested barely in 2021 as they did in 2014. Part of the blame is due to Trump’s corporate tax reform of 2017. It lowered the main rate of corporate tax but eliminated depreciation allowances for capital investments. As a result, S&P 500 index companies spent more money buying back their stock than investing capital in 2018, the first time that had happened since the 2008 recession.
2022-05-20 22:05:34