(Peter St Onge, Ph.D) The Federal Reserve has been gas lighting the American people for two years now on inflation in the economy. At this point the happy talk is hitting reality with the latest Empire State manufacturing survey, a bellwether for conditions across the country showing its biggest plunge ever, second only to the month they literally shut down the economy for COVID-19. Economists had expected a minus five on the survey. A minus means the economy is contracting. The actual number was minus 31.
Everything dropped across the board. New orders plummeted. Unfilled orders plummeted. Shipments crashed. Capital expenditures dropped to zero meaning companies are running down their assets at this point. Companies are even reducing workers and reducing the work week, both leading indicators of layoffs in fact the survey that is now at a number we have not seen since the depths of the 2008 crisis.
There were only two months out of the 18-month Great Recession that were this bad so we are obviously not performing exceptionally well as Janet Yellen has been telling us. Nor is the economy strong as hell as Joe Biden keeps maintaining. In fact these are the worst readings since the worst of 2008 and by the way 2008 itself was the worst recession since the Great Depression.
Indeed recent data is saying we could be very lucky if we only get as bad as 2008 because at least back then we did not have very much inflation. Banks dutifully hoarded the handouts that they were given by then chair Bernanke to cover for their bad debts. Not so this time. I mean banks are still hoarding their handouts instead of lending them out but it turns out printing up a third of the money supply in two years to fund a massive government takeover of the economy is in fact inflationary.
As I mentioned the other day, Americans inflation expectations for the next five to ten years are soaring again. In fact they’re higher than the peak of the inflation last year when the official rate almost kissed nine percent and the unofficial rate was well into double digits. I guess Jay Powell was not kidding last year when he confessed “we now understand better how little we understand about inflation”.
Put all these together and we’re looking at a 2008 style collapse before the recession that has allegedly started. Paired with a manufacturing collapse to go with the bank collapses we have already got. All paired with potential double-digit inflation that is already looking like it’s ready for a second go round.
We would have to go back to the 1970s to get the kind of stagflation the data is currently telegraphing. Of course in the 1970s we did not have 31.5 trillion dollars in debt which is now estimated to cost a trillion dollars a year simply to service and we also did not have banks dropping like flies. So yes we could get something even worse than the last decade our parents warned us about.
So, what’s next? Expect more of ‘this is fine’ happy talk from Yellen, Powell and Biden as the fire gets worse. Give it another month and maybe Powell will even update us on how much more he has learned about how little he understands the economy. In the meantime the American people will have to wait for solutions.
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