Death, taxes… and inflation

Tomorrow will see the release of the latest inflation stats for New Zealand, and they are expected to be bad.

Inflation is not a new phenomena created by the Industrial Revolution, paper money, or digits in a computer, whether backed by a central bank or a decentralised cryptocurrencies. No, even back in ancient times money was being debased:

Evea our kinsman Gratidianus failed on one occasion to perform what would be a good man’s duty: in his praetorship the tribunes of the people summoned the college of praetors to council, in order to adopt by joint resolution a standard of value for our currency; for at that time the value of money was so fluctuating that no one could tell how much he was worth. 

That was the Roman statesman and philosopher Marcus Tullius Cicero and he wasn’t writing an economic analysis but about some Roman magistrate taking credit for the work of others. Still it was an interesting, if vague and obscure, reference to possible financial problems in that Roman period (44 BC) and the frustrating thing was that there was not other evidence to support it.

Until now:

In part of an ongoing project, Butcher and colleagues analyzed the composition of the coins minted during these years. They used minimally invasive sampling techniques to prevent damaging the precious silver relics, bearing the heads of gods and Roman leaders, that were first introduced as currency in 211 BCE, valued at ten bronze assēs coins.

The researchers found before 90 BCE the denarius was composed of pure silver, but that dropped 10 percent only five years later.

“The denarius first dropped to under 95 percent fine, and then it fell again to 90 percent, with some coins as low as 86 percent, suggesting a severe currency crisis,” concludes University of Liverpool archeologist Matthew Ponting.

There were also other quantitative measures:

A massive increase in coin production also took place in 90 BCE, with 2,372 dies – the molds to make the coins – compared to 677 the previous year, and 841 the following.

You have to wonder what they’d have done with computers!

Still, it comforts me somehow to know that Grant Robertson is following in the footsteps of the Romans. Perhaps he should wear a toga during his press interviews tomorrow. Sadly we cannot expect anything from him as dramatic and effective as the solutions obtained from Gratidianus.

“It is all the more noteworthy that around the time Gratidianus published his edict, the standard of fineness rose sharply, reversing the debasement and restoring the denarius to a high-quality currency.”

ROBERTSON HAS NO ANSWER

Finance Minister Robertson’s wringing of his hands on Morning Report acknowledging that ‘we’ can expect inflation to increase further over the next two quarters suggests he has no answers and what will be will be. The country expects/demands leadership and here we have the man in charge of the levers with no answers and nothing to offer other than to continue to borrow and hope.

Nicola Willis is right on the money with her recipe for easing inflationary pressures …. (1) stop adding extra costs to businesses that are being passed on to consumers and (2) stop wasteful government spending and (3) expedite the entry of skilled workers back into the country.

But no … all Labour can do is point to increased new spending in the upcoming budget … all on borrowed money … spending ones way out of inflation is an interesting concept.

Meanwhile Kiwi families at the coalface struggle to make ends meet.

Food

For a guy who is basically in the business of making food I’m embarrassed to say that this news got away from me until now.

The Return of the Third Horseman

As viewed from an agricultural point of view, the world’s largest wheat exporter invaded the world’s fourth-largest wheat exporter. That alone condemns the Middle East to its most volatile and violent period in at least the last century.

One should always be leery of people making apocalyptic predictions; they usually don’t come true.

However in this case there’s a lesson from the recent past:

In 2010, dry weather across Western Siberia prompted concerns about the Russian wheat crop. In preparation for a poor harvest, Russian President Vladimir Putin ordered temporary export limitations for wheat, Russia’s primary agricultural product. Within weeks global wheat prices had doubled; Prices tripled in Russia’s primary export market, the Middle East. Those increases contributed to the series of protests, riots, coups, revolutions and wars we now know collectively as the Arab Spring and the Syrian Civil War.

What’s happening now in Russian and Ukraine is a lot worse than that. Farmers are simply not getting Spring wheat planted, whether for reasons of war (Ukraine) or financial problems caused by the war (Russia). However, the article looks at another aspect, fertilisers, three in particular.

Phosphate: China is the largest producer and they’ve banned its export because they need it for a massive increase in their rice crop to compensate for the massive cut in the number of pigs due to the Swine Flu Epidemic a couple of years ago. They culled as many pigs as the rest of the world has in total.

