All Bets Are Off

All bets are off (ABAO). What does that mean? It means that we don't know what is going to happen next and we often entertain extreme policies to deal with the unknowable. 

An extreme form of ABAO is what happens during wars. We turn society upside down when confronted by a war. 

World War II drafted our young people and sent them to be killed across both oceans. Japanese people who wanted to live in America were treated as enemies and imprisoned. In the Vietnam War, I had to register for the draft as soon as I finished high school and eventually volunteered for the Air Force rather than be drafted upon graduation from college. Nevertheless I got some lovely green fatigues to wear and an all-expenses paid trip to Saigon in 1972. 

Crazy times for sure. 

As crazy as any parts of the above, is how it turned most of us into liars. Kids, their parents, their coaches, and their teachers were part of this conspiracy of the young. What did we lie about? We lied about anything that had to do with deferments from military service. Some pretended to be in college to escape the draft for a while. I asked a doctor if he thought my feet were flat enough to make me unfit for soldiering. He said no. Psychologists said many of us had mental issues. If there was a deferment or exclusion, we knew about it. 

Local areas had draft boards who decided who got chosen for the draft. Some draft boards had big quotas; others did not. We all heard the rumors about which ones were the most active. Some draft boards included family friends. Not mine!

A giant sense of unfairness lay over the land. That's what we talked about. Who was getting out? Who was getting in? How many of our friends had already died in Vietnam. 

So what? I write about all this because War is a time when ABAO. We become amoral if not immoral. We get very selfish and do and say things we would never normally do. 

I write this because Covid is like a war. The line to get a Covid shot is like the line at the draft office. Deferments in 1968 were like vaccine eligibility in 2021. Who gets the shots? There is a nice list of priorities. Those with morbidities. Then who? Old people. Healthcare providers. Teachers and so on. How many stories have you heard about people trying to falsify or exaggerate their status in one of these priority lists?  

And it is not just people trying to get permission to take the shots. How many ways has Covid and the War on Covid changed work and life? How many of you don't wear a mask or don't distance? How many are tired of the boring life of Covid and go to Florida for spring break? Or how many go to a local bar that clearly lets too many people inside? How many "work" at home and misrepresent what we are doing during the workday?

You can add to the list. The point is that Covid is like another war and like another war, ABAO. We do the best we can for ourselves and that best is often not reflective of a lifetime of moral lessons. Each of us has to decide his own behavior. But make no mistake, when war is upon us, we are challenged and Covid is no exception.

Inflation

 At the bottom of this post is a table with monthly and annual inflation rates from February of 2011 to September of this year. Pretty boring. But there might be a story there. 

I get sick and tired of the press. We all know that Walter Cronkite is gone and with him is gone a rational and unemotional summary of the news. Recent studies say the press exaggerates every thing and mostly they prefer to report bad news. 

Whether the topic is Covid or inflation we get a lot of scary reports. The title of an article in the Wall Street Journal this week reads "Supply-Chain Bottlenecks, Elevated Inflation to Last Well into Next Year, Survey Finds." That's just one of many reports that claim we are stuck with an inflation problem.

I am not going to argue with that possibility but I will say that given today's environment, nobody knows squat about future inflation. Between Covid induced supply-chain disruptions, huge government deficits, and  a new waterfall of money from the Fed, we are in uncharted waters. 

So I decided I would spend a few minutes looking at the inflation numbers. I chose the Consumer Price Index. I downloaded the numbers from the Bureau of Labor Statistics, the government organization that creates and reports these numbers on a month basis. bls.org   I took the raw monthly numbers and created monthly and annual averages. I also took percentage changes so we could view inflation rates rather than CPI levels. The monthly numbers are annualized by applying a factor of 12 to any month's percentage change. 

If you just gaze at the whole table you come away with a notion that these monthly inflation rates look like a hare running from a hungry German Shepherd. For example, inflation was 11.7% on an annualized basis in March of 2011. In June, there was deflation of 1.3%. Wow, that's quite a change. Inflation one month; deflation a couple months later. Don't stare at the table too much or you might get dizzy. 

Covid is believed to have started getting serious in the second quarter of 2020.  Between March and August the inflation rate dives down and then swings up. The average for the full year of 2020 is, however, only 1.4%. It is not until 2021 that we see the inflation getting much higher, with rates between 5.1% and 11.1%. Clearly the chart has changed in 2021. 

But notice that the numbers are still a little higher than average but clearly lower by August and September, 2.5% and 3.3%. The average for 2020 is 1.4%, lower than the previous 4 years. Notice too that the average for 9 months of 2021 is 6.9%. That's much higher than any of the years before. 

We don't have October numbers yet but we shouldn't be too crazy about one month. Look at the table. The numbers swing all over the place. October won't prove a thing. But clearly, if October comes in at around 4%, that number will be lower than most of the months of 2021. 

We should expect a gradual decline anyway. We won't just automatically pop back to 2%. Why? First, thanks to a very loud press screaming and crying about rising inflation, this could easily cause inflationary expectations to rise. Already wages are heading upward. So are some interest rates. Expectations can be self-fulfilling. We expect more inflation and then we get it. 

The other reason why inflation might not drop back down to 2% quickly is government policy. Government is piling stimulus upon stimulus. Soon they will start to reverse engines. But until they do, its hard to imagine inflation coming down very quickly. Notice that now that some supply bottlenecks are easing, retail sales are starting to jump. With interest rates near zero and lots of government income subsidies, it's hard to imagine inflation falling very fast. 

Where is inflation heading? Probably to more of the same jack rabbit ups and downs. Will it get much worse. I don't know. It depends a lot on household expectations and future government policies. If you can forecast those things then you will be the expert. Good luck with that. 

Table. Consumer Price Index annualized monthly and yearly percentage changes.

Death and Taxes

Alan Blinder wants to solve the nation's deficit/debt issues by taxing the rich. It is interesting that in his Wall Street Journal article of September 26, 2021, he says nothing about raising the income tax rate on the rich but prefers to raise revenues with something called carried interest and constructive realization of capital gains at death. I will hold off on carried interest. Today is about capital gains at death. 

Apparently Blinder read something about the inevitability of death and taxes. More specifically he wants to tax rich people on unrealized capital gains but only after they die. It is common in economic models to make no distinction between family members. A family is often assumed to act like a single person. In such models, so long as there are heirs, there is no change in tax liability. It makes sense, your parents earned the money and now you get to enjoy the benefits after they croak. 

Blinder wants to change that. If they had sold assets before death, they would have had to pay a capital gain. Lots of us do that. But if they didn't sell, then they must have had a good reason not to sell. But Blinder does not care about that reason. To Blinder dying is tantamount to selling. You gave your assets to one of your brats. There was never a sale. So there is no capital gain. There is no tax. Blinder is envious. He wants some of the action on your money that you saved and left for your family. 

Maybe you don't agree. Y0u believe those rich devils should share their wealth. You might believe those bratty kids never did anything to deserve all those tax-free benefits. But it doesn't make sense. Blinder wants to tax a transaction that never existed. He looks at the price Daddy paid in 1946 and compares that to the assets' prices upon death. Sounds pretty cool until you realize that the asset was not sold upon death and never generated a penny for the brats. Not a penny. The heirs have some paper financial assets but nothing else. Of course, if they earn interest and dividends or they sell, they will pay taxes on that. 

