Wile E. Coyote looks down (U.S. economic downturn has begun in earnest?)

There’s a sports car dealer next to our favorite taco place here in Jupiter. Their lot was jammed with cars, seemingly twice as full as in the summer. From their perspective, the car market turned about 30 days ago. They’re now paying only MSRP for nearly-new (500-mile) C8 Corvettes. What do they turn around and sell them for? It’s a little unclear because they say “We haven’t had a call for a Corvette in 3-4 weeks. The interest rates have killed demand.” (Note that this is contrary to my theory that we have enough deficit spending and inflation-indexed spending to have inflation even if nobody does any borrowing; see Can our government generate its own inflation spiral? and Economist answers my question about high interest rates and high deficits.)

How about real estate? There’s a house in our neighborhood (built by the MacArthur Foundation for middle-class and upper-middle-class people!) whose $3.35 million asking price in April 2022 seemed aggressive, particularly since there was no pool and the new owner would have to lease it back to the sellers until October when the sellers expected their new-built house to be ready.

Here’s the “value history”:

In June 2022, there actually was a greater fool who agreed to pay $3 million for this albatross. But then it seems that this person disappeared or wised up and the closing price was $2.4 million (last week):

If you’re depressed because you forgot to sell all of your assets in March 2022, this message from the taco place might be useful:

If you’re depressed because you were dumb enough to buy a house early in 2022 at early-2022 prices (looking in the mirror is painful!), you can be comforted that you don’t live in San Francisco, which MSNBC uses as shorthand for a truly crummy and crime-plagued urban environment (the MSNBC interviewer says, regarding a higher-crime Manhattan, “We’re worried this could be San Francisco”):

Readers: What are you seeing? Did we run off the cliff a few months ago and not notice until now?

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Would Republicans be better off losing this election?

Late-night political thought… If prices are guaranteed to keep spiraling upward due to everything the government spends being indexed (see Can our government generate its own inflation spiral?), might Republicans be better off losing all of the Senate and House races on Tuesday? Even if the Republicans earned majorities in both sides of Congress, Joe Biden would likely veto any legislation that cut spending or removed inflation indexing from spending. So the Republicans have no realistic chance of reducing inflation, any more than the Inflation Reduction Act. If they’re totally out of government, only the Democrats will be blamed for the next two years of inflation and maybe that would help Republicans win the White House as well as Congress in 2024.

A Nobel laureate who is always right agrees with me: “Republicans Have No Inflation Plan” (Paul Krugman, New York Times, 10/27).

If we ignore the government inflation spiral-from-indexing effect, how much pent-up inflation is there? I remarked on the price increase for frozen peas (Peaflation at Publix). On a more recent trip, the supermarket shelves were entirely bare for all brands of frozen peas. The market-clearing price for peas is obviously higher than even the new high-ish prices. Similarly, canned pumpkin was sold out. Our 42-inch-wide built-in fridge is dying. Is a Sub-Zero a ripoff at $14,000? Actually, it is underpriced and should go up further according to Econ 101 because it will take a year (a year!) for them to build and deliver one. The company is giving away fridges right now for way less than the market-clearing price.

Isn’t there a good chance that Americans will become disenchanted with whoever wins in 2022? And some might remember Republicans’ absurd campaign promises. Here’s a medical doctor promising to “fix” inflation, which is as plausible as a Scientologist being significantly helpful at a car accident scene (Tom Cruise video; go about 1 minute in).

Even if Dr. Oz was in possession of an economic policy that would Whip Inflation Now, Joe Biden would surely veto it. Sprinkling a few Republicans into Congress isn’t going to turn around the policies that got the U.S. into this inflationary mess. Will Republicans truly gain by promising to stop inflation and then not stopping it?

Here are the House Republicans implying that voting for them will somehow stop “the highest inflation in 40 years”:

Here’s a promise from the Republican House leader to “lead the way” on inflation:

On the Senate side, here’s Mitch:

But Congress has never been able to cut spending (which spirals upward with inflation automatically). And the Republicans won’t support tax increases. So the deficit spending will continue even if Mitch McConnell and fellow Republicans can win a majority.

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Tax Day for procrastinators: big increases due to inflation

Happy Tax Day if you filed for an extension.

