Economic Policy – Page 8 – The Wrongologist

Monday Wake Up Call – July 11, 2022

The Daily Escape:

Penstemon and Paintbrush, with Mt. St. Helens in background – June 2022 photo by Edwin Buske Photography

There are two big economic issues that the media and pundits say will influence the 2022 mid-terms: inflation, and the possibility of a recession.

Let’s start with the scare of a looming recession. Most Americans have been told that a recession occurs when real GDP contracts for two consecutive quarters. Sounds easy to figure out, but this definition wasn’t met in two out of the last three recessions. Some facts: The 2020 downturn lasted just two months, not two quarters. And during the 2001 recession, real GDP didn’t contract for two quarters in a row either.

The difference is that recessions are determined not by pundits but by a group of economists at the National Bureau of Economics (NBER), and they use several measures beyond GDP to make it official. Here’s how they explain it:

“A recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators…”

They go on to say that:

“There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.”

In recent decades, the two measures that have had the most weight are real personal income and non-farm payroll employment. So, despite what you’re hearing from pundits about GDP, it basically boils down to income and employment. If income and employment turn south, there’s a good chance economic output will be lower.

But after two quarters of 2022, while output is slowing, income and the labor market are both still solid. The WSJ quotes Robert Gordon a Northwestern University economics professor and member of the NBER’s committee that decides on recessions:

“We are going to have a very unusual conflict between the employment numbers and the output numbers for a while…”

The US economy added 1.6 million jobs in the first quarter, and another 1.1 million jobs in the second quarter. Those numbers certainly don’t look recessionary, despite what the media is trying to tell us. U6, which is a measure of underemployment declined -0.4% to 6.7%. This is a new all-time low for U6, which has been tracked since 1994.

It may seem like splitting hairs to talk about the definition of a recession. But we need to be prepared for the coming political scenario where some argue we’re in a recession while others will refute that idea vigorously.

In this mid-term season, things are going to get weird.

Let’s turn to the scourge of inflation. It is among the first stories on the local news every night, but you might not know that as Paul Krugman says:

“The wholesale price of gasoline has fallen about 80 cents a gallon since its peak a month ago. Only a little of this plunge has been passed on to consumers so far, but over the weeks ahead we’re likely to see a broad decline in prices at the pump….what are the odds that falling gas prices will get even a small fraction of the media coverage devoted to rising prices?”

That seems to point to profit taking by the petroleum corporate interests. Have you noticed how much profit they have made lately? ExxonMobil plans to buy back $30 billion of stock this year with the extra money that we all paid at the pump.

Last Friday, PBS talked about a looming wage-price spiral, a neoliberal concept that says rising wages drive prices. But the annualized rate of wage growth, comparing the last three months (April, May, June) with the prior three months (January, February, March), was 4.3%,down from a previous annualized rate of 6.1%.

This is big since the Fed’s plans for aggressive interest rate hikes is based on its concern about a 1970s-type wage-price spiral. It is impossible to have a wage-price spiral when wage growth is slowing. The current 4.3% wage growth is less than one percent higher than the 3.4% rate in 2019 when inflation was comfortably below the Fed’s 2.0% target.

Retailers are now stuffed to the gills with merchandise. What happened was that all of the product that was stranded at sea has finally reached store shelves. They will hold massive sales this fall to get rid of it, and that will lower prices.

The lockdowns in China are mostly over, last year’s fiscal stimulus has worked its way through the economy, and the Fed has begun sharply raising interest rates.

Krugman feels that as the economy weakens, the prospect for sustained inflation is receding.