Just for fun let's suppose the asset cost $100.00 in 1946, $1,000.00 at death, and then $99.00 a week after the death. Hmmm. If the child held the asset for one week, the asset would be worth $99.00 and would generate a capital loss. Why would you want to pay a huge capital gain at death when the value of the asset produced a loss? That doesn't seem correct or fair. True, a contrived example. But also true that death does not create a transaction and death distorts what the heir should pay. 

Why didn't Blinder require that the heirs sell the asset? In that way, we would have a real economic value for the capital gain/loss. In that way, the heir would actually have a capital gain/loss and the tax would make sense. Blinder must be assuming that the heir has a right to do as he/she pleases with inherited assets. He doesn't want to interfere with the heir's right to use the asset but he does want to take a capital gains tax on a fictional gain number. 

Which is it Mr Blinder? Does the heir own the asset or do you? 

Powell Must Be Jealous

As the government debt/debt ceiling issue gets all the headlines, poor Jerome Powell, the head of the Federal Reserve, must have been feeling left out. The Fed has nothing to do directly with national debt so Congress and the President are getting all the attention. Sort of like you getting jealous when your brother gets a spanking. 

Powell and his monetary genius friends told us last week that they can save the day. Reminds me of Micky Mouse flying in to save Minnie in the nick of time. Except in the case of these famous mice, it usually works. Mickey really is the Mouse!

Powell is no Micky Mouse. But he thinks he is. This may take a bit of explaining so please pour another gin & tonic.  Don't forget the lime. When the government has a deficit it means it has to borrow by printing up brand new shiny government bonds. Okay, they aren't shiny but they are new. 

This borrowing process usually works until the times when the government's debt gets so large that people lose trust in the government's ability to stand behind the bonds. That is, you get a nice new bond and a promise of two things -- each year you will get an interest check and when the bond matures you get the principal back. But what happens when you lose faith in the government's ability to pay back?

You wouldn't loan money to Uncle Charlie if you were pretty sure he was not going to pay you back. The same goes for loans to Uncle Sam. All this razzamatazz with government debt and debt ceilings calls into question the government's ability to pay us back. So, of course, we would be reluctant to buy government bonds. 

How do we get to the Fed and Jerome Powell from all this? The answer is that the Fed has a "money printing press." Wouldn't you love to have your own dollar printing press? Well, Powell has one. And that means he can play Micky Mouse saves the day. How?

Suppose none of us want to buy the government's bonds. We think they stink like seaweed. We think we won't get our money back. Well, guess what? If you had a printing press, you wouldn't care about being paid back. So the Fed and Mr Powell will crank the money machine a bit and buy some of those stinky government bonds. Mr Powell will go to Pelosi and say....are you having a nice day dear? How much money do you need? Just say the word and we will buy trillions of dollars of those nice new bonds you are cranking out. Don't worry about selling them to the suspicious and cranky private sector. Old Jerome will buy them all. No questions asked. 

Wow. That sounds really cool. The government incurs a debt and we don't have to worry a bit about it. Pelosi + Powell. Go team. 

What could go wrong? For one thing, it is pretty much illegal. The Fed is supposed to be an independent institution. It is not supposed to have financial handshakes with Congress. Of course, Jerome and friends are pretty sneaky and they can make it look innocent and legal. 

What else could go wrong? Let's think about the incentives created. Mom, I gambled away my allowance last night. Oh, don't worry honey, here's more money. Please don't gamble again. Okay mom, sure. Thanks. Right! If the Fed steps in and buys those government bonds this time -- what about next time? What's to stop the process?

And that leads us to the third problem with the Fed's bailing out the Congress. It means you get a double whammy of stimulus. You get the government spending stimulus and then you get a huge monetary stimulus. Wow. Wave after wave of stimulus when the economy already seems to be healing. That cannot spell anything good for inflation, interest rates, and whatever policy has to be enacted to offset all that.

Powell is not Micky Mouse. His rescue is fake. His rescue will make us all worse. We don't need Micky Mouse. What we need are leaders in Congress and at the Fed who understand economics. Perennial huge debt doesn't work for you, me, or our government.  Instead try reasonable debt. No debt ceilings. No monetizing the debt. No roller coaster economy. Simple. 

The Inmates are Running the Prison

You have all heard this comment -- the inmates are running the prison. It makes you shake your head. No, the inmates don't run the prisons. That doesn't make sense. If they ran the prison they could open the doors and let everyone out. We have prisons for a reason. If you do hear that statement it means something is wrong. 

Well, here goes. How is it possible that the same people -- the people in Congress -- set the value of both the government debt AND they decide on a debt ceiling? How is that possible? What a strange assumption about behavior. The people who create unsustainable debt would then be asked to create a debt ceiling. Would they not let the prisoners out....err I mean would they not raise the ceiling whenever the debt needs to increase again?

It mystifies me that so much press attention goes to this supposed political issue of the debt ceiling. Of course, after enough pontificating they will increase the debt ceiling. Okay maybe they will wait until they get everyone really mad, but what else are they going to do? We have a huge debt in this country and every month the government runs another budget deficit the government has to borrow. It has to sell bonds. Those bonds are the signature of the debt increase. 

Note. The government deficit in 2020 alone was $3.13 trillion. In the first eight months of 2021 it was $2.06 trillion. Those are basically one-year figures. They show how much new borrowing the government had to do to keep its activities running. Even though we took in a pile of tax revenues, we were short that much. 

Of course, we have been running such deficits each year for quite a while (since Jimmy Kiltie was knee-high to a grasshopper). The total stock of debt we have accumulated is now over $28 trillion. If you can add on your fingers or toes, they means that the debt number will increase by the sum of those recent deficits -- rising by another $5 trillion to the neighborhood of $33 trillion. Wowee. What a ride. 

Given that bit of historical background, we return to the issue of debt ceiling. If they don't increase the debt ceiling above, say $28 trillion, then the theory says the government cannot issue that extra $5 trillion of  debt. If they cannot increase the total amount of debt above $28 trillion then they have no means to pay for those annual deficits of about $5 trillion. Then what? If they can't have those annual deficits, then they either have to reduce government spending or raise taxes to erase that $5 billion debt. 

So you see why Congress would never do that to itself.  Congress cannot reduce spending nor raise taxes and still get re-elected. 

So what will they do? Of course they will extend the debt ceiling. And move our debt to $33 trillion. And they will blame Putin, Covid19, or little green people from Pandora. Each party will blame the other and Joe will blame his neurologist. 

To raise the question again. Why does Congress decide the debt and its ceiling? Why don't we have an impartial non-political institution set the ceiling? If they want I would volunteer to set the limit. Any of you want to volunteer? 

I am just hoping that none of this gets settled before next Tuesday so I can post this on my blog as news. Shoot. I will probably post it anyway. 

Moving Along

Note to the reader. This post is about death and dying. While I try to take a positive approach to this very personal and sensitive topic, it probably isn't for anyone. Take the week off if you think this might bother you. 

I am 75 now. It's no surprise. It came in bits and pieces one year at a time.

But I have to admit, it’s pretty different now and in some ways overwhelming.

We have always known that the day would come when the lights went out. When you were 14, it meant almost nothing to you. Getting a hit in your next Little League game meant a lot more.