What’s different this year? Inflation means that ordinary schlubs can pay tax rates that were sold as applying only to the elite. The Obamacare “Net Investment Income Tax” of 3.8 percent on top of ordinary income and capital gains taxes, for example, wasn’t supposed to hit Joe Average. But what if Joe Average tried to escape the lockdowns and school closures in California by selling a house and moving to Texas? Adjusted for inflation in the real estate market, his house might not have gone up in value at all. In other words, his purchasing power from selling the house to buy a different house wouldn’t have changed (probably reduced, actually, in terms of how big a house in Austin can be purchased with the proceeds from selling a house in California). But almost surely he will have more than $250,000 in nominal gains. This is all an illusory inflation-driven “gain” and the tax code recognizes that to a small extent by excluding the first $250,000 of house price inflation. But on the rest of it, Joe will have to pay California capital gains tax, Federal capital gains tax, and an additional 3.8 percent for Obamacare. From the IRS:

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The pre-existing statutory exclusion in section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

How about a wage slave? If he/she/ze/they was earning $170,000 in 2019 and got bumped to $210,000 in 2021, his/her/zir/their spending power is actually lower due to raging inflation. Yet now he/she/ze/they is subject to the 0.9 percent Obamacare “Additional Medicare Tax” due to having income over a fixed threshold of $200,000 (soon to be the price of a Diet Coke?).

From Delray Beach, Levy and Associates:

What kind of people are paying the bill for all of the great work done by Congress and Joe Biden? From the haters at Heritage Foundation:

In 2018, due to the cruel policies of the dictator Donald Trump, the rich Americans who earned 21 percent of all income paid only 40 percent of income taxes. Separately, keep in mind that the above chart relates to cash income. A person could be in the “Bottom 50%” with $0 in W-2 income and still have a spending power and lifestyle better than someone earning $50,000 per year (in the “25%-50%” column) due to means-tested public housing, health care, SNAP/EBT, smartphone, and broadband. See “The Work versus Welfare Trade‐​Off: 2013” (CATO) for the states where being on welfare leads to a larger spending power than working at the median wage. Maskachusetts is #3 in Table 4, with welfare being worth 118% of median salary.

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Cofflation since 2017

In 2017, I purchased a single-serve coffee maker for $29.88:

This machine has brewed its last cup. How much is the new one?

The $42.39 price is 42 percent inflation relative to the $29.88 price paid in 2017. What does the official government site say? It should cost $35.88 (20 percent inflation).

Separately, if you don’t like the weak Keurig coffee, you might enjoy this one though it is slightly more effort. Keurig is trying to be French press coffee, but with minimal contact time between water and grounds. A standard drip machine like this yields a more intense drink.

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New York Times inadvertently makes my point about inflation being driven by government spending

Back in June, I wondered Could our epic deficits drive inflation no matter how high the Fed raises rates? and this question was followed up Economist answers my question about high interest rates and high deficits. Here’s the NYT front page, September 22:

The government has been shoveling out cash to people who don’t do anything to earn it while at the same time trying to stanch the inflation bleeding with high interest rates charged to those who might have a productive purchase for money. Our best and brightest can’t figure out why inflation persists.


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Peaflation at Publix

Until a few months ago, we paid $1.99 for 16 oz. of frozen peas. Now it is $2.29 for 15 oz. That’s 23 percent inflation.


  • “Frozen food category surges amid inflation: ‘It’s a dramatic shift,’ says food exec” (Yahoo! Finance, May 2022): Saffron Road’s Durrani added that “frozen is now considered an ESG value,” as well— representing yet another benefit to the overall category. …”Consumers are making a discerning choice to pay up for ‘better-for-you’ brands,” he continued, adding that the brand upped its pricing twice since the start of the pandemic — once last year (+5%) and again this year (+5%). “We haven’t seen any backlash when it comes to those price increases,” he revealed.
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Pent-up inflation from low labor force participation rate?

In the spring of 2020, the typical state governor ordered his/her/zir/their subjects to stay home and watch TV or play Xbox. A lot of us are still following the habits that we developed in 2020. The U.S. labor force participation rate:

A business executive with whom I talked in Oslo said “it takes three months to create a new habit,” which was his explanation for why a fair number of Norwegians haven’t returned to their pre-coronapanic work habits. (World Bank stats show that Norwegians are much more likely to work than Americans, with participation rates of 66 percent versus 61 percent. Part of this may be a difference in family law. It is not straightforward in Norway to live comfortably off a prior sexual relationship, either by alimony or child support. The country offers no-fault (“unilateral”) divorce, but anecdotally, profits are limited to about 10 percent of the defendant’s pre-tax income. Having sex with a high-income defendant and harvesting child support is even less lucrative.)

