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Tackling Inflation and Other Economic Problems
This writing regards inflation. For the record, I am not a trained economist. I am a former CPA, M&A executive, and public company CFO, so my knowledge on economics is a more practical kind.
I describe inflation as the rate at which the costs of goods rises. Inflation, hence, is also the rate at which the value of currency, that is money, is devalued. As a practical matter, if the cost to produce something rises, then the cost of that item in the market must rise if the producer is to secure sufficient margin to remain viable. There is a point where price affects demand, leaving the buyer with a value decision, to purchase that item or to make a less expensive choice or none at all. In a high inflation environment, where costs are rising generally beyond a rise in wage rates, a shift must occur from goods that sell at a premium toward more generic purchases. This puts profit pressure on all producers who rely on higher margins on premium goods than on generic goods. They must either survive on lower margins with higher volume or increase productivity (amid higher labor, fringe and energy costs) to offset lower overall margins.
It is no fun operating in a high inflation environment.
The value of currency is not immune from devaluation pressure caused by oversupply. The current administration continues to spend well beyond its means and these deficit borrowings do not remove currency from the current money supply, that is are not borrowed from existing currency reserves in a market-based auction at market interest rates. Rather, these funds are created (printed) by the Federal Reserve and sold at artificially low interest rates. The inflation created can be seen especially in residential real estate where quantitative easing (newly created currency borrowed from the Fed) provides a mortgage funds interest subsidy amid restricted supply of housing, pushing real estate values and creating an inflation bubble. That bubble will deflate eventually when market interest rates return.
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ut inflation is not just about money supply. It is also about the availability and supply of goods and services. The current administration has declared war on fossil fuel. Their reasoning is highly suspect and fraught with issues; they might as well declare war on the wheel for circular thinking. However, this has not stopped them. Our domestic energy exploration, production, refinement, transport, and related industries are all under siege by the rabid environmental wing of the current administration.
As a result of their policy decisions, fuel prices have risen dramatically despite the fact that the United States has the most accessible and immense fossil fuel reserves in the world. All this has led to much higher electricity and transportation costs. This increase raises the cost of everything and has led to shortages and outages. It is an exponential thing, driving inflation. In the meantime, our local energy utilities are investing heavily in energy production technologies that are much more expensive and far less reliable than fossil-fuel-based solutions and they are doing it with the ratepayers’ money, cementing future inflation as well as ensuring reliability issues.
Bad trade policy and a failure to secure domestic production of key goods and natural resources have likewise caused production issues, scarcity, and inflation. This would apply to pharmaceuticals, computer chips, supplies of rare earth elements, and other items where production shortages are currently strangling our economy. The Biden administration has done little if anything to address the shortage of major seaports nor of the union monopolies and local pseudo-government monopolies, in bed with state actors, currently strangling our ports of entry. Productivity is irrelevant if goods cannot be efficiently delivered to the market. And when key items are unavailable in the domestic economy because production has been outsourced elsewhere, then our economy remains vulnerable to future shortage, price gouging or other manipulations. For example, there are reports that the costs of container transport from the far east have increased tenfold in just the last year.
Addressing domestic energy production, rolling back utility mandates and re-embracing domestic fossil fuel production would go a long way toward restoring an inflation-resistant economy. We also need to ratchet back local utility “renewable energy” production mandates and secure the domestic production and supplies of natural resources, medicines, and components key to our economic security. And last of all, we need more ports of entry and existing ports must be freed of monopolistic, anti-competitive cabals of union and local government control.
Published in Economics
We should be energy exporters of LNG.
Yep. I remember when we were… Seems like a lifetime ago.
An economist would probably say that, technically, inflation is a rise of the general level of prices. All the micro things you detail are true, but for the general level of prices to increase without an offsetting reduction in GDP (recession or worse) requires an increase in the money supply. And we have had that in spades.
An economist would add, “…or an increase in velocity”.
I just added that to be annoying.
The U.S. is exporting liquefied natural gas at a record pace these days, as gas prices and geopolitical tensions in Europe rise amid the energy crisis and the Russia-Ukraine standoff.
LNG tankers were loading or being docked at each of the seven LNG export facilities in the United States on Saturday, leading to a record 13.3 billion cubic feet of natural gas flows to U.S. LNG export terminals, Bloomberg reports.