And then life goes by. Education, love, marriage, career, fun, and so much more comes at you.  What a whirl. Some people you know die and you take a moment to process it, but it doesn’t have much to do with you. You learn to smell the roses and to take the good with the bad. You take one day at a time, but you don’t have the time or the interest to wonder about your own eventual demise and mortality.

The demise process is almost as daunting as the end. The lights going out seems scary enough. But lately I have been dwelling on the demise part. Getting run over by an Amazon delivery truck might be the way to go. It's quick and maybe your heirs can collect. You might not even know what hit you. Bam. So long.

But we all can’t be that lucky. I don’t know about you, but I must have a dozen little things that might get me in the end. When you are 75, there is one thing that is very true. Your body is 75 years old! No kidding. Your brain might think like a teen on steroids, but your body is 75 years old.

That means your skin and your organs and your glands and your bones and your teeth and all that stuff are 75 years old. It was probably meant to last 50 years but there it is – 75 years old. Sure, you can work out and you can apply creams and do a lot of things to slow the process down, but we don’t kid ourselves. These remedies apply only a bit of friction against the eventual decline of our many body parts.

My eyes started declining when I was 30. Today I can barely hear a freight train and don’t get me started on my prostate. What about all those brown aging spots? Dudes, it is all going and there is little we can do.

Luckily, a lot of these things are manageable. We can take some drugs and have surgery. I used the word demise above. We are demising for sure but the thing that sometimes keeps me awake at night is the actual process. The Amazon truck is one thing – it’s fast. But what about the slow alternatives? We all want a slow alternative that is not painful and wherein we have some brain functions left as we decline. But we have very little control over the last chapter. It might be painful. It might be perplexing and confusing. Not exactly the way we want it to end.

Some of you notice that I have ignored religion and afterlife. For many of you, there is much comfort in knowing that you will be moving along to heaven. The above is not, therefore, of much interest to you. I hope you are right, and I wish you bon voyage.

I am not sure what is left to say. I am not writing this because I have been diagnosed with something terminal. I hope to live a lot longer. I am writing this because this is a topic that no one wants to discuss. It is probably the best-kept secret out there. People who are very ill don’t want to scare everyone else. People who are worried they will soon be diminishing would rather talk about happier topics like Covid or Donald Trump.

I feel better having put my spin on Moving Along. I’d love for you to share your thoughts too.

One more point. This piece is not meant to be morbid. I don't know how you will react to it. My take is that we should enjoy that last chapter. Some people will want to fight to the very last gasp. Others will go more gently into that good night. Whichever it is, I want to be aware and I want to make the most of every moment. It might be a last chapter but it might also be a really good one. The alternative is that it will be the last chapter and a very bad one. I'd rather not go in that direction. 

Is the Fed Redundant?

Reading the newspaper lately makes me wonder if the Fed is redundant. I looked up redundant -- it means no longer needed or useful; superfluous. 

Don't get me wrong, they do provide a lot of cheap entertainment. But that's about it.

We didn't always have a Fed. It was created around 1914 by the Congress. Congress felt it was not up to the task of supervising banks and regulating the economy. Sort of like Beavis deciding to create Butt-head.  

We have other institutions that regulate banks. The Comptroller of the Currency and the Securities & Exchange Commission regulate banks and could easily take over the Fed's role of bank supervision.

And then there is the supposed role of maintaining maximum employment with stable and low inflation. The Fed was given the unique role of creating and controlling the money supply to attain economic stability. But clearly, the Congress and the President are capable of doing those things. I say that because the Fed and Congress and the President don't really care about inflation -- they essentially have taken the employment drug and and do a great impression of the Three Stooges in that regard. I cannot imagine the Congress making a bigger mess of things than the Fed does.

For example. In the paper today I read that even though the Fed has exceeded the goal inflation rate of 2%, they have made up at least a hundred excuses as to why an inflation rate of 5.4% is not higher than 2%. It is very funny. How could Congress do anything more stupid than that? At what point do they decide that 5.4% is higher than 2%? Maybe when it hits 54%?

Of course, that whole discussion is misleading. The real problem with the Fed these days is the same problem as with Congress. These people are not motivated primarily by economics -- it is all politics. One does not have to be a Trumper to see that Biden/Powell are two liberal peas in a pod. Neither Biden nor Powell would do what is necessary to control escalating inflation because it might have negative short-term impacts on employment. There might be a news headline that says -- Biden/Powell cause interest rates to rise and that hurts the housing market. Gold-forbid such a headline. 

Which brings me to one more point about the Fed. That is this fiction about Fed bond purchases and interest rates. Powell keeps saying that they are going to taper and then they are going to end bond purchases which pump money into the system. He somehow separates that tapering from the role of interest rate management. That is nuts. If the Fed reverses its activities and stops providing trillions of dollars to money markets, surely interest rates are going to rise. That is what they should be doing. But how can they do that when they see tapering as separate from interest rates? That is really weird. Where do they come up with this stuff?

They would prefer to look the camera in the eye and explain that 5.4% is not higher than 2%. If the Congress already prefers liberal/progressive economic policies, why do we need the Fed too?  Abbott and Costello for sure. Enjoy the entertainment. 

Okay. I have pontificated enough. Am I recommending that we get rid of the Fed? Of course not. They might not have anything useful to add to economic stability and bank regulation, but they sure provide a lot of entertainment. 

Taxing the Rich and National Saving

 The latest public discussions concern taxing the rich. The context is usually very narrow -- with a focus on inequality. The logic is simple. The rich, for whatever reason, have a lot more income and wealth than it takes to live. The poor don't have nearly enough. Any simple sense of fairness would argue for a redistribution. Taxing the rich, including corporations, seems to be the preferred vehicle to make things more fair in America. 

Those who argue against this logic typically get caught in the bind of one dimension -- fairness. I remember professor Adler at Georgia Tech teaching us the the idea that every policy has both direct intuitive effects AND not so obvious ones. The discussion about higher taxes on the rich and corporations must therefore widen the argument. What could go wrong if we try to do what is right? 

One thing that will clearly be affected by a policy to increase taxes on the rich is how those taxes affect national saving. National Saving? Really? It's true. This is critical. Why? Because national saving is what shows up in banks and other financial institutions and makes it possible for us to borrow. Imagine an extreme world where there were no savings sitting around in banks? When you went in for a car loan or a company went in to borrow money for a new plant, the banker would shrug and say sorry. We have no savings here and have nothing we can lend you for the plant that will employ workers or the store/plant that will sell/produce a car for you. 

Why do I single out saving? Because here is a very clear case of rich versus poor. As you might imagine, the rich do most of the saving in the US. The richest Americans who are about 1% of the population account for at least 40% of all saving. Poor people account for almost zero of it. If we decide to tax the rich a lot more, then the rich will respond by spending and saving less. The drop in spending reduces demand in the economy. The drop in saving means less money in financial institutions and less borrowing for spending and projects. 

This illustration with saving is meant to get at Prof. Adler's idea that you have to look at the obvious and the less obvious when analyzing any policy change. 

A second point concerns the efficacy. If we tax the rich more, will that really reduce income and wealth inequality? Will that tax money really be used to significantly and permanently change the condition of those with lower incomes? We have had a progressive income tax and growing entitlement programs for decades, yet this has not dented poverty and has not resulted in more equal incomes. What do we do ten years from now after we have significantly raised taxes on the rich and income inequality remains skewed? 

