Note: The comments have been getting bombed by Ukrainian bots, which is why moderation has been so immoderate. This was part of the public relations campaign around the recent offensive. It is slowly abating, but for now moderation will remain tight to prevent a flood of nutty comments.
The American stock exchanges dropped sharply yesterday when it was announced that the inflation reduction act had not reduced inflation. The consumer price index came in higher than expected. This triggered the robots to sell on the expectation that the Federal Reserve will keep tightening the money supply. The DOW dropped 3.94% bringing the decline for the year to 14.4%. Luckily, they have changed the definition of a bear market so this is still a bull market.
The inflation report was all bad news. Gasoline prices declined ten percent, but all other energy increased for the period. That probably means two things. One is the gas price decline is due to less driving. In other words, people are adjusting their spending because inflation is not starting to take a bite out of their budgets. Instead of a weekend car trip, people are staying home. According to AAA, over all sales of gasoline declined in August to levels last seen during the lockdowns.
Another piece of the gasoline puzzle is the dumping of cheap crude on the domestic refineries by the Biden administration. They panicked when gasoline hit five bucks a gallon nationally so they started releasing crude from the SPR. This drives down the price of gasoline a little. The taps run dry at the end of next month, just before the election, so prices will tick back up. In other words, some of the bad news has been pushed out to after the November elections.
The reaction to the inflation report is a good example of how the people in charge believe their own narratives. The never ending debate on this side of the great divide is whether they believe their nonsense. When it comes to the economy, they can talk themselves into anything. They had Biden out bragging about the good economy just when the report was released, on their assumption that it would be the proof they needed to go along with his speech. Whoops.
This also ties in nicely with the orchestrated media campaign in August claiming that Joe Biden was leading his party to victory in November. They rolled out a bunch of polls along with pleasing narratives about specific races. Of course, they claimed that abortion was killing the Republicans with voters. The narrative said the economy was catching fire, inflation was falling and this would result in the most popular man in history leading his party to a smashing success.
Putting that aside, inflation is the second worst thing that can happen in an economy, the worst being deflation. There is a debate about where the sweet spot is with prices, but everyone agrees that anything outside the two percent range is bad. The Fed targets two percent inflation. The sound money guys think a two percent decline in prices is the right target. Right now inflation is at eight percent using the current model and double that using the old model.
That last bit is key. We have been lying to ourselves about inflation since the 1990’s and it is obvious when you look at old bills. Pull out a cable bill from ten years ago and you see the difference. Food is probably twice what it was ten years ago. Ten years ago, people were complaining about two dollar home heating oil. In places with real winter, oil contracts are around five bucks a gallon now. This has been over a period when they say inflation was around two percent.
The subtext to this is the politics. The reckless behavior of the ruling class made people angry enough to vote for Trump when times were good. When people are worried about buying food, they tend to get a bit cranky. This hits the middle-class even more as they are riddled with angst. Poor people accept that they may have to stand in line for food, but middle-class people loath the idea of it. It is why we hide food banks from the middle-class, so they are not freaked out about it.
A suddenly panicked middle-class, still not happy about the 2020 election or the behavior of the elites, might start looking around for something a bit stronger than Trump and his one-liners. Whether that is happening or not does not matter, as the regime will assume it is happening. That is why the administration is sending goons out to rough up political opponents. Just as they were sure inflation was a social construct, they are sure the invisible Hitler army is angry over inflation.
This is probably why Russia and China are so confident about their prospects in this global economic war. They look at Europe and see an economic and political circus that is about to get very bad. In the United States, all the signs point to the last days of an empire in decline. Realistically, they are not wrong. America has been broken for a long time and now it is going broke. That is why countries like India and Saudi Arabia are not siding with the empire in the war against Russia.
Putting that aside, the news is all bad right now as far as the economy. The Federal Reserve has no choice but to keep raising rates. They should have moved faster and earlier, but Powell is doing his Arthur Burns impression. He was the Fed chief in the 1970’s who dithered while inflation raged. Powell seems to be finding his inner Volcker so that means tight money and that means recession. Just how deep is the only question that matters at this point.
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