U.S. stock prices and President Biden’s approval ratings continued to decline as inflation swamped household incomes. Only 39% of Americans approve of Biden’s performance, and only 33% of Democrats believe the country is moving in the right direction. That’s not surprising, given that the retailer’s stock has plunged nearly 40% this year. The S&P 500 is teetering on the brink of a bear market — a peak-to-trough decline of 20% or more.
Biden’s stimulus — compounding the Trump administration’s mistakes — amounted to a Ponzi scheme that dumped $6 trillion in spending power on American consumers while limiting supply. It’s like giving out 10,000 vouchers at a baseball game for 5,000 available hot dogs.
The result was an inflation rate of 12%, not the 8% reported by the Bureau of Labor Statistics. Hourly wages are only increasing by 5% a year, so real earnings are plummeting. Americans have been racking up credit card debt to make up the difference, but the collapse in retail stocks shows that the post-pandemic consumer boom is over.
U.S. consumer prices rose 8.3 percent in the year to April, according to official data, but that includes estimates for housing inflation, which is just 5 percent a year. According to Zillow and Apartmentlist.com, the two most comprehensive private indexes, rents rose 16% in the 12 months ended April 30. Housing accounts for one-third of the consumer price index, so the actual transaction-based private sector housing count adds another 4 percentage points to consumer price inflation.
The Asia Times’ adjusted inflation rate of 12% means that the first quarter of 2022 saw the sharpest decline in real earnings on record and was worse than the 1979-1980 recession – the last time inflation hit double digits Counting hours – even worse. After-tax earnings fell even more because inflation pushed workers into higher tax brackets and raised their effective tax rate.
The Trump administration is partly to blame. The massive federal bailout to offset the economic impact of the Covid pandemic began with the previous administration. Biden made things worse.
That explains why the retail sector led the market down after warnings from Walmart and Target that big-box retailers can’t pass on rising costs to customers.
Inflation is crushing capital investment and consumption. The Philadelphia Fed’s monthly survey of manufacturing, an early indicator of economic activity, followed, showing a sharp drop in overall activity. Prices paid for raw materials and labor continued to rise, while planned capital expenditures fell.
The Philly Fed series is a diffusion index, so a price paid reading of 80 means that 80% of survey respondents are paying more than the previous month. Higher input costs mean lower revenue and shrinking profits, as well as less money for capital expenditures.
Lots of extra demand but no extra supply, lots of hot dog coupons but not enough hot dogs, is the culprit behind Biden’s Great Inflation. The Fed is fueling the library game by expanding its balance sheet by $6 trillion, effectively printing money to pay for consumer stimulus.
But the problem comes from the supply side. U.S. companies are investing as much in 2021 as they did seven years ago, leading to a huge deficit in productive capacity.That’s why raising interest rates won’t have an effect on inflation – except maybe indirectly by taking some air out of the house price bubble – as I’ve written in this space April 6 (“Untimely Fedism in U.S. Monetary Policy”).
An underinvested U.S. economy cannot meet the tsunami of demand spurred by stimulus. Biden’s library money can’t find enough American goods, so it buys goods from China. This underscores the failure of Trump’s tariffs on China: From August 2019, when the tariffs took effect, to April 22, China’s exports to the United States rose by a seasonally adjusted 55%. The only sensible advice from a Biden administration on inflation came from Treasury Secretary Janet Yellen, who observed that removing tariffs would moderately reduce inflation.
A collapse in corporate capital spending will only worsen inflation. U.S. non-financial corporations will not invest nearly as much in 2021 as they did in 2014. Trump’s 2017 corporate tax overhaul is partly to blame. It reduces the overall rate of corporate tax but removes the depreciation allowance for capital investments. As a result, S&P 500 companies spent more to buy back their own stock than they invested in capital in 2018, the first time since the 2008 recession.