Nitrogen-based fert. Produced using natural gas. Guess who is the largest supplier? Russia. So a threat to supply, which has already boosted the cost, especially in Europe, where it’s increased five-fold.

Potash: Russia and Belarus have 40% of the global supply.

All of these things can be worked around, but that can take years as new supply chains are created; building new pipelines, factories and so forth – all massive expenditure with the knowledge that if/when the Ukraine War ends and if/when sanctions against Russia end, the availability and price of these things might rapidly return to the 2020 status quo.

I’ll take Manic Pixie Dream Girl for 5% inflation, Alex

The latest statements out of the dairy companies show the biggest monthly leap in payout prices that I can recall, greater even than the big boom of 2013/14.

And farmers vividly recall what happened next; the biggest crunch dairy farmers have ever experienced, which is why I’m looking at their forecasts of similar pricing into 2023 and taking those with a grain of salt.

Everybody likes to see a steady increase in value for what they produce, a steady growth in wage and salaries or other income.

But nobody, at least nobody with a sense of the future, wants to see these sorts of rises because they’re not real in the sense of steady increases in the number of your customers or their increased valuation of your product or service, or perhaps just their steady increase in wealth that makes them less penny-pinching.

No, these sorts of price increases mean that something is very wrong with the system. That money is floating around out there and being thrown at assets and commodities because in our bones we know it can’t last.

Milk is not in that graph but it should be. Farmers had a good sense of what was coming before most economists did, when we saw the price pressures building in 2021. We know from our history that we’ll benefit from inflation before anybody else because commodities go first – but we also know that it will bite us (and everybody else) in the ass later on, as the pressure feeds into the costs of fuel, fertilisers and a hundred other things needed to run a modern farm. Today’s bumper profits and excess cash flow can vanish real fast under those circumstances.

Still, it’s better than being in the situation of a wage and salary earner, especially in the lowest brackets. Those poor bastards are getting screwed right now and it is going to get worse and all the increased minimum wage and WFF kerfuffle is not going to count for much.

That note about the suspension of trading in Nickel forwards is not due to some fundamental problem obtaining Nickel but because some Chinese billionaire and his giant Nickel processing company found himself stuck with an $8 billion loss on short positions he took.

This is going to get worse before it gets better and I hate to tell you this, but in the short-term there’s not much that governments can do about it. They have lit the fuse, as usual, but the it’ll be the marketplace that clears the crap out of the way in its usual, brutal fashion.

“The US currency will fall to zero”

Over the next hundred years. At least that’s the working assumption they’re using for investment strategies over at the famous Berkshire Hathaway investment fund, (fund net worth $US 700 billion) according to the Vice Chairman of it, Charlie Munger.

This comment came in the middle of an interview that focused on the current inflation crisis in the USA.

Also this:

“Eventually the whole damn Roman Empire collapsed…. It’s the biggest long-range danger we have probably apart from nuclear war.”

“Inflation is a very serious subject,” Berkshire Hathaway Vice Chairman & Daily Journal Chairman Charlie Munger says. “You can argue it’s the way democracies die.” More: pic.twitter.com/mZsNhmSmIC

— Yahoo Finance (@YahooFinance) February 16, 2022

Now I have to admit that Munger is not a figure I admire much, if at all, on the basis of his approval of the way things get done in China:

The Chinese Communists did the right thing. They just called in Jack Ma and said, “You aren’t gonna do it, sonny.” 

Jack Ma is a former Chinese schoolteacher who co-founded the gigantic Albaba e-commerce firm. I wonder how Munger would feel if a US President did the same thing to him?. To be fair, in that 2021 interview he did say that he didn’t want the Chinese “system” in the US, just the financial bit of it, although he doesn’t seem to recognise that the CCP would probably “solve” inflation the same way they solve all their problems; repression.

But when it comes to things economic we should probably listen to him.

Then there’s this news, which is a surprise to me considering how productive the US housing construction market is.

As a result of these policies, a shockingly large price bubble appears to have formed in the real estate market. The average sales price of a home in the fourth quarter of 2021 was $477,900, compared to $403,900 in the fourth quarter of 2020 and $384,600 in the fourth quarter of 2019. That’s a $93,300 increase in just two years, by far the biggest increase ever recorded in just 24 months.

