Economics has always been what I consider as a science based on common sense. Supply and Demand. Simple concepts that are balanced based on understanding market drivers. Now, the devil is always in the details, and that’s what Economists are there to figure out, but the base theories historically hold firm time after time. What’s the recipe for economic harm? It has a few ingredients:
Ingredient number 1: Pandemic fallout. Last year saw prices impacted by a totally abnormal situation. Some prices plummeted; others surged to new highs. The problem is that the prices have yet to settle back to near-normal levels, setting the stage for 2021.
Ingredient number 2: When you need something, and the supply line changes in location, quantity, availability, etc., the price rises. Case in point: Exec Order 13990: Revoking the Keystone XL Pipeline, followed closely by Exec Order 14008: Killing Leases by Oil and Gas on Federal Lands and Waters. When oil-producers saw those actions coming (as previously announced by Biden before taking office), OPEC began cutting production to immediately start propping up oil prices that were held lower when the US was a major player in production and export. When Biden’s plans for this were beginning to become apparent at the end of December, moves started happening around the world to adjust the futures market upward – by a significant amount. The result: Since Dec 31, 2020, retail gas is up 34%. Since inauguration day: Up 26%.
Downstream this has causal impacts, bringing us to ingredient number 3: Food and commodity prices are surging across every major supplier, starting back in March (possibly earlier), as transport costs have surged. See ingredient 2 above. Net net: Our grocery bills are also increasing. Last year we saw meats and grains surge by as much as 30+%, but we struggled to reduce that cost increase over time. Also, note that our building materials are skyrocketing (lumber is up in some cases over 400%, and home builders are seeing an average of $15,000 more in materials costs to build).
Then let’s add ingredient number 4: A soft labor market. Unemployment benefits by the Feds in the almost $2T stimulus passed and signed by the current administration has locked unemployment benefits for most people until at least September. Here’s the rub: Service industries aren’t able to attract employees back to work. Iowa is the latest to report 6,000 more available jobs than they have people claiming unemployment. The stimulus is creating an artificial inversion in the labor market – which is, frankly, incredibly stupid. So now we see Iowa, Montana, Idaho, and 8 other states – all led by Republicans (some of you may find that polarizing; you shouldn’t, but instead it should make you more curious as to why) canceling their participation in the Federal Unemployment program. Why? Simple: They are all seeing service industry employers literally at risk of closing for good because they can’t get staff to come back to work. It’s that simple. The demand is there. The labor supply is not, because they’re getting paid to not go back. And let’s not forget the estimated 200,000 businesses that closed for good from the pandemic already; over 9 MILLION more small businesses still fear they won’t survive.
That brings us to ingredient number 5: Artificial wage increases. To lure employees back, thousands of businesses are having to offer much higher wages, bonuses, etc. Guess where that cost goes? Yes – to the consumer. And now the cycle continues with more inflation this time caused by a labor shortage… as unemployment surged back north nationally to 6.2% last week.
But one more ingredient needs to be factored in: Completely out of control government spending. Like beyond out of control. Over twice the previous federal budget from just last year. Taxing will not fix that, so we are printing money and issuing debt (bonds) like they were M&Ms at Halloween. That, my friends, is a major problem. The dollar’s value is being masked by the Euro, where we are steady or gaining – but Europe is in a worse economic condition, so that‘s to be expected. No – the problem is against the Chinese Yuan, which has been making steady gains against the dollar since May 2020. And our trade deficit with China is again on the rise. Result: We buy less with $1.00 on the world market than we used to. So, we need more dollars. Which raises our imported goods costs.
What’s the outcome? That depends on whether all of these ingredients continue to be mixed together. If they are, inflation will resemble a runaway freight train. All the ingredients are present. These impacts take time to unfold, but when they do it takes years to reverse and recover. As of the beginning of this year we have set an ominous stage by poorly conceived actions at the federal level (and in some states). The question: Will we recognize the mistake and correct it in time?
