Economy slowing for a number of reasons, which is incredibly disconcerting since it has not even rebounded to pre-COVID levels. Very much a "tale of two cities". Some industries can't keep up with demand, others languishing.

In terms of employment dislocation and people not going back to work... this is madness.

A FUNDAMENTAL flaw in the modern, socialist democracy is that we have severed the link between effort and sustenance. Go back 150 years, if you did not farm or work, you did not eat. Today we have severed that link. It is wrong and economically unsustainable. We have exacerbated that wrong with the extension and enhancement of unemployment payments. Ask anyone who owns or runs a business these days. Finding people is extremely difficult and anyone with an admin job, (i.e., not directly in manufacturing, swinging a hammer or turning a wrench) wants to "work remote". Which in many cases means lounging around, walking the dog and putting a solid 2-3 hours of work into an 8 hour day. Net, net between expanded benefits and remote "work" an overall drain on output and productivity. More folks in the wagon and fewer pulling.

The Fed, I believe, lacks the cajones to put interest rates back up. We have become addicted to cheap money. Demand for nearly every expensive good that we have is dependent on low interest rates and "low monthlies", with less regard for the principal amount. Cheap money begets inflation, inflated prices require cheap money to keep pricey goods within reach on a monthly payment basis. Real estate, cars and yes airplanes.

And you are correct, about M2. Far too much $$ in circulation. Fundamentally money is a medium of exchange representing surplus value that has been created but not yet consumed. Go back to the farm... if i only grow enough corn for my family I have no surplus to trade. Trade requires surplus value creation. Trade requires an underlying value. Money just simplifies the transaction. So the money supply should either expand or contract with GDP. End of discussion. All else is alchemy, an illusion.

We are also mortgaging our kids and grand kids futures with all of this debt. Traditionally, parents save and work to make things better for their kids. We are doing the opposite. We are saddling the future generations with a national debt that they have no prayer of paying off absent historically unprecedented economic growth, or the robber baron of inflated dollars. Either way our demands as a people, and the behavior of politicians in this regard is beyond feckless.


This will end. This will end badly. The only question is when, how loudly, and will we recover or become a zombie economy like Japan.

The Fed's position is difficult. And Powell's personal situation is somewhat tenuous. It will be interesting to see if he get's reappointed, and if he does, if there are any fundamental Fed policy changes.

In terms of addiction the principle decision makers are the ones really addicted to cheap money and they have a very difficult set of political, not to mention, economic problems if/when rates go up.

The Fed has tried twice to raise and been forced to back down each time.

Interesting that you mention Japan. Their long term economic problems have been driven by demographics. A very old population with not enough young workers to hold up the pyramid. This is the same problem facing Europe, Russia and especially China. Not so much in the U.S. Yes, we have more older people all the time, but except for the Covid dip our birthrates have generally remained above replacement and the immigrants many like to bitch about are keeping our average age lower and more people under the pyramid to support the old folks.

When you take a look at what happened to Japan when they decided to get off of cheap money it's interesting. It was painful for them but they have more or less survived. It could be an object lesson for us.

A lot of the younger people that might In theory be holding up the pyramid are not taxpayers or are net negative taxpayers.

Bingo!

At the risk of getting flamed.. Look at where the birthrates are higher and where they are lower from a socio-demographic perspective.

https://www.statista.com/statistics/241 ... in-the-us/

It depends on several factors primarily your location to an airline hub. If you live near a hub it makes the playing field more level. A 182 or in my case a 195 that is Ifr equipped can beat the airlines most everytime on a 500NM trip.

KTUP - KICT 468NM
130kts 3.6 hours of flight time no wind

Airline.
MEM KDFW 1.3
1.0 connection time
KICT ICT 1.0hours
Drive TUP MEM 1.8 hours
Arrive 1.5 hours early at the Constitutional free zone to get in line to be inspected by the gestapo.

6.6 hours if the flight leaves and if you don’t have a problem with the connection.