Does this mean there is nothing we can do? I don't think so. Maybe we are barking up the wrong tree? It might be easy for politicians to raise taxes on the rich. They can go home and sleep better. Maybe they simply are not up for the work of attacking what's really the problem?

Put on the Feed Bag

Mr. Sow-L (rhymes with Powell) is Chairman of the FEED (Feed Everyone Every Day). All the remarks below were taken from a recent barnyard speech he made in Washington D.C. 

Mr. Sow-L wanted to reaffirm that the FEED will not back away from its plan to require us to eat less each week. He overfed us for quite a while and he admitted it was time to remove the feed bag. While SOW-L indicated that we would definitely start us on a new and healthy diet, he was reluctant to begin it right now preferring to pin down the actual start date as sometime before Hell freezes over. 

Until then, he promised to keep force-feeding us another $120 billion ears of corn per month because he noted that many of us show acute signs of hunger, especially while watching reruns of the Little Rascals  on late night TV. 

He admitted that sticking with the $120 billion per month figure has been causing dramatic weight gain among the sow and pig population, but he believes that the weight gain has been the result of global warming and the Georgia Tech football team's record. It makes no sense to Sow-L to begin to reduce the number of corn ears in such an uncertain environment, especially since the Delta Delta Delta fraternity at Georgia Tech is going into Pledge Week.

His plan, therefore, is to hold numerous meetings over numerous months with his FEED Board over sumptuous salads and Twinkies to ascertain whether or not it is prudent to reduce the figure of $120 billion of ears to something more reasonable like $119 billion additional ears of corn. 

He admitted that adding so many ears of corn to the hog and pig population might cause even fatter results, but then reiterated that if the Tri-Delt thing kept up, it could spread to the GDI population. And then we would all be in real trouble. 

Nancy Pigosy and President Ride-M supported Mr. Sow-L's points and each promised to do what they could do separately to help the situation by using their debt powers to support infinite dollar outlays for feed, not only for pigs, hogs, and sows, but also for horses, cattle, sheep, and small dinosaurs. 

The FEED's next meeting is September 21-22 where they plan to assess the animal feed/weight issue again. Should the herds be growing in waist size, they will ponder the possibility of slowing growth to an extra $119 billion but they warned that such an extreme change could be unsettling to the gilt population.

One reporter pointed out that even a reduction to $119 billion was still a gigantic increase in corn and he wondered out loud when the FEED would begin to actually remove some of those gigantic piles of maize. Sadly he was stripped and whipped and relieved of his FEED badge.  Everyone knows that an actual reduction in corn piles could lead to mass starvation and possibly herpes. 

Inflation Madness

There are lots of people writing about inflation now. I guess it is cool now that inflation is higher. 

I don't mean to be a macro snob but I think inflation is one of the hardest things to understand and to write about. 

It seems simple on the surface. You go to the store one day and an apple costs a dollar. You go the next day and it costs two dollars. You didn't get a raise in your salary so if you buy the inflated apple, you now have a dollar less to spend on JD and artichoke hearts. 

Simple. Now extend the apple example to a basket of goods and services people usually buy each month and you can do the same kind of comparison. If it costs more to buy that bundle of goods and services this month, then we say there was inflation. If the cost of those goods was to fall this month we could call that deflation. 

What else? While we know inflation means we can buy less for a given income, what happens if your income is changing too?  That's were it starts to get more interesting. That's where we start saying more about the impact of inflation. Suppose inflation is 5% this year and you got a 6% raise? Hmmm. That means you can buy more goods and services -- not less. 

So what do we have to consider to know the impact of inflation? We need to know all the sources of income --- wages, salaries, benefits, dividend income, interest income, gambling profits, housing appreciation....please stop me. Clearly this means several things.

First, it means that inflation will likely have different impacts on different people. Kiltie might be doing great because he is a great investor while Gibson is suffering because of the decline in his rentals of surf boards. 

Second, if we can somehow add together all the various income sources of all the people, then we can talk about the macro impact of inflation. If price change is greater than income change, then we can say we have a national impact of higher inflation. 

Third, it is important to think about temporary versus more permanent changes in the impact of inflation. Economic data jumps around each month. There is a lot of noise in most economic time series. Like your weight. It goes up some one day; down some another day. What matters most to your belt is the trend. Is it getting looser or getting tighter?

That may be the hardest thing when it comes to understanding the impact of inflation. Let's suppose prices in June go up a bunch. It might be a one month thing. Maybe it is caused by weather in June. So you see that the inflation rate in June was high -- maybe 10%. A reasonable thing is to ask how much inflation has gone up over the last year, ending in June. Despite taking a longer term perspective in June, that big increase might calculate to a large increase in inflation over the past year. Was it a one-month thing or was it a 12 months thing?

That's what happened this year. Inflation went up by 5.4% in June compared to the previous June. A one year increase of 5.4%. That was worrisome. But really, it was mostly all happening in a few months. So we have to wait and see.

I looked at CPI data since 2011. Yes, inflation from July 2020 to July 2021 was 5.4%. In the previous three years (2018 to 2020) inflation averaged about 1.8% over each year.  How do you get from 1.8% per year to 5.4%?

Mostly because you had Covid and that caused negative inflation from February 2020 to to June of 2020. Almost half a year where the CPI never got above its value in February of that year. It was not until February of 2021 that the CPI began rising again. It rose a bunch between February and July of 2021. 

What's the point? The point is that the rise of inflation to 5.4% is almost meaningless. It is covid induced and reflects prices falling and then rising. 

It is difficult to make any forecast of the future from this information. Its like steering your boat in a storm. You cannot make rational forecasts during a storm. Inflation has been tossed around in a storm. When the storm is clearly gone, then maybe we will have something to say.

When the storm clears, maybe the impacts of excessive money creation or government deficits will be more recognizable. Maybe all the experts should wait and give a chance for the clouds to clear. 

Bernie Sanders Wants Bold Action

Below I cut and pasted words from an article published in the Wall Street Journal by Bernie Sanders. I promise that while I didn't want to take all his words, I did not misrepresent his meaning. I took enough words so you could see what this guy wants to do to our country. 

Looking at each individual item, you might say he sounds reasonable. There is a lot in the USA that should be fixed. 

But pay attention to his last line where he concludes by saying "it is time for bold action."

Make no mistake, he wants to do it all at once within the scope of a $3.5 trillion Reconciliation Package. 

I don't need to say much else. I just ask you to read his words and then wonder if we can handle bold action. He is not the least bit shy here. And he shows absolutely no worry that we can make significant progress on so many fronts. You might say that if you don't wish big you won't ever reach your dreams. I could also say that if you wish too big then maybe you are in the wrong profession. Is he a politician or a preacher? 

It reminds me of you or me declaring that we are going to get really smart. It is time to act and so we are going to become really smart with respect to biology, economics, physics, astronomy, leg pain, cooking, habits of crows, and a few other things. 

It sounds good, right? But really, how do you quickly become an expert in all those areas? Bernie has no worry about doing a lot of things boldly at once. His actual words are below my summary of his list. What do you think? 

