Good Friday Morning, and a special Friday it is because, on Thursday Night Football, the Baltimore Ravens lost to the Miami Dolphins, ensuring the Titans get to keep the overall number one seed in the AFC another week. Will it last to the end of the season? Maybe, maybe not. I’m enjoying this ride and especially enjoying the Ravens losing. That’s just good fun.
I’m keeping the introduction short this week because I’m going a little long on inflation. The latest report came out, and all evidence points to a White House that’s still checked out on the topic. It’s astonishing, if not expected, at this point—links to follow.
- For those who enjoy good music: Bruno Mars finally released his new album from his Silk Sonic band project. It is, as expected, spectacular. My extremely hot take music opinion is that Bruno Mars is the best artist on the planet, by a mile. He’s got albums exploring 50s, 60s, 80s, and now, with Silk Sonic, the 70s.
Where you can find me this week
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Biden’s vaccine mandate sits on shaky ground – The Conservative Institute.
Republicans take lead on 2022 midterms, education, and more – The Conservative Institute.
The President who isn’t there, or doesn’t care, about inflation.
I’ve frequently remarked on the Biden administration that it’s shocking to me how disconnected they are from reality. It started as “the President who isn’t there.” I think, after Afghanistan, it morphed into “the President who doesn’t care” (there are still thousands of people in Afghanistan stuck in that country, with no way out — the White House does not care).
At this rate, everyone needs to apologize to Jimmy Carter. I say that because Joe Biden is rapidly falling through the ranks of worst Presidents. His collapse is compounded not just by him being poor at this job, but his staff, the JV squad of the Obama administration, is out of their depth and incapable of doing a single thing right.
It’s incredible how out to lunch the Biden administration has been on inflation. I’m a lawyer by trade, but I’m no economist. How is it that I was writing about inflation being a potential issue this year back in MARCH, the week the President’s COVID-19 relief plan was passed, and the White House missed it? Here’s what I wrote on March 11, 2021, warning that consumers and businesses were already ahead of the White House:
American citizens and Wall Street are already ahead of the Biden administration. Wall Street, in particular, is instructive. For the better part of six months, Wall Street analysts and investors have been trying to figure out the impact of both a post-pandemic life and a massive infusion of cash from the federal government. Both are happening simultaneously right now, and Wall Street is banking on one future in the near to medium term: inflation.
This massive spending boondoggle, which has more in common with a progressive’s wishlist than actual COVID-19 relief, could help kickstart inflation further. Again, the Biden administration is banking on the Federal Reserve controlling any inflation surge. But the Fed doesn’t want to raise interest rates right now, not for another year at least. If things get hot by May on the inflation front, as some analysts expect, both the White House and Fed could be looking for answers.
That’s not to say there aren’t some good things in this spending bill. There are if you look for them. But it could have been done better, with more political purchase and more immediate aid to issues the country needs right now. This legislation will have long-term consequences, and we don’t fully see them yet.
That emphasis is mine because, on May 11, I wrote a column for the Conservative Institute declaring that inflation had arrived. A little later in May, I revisited the inflation topic in a newsletter highlighting that what I thought about inflation was the same thing as Obama administration economic advisor Lawrence Summers.
I bring that up not as a victory lap but to say that the warnings have been out in the open since the beginning of the administration. Biden and his cabinet have ignored those warnings. That’s why I read a recent Politico Playbook with some level of disbelief. The question in Politico was simple: Does the White House Owe Lawrence Summers an Apology? The White House doesn’t even think they’re wrong…
“[W]hile there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown.”
It was better, Summers argued, to take some of the short-term ARP money that risked fueling inflation and devote it towards the longer term policies in the follow-up legislation that became BIF and BBB.
The reaction from the White House was fierce. Top advisers rushed to the cameras to push back. Summers was “flat-out wrong” that Biden’s team was “dismissive” of inflation risk, said economic adviser JARED BERNSTEIN, who repeated what would become the Biden mantra on the stimulus: “the risks of doing too little are far greater than the risks of going big.”
Privately, White House officials were withering in their attacks on Summers.
The White House continued to downplay inflation throughout the spring and summer. “We think the likeliest outlook over the next several months is for inflation to rise modestly,” Bernstein wrote in April, “and to fade back to a lower pace thereafter.” The following month, when asked about inflation concerns, White House press secretary JEN PSAKI said, “Our economists have conveyed that they feel that the impact of our proposals will be transitory.”
