Enough of “oh I don’t have a crystal ball”, blah blah bullshit.
Let’s sum up what the fuck is going on. It’s bad. It’s getting worse. It’s getting worse quickly.
Let’s look at the problematic topics in the economy right now….
2) Interest rates
3) Consumer Spending
Firstly, inflation… obviously high. Going much beyond real wage growth. But what’s causing this? Demand? No. It is primarily driven by supply. This all stems from the brilliant idea of shutting down the economies in 2020. It created major issues in supply chain. Think of water flowing through a pipe. Break that pipe, pump water into it to keep water flowing, then try restarting at full throttle. Good luck. Demand is no higher than pre-pandemic but the flow of supply has been fucked up.
This caused the SHORTAGES.
The economy is a complex web of chains. Break one, it affects the others. All chains broken, try restarting full throttle. Never could you do this. It leads to inefficiency. It leads to more widespread shortages.
Since demand went back to pre-pandemic levels, the shortage of supply causes inflation. It’s not absurdly strong demand. It’s a shortage of supply, with normal demand. Prices go up.
Now high inflation causes higher velocity of money. Why? Better to buy that thing today than tomorrow. What does higher velocity of money do? Add more inflation. Similarly, the job market is seeing a much higher velocity of movement of workers, leading to a perceived shortage, higher turnover and higher wages. Add more inflation.
So let’s get to the Fed solution…increase interest rates. What does that do? Decrease demand. This has 0 impact on fixing any supply issues. It can only hamper supply issues further. How? Companies experiencing out of control costs getting hammered with higher debt service costs, causes more difficulty. The Fed needs to decrease demand so significantly to match the issues from the broken web of the supply chain.
Case in point…the automotive inventory levels are so low that dealers barely have cars on their lots. Even if the Fed suppresses demand so significantly to reduce sales by 30%, the automakers will still be operating as much as they can for over a year to recoup those inventories. This is the same in a lot of industries right now. There will be no letting off the gas because of the supply issues.
So the Fed will NOT be able to solve this and will continue steep increases in interest rates since it WILL NOT tame inflation. If they are looking to tame inflation, the ONLY result will be a severe recession since inflation will not settle unless demand collapses for some time (see auto example/reason).
The consumer only has so much money. The biggest costs most consumers have are mortgage/rent, food, and energy. With the steep interest rate rises, mortgage costs will go up substantially. Rents have already gone up and will continue. Energy costs have nearly doubled. Food costs are up 25% (compare your grocery bills from before to now). With all these costs going up on necessities, less money available for discretionary spending.
So consumer spending starts to reduce, rather significantly. This leads subdued earnings (especially at companies that are not considered necessary). This results in hiring freezes and layoffs.
Investment starts to decrease as assets are revalued at higher interest rates.
The government starts pulling back on spending due to the enormous debt and higher cost of debt.
Now we have 3 out of the 4 components of GDP decreasing.
Then it is a chain reaction.
We need a quick, deep recession to rebalance all the supply and demand issues and stop more pain. The longer it drags out, the longer and worse it will be.
How long will this last? This is the question that cannot be answered because it is dynamic with variables that can be changed. Does inflation get worse, does Fed go harder, do assets deflate….
PS. Our component prices will be up 50% in vehicles by July 2022. A new car in 2023 will cost a pretty penny.
TLDR; The Fed cannot fix the supply-side driven inflation. The velocity of money is causing more inflation. This will all cause consumer spending to decrease, layoffs, and a deep recession likely for some time. We need the economy rebalanced as quickly as possible.
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