My summary: Make rich people pay their fair share of taxes, reduce the greed of pharmaceutical companies, reduce child poverty by extending tax credits, reduce our dysfunctional child care system by capping childcare expenses, expand higher education and job training by making community colleges free, guarantee paid family and medical leave to all, expand Medicare for seniors by making hearing aids and glasses free, provide healthcare to all uninsured people, provide enough doctors, dentists, and nurses in underserved areas, help seniors and others with disabilities to get care without leaving their homes, make unprecedented investments in affordable housing, provide pathways for citizenship for undocumented persons, move our transportation, electrical generation, buildings and agriculture towards clean energy,  and hire hundreds of thousands of young people to protect our natural resources and guard against global warming. 

That's all he wants to do. All we need is bold action. Below is much of the article he wrote. 

Bernie Sanders: Why We Need the $3.5 Trillion Reconciliation Package

• August 3, 2021

By: Bernie Sanders; Wall Street Journal

THE AMERICAN RESCUE PLAN BOOSTED THE ECONOMY DURING THE PANDEMIC. BUT IT DIDN’T GO FAR ENOUGH.

The bad news is that the American Rescue Plan didn’t address the long-neglected structural crises that many U.S. families face.

 We need structural reforms to improve the lives of U.S. families. If Democrats can’t get Republican support for these reforms, then we have to do it alone through the reconciliation process.

But we will use it (the reconciliation process) to support the middle class and struggling families and, in the process, create millions of good-paying jobs.

Here is some of what is in the $3.5 trillion reconciliation package that the Senate Budget Committee agreed to:

We are going to end the days of billionaires not paying their fair share of taxes by closing loopholes, while also raising the individual tax rate on the wealthiest Americans and the corporate tax rate for the most profitable companies in our country.

We will take on the greed of the pharmaceutical industry, which charges U.S. residents the highest prices in the world by far for prescription drugs. Under our proposal, Medicare will finally be allowed to negotiate prescription drug prices with the industry.

We will end the absurdity of the U.S. having the highest levels of childhood poverty of almost any major nation by extending the Child Tax Credit so families continue to receive monthly direct payments of up to $300 a child.

We will radically improve our dysfunctional child-care system so that no working family pays more than 7% of its pretax income on child care, and we will provide universal pre-K to every 3- and 4-year-old.

We will expand higher education and job-training opportunities for students by making community college tuition-free for all Americans.

We will end the international disgrace of the U.S. being the only industrialized country not to guarantee paid family and medical leave. Women shouldn’t have to return to work a week after giving birth because they have no paid leave and can’t afford to stop working.

We will expand Medicare for seniors to cover dental needs as well as hearing aids and glasses. We will also make sure that we have enough doctors, nurses and dentists in underserved areas, while expanding Medicaid to provide healthcare to the uninsured.

We will give hundreds of thousands of seniors and people with disabilities the ability to get the care they need in their own homes instead of in expensive nursing facilities.

We will also address homelessness and the national housing crisis by making an unprecedented investment in affordable housing.

Further, we will provide undocumented people living in the U.S. with a pathway to citizenship, including Dreamers and the essential workers who courageously kept our economy running in the middle of a deadly pandemic.

Perhaps most important, we will begin the process of shifting our energy system away from fossil fuels and toward sustainable energy to combat the existential threat of climate change. This effort will include a nationwide clean-energy standard that moves our transportation system, electrical generation, buildings and agriculture toward clean energy. We will also create a Civilian Climate Corps, which will hire hundreds of thousands of young people to protect our natural resources and fight against climate change.

Now is the time for bold action.

Vietnam and Unfair Competition

Our leaders in Washington have been complaining about Vietnam and how they manipulate their currency so as to generate unfair competition for the USA. Their currency is known as the dong and that's another story but the rub comes because it is alleged that they purposely create and sell a lot of dong in international currency markets so as to cause the dong to depreciate against the dollar and other currencies. 

President Biden has backed away from naming Vietnam an unfair competitor, a label created by President Trump. But there remain negotiations between our nations and Vietnam has promised not to engage in predatory exchange rate practices. The light still shines on them. 

One of my points is that this currency depreciation is an old story and doesn't exist if data is true. But even if it were true, complaining about Vietnam brings about my second point. That is we must have gotten really desperate to complain about a country that is both poor and tiny. 

Vietnam has 98 million people who earn on the average $3,600 per year. Yes you read that right. The average US citizen makes $63,000 per year. 

While their GDP per year is $355 billion, ours is  $22 trillion. Yep, they produce one third of a trillion and we produce about 66 times that. 

Here is a good one to think about. We export to the world each year $2.6 trillion of goods and services. We import $3.2 trillion. Vietnam exports $290 billion. While Vietnam punches above its weight in trade, their total exports to the entire world only amount to about 9% of what we buy from the world. Or put another way, even if we stopped all imports of Vietnamese goods and services, US imports would still be $2.9 trillion and our trade deficit would still be about $300 billion.

We are worried about unfair competition from Vietnam?

Back to the Vietnamese currency issue. Between 2003 and 2012 the dong depreciated against the dollar by 35%. Between 2012 and 2021 the depreciation was a total of 14%. Between 2019 and 2021 it was zero. Zilch. Nada. 

Hmm. We all know that Vietnam is a developing country. It is a poor developing country. A novice boxer needs to attend to a lot of skills and practice before entering the ring. Vietnam is in a very competitive ring. We have bigger eggs to fry than to complain about unfair competition from Vietnam. 

                                    Vietnam   USA

Population  (millions)         98          333

Percapita GDP ($)          3,600     63,000

Nom. GDP (Billions $)      355     22,000

Exports (Billion $)             290       2,600

Imports  (Billion $)             NA       3,200

Holiday

 Hi all,

I'm on holiday this week. Enjoy your week off. 

Best,

Larry

Joe Biden, Trust Buster

The WSJ was full of articles about Joe Biden becoming the latest trust buster. I watched a clip of one of his recent speeches. As usual he is full of passion for the average Joe and he is ready to make corporations and rich people pay for a wonderful and glorious, fair and equal world for everyone. 

Wow. We used to call these people snake oil salesmen.  There used to be people who prayed on other people by promising that if they bought and swallowed the snake oil, they would be miraculously cured. Hmmm. 

Don't get me wrong. There is lots that could be done to help poor people and make the world more fair. It is also true that large corporations take advantage of their largeness. But holy jumping junipers, do we really trust Joe Biden and his buddies to know what to do and how to do it? 

We have already seen their lack of respect for the dollar and finance. In the name of the same kinds of goals, they have dug us deeper into a debt hole that we will probably never escape. Luckily our kids are smart and successful and they will happily figure out how to pay it back. Please note the sarcasm. 

But that was yesterday's headlines. Today Joe is smiling on TV as he goes after companies. Same promises. The world is going to be a better place if he puts Amazon and Microsoft and Apple and Facebook into their proper places. 

Clearly, AMAF are monsters. And Joe, Nancy and their buddies are our saviors. They know a lot about business, right? I don't think Joe even had a paper route. Has he ever held a job? Made a payroll? Aside from passionate political speeches that play to people's weaknesses, does his government job require him to accomplish anything? Sure he was supposed to show up and vote now and then. Is that the kind of person who is prepared to even understand the first thing about a company?