We all know what happens to bubbles right?

Stock up on gold perhaps? Plus food, fuel and ammo! 😉

The Dying Dollar

That’s a hell of a title for an article but it’s hard to argue with the points made in it, especially when you consider the games played with the Consumer Price Index (CPI) over the years:

The methodology of the Consumer Price Index used to be a fixed basket of goods, now the basket is dynamic, allowing them to take out goods that increased significantly in price and replace them with substitutes that have more modest price increases or even price declines. According to economist Peter Schiff, the original CPI methodology would today show an inflation rate of around 15 percent. 

That last figure seems correct when you look at the price increases of ordinary things in the USA that people buy every day, as opposed to iPads. And it’s ordinary people who get screwed the most and the fastest by inflation, which is a tax you can’t avoid:

The wealthy hold assets and debt so they’re relatively protected, but the middle and working classes face penury. Remember the World Economic Fund slogan “You Will Own Nothing and Be Happy”? That dystopian vision is what runaway inflation is accelerating us towards. Wage workers won’t be able to afford down payments on property, credit will be tightened and rates will be raised to combat inflation. 

I think we’re seeing that here in NZ also. One of the many reasons the young friends of my kids gave for voting Labour in 2017 was that they saw little hope of being able to afford a house much before they hit their forties. Now they don’t even want to talk about it, so bleak have the prospects become, although their parents assure them they’ll help out.

Back in the USA there are some geo-political realities that must be accounted for because of the US dollar’s status as the ultimate reserve currency:

It backs all but a handful of other currencies around the globe and as such, its depreciation can lead to depreciation of other countries’ currencies, compounded by those countries’ own central bank inflation. The reserve currency status of the dollar is chiefly responsible for America’s standard of living being as high as it is. The entire American economic model is built on the dominance of its currency. We are able to sustain a perpetual trade deficit with the world because of it. We export dollars and we get cars and electronics and food in return. On the fiscal side, inflation is a tax paid not just by Americans who hold dollars, but by dollar-holding foreign countries, companies, and citizens as well. 

Countries tolerate this trade-off because of the anti-inflation credibility built over the past 40 years by hawks at the Fed like Paul Volcker.

Ah yes. The Federal Reserve of the USA. With them lies the solution. There’s just two huge problems with them providing a solution.

First is that they’ve enabled this bullshit to happen in the first place. Sure, the Federal government, especially in the hands of the Democrats, have reached unseen levels of insanity with spending. But it would not be possible for them to do this were it not for the Fed. When it comes to inflation, it’s the Fed, stupid:

Figure 2 (below) shows Real M2, adjusted for inflation (with 1982-84 dollars serving as the base), from 1959 to the present day. Here too, we see the line take a vertical turn in 2020. If those graphs do not alarm you, they should.

There are other equally scary graphs in that link, of things like the Fed Balance Sheet and Funds Rate, covering the infamous Quantitative Easing and Zero Interest Rate Policy (ZIRP) of the last decade since the GFC. The QE back then did not cause inflation, despite fears that it would. Why the difference now?

That [2008-2014] money never entered the real economy and did not even count as part of M2.
…
By the end of Bernanke’s term in January 2014, M2 was $11 trillion. In over five years’ time, the money supply increased 42%.

Powell’s Fed, since March 2020, has superintended a 37% increase in M2 – in only a third of the time that it took Bernanke’s Fed to witness similar growth.

Second, all this is piled on top of an already terrifying debt level of $28 trillion, more than 100% of GDP, which means that it’s going to be almost impossible to repeat what Volcker did starting in 1979:

Despite historically low interest rates, the federal government is projected to have spent $300 billion this year on interest payments on the national debt. Even a mild increase in interest rates would increase government expenditures on interest payments by hundreds of billions of dollars. 
…
The Federal Reserve’s hands are tied, as evidenced by their decision to keep interest rates between 0.00 percent and 0.25 percent, even while removing “transitory” from their vocabulary. Increase interest rates quickly and significantly enough to curb inflation and the entire market melts down along with the federal government’s fiscal budget.

