“I want to talk about happy things, man.” – President Joe Biden, July 2, 2021
Lasting Disaster
While the prices of some commodities have decreased, they remain far from signaling the end of price inflation.
Take lumber futures as an example; they fell over 40 percent in June, representing the largest decline since the 1970s. However, after soaring from around $495 per thousand board feet in October 2020 to a peak of over $1,423 in April 2021, the current price of $718 is still nearly double the average for the past three decades.
Similarly, futures for lean hogs have tapered off. After peaking at 121.95 cents per pound on June 9, they are now at 110.10 cents. Yet, despite this recent drop, lean hog prices have risen by over 57 percent since the start of 2021.
One year ago, raw sugar futures were at 11.76 cents per pound. They peaked at a four-year high of 18.49 in February, but as of now, they sit at 17.45 cents. A portion of this increase is due to concerns about adverse weather affecting sugarcane production in Brazil. Is it time to consider sugar in your investments?
What’s behind these erratic price movements? Have demands waned, or have supplies increased? Has the broken supply chain been fixed? Is weather to blame?
Perhaps, but we might not see prices revert to pre-pandemic norms.
The economy, shaped dramatically by extreme government intervention, has changed significantly since the pandemic began. Lockdowns created chaos—disrupting production, supply lines, and capital distribution.
Yet, the remedy for these lockdowns—massive financial relief—has ushered in a long-lasting crisis that is unlikely to fade. Here’s why…
Price Distortions
The federal deficit reached $3.1 trillion in fiscal year 2020, more than three times the deficit for 2019. This represented over 15.2 percent of GDP, marking the highest deficit relative to the economy since 1945. The 2021 deficit is also expected to surpass $3 trillion.
A significant portion of these deficits has been funded through printed money—that is, credit fabricated by the Federal Reserve. In February 2020, the Fed’s balance sheet totaled $4.1 trillion, and now it exceeds $8 trillion, nearly doubling in just over a year.
The Fed continues to expand its balance sheet by about $120 billion monthly; of this, $80 billion is directed to U.S. Treasuries, and $40 billion to mortgage-backed securities. This influx of printed money has, undeniably, fostered a persistent crisis.
Inflation fundamentally stems from an increase in the money supply. Rapidly inflating the money supply yields strange and often chaotic outcomes.
Companies that shouldn’t survive are given lifelines, individuals receive payments to stay out of work, housing prices skyrocket, and the NASDAQ, following a decade-long bull market, doubles in just 16 months.
Tech giants like Apple and Microsoft soar beyond a $2 trillion market cap, and NFT digital artworks are auctioned for $69 million. Additionally, a stark disparity exists between those applying for pandemic-related unemployment and the record number of job openings.
Moreover, these price fluctuations are swift and unpredictable. Lumber and food prices, for instance, exhibit a volatile up-and-down rhythm, akin to ocean tides influenced by celestial bodies. Such wild variations create confusion for actual suppliers and wholesalers.
The Wall Street Journal recently reported that grocery stores are accumulating stock of frozen meats, sugar, and other goods to mitigate anticipated price hikes. This behavior, driven by perceived shortages and undue stress on supply chains, only exacerbates the issue, leading to unnecessary production followed by surplus and sudden price drops.
Is the Great Post-Pandemic Boom a Great Big Dud?
It is crucial to remember that prices convey information. When this information is distorted by an oversupply of currency, businesses and individuals are driven to make illogical decisions. The most impacted market—the credit market—becomes susceptible to such destructive behavior.
As previously mentioned, the Fed is injecting $120 billion monthly into Treasury and mortgage sectors. The resulting price distortions caused by historically low mortgage rates are astounding. In parts of California, for example, 1,200 square foot homes from the 1940s, lacking charm, are being sold for a million dollars.
This week, the yield on the 10-Year Treasury note fell below 1.30 percent. Given that consumer price inflation is running at around 5 percent, this effectively means that in real terms, the yield on the 10-Year note is negative. What is going on?
Are investors fleeing the stock market in favor of Treasuries, seeking safety? Is the much-hyped post-pandemic boom turning out to be a mere illusion? Has the reflation trade lost steam?
Answers are elusive, primarily because the Treasury market has been manipulated by Fed interventions. What is evident is that artificially low Treasury rates allow the government to manage its colossal debt more easily.
In summary, through monetary policy that keeps short-term interest rates below inflation, the government effectively extracts wealth from your savings and future earnings to repay public debts. This results in a transfer of economic growth away from the populace, as zero interest rates and rampant money printing serve to devalue government debt.
The fallout from this is dire for wage earners and savers. As a rough estimate, one might expect that by the end of the decade, prices will have roughly increased by a factor of ten. A 10-Year Treasury note yielding 1.30 percent certainly won’t bridge that gap.
Sincerely,
MN Gordon
for Economic Prism
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