Think about it. He seems to know everything about how companies hurt us. He told us that big companies cause national economic growth to be slower. They also cause inflation to be higher and wages to be lower. These companies also exacerbate inequality of incomes and cause global climate change. They make us less globally competitive. Really. In a very short speech he said all that. 

Wow. Why is he regulating these companies? If all that were true, why not just hang the heads of these companies. That's some really bad stuff that they do. Give them life sentences. 

And why is everything so one-sided? In Joe's zest to regulate, as he is enumerating all the sins of business, could he not mention one or two good things? Why do we need to believe that these companies are blood-sucking monsters? How many people do they employ? How many people in these organizations make really good money? How much tax revenues pad the government budget? Have tech companies not put enormous resources and communications at our fingertips for virtually nothing? What about the impact these companies have on not-for-profits. How much do they give to charity? How many of their employees serve on boards and committees and run wonderful projects in their local communities? He didn't utter a word about the positives. Nope, they are monsters who perpetuate evil. 

Joe, how much money have these companies given to you and your buddies so that you can finance your travel and political expenses? 

Tell the whole story Joe. No one believes an extremist who only sees one (ugly) side of the picture. If you want to regulate these companies -- don't turn them into national criminals. Get serious and do the hard work of convincing the people that regulations you propose will make some things better. As one of my management professors told me at Georgia Tech, attend to a problem but consider the full consequences -- Don't throw the baby out with the dirty bathwater. Joe, please don't throw the baby out with the dirty bathwater. 

National Output since Covid

A GDP numbers game is in full swing in the press. Is the US economy growing? Slower? Faster? The fellow who gets sick and loses 50 pounds regains that weight when he heals. The gained 50 pounds is simply a return to normal. But when it comes to GDP and the press and politicians, only God knows what is happening behind the curtain. 

The best way to understand what is happening is to go behind the curtain. In this case, I went to the Bureau of Economic Analysis, the BEA, for the raw GDP numbers by quarter.  https://apps.bea.gov/iTable/iTable.cfmreqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey

The numbers presented below are for chained or real GDP. These numbers represent how much of GDP's growth is from higher quantities produced of goods and/or services. It "removes" any price changes from the data. When Real GDP grows you know the pile of goods and services produced is getting larger. 

Pre-pandemic, in the fourth quarter of 2019, real GDP stood at $19.3 trillion. By the middle of 2020 it had declined to $17.3 trillion. That's a decline of $2 trillion dollars in half a year. Since Q2 2020, real GDP has been rising. But by Q1 of 2021 it had not returned to its former high. Q1 came in at $19.1 trillion. That's close but no cigar. We expect that by Q2 2021 real GDP will be back to where it was before the pandemic hit. 

That means it will have returned to its former self in about 6 quarters. Of course, that's nothing to celebrate since that means that over the past 1.5 years the growth of real GDP will have been about zero. 

But wait, What about the press? The above story would put even Nolan asleep. What the press is harping on is the re-gained 50 pounds from above. But that's stupid, if not misleading. The story is really that we likely will have had zero economic growth for about 1.5 years.

You beg to differ. As we move back to a normal real GDP number, you say, that's a lot of pressure on an economic system, especially one with supply constraints. But surely that is a temporary issue that will heal itself. As it becomes more clear that a recovery is underway, surely supplies will line up. Maybe inflation will burst a bit for a moment, but the underlying truth is still there. We are headed back to whence we came. We are basically headed back to 2019.

If you are boring enough to be a regular reader of this blog you will see that I have pontificated about the danger of rising inflation. So let's be clear. Now is a great opportunity for Joe and his buddies to start removing stimulus. If he doesn't, then what seems like returning to normal will be met with a storm of increased spending. Normal output will be met with a growing tidal wave of demand and will surely lead to more sustained inflation. 

Some times it helps to dig a little deeper and it often improves your sleep. Real GDP has a lot of components. Let's take a quick look at some of them to see what's growing and not.

The numbers below show how much each category of real GDP changed from pre-Covid to Q1 2021. 

Households are leading the return with spending on consumer goods and houses. 

Businesses, in contrast, have reduced spending on business structures and are getting less attention from the rest of the world 

    Consumer goods +24%

    Residential Structures +14%

    Business Equipment   +4%

    *Government defense spending   +3%

    *Government non-defense goods and services +2%*

    Imports  -1%

    Consumer Services -6%

    Exports   -11%

    Business Structures  -16%

*Note that these categories are not the whole amount of government spending. It only includes government spending on goods and services. Government spending on transfers -- where they essential transfer money to households (e.g. entitlements) -- is not included here. I suspect that would be a very large positive number but it doesn't belong in the GDP statistics. 

The Federal Reserve is Irrelevant

The US federal Reserve met on July 7 and much was decided after a sumptuous lunch of baloney. With straight faces and expensive suits, they looked the camera in the eye and said that they had decided not to forecast the weather and that they were not perfectly sure about the future of interest rates and monetary policy. But they were quite certain that they would meet again and bring up the fact maybe possibly they might change policy. Exciting stuff. 

Apparently the private sector financial players have turned into a bunch of meanies. They lurk in dark places just waiting for the next taper tantrum. That is, they apparently sit around all day and wait for a Fed official to say something about tapering Federal Reserve purchases of government bonds. Such a taper would reduce the demand and prices of government bonds in the markets and thus cause interest rates to rise. Just the smell of such a possibility has private sector vultures ready to swoop first. If they move before the Fed moves, then they are able to "sell high and buy low" -- the dream of all financial players.  Of course, this has the market effect of forcing up interest rates even before the Fed does anything. 

So it behooves the Fed to say confusing and meaningless things so that the private sector meanies don't mess up the economy. 

While the above is a lot of fun and almost makes some sense, there is a more somber picture hiding out there. None of the above mentions the real culprit in all this monetary policy hooey -- our friends in government. By government I mean President Joe and his colleagues and the people who run Congress. The Fed and monetary policy are not exactly immune or walled off from what that government does. 

I am not talking about DC hot dog weenie roasts or the late night parties. I am referring to the thing we dearly called the government deficit. While there is quite an IQ deficit in government, the deficit we can measure is called the Federal Government Budget Deficit. If you haven't looked lately, it now amounts to about $3 trillion per year. That $3 trillion dwarfs anything that went before it. 

So what? A bunch of DC accountants come up with a big negative number. Who cares? Well, you do and so does the Fed. That $3 trillion government deficit means that the government cannot pay for all its goodies. It is $3 trillion short this year (and last year). Where do they get that $3 trillion so they can spend it? They don't get a personal loan from Donald Trump or Bill Gates, that's for sure.

They borrow it from you! Well maybe not you but they borrow it from the general public. They sell government bonds and we buy them. Money that we might have used to buy Amazon stock or a new roll of toilet paper, we instead send to Joe and he sends us a piece of paper called a government bond. And you thought the government just printed a bunch of $100 dollar bills. No way, it is just as easy to sell bonds. They will give us our money back later. No big deal. In the meantime Joe gets $3 tril.

So what? Here's where the Fed comes in. During a time when the government is flooding the market with bonds, financial markets go crazy. A modest amount of bond sales would be fine. But $3 trillion? Wow. Now that's a story.  The $3 trillion of bonds for sale greatly exceeds the demand for bonds so the price of bonds falls...and interest rates rise. 