What then will Fed Chairman Powell do? My bet is nothing for at least another year:

[He} faces a Sophie’s Choice scenario: continue to allow inflation to spiral out of control by keeping interest rates low—which would result in all manner of civil unrest and possibly even a real insurrection—or raise interest rates, which would crash the stock market and force Congress to cut spending, ensuring the complete and total destruction of Congressional Democratic majorities, the likes of which the country has never seen.

So wait until the GOP takes control of Congress in 2022, possibly with large majorities, and let them take the hits along with Biden. But the Democrats might not care; Biden – and their own policies – are millstones around their necks that are drowning them right now. Perhaps losing in 2022 will be the best thing that can happen to the Democrat Party? Promise an end to the pain in 2024 with lots of soothing government programs and win it all back?

The first article ends on an even more cynical note than I’m capable of:

The more 3D printed suicide pods I see the less I believe in mere coincidence. What I do know is that the ultra-wealthy and the banks have the most to gain from this and they are the ones who have most encouraged the policies that have brought us to this. It seems that they are well-positioned to buy up the remaining assets of middle and working class Americans at fire sale prices, after they have finished setting fire to the economy. But then again, it could just be incompetence. That is one commodity that there is no scarcity of among those who occupy the commanding heights of power in America. 

One thing I can say with confidence is that the government will not act. It will do too little, too late. There isn’t the courage left in our political class to make hard decisions. There are no more Jimmy Carters. We have to begin thinking about what comes next. 

Lastly this article has more up-to-date figures, and a better way of framing the impact on the US fiscal budget from increased interest rates:

The federal government will spend around $413 billion in 2021 on debt interest alone, according to the Congressional Budget Office. Debt service was a comparably reasonable $197 billion in 2010.
…
But remember that is at about one percent interest. Each one-percent interest-rate increase costs another $413 billion. More precisely, each one-percent interest-rate increase costs American taxpayers another $413 billion (and climbing.)

If the Fed was serious and raised rates to five percent—which still may not be enough—that would be close to $2 trillion in interest the federal government would need to pay annually. That’s half of the entire federal budget. Americans will be outraged to discover that Social Security, Medicare, defense spending, infrastructure, and everything else will need deep cuts in order to pay interest on money long spent by craven, irresponsible politicians. 

Meh. Let the GOP deal with that; they’re always boasting about being better with budgets and spending than the Democrats. Let them cut all those areas in 2023 when they’re in charge of Congress. By the same token the GOP will have to hope that Biden refuses to sign such cuts, going against his grain as it would be, as well as letting him be the fall guy for those millions of Americans who think the President is in charge of this stuff.

Inflation heading this way in 2022

In effect we’ve already been seeing inflation in New Zealand for a year now, as the huge flush of government created / borrowed money, designed to keep businesses and people afloat, has flowed into a New Zealand economy that could not absorb it thanks to lockdowns and other restrictions imposed by the government to fight the great Chinese Xi Snot pandemic. It’s just that our inflation has mainly been in the form of insane increases in house prices across the nation, none more so than in Auckland (Refer to the chart at the end of this article).

But in the US inflation is not showing up in house prices – yet. Over there it’s crashing into people’s consciousness in the prices they’re paying for everyday products.

Inflation hit 6.8% for November, which is the worst mark since 1982 when the country was still recovering from the Jimmy Carter years.

That’s just the generic figure and its calculation quite deliberately misses some everyday things. For ordinary people the following is the real inflation they’re facing.

Incidentally that article points out that this shocking piece of economic news is the likely reason why the following happened…

Earlier in the week, news broke that the White House had been colluding with mainstream media outlets in order to change the narrative surrounding Joe Biden’s fledgling economy. That collusion quickly produced results, with outlets such as CNN, MSNBC, and CNBC complaining that the administration was being treated unfairly.

