Inflation is back. What’s left to see is what anyone does about it.
The Consumer Price Index (CPI) for January came in at a strong 2.1% over the last 12 months. That’s above the target rate of 2.0% set by the Federal Reserve for the fourth month in a row. There will be attempts to explain it away in various ways. In the noise that will be created over this what will count is action by the Federal Reserve one way or the other.
Arrests by Immigration and Customs Enforcement (ICE) were up in 2017, but not as dramatically as you might think. What has increased is the visibility of these arrests and the fear that they bring. It is generally believed, without only scant evidence, that undocumented immigrants are leaving the US in large numbers. This would continue a downward trend which started in 2007.
Some people might cheer this action, but as a whole the economy probably isn’t. Undocumented workers do jobs that no one else wants to, for the most part. Their absence means that work is not being done and wages are rising rapidly in areas that have depended on cheap labor for years. There may be signs that this is accelerating and will ultimately spark a high rate of inflation and even shortages.
We’ve been talking about the stock market this week, so why not end it with a bold prediction: Once the federal debt ceiling is raised, look for the stock market to utterly tank within two weeks, certainly within a month.
While there are many reasons why the market is taking at least a pause if not slouching towards a correction, the most important is the appetite for government debt. A time like this requires careful management and attention to consequences. We’re not getting it. What we have instead is mismanagement on an epic scale that will certainly spook the market and ultimately kill it.
Stocks appear to have stabilized after a rough week. But several questions remain. Was this a one-time shock event, or is it a correction? And if it’s a correction, how low can things go?
We can be sure that what has happened so far is not an isolated event, but part of a major change in the regime from loose, cheap money to a more normal economy. Corporate profits are high, and America is taking care of business, so there’s no apparent reason to be terribly afraid.
Yet the change is significant, and precisely how significant will not be clear for some time. Here is what to watch for as stocks and other markets absorb the change and make a transition into a new economy.
As the eight year old bull on Wall Street is slaughtered for its meat, several questions come to mind. Is the fall likely to continue? Where will it stop? And, for those on the sidelines looking to score political points, who is to blame?
The answers to these questions are easy and a little terrifying. Yes, this is going to go on for a while. It may not stop until a lot of money is lost. And while you can’t blame anyone for actions which are cyclical, you can blame those who make things worse. The US economy is a large engine, and any good mechanic knows that while you can do a few small, smart things to make it run better it is much easier to really screw it up.
It’s becoming a common theme – the economy is in great shape! Whether you want to give credit to Trump or Obama, it’s definitely all about policy of some kind, right?
Barataria has been revisiting some old arguments to build a new study for how the economy is changing. As the Managed Depression of 2000-2017 moves behind us, the reshaping of how we work, shop, and generally get by is starting to take shape. It’s hard to be sure about much.
One thing we do know – none of this happened overnight. So let’s revisit some old discussion.
President Trump is threatening a trade war with Europe. “I’ve had a lot of problems with the European Union, and it may morph into something very big from … a trade standpoint,” Trump said in an interview with British ITV on Sunday. “It’s a very unfair situation, we cannot get our product in. It’s very, very tough, and yet they send their product to us — no taxes, very little taxes.”
Yes, trade in goods and services with Europe is not precisely balanced. But why? Is it because it’s so hard to get products in, and they have a tax advantage? Wasn’t that supposedly taken care of in the recent tax bill?
Like most of what Trump says, the statement is not only wrong, but completely misses the difficult underlying reason why US trade will never be in balance. It’s a major feature of the power we wield around the world through the greatest strength we have – the US Dollar. And messing it up may make us lose far more than we think to in the destruction of a “war.”