Another issue with the airlines is the terminal. It almost takes a visit to a guru for me the get ready to wade the unwashed masses of humanity. I wish I could buy a body condom to insulate me from the the traveling JOE Q Public. Cheap airline tickets have turned the airlines into the greyhounds of the the sky. Not to mention the mask issue, lines, delays, non exinsistant service and the customers that won’t fit in the seat they bought.

Makes an old worn out 182 or 70 year old 195 seem like a magic carpet.

Nicely written summary. I think it captures our current situation pretty well.

The outcomes however are still up in the air. Inflation vs Deflation is still unanswered. I am leaning towards a bout of sustained inflation. The Fed cannot allow interest rates to rise or the govt would be unable to cover the interest on the debt plus its obligations. The Fed would have to monetize directly and the jig would be up. Runaway inflation would follow.

Many are watching the sausage making in DC on further stimulus. If all of it passes you can expect a lot more of JGG's funny money to come raining down. I disagree on your characterization of the infrastructure bill as indirect. The money will directly rain down on the upper classes and business owners, exactly the folks that would think of buying an airplane (especially in Chip's world). So that could definitely sustain at least turbine prices.

If an inflationary psychology catches on, people will not want to hold onto "zero-interest paper" and will want to trade them for hard assets as quickly as possible. If wages continue to rise as they have been in order to get workers in the door, we could end up with a wage-price spiral and a repeat of the late-70's or worse (I don't see a Volker anywhere on the Fed's roster).

One last thought, we could have both. We could be seeing a return of the deflation we were seeing pre-COVID. In that case, if the stock market drops a bunch and we have a recession, the funny money spigots could open wider than we could even imagine in order to save the economy. That wave of cash could then fully set in motion a change to an inflationary regime.

Finally, this could all take years to play out. The current stock market bubble could easily last for another year, until the Fed starts taper/hiking. So it could absolutely pay to wait to buy. But keep in mind that you may be waiting a while.

All our babies are magic carpets!!!

It depends on several factors primarily your location to an airline hub. If you live near a hub it makes the playing field more level. A 182 or in my case a 195 that is Ifr equipped can beat the airlines most everytime on a 500NM trip.

KTUP - KICT 468NM
130kts 3.6 hours of flight time no wind

Airline.
MEM KDFW 1.3
1.0 connection time
KICT ICT 1.0hours
Drive TUP MEM 1.8 hours
Arrive 1.5 hours early at the Constitutional free zone to get in line to be inspected by the gestapo.

6.6 hours if the flight leaves and if you don’t have a problem with the connection.

Another issue with the airlines is the terminal. It almost takes a visit to a guru for me the get ready to wade the unwashed masses of humanity. I wish I could buy a body condom to insulate me from the the traveling JOE Q Public. Cheap airline tickets have turned the airlines into the greyhounds of the the sky. Not to mention the mask issue, lines, delays, non exinsistant service and the customers that won’t fit in the seat they bought.

Makes an old worn out 182 or 70 year old 195 seem like a magic carpet.

I had to smile this morning when FOX Business TV had a short piece on this subject.
I forget what dealer the reporter was talking to, but he said he saw no end to the demand.
It was a bit of a fluff piece, but the timing to this thread was interesting to me.

Nicely written summary. I think it captures our current situation pretty well.

The outcomes however are still up in the air. Inflation vs Deflation is still unanswered. I am leaning towards a bout of sustained inflation. The Fed cannot allow interest rates to rise or the govt would be unable to cover the interest on the debt plus its obligations. The Fed would have to monetize directly and the jig would be up. Runaway inflation would follow.

Many are watching the sausage making in DC on further stimulus. If all of it passes you can expect a lot more of JGG's funny money to come raining down. I disagree on your characterization of the infrastructure bill as indirect. The money will directly rain down on the upper classes and business owners, exactly the folks that would think of buying an airplane (especially in Chip's world). So that could definitely sustain at least turbine prices.

If an inflationary psychology catches on, people will not want to hold onto "zero-interest paper" and will want to trade them for hard assets as quickly as possible. If wages continue to rise as they have been in order to get workers in the door, we could end up with a wage-price spiral and a repeat of the late-70's or worse (I don't see a Volker anywhere on the Fed's roster).