I’m wondering if there is some pent-up inflation that we’ve built into the U.S. economy by teaching people how great life at home with a plethora of screens can be. Getting Americans back to work at previous levels plainly will require paying them more than what employers are currently paying.

We saw evidence of this in every state that we visited this summer between Florida and Oshkosh, Wisconsin. A coffee shop near Great Smoky Mountain National Park:


A hotel manager in Oshkosh explained that he had to fly people in from Florida and Georgia to work during the peak EAA AirVenture week.

An airport manager retired in May 2021 and, as of July 2022, the city of Prairie du Chien had not been able to find a replacement at the wages offered (about $63,000 per year, plus benefits worth another $40,000 per year?):

The saddest photo of all… a homemade donut shop with shortened hours in Chattanooga:

What do we think? Is there a round of inflation built into our society that is yet to hit us? Either employers will have to raise wages to get Americans off our couches or money will need to be borrowed/printed by the government to fund all of the means-tested benefits to which the couch-dwellers are entitled (raising tax rates is not an option, I don’t think, for increasing revenue because rates are already set to the level that maximizes taxes actually collected). Both of these changes would be inflationary.

(Norway, incidentally, has no help-wanted signs nor, as far as I could tell given my illiteracy, any apology signs. The locals say that service businesses are short-staffed and that quality has suffered, but that all recruiting is done online so customers won’t see signs encouraging job applications.)


  • “Who Are America’s Missing Workers?” (NYT, 9/12/2022): “I could jump back in, but then I got used to being retired,” said Thomas Strait, who chose early retirement at the beginning of the pandemic. [moving from California to Florida] … men in their prime working years, from 25 to 54, have retreated from the work force relative to February 2020, while women have bounced back. [Is it men or women who love Xbox more?] … “A lot of workers are still disconnected, and we’re just not seeing them come on,” said Jesse Wheeler, an economic analyst with the polling and analysis firm Morning Consult. “It’s unclear how all of them are making ends meet, but I think it has a lot to do with consolidation of households and cutting costs. It would’ve been difficult to change if they weren’t forced into it.”
  • Help-wanted ad from the University of California, Santa Cruz: The Critical Race and Ethnic Studies Department (https://cres.ucsc.edu/) at the University of California, Santa Cruz (UCSC) invites applications for a an Assistant/Associate Professor of Critical Race Science and Technology Studies (STS). … A demonstrated record of research that de-centers Western scientific ways of knowing and challenges extractivist capitalist practices is especially welcome as are commitments to queer and indigenous ecologies, trans-species studies, and race-radical approaches to STEM. … Ideal applicants will demonstrate an approach to science and technology grounded in histories of and innovative methods of analyzing anticolonial, decolonizing, liberationist political thought and praxis, … Document requirements … Statement of Contributions to Diversity, Equity, and Inclusion** – Statement on your contributions to diversity, equity, and inclusion, including information about your understanding of these topics, your record of activities to date, and your specific plans and goals for advancing equity and inclusion if hired at UC Santa Cruz. Candidates are urged to review guidelines on statements (see https://apo.ucsc.edu/diversity.html) before preparing their application.
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Today’s stock market drama

From May 9, 2022, S&P 500 down at least 6 percent since Joe Biden took office:

Who wants to get bragging rights by calling the bottom on this market slide? I’m going to say that the correct value is 3,200 (pre-coronapanic value) plus 0 percent growth for 2020 when Americans cowered in place and 8 percent growth for 2021. Then add 20 percent for the inflation rate that is experienced by people with enough money to buy stock. So today’s correct nominal value is 4,096. Markets tend to overshoot, though, so let’s take 5 percent off that for the bottom: 3,891.

Today the S&P 500 closed at 3,932, down 4.3 percent after the government released inflation numbers.

Let’s look at the chart:

Not a huge change compared to May 9, 2022, at least in nominal dollars, but the index is down in real terms given the inflation that continues to eat away at savings.

My prediction that the stock market would bottom out at 3,891 was wrong. 3,667 on June 16 was the local minimum. But some of the folks who commented were off by even more, e.g., with a prediction of 2,700 (but on the third hand, I didn’t specify a time interval so it is possible that we will yet reach 2,700).

