Inflation Woes

 

Short Term Pain For Long Term Thinkers

How often do you find yourself saying, 

“Ughh, these prices. I’ll need a raise at some point, show me the bargains"?

At Walmart the other day, yes I shop there you snobs, I grabbed the small cart for a midweek shopping run. The midweek buy is just for essentials, mostly Sudafed and whiskey. I haven’t had to take the calculator with me in a long time and that’s just fine. It’s a good practice when you’re trying to be frugal and get the most for your buck. I thought my Aldi days ended after college, yes I shopped there you snobs. 

At a certain point I became a little more finicky about my groceries and swore off that discount juggernaut. I might be taking a closer look at it again if prices keep going up like they are.

I get used to buying, roughly, the same items and spending the same amount without even trying. There are some days when I need the extras, laundry soap and paper towels, that add a higher percentage to the bill. Mostly I’ve got my grocery bill locked in. The problem is inflation. We all know instinctively what it is and what it feels like. It’s a tax you weren’t counting on, or a pay cut right off the top of your salary. You might not think about it until you’re in line at Walmart and your cashier announces the total. Your first reaction might be “How many pizza rolls did I get anyway?” Or “I thought I left the institutional size bacon pack in the freezer”.

Inflation is the surprise you didn’t see coming. Maybe you should have, but it’s hidden. Prices rise when the money supply increases. In our recent history the most common way of creating inflation is through bond buying. The Fed purchases bonds from large banks and the cash it uses to buy the bonds goes into the economy via the banks. The purpose is to get the banks to use that cash to issue loans to other businesses. When companies get loans they go out and build, buy and hire. The extra cash in the market is supposed to get the economy going.

They can also purchase toxic loans, that's what happened in 2008. The Fed set up a fund and capped it at $700 billion, to be used to purchase troubled assets. Those crappy packaged loans that caused all the trouble to begin with.

But that’s in the textbooks already. It’s Wikipedia stuff about TARP (troubled asset relief program) and website summaries about how bond buying works. In truth it’s never that clean, especially when politics are involved. No president wants to have a stock market crash on their watch. Bankers don’t want lines and panics outside their offices. Investors, from the big funds to the small financial planners are loathe to lose value. Business owners of all sizes can’t afford to shut down operations for even a few days. Money goes out to lenders, and it comes in from customers all day. When capital stops flowing it’s a loss for everyone.

JFK famously said that a rising tide lifts all boats. That’s certainly true for a time. But the tide eventually goes out.

We’re in low tide economic season right now. The inflation is the result of overspending by the federal government. As long as business is good, the increasing tax receipts takes care of the debt. But without accountability there is no brake on spending. Most of our budgets are on autopilot anyway. Don’t fall for those debt limit charades Congress pulls every year. It’s theater. There isn’t a real debt limit anyway. As long as everyone gets paid (in a manner of speaking) majorities aren’t likely to actually vote down a budget. Keeping the debt limit in place sends a signal to the rubes (yes, me too) that they’re still negotiating responsibly. You know, cause two Trillion dollars of spending is reigning it in.

We might be in for another housing type crisis like the one in 2008. I say “housing-type” because of the fraud inherent in the packaged loans. They were valued high but worth nothing. Where are the overpriced bargains? What out there is priced like a high rise condo in South Beach, but is actually a condemned apartment building in Baltimore? Economic downturns are for people on the sidelines looking for good deals. It’s when the savers finally get their shot at some value buys. Collapsing prices, and yes recessions, are good for scrappers that stay out of debt. No one wants a 1920s era depression that wipes out the economy for a decade, but an honest recession exposes the underlying weakness. That’s how it’s supposed to work.

The government will never allow the biggest banks to fail. They’re tied in with the Fed like bells on a string. It’s not a market economy in the truest sense anymore. With no risk there is no reward. Lenders can take huge ‘risks’ because failure isn’t really failure when the government backstops your efforts. This only changes if the whole system collapses. That’s some serious Mad Max type carnage that no one wants. Or maybe I’m wrong. There may be a way to save this thing without the cage fights and desert gangs. It will probably take going back to Aldi for a bit. We’ll all have to learn how to save again. We’ll have to break out the calculators and argue with the cashier over a $1.50 coupon on Honey Bunches of Oats. But I can’t imagine the US economy becomes a place for everyone again without some short term pain.