They were wrong.
Finally in August, with inflation showing no signs of the tapering Berstein predicted, with Summers arguing he may have understated the inflationary risks, and with polls showing that voters wanted Biden to focus on rising prices, the president finally shifted. His infrastructure and reconciliation packages, he now argued, were actually designed to fight inflation.
“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” the president said.
Politico added this observation:
There is a lesson here about the insularity of this White House: Summers was correct about inflation, but Biden’s economists dismissed him and some attacked him personally. It took months for them to fully come around — and it only happened after Biden’s approval rating suffered from voters’ perception that he wasn’t attentive to their concerns, a shellacking in the off-year elections in which inflation was a top concern and blindingly obvious data like that released today.
The inflation data Politico references come from the latest CPI report from the BLS. Over the last year, inflation has gone up 6.2% across all items:
The all items index rose 6.2 percent for the 12 months ending October, the largest 12-month increase since the period ending November 1990. The index for all items less food and energy rose 4.6 percent over the last 12 months, the largest 12-month increase since the period ending August 1991. The energy index rose 30.0 percent over the last 12 months, and the food index increased 5.3 percent.
You have to go back 30+ years to the administration of George H. W. Bush to find inflation numbers this bad. CNBC reports that inflation is now seriously outpacing the increase in workers’ wages. And none of this factors in how those on Social Security or other limited pensions are watching their retirement vanish before their eyes, as inflation causes prices to skyrocket beyond what they had planned (the October inflation numbers are more significant than the COLA increase for Social Security set to kick in next January).
Even with this mountain of evidence, the White House is in denial. Here’s another Politico update:
INFLATION FALLOUT: Earlier this year, the Biden administration forecast that the annual rate of inflation would be 2 percent. On Wednesday the Labor Department reported that inflation hit 6.2 percent, the biggest spike in prices since 1990, and the news is reverberating across every aspect of American politics.
Here’s Jake Tapper to White House COS RON KLAIN on CNN’s The Lead Wednesday afternoon:
“Do you think that Build Back Better in its current form is essentially dead because of inflation?” (“Quite the opposite, Jake,” Klain responded.)
LARRY SUMMERS, the OG inflation Cassandra, sees a White House that still doesn’t get it …
“The policymakers in Washington unfortunately have almost every month been behind the curve,” he told Chris Cuomo on Wednesday night on CNN. “They said it was transitory. It doesn’t look so transitory. They said it was due to a few specific factors. Doesn’t look to be a few specific factors. They said when September came and people went back to school that the labor force would grow and it didn’t happen. So I hope they’re right…My experience is that you should hope for the best and plan for something much less than the best.”
Corporate America is noticing the same thing with this White House. The Biden administration is checked out and not responding:
“I don’t think the administration is on top of it at all,” said the CEO of one of the U.S.’s largest companies who spoke on condition of anonymity out of concern over angering the administration. “How many people inside this White House really know what inflation is or how it impacts businesses? It’s not really their fault. It’s been so long since we really had it.”
“Inflation is really something our parents had to deal with, and for a lot of us, even though we are getting older, we really only knew about it theoretically,” said Jack McCullough, president of the CFO Leadership Council, which claims over 2,000 members in a variety of industries.
“I don’t sense a lot of optimism among our members on inflation or the government response to it, and they don’t think it’s a transitory three-months-to-a-year kind of thing,” McCullough said. “It doesn’t seem that on a bipartisan level our government is actually interested in doing anything about this.”
White House economic officials, echoing Powell and the Fed, continue to largely dismiss the numbers as the temporary byproduct of an economy ground to a halt by Covid. The administration says it’s working hard to address supply chain problems and that as more Americans come back to work in the coming months, wage pressures on employers will ease and inflation will drift back down.
The evidence has been there for months. It continues to say the same thing: inflation is going nowhere. The data, trendlines, and everything point to this being an issue well into 2022. The supply-chain crisis at our ports remains a genuine problem, and we’re getting little action.
It’s a shocking dereliction of duty from the White House. They have quadrupled down on inflation not being an issue worthy of their attention. And everyone is noticing!
Nothing I’ve referenced here factors in other events joining the fray. A recent report from the Federal Reserve highlights two risks that I’m particularly concerned about for 2022. The first is a sudden rise in interest rates, and the second is an economic crisis in China.