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Inflation at Target

The latest CPI numbers are out today. What’s the correct level of panic?

Here are a couple of mid-August pictures from Target:

Prices were going up to fast that the “Sale!” numbers are actually higher than the regular prices, listed above (it isn’t a positional error; the SKUs match).

“U.S. Inflation Eased to 8.3% in August” (WSJ, today) headlines what seems like an irrelevant number in a world where half-trillion-dollar government spending programs may be announced at any moment (e.g., Joe Biden’s transfer of student loan debt from the laptop class to the working class, funding housing, health care, food, etc. for millions of additional migrants, ). Is the price increase compared to a year ago informative regarding what to expect next month? If we dig into the article we can learn a bit about what is happening now:

On a monthly basis, the CPI increased 0.1% in August from July, despite a sharp decline in gasoline prices. The core CPI rose 0.6% in August–double July’s pace.

The best estimate of current inflation, then, is 7.4% annually (the 0.6% core number, fed into the Google as 1.006^12). But it could also be only 1.2% (based on the 0.1% month-to-month number).

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Europeans printing their way to happiness

“As Crises Mount, Europe Turns Once Again to Big Spending” (NYT, today):

Nationalizations. Subsidies. Cash handouts. Price caps. Profit taxes. It’s back to 20th-century economics in Europe.

Governments are resorting to old-school solutions, long dismissed as bad policy, throwing vast amounts of money at the energy crisis engulfing the region, in a bid to avert a political, social and economic meltdown.

In response [to rising energy prices], E.U. governments have already earmarked more than $350 billion to subsidize consumers, industry and utility companies; ministers are to meet on Friday to finalize the bloc’s direct intervention in markets to grab excess profits, cap electricity prices and subsidize utilities companies.

The huge public spending is in addition to a nearly trillion-dollar stimulus package adopted over the past year to deal with the economic fallout from the pandemic, mostly through borrowing. The ballooning debt load would have normally caused an uproar in the bloc, where fiscal conservatism has dominated policy and politics for years.

“This is clearly an exceptional and one-off situation,” said Daniel Gros, a German economist and director of the Centre for European Policy Studies, a Brussels-based think tank, who normally takes fiscally conservative positions. “It’s different from increasing unemployment or social benefits structurally forever, and it’s a special situation that won’t last forever.”

The last paragraph is my favorite. Coronapanic was exceptional, so borrowing/printing and spending $1 trillion (amateurs! the U.S. spent $10 trillion) in 2020/2021 was okay. The rise in energy prices is 2022’s exceptional event, so borrowing/printing and spending another $1 trillion will also be okay. The end of the paragraph is also interesting. The U.S. actually did make “structurally forever” changes to the American welfare state, already the world’s 2nd largest (percent of GDP), the free-forever broadband benefit for those who choose not to work and King Biden’s forgiveness of student loans previously owed to the Crown. According to the Germans, therefore, we are headed for disaster.

Eurocrats seem to think that voters won’t notice the subtle inflation tax caused by these programs and/or future standard tax increases. They’re paying subjects with their own money:

The Belgian government has handed out $100 to every household irrespective of income.

This is a fascinating example of human psychology. Europeans will eventually have to pay for all of the energy that they’re consuming in 2022 and they’ll have to pay the 2022 price. But they’re going to be happier paying starting in 2023 if the government gives them a Three-card Monte game to watch in 2022. And they’ll be happier getting a pay cut via inflation than getting a pay cut in nominal euros.

What’s non-EU-member Norway doing, other than getting insanely rich from the war in Ukraine? The nation’s hydroelectric power is being sold at record prices to the rest of Europe. The oil and gas wells are producing unprecedented gushers of money. Consumers have to pay higher prices for natural gas, but the government steps in and pays, using the record revenues coming in for oil and gas, 90 percent of the amount over a set price. Cruise ships that formerly stopped in St. Petersburg now come to Oslo for two days per sailing, paying enormous port fees and buoying the local tour operators.

“The problem with socialism is that you eventually run out of other people’s money,” said Margaret Thatcher. Norway has amended this to “The beauty of socialism is that you never run out of the dinosaurs’ money”.

Here are some of Oslo’s gleaming new waterfront neighborhoods next to the gleaming new Munch Museum:

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