Aha. It is Joe and his buddies -- not the Fed -- who are the real causes of higher interest rates. And that harm has already been done. Bam. Government deficits cause interest rates to rise. Period. 

All that mumbo jumbo about inflation and how the Fed will react to it is supposed to divert your attention. It makes for great newspaper sales and for colorful evening news. And even though Joe and his buddies are the real culprits, we focus our misguided attention on the Fed. And the Fed, not having the courage to tell the truth, does the government's bidding. The Fed jumps in the market and buys all (or some of) those bonds that are sitting around unsold. What a tag team! Joe and his buddies sell a bunch of bonds and the Fed buys them like they were tacos at Taco Bell. And yes, the rumor is true. The Fed can create money and buy as much they want. 

The net effect is to forestall the downward price of the bonds and viola -- and puts a ceiling on the interest rates. Well, maybe. Maybe for a second.  If the Fed pumps in too much money and keeps rates too low, then inflation, which is always lurking in the shadows, will come back to haunt us -- eventually raising interest rates and causing all sorts of havoc. 

So we come back to the Fed. Will they or won't they? It really doesn't matter because the real problem is Joe and his buddies. They show no signs of conducting an honorable fiscal policy. So long as they choose to spend like drunken sailors, things will not be well in the metropolis. Doesn't matter much what the Fed says or does.  Taper tantrum or not. Those evil financial firms understand all this and they are ready to pounce at a moment's notice. 

Slow Wage Growth

It seems almost axiomatic these days that policymakers decry slowly rising wages. The slowly rising wages mantra is one part of the overall story about income inequality. But today's post is not about income inequality. It's more about labor income which includes what we earn through our labors and not what we gain from investments. 

To investigate wage change I chose to use time series from the Bureau of Economic Analysis of the US Department of Commerce. I had lots of choices but after noodling around I decided I would use the BEA data. For those of you who like to noodle such things you might have also used statistics from the US Bureau of Labor Statistics. 

I chose the BEA data because it comes with an integrated comprehensive set of data that show how much workers in the private sector received in (1) wage and salaries, (2) employee supplements (pension and insurance funds), as well as how much was paid to workers for government social benefits (Social Security, Medicaid, Medicare, Unemployment insurance, and Veterans Benefits).

In total, this data set covers most of the income workers receive as part of what is often referred to as personal income. The date is available from 1970 to 2020 and I chose to examine changes in decade increments.*

I then made two adjustments. We know that we use income to buy things -- and we know the power of our income depends very much on how much prices are changing. One adjustment, then, is to subtract from the income changes the changes in the price level. We thus convert the data from current values to real values. 

The second adjustment is to subtract the employment changes from these real values. In that way we get data that refers to the average employee -- or what we call per employee real income changes. 

Making these two adjustments, we get a better picture of changes in the buying power of the average worker. One example helps. From 1970 to 1980, wages and salaries increased in nominal aggregate terms by 149 percent. Once we adjust for inflation and employment changes, the resulting increase was 24 percent. That 24 percent represents how the spending power of the average worker changed during that decade. The 149 percent is simply the change in total amount paid to the sum all private sector workers to keep up with inflation. Between 1970 and 1980 the inflation rate was 97 percent and employment increased by 28 percent. 

Reading the table -- each number below is a percentage change over ten years. The number for 2020, for example, is the percent change from 2010 to 2020. Divide by 10 if you want the annual change  of that 10 year period. The number 21.4, for example, means that item grew by about 2% per year. 

The data in the Table below show a great degree of stability. Except for the time period from 2000 to 2010, the real percentage changes per worker are stable -- wages and salaries oscillating by decade from a low of 11 percent (2010 to 2020) to a high of 31.3 percent (1990s). The 11 percent change between 2000 to 2010 was mostly the result of two recessions. For example, that was the only decade when employment fell during the decade. 

If you instead examine total income -- personal income also includes company benefits and government social payments -- you get a similar picture of stability. The 1970s found income growth of 47 percent and that was high compared to the 27.1 percent of recession bound 2000 to 2010 but we also see a partial return in the following decade to 28.5 percent. It helps that the government benefits increased by 60.1 percent from 2010 to 2020, making up for a drop in company supplements. 

I know this is a lot of data to swallow. But sometimes the truth is not so easy to discover. Wages and incomes are never helped by major recessions or slow growth time periods. But this look at a half-century of data suggests that there are no clear trends that mitigate against the average worker. When we put together a comprehensive set of income data, my recommendation would be to find ways to promote long term economic growth and employment without inflation. That's the best way to make sure our wages and income stay strong. 

        Table.  Elements of Person Income*

        Decade Percentage Changes, 1970 through 2020

        Real Percentage Change Per Worker

                                            1980  1990  2000  2010   2020

Private Wages & Salaries         23.6   26.0   31.3   11.0    21.4

Company Supplements          120.7   67.0   25.8   31.0    11.4

Government Social Benefits  152.7   37.8   36.9   97.3    60.1

Total                                    47.0    33.1  31.3   27.1    28.5

Nonfarm Employment            28.4    20.1   21.5   -1.4       8.9 

PCE Deflator                           96.7   53.5   23.3   22.4    16.1                         

*Personal Income in 2020 was $19.7 trillion. The three components above totaled $15.7 trillion. The remainder of PI not discussed in this post were proprietor's income, rental income, interest, and dividend income. 

             

Federal Government Spending 2000 through 2020

Given that my life is already very boring, I decided to bore myself to tears with a digital trip to the Office of Management Budget where I found federal government budget numbers. Talk about a nap-inducing exercise. 

I could have chosen budget numbers back as far as when Tuna's grandtuna was a mere minnow.  Instead I decided to be modern and look at recent numbers -- looking at the columns for 2000, 2010, and 2020. I could have gone out to projections through 2026 but I decided that I was interested in history and not fiction. 

Where do I start? I printed some of the numbers and they lay in front of me like an army of wannabees.  I have to be choosy over what I report here as I know you might need a little nap too. So let's hit the high points. 

Total government expenditures rose from $1.8 trillion in 2000 to $3.5 trillion in 2010, and then landed on $6.6 trillion in 2020. That's a lot of change, but keep in mind that these numbers reflect decades of change and that government is an unstoppable runaway train. I won't do the calculations, but the changes between decades are pretty similar. Government spending roughly doubled in each of the two decades. These government numbers are not adjusted for inflation -- they have not been purged of inflation like a lot of GDP numbers. So they are going to look pretty large because of this.  Just fyi -- the CPI rose by 28% in the first decade. It rose by 16% between 2010 and 2019. It rose by 19% between 2010 and 2020. 

What else? How about national defense spending? After rising by nearly $400 billion in the first decade -- it rose by $31 billion in the second one. Luckily the world because a safer place and so we didn't need to waste all that money on national safety and security. Please note the sarcasm as indicated by italics. 

And then, that's when it hit me that my results were too much affected by Covid by using 2020 as my terminal point for the second decade. So I used instead changes between 2010 and 2019. My results changed markedly. Instead of total government spending rising by $3.1 trillion in the second decade, they rose by only $990 billion. 

Wow. What's the point? Covid meant that the government was going to come to the rescue with spending. In just one year (2020), the change for the "decade" went from less than a trillion before Covid to $3.1 trillion after government had a little time to react (in 2020). 