Inflation for some of these things are already flowing into NZ, starting with the price of petrol. But the rest will be along soon enough to add to our already unaffordable homes, as pointed out by Mr Reddell at Croaking Cassandra:

If house price inflation slowed to 1 per cent per annum, year in year out and incomes rose by 2.6 per cent per annum, in 20 years time the nationwide price/income ratio would be 5.85.
…
And if by some chance you think a price/income of 6 doesn’t sound too bad. well (a) you’ve just too used to latter day New Zealand, and (b) check the table on page 15 of the Demographia report for the metropolitan areas (most of them) with ratios lower than 6, in lots of cases much much lower. New York – never really thought of as a cheap place to live – shows at 5.9, Montreal at 5.6, Manchester (UK) at 4.8, Nashville at 4.2, Edmonton at 3.8, and on downwards.

Graph from an older post, A Distorted Economy:

I wish I could celebrate the payout increase

They’ll be lots more dopey coverage of the recent surge in dairy prices, like this one from Radio New Zealand (RNZ as they style themselves now, Radio Aotearoa being a step too far for the moment).

Dairy prices up 3.7 percent as commodity prices reach record high

That article talks of global milk supply being constrained, but for those of us who dig deeper – and farmers have a great incentive to find out what’s going on – the terrible truth is that it’s simply another symptom of a global surge in inflation. Even that article hints at it by pointing out that every other commodity is surging in price also.

I don’t think there’s any question that this comes about because of governments printing money and stuffing it into economies that were only in recession because of lockdowns. Unlike the GFC era, when inflation worries abounded, the economies are not on their knees because of market problems. Back then the credit creation was filling real gaps, which is why inflation did not appear despite all those created trillions of dollars.

This time all that was needed was for government to take its Covid-infected foot off the throat and the economies would have roared back to life, as they were doing very well up to early 2020. Stuffing more money into a system whose production is still being held down may have sounded like classic Keynesian stimulus but was wrong for this scenario.

But aside from that general problem, the lead here is energy costs and that really is a supply constraint – as the Greens are gagging for. A few years ago I attended a Rabobank seminar on the global dairy industry and the guy giving it finished his discussion by pointing out a strange correlation for which no causal link had been established: oil and milk match eachother’s price rises and falls.

If that’s the case then this news is a double-edged sword:

Crude oil is up 65% this year to $83 per barrel. Gasoline, above $3 per gallon in most of the country, is more costly than any time since 2014, with inventories at the lowest level in five years.

Meanwhile natural gas, which provides more than 30% of all U.S. electricity and a lot of wintertime heating, has more than doubled this year to $5 per million Btu.

Even coal is exploding, with China and India mining as fast as possible. The price of U.S. coal is up 400% this year to $270 per ton.

The sword is a scimitar, as the drooling root vegetable known as “President” Biden is discovering.

That plea from Biden happened a couple of months ago and OPEC told Biden to go screw himself. Amazing to think that in January 2020 the USA was a net exporter of oil.

As that article points out, this is actually going to get worse in the Northern hemisphere winter:

Put it all together, as the weather gets colder,  energy costs will rise even faster. The increase in energy cost will raise the prices of goods produced from companies the use energy in the production and distribution of their products which will be passed along to the consumers.

As every farmer knows, we often get the benefit of being first in line for inflation, via commodity prices. But sooner or later those other cost increases, on fuel, fertiliser, power and machinery, arrive with a rush. Talk to any old farmer who remembers the First Oil Crisis of ’73 and then the crunch of ’74.

It’s arrived in New Zealand too, and the effects are already being seen, if not felt:

“The latest quarterly Labour Market Statistics show that on average wages went up by 2.4 per cent over the past 12 months. Unfortunately, inflation over that same period was more than double that figure, running at 4.9 percent, the highest rate in 25 years.

Fasten your seatbelts – and tighten them too.

Good grief, even the NYT has figured it out – and who’s to blame:

You can draw a direct line from a specific policy decision that Biden and congressional Democrats made this past winter to some of the inflation happening now.

In designing the stimulus that Congress passed in March, Biden’s administration went big, with $1.9 trillion in pandemic relief — on top of a separate $900 billion package that passed three months earlier. Put the two together, and $2.8 trillion in federal money has been coursing through the economy this year while economic activity has trended only a few hundred billion dollars a year short of what mainstream analysts would consider full health.

The dementia-riddled “President” must really be hurting the Democrats if even the NYT is throwing him under the bus.