— https://oilprice.com/Latest-Energy-News/World-News/US-Exports-LNG-At-A-Record-Pace.html
That should put some pressure on Putin.
I said that Obama should have been doing this when gas prices were low, but ours were lower. Actually, all Obama needed to do was announce we were going to, and the natural gas futures would have dropped like a stone.
Very few contracts have Inflation clauses because high inflation has not been around for almost 40 years and many customers would not even allow you to bid if you had that clause.
So Capital Goods and Construction Companies are the ones that will suffer more than anything if their contracts are not set up correctly to protect them. However, to be honest, we had a contract like that with food and we got screwed anyway. They claim Drug Cartails controlling Lime trees therefore driving the cost up was an act of God. It was just not worth it to sue and we needed the product. (this is one reason why Monopolies and Ologaoplies are evil.). I more care about what its doing to my Savings. I always keep a lot of Cash. Thank goodness my 401k has offset what I lost in savings. To be fair only Food inflation is really affecting my Budget right now, but I need a new roof so inflation is going to kill me on that front in regards to my savings.
It wasn’t Obama, it was Trump. That only made it better.
Indeed. This happened in 2021, when stimmy checks landed in bank accounts and people didn’t do much spending. The money supply grew, but the velocity fell off a cliff. By the end of 2021, those extra trillions in savings accounts were getting spent and that is when inflation started really cooking.
The Treasury can sell debt and collect taxes. They cannot print money (although they can mint coins). The printing, happens, when the Fed buys the debt on the open market (Q.E.).
Very good comments. I didn’t even think of the perfect recent example you gave (the stimmies) of velocity greatly affecting inflation!
I also give an automatic “A” to any comment on any blog that says anything factually correct about the Fed or the Treasury, and I read a lot of them. Yours is not only true, it is relevant.
My adult kids can’t believe that we had a 12.5% mortgage on our first house–and that was a VA loan. Rising prices for everything was normal. Jimmy Carter was in the White House, OPEC stuck it to the world (and was mildly and happily surprised that there was no serious pushback), there was no bar code scanning so price tags were manually changed.. LBJ and Nixon screwed us and hapless Jimmy had no clue.
I told the tale of two tubs some time ago. The tub being installed currently cost $1800 six month ago. Lowes now has it on their web site for $3400. The extra tub in my garage (new, still in box!) was $1400. Now it is $1900. Further, none are currently available at any price. There is no inventory (except in my garage.)
Rough plumbers start next week!
Some may find this interesting. If they raise rates and we have so many businesses that have business plans based on low rates, it could blow up production. There is no doubt that there are too many zombie businesses because of low rates.
Click into it, of course.
This is only true if you believe that the Chinese wall separating the Fed and the Treasury department exists; many of us do not.
It is a distinction without a difference. Especially now that we rotate the head of Treasure to the head of the Fed.
When my wife and I got married it was around 18%
My first wife, Sherleen, had a thing about rough plumbers. We tried counseling, we really did, but one day the therapist took me aside at the end of the session and confided in me that I–at the time a mild-mannered HVAC guy– was never going to be able to satisfy her. Shortly after, we quietly got an annulment.
So many possible responses, but for the COC…
Very rough indeed. Nothing like lead, epoxy and a few slip couplings to connect some soil pipe, except for the fact that pictured in the foreground above is electrical conduit, some duct or black tape and a corroded junction box. My guess is they have passed it directly through a plumbing vent pipe. A little spark and some lingering methane could cause flames to shoot from the roof! Hopefully they ran the vent through the roof and not into the eaves of a crawl space as some folks did when installing indoor plumbing.
I can’t fully explain this. I think this was all baked in the cake when we didn’t respond properly to the wage deflation and job destruction from automation and globalized labor.
After the Soviet union fell we had to do three things:
Get the unfunded liabilities under control.
Make a totally libertarian economy.
Every Western central bank had to switch to deflation.
You had to reign in militarism globally because this requires inflation.
Now we have both an asset bubble and CPI inflation. Plus all of the social chaos.
Remind yourself to vote. lol
In other words, we are making up for a crappy economy and government with printing money.
Say what you want, if it isn’t broke or a fire hazard, or toxic, don’t fix it.