Inflate or Die
Earnings are off, incomes are down and housing is soft... what's a Fed Head to do?
The Other Leg
Yesterday, we looked at one of the two legs that hold up American family finances – houses. Homeowners can no longer count on ‘taking out equity,’ because there won’t be any excess equity to take out. Nor can they refinance at lower mortgage rates – because mortgage rates are going up. Already, refinancing applications are down 80% and new house plans are being canceled. Soon, house prices should go down too.
But today we look more closely at the other leg – income. In short, real incomes are falling… and they can’t get up.
Wages are said to be going up at a 5% annual rate. Prices are rising at a 9% rate. That leaves a 4% gap – which is the rate at which real incomes are falling.
Workers will, of course, push employers for wage increases to keep up with inflation. But (thanks to years of Fed-induced malinvestment) productivity is sagging… so the only way employers can pay more is by passing along the costs to consumers – further pushing up prices.
This is the ‘wage-price spiral’ that troubles central bankers’ sleep. Wages go up to keep the working stiffs from losing ground. Then, the extra labor costs force up prices. The higher prices cause workers to plead for higher wages.
Wages tend to be ‘sticky,’ say economists. Once a raise is given, it is hard to take it away. So, wage-driven price increases ratchet upwards with no easy way to bring them down.
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So, the pressure mounts. The Fed must ‘do something,’ say the kibitzers.
But what?
In yesterday’s news, Senator Elizabeth Warren came forward with a typically blockheaded comment. The Washington Examiner:
Sen. Elizabeth Warren (D-MA) tore into Federal Reserve Chairman Jerome Powell, accusing him of threatening to undermine the economy with his efforts to curb inflation by raising interest rate targets.
Warren, one of Powell’s most vociferous opponents, argued against the Federal Reserve’s increasingly hawkish monetary policy in a Wall Street Journal op-ed. She pointed out that the economy has experienced a robust labor market for the past year or so and said that the central bank’s aggressive rate hikes could trigger a “devastating recession.”
Uh oh.
The Fed is coming up to its “Decision of the Century.” It’s the most important decision ever made by a central banker… one that will shape our investments, our economy, and even our government for decades into the future.
Recently, news items have focused on the challenge. One said it will test “Jerome Powell’s skill” as a central banker. Another noted that avoiding a recession will ‘require careful management’ by the Fed.
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