Being Mean

Inflation is likely to become the number one priority over the next year, judging by the price rises to date on various consumer items and the fact that there’s nothing on the horizon that would stop it. Oil looks to be going higher, supply chains are still in bad shape, and governments continue to pump money into their economies to compensate for lockdowns.

It also looks like it will be a global event rather than just a few nations, since almost every nation has followed the same path and is having the same problems.

On top of everything else, the MSM has begun to take notice by interviewing not just the usual economic “experts” but ordinary people, which is what CNN did the other day:

“To demonstrate the ‘squeeze’ of inflation and supply chain issues on everyday Americans, CNN’s ‘New Day’ featured the Stotlers, a Texas couple looking after nine children – two of whom are their biological kids, while they’ve adopted six more and have one foster child. Krista Stotler said she started seeing prices rising this summer and it was costing them an extra $100 a week on groceries….  ‘A gallon of milk was $1.99. Now it’s $2.79. When you buy 12 gallons a week times four weeks, that’s a lot of money,’

For their troubles of appearing in a CNN interview the Stotler’s got these reactions from “Liberal” voices, including any number of journalists and Democrat activists (but I repeat myself). Here are just two but there’s plenty more where they came from:

That last one shows the usual situation of people reading a headline and not the whole article. As you can see above, only 2 of the children are the natural offspring of the parents. The Stotlers have opened their home to 7 more children. And he’s sneering at them!

On top of that the mockery is based on the gut reaction that 12 gallons of milk a week is absurd. But with 11 people in the family, it’s an average of two and a half cups of milk per person per day.

It shows how out of touch these critics are, but that won’t stop them being invited by their MSM mates onto talk shows to explain away recent Democrat election losses and how to get in touch with The People again.

It also shows that they’re assholes, which brings me to this article about Alec Baldwin’s recent shooting and killing of an innocent woman:

Alec Baldwin got to play his dream role last week, and unfortunately for an innocent woman, it was a method-acting version of Ted Kennedy. Now, you note that I am mocking a guy whose probable gross negligence killed a lady and maimed a man, and this raises an important question – do we really want to live in a world where our reaction to a tragedy caused by an enemy is not sorrow and compassion but mockery?

The article goes on to explore the pros and cons of being enough of an asshole to mock Baldwin in this situation:

In the world I would want to live in, we would all be at Option A, whispering a silent prayer for the hurting – and I did. But this is not the world we live in, and none of us are under any moral obligation to pretend we do.
…
Alec Baldwin is a bad person, but more than that, he is a bad person who hates us – with a mortality rate thanks to his hypocrisy. And now he is vulnerable, and the rules say he is fair game – his rules.

Not only that but this is not “punching down”, which Baldwin has done on Twitter countless times to ordinary people, in keeping with his Lefty peers as seen above with the Stotler family. By contrast, ripping Baldwin is punching up across the shields of his fame, wealth and the moral superiority that comes with the high levels of self regard his class of people have.

The conclusion is that it’s down to individual choice but that the writer is not going to condemn you if mockery is the route you take.

Think of it as the Cold War. Option B is mutually assured destruction – if you launch social media cruelty at our misfortune, you will pay in spades, so don’t. Option A is unilateral disarmament. Nice people on our side want us to disarm to make us better people; our enemies want us to disarm to make us better targets.
…
Those are the rules we’re playing by today. I didn’t make the rules. I don’t like them. I’m even willing to return to the old ones, once enough pain has been inflicted to teach the necessary lesson about changing the rules. But I am not willing to play by a different set of rules that limits me at the expense of my opponents.

I wonder if we’ll see this from The Herald?

I always find it amusing when people whinge about Fox News’s coverage of the GOP when almost every other US MSM source turns themselves inside out to defend the Democrat party, sometimes with outright bullshit, often by just not reporting something that could hurt the Democrats and help the GOP.

The coverage of the 2020 BLM/Antifa riots across the US being just one example, probably just behind coverage of the Trump-Russia collusion hoax and the January 6 “Insurrection”.

Compared to those this piece from MSNBC is mild, but it’s perfect for showing how far they’re prepared to go.

Also: some days I think the Babylon Bee (Fake News You Can Trust) is living in a target rich environment for their satire, while on other days I can see why they had to establish a sister-site called Not The Bee for real news stories: 10 Great things about Hyperinflation.