What else? Defense spending was goosed some by Covid -- rising in the second decade through 2020 by $31 billion. That was a lot more than the planned decrease through 2019. Before Covid hit, defense spending was going to shrink from $693 billion in 2010 to $686 billion in 2019. That's a Covid-induced increase of $39 billion for defense. 

Similarly, income security spending was set to decline from 2010 to 2019 by $107 billion. By 2020, the change from 2010 was  an increase of $642 billion or a swing of almost $750 billion. Clearly Covid made a huge difference for federal spending for income security.

Similarly, the Feds were going to spend an additional $57 billion between 2010 and 2019 for Commerce and Housing Credit. And then Covid caused that number to swell to $651 billion between 2010 and 2020. That's a swing of almost $600 billion. 

Most of the key categories of federal government spending show the same increases because of Covid. Education, Health, Medicare, Social Security, and many others show increases beyond what was planned in 2019. 

Note that the numbers I quoted above are past outcomes. They do not count any of the spending increases planned for the future. When the emergency is over, will we have the discipline to move these spending numbers back to something more normal? It's hard to imagine it. The budget requires legislators to either reduce spending or raise taxes. They don't seem to excel at either. If they don't, then the only other option is a much large national debt. 

Inflation 2015 to 2021

The Fed met last week and after a good lunch of weenies and baked beans they spilled the beans and said that they no longer believed that inflation would require them to leave interest rates at zero until 2024. They pushed up the date when they might maybe perhaps would possibly raise interest rates above zero to 2023. The markets swooned and left-wing commentators drooled. 

Geez guys. Have you looked at a calendar lately? Some folks are worried about inflation NOW...and the Fed is going to quell inflation by raising interest rates a smidge in 2023. The last time I looked, 2023 is two years from now. This is like me telling you all that since I gained thirty pounds recently, I am going to cut out bacon on my baked cheese-soaked potatoes in 2023. Recall that money is supposed to hit inflation with a lag. So if they start putting the brake on in 2023 then inflation will begin to come down in 2024? 

How dumb do they think we are? Never mind. 

My last post was pretty long and pedagogical. The summary mainly suggested we wait and see as to how long inflation stays high. 

I wasn't happy with that result so I looked at some CPI  numbers -- focusing on each May from 2015 to 2021. Doing that suggests to me that the recent bout of inflation is more than temporary. 

Below are the May CPI figures from 2015 to 2021. The last column is the change from May of one year to the next year. 

Year   CPI*   Change

2015   237

2016   240   3

2017   244   4

2018   251   7

2019   255   4

2020   256   1

2021   269   13

*The numbers below are CPI index numbers. You calculate inflation by taking percentage changes in the index numbers. 

Wow. The 13 point change from May of 2020 to May of 2021 is huge compared to the changes before. It is true that 2020 showed a very small increase. But the change of 13 in 2021 more than makes up for that one year. 

The average change from 2015 to 2019 was 4.5 points. Even if you bring in the two extreme points, the average from 2015 to 2021 is 5.3. Either way, the 13 point increase in 2121 looks very large. 

Prices generally rise year after year. They rose by very little in 2020 mostly because the Covid change was minus 3 from February 2020 to May of 2020. But guess what? By July of 2020, prices had already returned to the number attained in February 2020. 

So the huge 13 point swing in 2021 is not just a temporary bounce back from a Covid induced drop in prices. There is a lot more going on there. 

Could that 13 have something to do with the Fed and the government stimulus? Might these impacts be lasting if the FED and government don't remove that stimulus?

Inflation 2021

Now that inflation is back in town I have been reading all the articles and thinking more about what it all means. 

It made me want to start at the beginning and that's where it gets really strange. Inflation is a very unique word. It has way too many meanings to be easy to discuss. For example, inflation can be a very general word meaning to increase in size or function. You inflate your tires and some people inflate their egos. Those meanings have very little to do with economic inflation though they share the idea that something is changing in size. Inflate means to become larger. Deflate means to get smaller.

While that first step is logical, it doesn't help us much to understand today's news.  Ok, economic inflation  is getting bigger. What exactly is inflating? How do you measure that? Once we get through all that, we ask is inflation good or bad? If it is usually bad -- then how is it ever good?

What is inflating? While my waistline is often inflating, what we mean by inflation usually has something to do with the consumer price index -- the CPI. Each month the labor department surveys a lot of stores and asks about the price being charged for the goods and services they have defined as part of the consumer's typical purchases. They average the prices of the typical consumer's "basket" of goods and services. If the average this month is higher than the average last month, they say there is inflation. If lower, they say we experienced deflation. 

Typically they also report the percentage change from one month to the next. So they might say that the inflation rate was 4% in May. If the inflation rate was 1.8% in the previous month they we would say the inflation rate increased. 

Think of all the prices out there. There are prices for new things: nondurable consumer goods (food), durable consumer goods (autos), consumer services (electricity) -- when we measure changes in those things we are mostly looking at consumer inflation. The Bureau of Economic Analysis produces a similar consumer oriented price index called the personal consumption expenditures deflator. It is very similar to the CPI but differs in several ways. They sometimes come up with different results for consumer inflation, 

There is a similar long list of non-consumer items -- that business firms buy. Like households, businesses buy food and clothing (uniforms) and energy, but they also buy tools and other equipment their workers use as well as the structures they erect, like new office buildings and plants. They also buy partially finished goods from other firms. And they may buy a host of business services like accounting and consulting. These items are often measured in wholesale price indices or in business cost indices. It might be possible that consumer prices are rising one month even though business prices are falling. Both measures are important in their own right and tell us different things about inflation. 

If households or businesses import goods or services from other countries these are factored into inflation too. Exchange rates complicate the valuations of import prices since we know that a lower (higher) dollar makes foreign items cost more (less) for any given sticker prices. 

Main point so far. Inflation comes in a lot of flavors.

A second point is that much depends on the time period you are measuring. Like your weight, inflation can fluctuate a lot on a given day. Most of the time we measure price change in months or quarters or years. The longer the interval, the more we can conclude there is a trend and that is another way of saying that it has gone on long enough to really impact us. Sometimes we ignore a big in change in inflation in one month -- preferring to wait and see what happens over the next months 

Lots of flavors. Lots of time periods. Lots to think about. 

Is a sustained increase in inflation something to worry about? Most of us think from the perspective of buyers and we usually don't like consumer price inflation. But if you sell apples and the inflation rate of apples rises, then you are probably happy. Your customers might not be so happy but at least they are getting apples. Maybe with less inflation sellers would be less willing to bring apples to the market? You see, now it is getting complicated. Is inflation good or not? 

Generally we think that inflation is like grease -- a little grease applied in the right place at the right time makes the machine work well. But too much grease can clog up the works. Inflation is similar. We don't mind a little inflation. As a firm, it's nice to think that your prices are rising. As a worker, rising goods prices often bring higher wages and incomes. But when inflation starts jumping around and rises in leaps and bounds, then it drives us crazy. When the average increase in each month goes up for several months, then we start to get concerned. 

So that's a little ditty about inflation. At the moment, we have seen some large one-month changes. While that gets our attention it does not mean the large changes will continue in the future and it does not mean that higher inflation is sustainable. It does mean that we need to look into it more and make sure that policy is not making it worse.