One last thought, we could have both. We could be seeing a return of the deflation we were seeing pre-COVID. In that case, if the stock market drops a bunch and we have a recession, the funny money spigots could open wider than we could even imagine in order to save the economy. That wave of cash could then fully set in motion a change to an inflationary regime.

Finally, this could all take years to play out. The current stock market bubble could easily last for another year, until the Fed starts taper/hiking. So it could absolutely pay to wait to buy. But keep in mind that you may be waiting a while.

Chris,

I'm not saying their won't be direct beneficiaries, I agree that there will be. But, there will also be huge indirect beneficiaries and massive inflationary consequences as well.

It's still an open question as to how the books get balanced vis a vis the so called "wealthy" and many "business owners" fall into one definition or another (Joe the Plumber anyone). The current tax proposals, especially capital gains, are going to be fairly punitive if enacted on some parts of this group. Not all, as many of the Uber rich will have escape mechanisms not available to the average "rich" person (Joe). And some of these will benefit from government contracts, etc. but most won't, they'll just get to pay more taxes.

There are political and social efforts here that we can't discuss. But I think we can discuss the economic consequences. Those include inflationary pressure and a greatly reduced willingness to take risk - which has obviously profound consequences.

To channel JGG and his storytelling to make a point: I will always remember coming home from college in the late 70's and dropping by my father's office on the way to the house. It was early October. He had all kinds of tax shelter deals on his desk and was hard at work trying to figure out how to reduce his tax burden. He wasn't rich just moving into the deeper end of the middle class. He spent the rest of the year that year trying to figure out how to hang to more than half of what he made. I was impressed by the wasted time and potential.

We are possibly headed there again. That's going to be great for social levelers. At least in the beginning. But the consequences ultimately are fewer jobs in a period when jobs are going to increasingly be moving to tech. And running dollars through the government before spraying them into the economy is incredibly inefficient.

As a young legislator I worked for several years on welfare reform. Knowing, as I did, a lot about it coming from the subsidized housing industry. I knew first hand how inefficient the transfer payment system was but even still was shocked to learn that about 50 cents on every dollar collected for recipients was consumed in its distribution (i.e. the government). That was nearly 30 years ago and there is zero evidence that I can see that that system has increased in efficiency.

Modern monetary theory is bull excrement wrapped in lots of charts, graphs and seemingly sophisticated language (which is really sophistry). IMHO anyway.

The laws of physics, math and money are immutable.

Currency debasement is the natural order of civilizations. It never ends well.

The key is not to confuse inevitable with imminent. These things take longer than we think.

I was being kind when I used the word "unclear" with regard to fiat currency. Most people have a dim view of centrally planned economies. Why on God's green earth do we have any faith in a Central Bank?

With regard to negative rate purchases... I am struggling to think of a scenario when "rates go even more negative", that does not include deflation of hard assets... but wiling to learn.

A commentator I have followed for a long time, John Mauldin, calls physical gold "Central Bank Insurance."

If rates go even more negative, then yes, we will have hard asset deflation. That is the base case for continuing the pre-COVID deflationary regime.

What you are proposing is stagflation. It could certainly happen. I think a lot of it hinges on what the govt and Fed do. If they keep showering gobs of cash on people and businesses, as you say, that money has to go somewhere. Once people's psychology has shifted to inflation, they tend to trade currency for hard assets as quickly as they can. This would tend to raise the prices of hard assets.

If the govt and Fed are gridlocked and unable to pass a lot more stimulus, then I agree with you and stagflation is a likely outcome.

Lastly, we could have both, in order. A bout of deflation due to a recession, Fed taper/hike, etc. Asset prices fall. Service/consumable prices are sticky. People's purchasing power is diminished due to paying more for consumables, interest on debt, etc. They cry to the govt to fix it. When the cries get loud enough, the govt passes some major stimulus and we are off to the inflationary races.