Pilot Error

Pilot Error

According to analyst Ed Yardeni, the average American family is now spending US$3,000 more per year on food and fuel. Here’s the report from Fox News:

Gas prices hit a new all-time high on May 10, 2022, amid rising inflation and President Biden’s restrictions on oil and gas production.

According to AAA’s average gas price calculator, the national average cost of a regular gallon of gasoline hit $4.374 on Tuesday, the highest since September 2014, when the average monthly cost hit $3.387. 

According to Yardeni Research, increased oil costs suggest the average American household will pay almost $2,000 more for gasoline in 2022, according to a March research note.

“In addition, we estimate that the average household is currently spending at least $1,000 [according to a seasonally adjusted annual rate] more on food as a result of rapidly rising grocery prices,” Edward Yardeni, the president of the firm, wrote on LinkedIn. “That’s $3,000 less money that households have to spend on other consumer goods and services, which also are experiencing rapid price increases.”

There are some 400 PhD economists on the Fed payroll. Did any of them foresee the obvious consequences of printing up trillions of dollars’ worth of new money? Apparently not. Did any of them mention that it would make most Americans poorer?

But wait. Their job isn’t to speak the truth to the powerful Fed governors but to protect them from it. Armed with jackass theories and overblown conceits…they stand guard at the temple door.

Like the vestal virgins, Fed governors are unblemished by the carnal facts of real life…untested by the give and take of real-world commerce…uninstructed by the bid and ask of a real market economy. And with their own backup team of like-minded PhDs on the job, they never have to get a real job…never have to mingle with real businessmen…or sup with real investors.

Unhinged from reality

Their imaginations, untethered by real-world experience, are thus free to believe whatever they want…no matter how absurd. Such as…

…the idealness of 2% inflation (a total fantasy…supported neither by theory nor experience)…

…or the doctrine of data dependence (otherwise known as ‘driving by looking in the rear-view mirror’), which is how the Fed ran into 9% inflation. ‘Who could have seen that coming?’, they ask one another. But Fed governors were almost the only ones who didn’t see it coming.

In today’s news, we find Loretta Mester again, the Fed governor we spotlighted yesterday. Ms Mester has no idea whether inflation is coming or going. Here’s Bloomberg on the story:

Cleveland Federal Reserve Bank President Loretta Mester said she favors half-point interest-rate increases but would support bigger increments later if inflation doesn’t ease by the second half of the year. 

“We don’t rule out 75 forever, right? The cadence we’re going now seems about right to me,” Mester said during an interview on Bloomberg Television with Michael McKee on Tuesday. “We’re going to have to assess whether inflation is actually moving down, and then we’ll be able to get more information after we do a couple of those to see,” she said, referring to 50 basis-point hikes.

That’s ‘data dependence’. You spend your whole career on the Fed payroll, pretending you know what you’re doing…and then, when it becomes clear that you’ve made a mess of the economy, you try a little rate increase…and see what happens!

… and there’s the ‘wealth effect’. Behind it is the notion that if you can make some people richer, they’ll spend more money…and then the wealth will ‘trickle down’ to the rest of the population.

But the whole idea is transparently ridiculous. If you could make some people richer…why not just make everybody richer? And if you can’t make people richer (which the Fed surely can’t), pretending to make them wealthier (by manipulating their stock prices, or their house prices, for example) is just a scam. There’s no real wealth that can trickle anywhere…just fake wealth dripping like water from a leaky roof, rotting the whole house.

And then, inevitably, the gimmie/stimmy ends, and it’s payback time. Spending goes down…and the ‘The Wealth Effect’ becomes a ‘Poverty Effect’.

Now we see the elegant symmetry of real life when those who got what they oughtn’t to have gotten get no more…and the awkward, distorted economy — as heavy as a freight train…as clumsy as a barge — comes in for landing.

Wipe out!

Households are already upping their credit card and mortgage debt…desperately trying to maintain the standard of living to which the feds made them accustomed. The most richly priced stocks are falling 20%, 40%, 50%, while the flaky memes, NFTs, and cryptos are getting wiped out completely.

That’s when we ask: what lever does Ms Mester pull now? What dial does she turn to avoid a hard landing?

As we explored last week, the problem is the metaphor. Fed governors see themselves as the press portrays them — expert pilots tasked with bringing the giant US economy down to Earth without spilling a single drink in the first-class section.

But not everything is as simple as flying a plane. When you have an argument with your wife, for example, there are no wheels you can turn or throttles you can open to fix it. Nor are you likely to find a technical solution to the problems of laziness, stupidity, greed, vulgarity, ignorance, or bad taste. Each one must be addressed in its own way.

A better metaphor for describing the Fed’s dilemma is this:

The Fed wanted to liven up the party. As we saw yesterday, Ms Mester and other Fed governors wanted higher inflation rates. So to get people moving, they set fire to the house.

It was fun for a while…the flames gaily dancing in the living room…a warm glow in the parlour. But now, the blaze is out of control. Instead of 2% inflation, they got almost 9%. And so now the Fed is faced with a challenge: putting out the conflagration without damaging the furniture.

It tossed a glass of water towards the flames last week. Next quarter, it may try another 0.05% rate increase. And then, maybe another spritzer in the third quarter…and so on…until…

…still looking in the rear-view mirror…finally…Ms Mester sees the house burnt to the ground.


Dan Denning Signature

Bill Bonner,
For The Daily Reckoning Australia