First, the interest rates:
A steep rise in interest rates could lead to a large correction in prices of risky assets. Valuations of many assets have benefited from low-interest rates and therefore may be susceptible to a spike in yields, especially if unaccompanied by an improvement in the economic outlook. A range of financial intermediaries hold long-duration assets and could take mark-to-market losses. Such losses would reduce their ability to raise capital and retain the confidence of their counterparties, even if accounting conventions prevented the losses from appearing on financial statements.
A sharp increase in interest rates could also lower housing demand and thus reduce house prices, weakening the balance sheets of households. The resulting stresses may be especially pronounced for homeowners currently in mortgage forbearance or in the subprime and near-prime risk categories.
Additionally, the effect of a rise in interest rates on business borrowing costs would likely be amplified if spreads widened from their current low levels. This increase in business borrowing costs could have negative consequences for employment and business investment.
Here’s how this could take place. Let’s say Biden suddenly shifts course and thinks inflation is a big deal. How would a politician of Biden’s generation think about it? He’d want the Federal Reserve to step in, raise interest rates, and choke out inflation as the Fed did in the 1980s. The White House could put political pressure on the Fed to take action, as White Houses have long done.
Will it happen? The Federal Reserve is pushing towards having the ability to raise interest rates in early 2022. Whether they take action is still an unknown, but they’re moving towards adding that to their policy toolbox.
The second issue, a meltdown in China:
In China, business and local government debt remain large; the financial sector’s leverage is high, especially at small and medium-sized banks; and real estate valuations are stretched. In this environment, the ongoing regulatory focus on leveraged institutions has the potential to stress some highly indebted corporations, especially in the real estate sector, as exemplified by the recent concerns around China Evergrande Group. Stresses could, in turn, propagate to the Chinese financial system through spillovers to financial firms, a sudden correction of real estate prices, or a reduction in investor risk appetite. Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States.
I wrote a few weeks ago about the threat Evergrande could pose to the global financial system, and the Fed largely agrees.
If any of these things — inflation, interest rates, supply-chain, China, etc. — happened by itself, in a vacuum, the overall threat would be much smaller. But it’s not happening in a vacuum; it’s all taking place together, at the same time, with downstream impacts.
I get being a President is a hard job. But on some level, just showing that you understand, care, and are acting on a situation is comforting. There’s no evidence of that, and that’s not just my opinion: it’s the opinion of journalists and corporate America too.
Following this administration through the pandemic, Afghanistan and now inflation is an annoying result of seeing the same kind of incompetence repeatedly. First, they deny the problem exists. Second, they pivot to saying the problem isn’t as bad as people say. Third, they shift to suggesting that the problem is “actually” a good thing. Finally, they ignore it and send someone out for a photo-op. By the time we hit this last point, usually, another crisis has taken the top news spot, and we repeat the cycle.
Maybe something new takes the top news spot to save Biden from continuing to flounder on this topic in the news. But I doubt it does. It’s easy to ignore the pandemic when vaccines are plentiful. It’s easy to dismiss people trapped in Afghanistan when you pull all the journalists and troops. It’s hard to get people to ignore inflation. You meet inflation every time you go to a grocery store or need to buy something experiencing a shortage. Inflation is everywhere, eating away at paychecks and livelihoods.
There are plenty of historical examples where inflation, food shortages, or famines caused immediate political upheaval. Most great leaders and nations feared food shortages above all else (the Romans emphasized the food part of “bread and circuses.”). Expensive food is terrible, politically. Most politicians intrinsically understand this point. Astonishingly, this White House does not.
Links of the week
US food banks struggle to feed hungry amid surging prices – Associated Press
China Weighs Moderating Property Curbs to Help Troubled Developers Unload Assets: Beijing is wary that financial risks could spread through the economy as it tries to rein in the real-estate sector – WSJ
Is Biden Oblivious to a Mounting Economic Disaster? – Jim Geraghty, National Review
Should Kevin McCarthy Stay or Should He Go? – Jim Geraghty, National Review
Have the National Conservatives Missed Their Moment? There is no nationalism faction on the Hill, and the movement has not overturned much of the right-wing economic dogma it opposes. – Oliver Wiseman, The Dispatch
Boy born at 21 weeks named world’s most premature infant to survive – Good Morning America
Twitter Thread(s) of the week
Satire of the week
Thanks for reading!