Time to wake up America, don’t get demagogued by the scary economic terms that the politicians will throw at you. To help you wake up, let’s listen to Barenaked Ladies – “If I Had a Million Dollars” Live in Michigan in 2007:

Lowering Gas Prices Isn’t Easy

The Daily Escape:

Sunset, tide pools, La Jolla, CA – June 2022 photo by Paul Folk

Fed Reserve Chair Powell appeared before the Senate Banking Committee on Wednesday and the House Financial Services Committee on Thursday to talk about inflation and the Fed’s role in bringing it under control. Both Democrats and Republicans agreed with Powell’s desire to bring inflation down as quickly as possible. But they had vastly different views on how the Fed and Congress should do the job.

When pressed by Sen. Elizabeth Warren (D-MA), Powell said higher interest rates could not boost the production of oil or end other supply shocks that are driving prices higher:

Basically, Powell agreed that the forces causing inflation were largely beyond the Fed’s control.

The Fed is raising interest rates to dampen demand, but consumers are in relatively decent shape and still have money in their bank accounts to spend. If spending declines, companies are often forced to keep prices stable or cut them, which throws some cold water on inflation. But that also can cause job losses and wages to stagnate.

Committee Republicans blamed the Fed for not listening to their calls to raise rates as inflation began to rise last year. Several GOP Senators questioned whether the Fed has the will to induce a recession if that becomes necessary.

Politically, it’s clear that a sharp recession that cost jobs would be ruinous for millions of Americans. But, it has the advantage of giving Republicans a clear path to winning back control of Congress in 2022 and possibly the White House in 2024.

That’s how politics works: The Party out of power blames the Party in power for whatever isn’t working.

However, inflation has multiple causes, most of which Powell admitted were outside the control of the Fed or the White House. Let’s focus on gas prices, an area where neither Biden nor Powell can do much to bring prices down.

The key to gas prices right now is the global lack of refinery capacity. Seeking Alpha reports that excess refining capacity doesn’t exist outside of India, China, and Russia. As a result, US and European refineries are making huge profit margins. From the Economist:

“In normal times, the refining business is a low-margin, low-drama adjunct to the…business of oil production….Refiners typically make profit margins of $5-10 a barrel….This time….Margins for many refiners have rocketed, and bottlenecks in the sector are propelling global petrol prices upwards.”

Here’s a chart:

A government report shows that US refining capacity has fallen in the last two years. In fact, it’s where it was in 2014, meaning that gas supplies would still be tight if refineries were running at 100%, and they’re running at close to that. Industry capacity utilization is at roughly 94%, the highest since 2018.

US oil refining capacity has decreased by more than one million barrels/day (5% of the total) since the start of the pandemic. Some old facilities were closed permanently after Covid stopped people from driving, which crushed fuel demand. Other refineries are being modified to produce renewable diesel instead of gas. Those conversions may be too far along to reverse course.

Since there’s little chance of bringing new US sources of gasoline refining online anytime soon, Biden’s best chance to lower prices will likely come from jawboning the refiners to accept smaller profit margins.

We shouldn’t count on America’s corporations to do the right thing.

Over the longer term, Mr. Market might help save the day. The price spikes will cool demand for gas, which should lower prices. A shift in trade flows could also help. The Economist says that India’s refiners see an opportunity to become, as RBC Capital Markets says, “the de facto refining hub for Europe”.

New refineries are scheduled to come online in Kuwait and Saudi Arabia, which should help ease the shortages too.

The hard reality is that there’s no easy solution for gas prices, or for food prices. If they existed, Biden would’ve flipped that switch months ago. Earlier this week, Wrongo said:

“Will people vote this Fall based on the price of gas? Or the threat of a recession? Or, will they understand that there’s a real possibility that democracy as we know it in the US could vanish?….Inflation comes and goes. Recessions come and go. If we lose our democracy, it won’t be returning any time soon.”

The GOP keeps slamming Biden over inflation, but it has zero solutions to offer, because this shit is complicated. Rep. Elise Stefanik, (R-NY), the third-ranking member of the House GOP, isn’t even pretending the GOP has a plan. She recently said of inflation:

“House Republicans will address these crises when we earn back control of the House this November.”

Sure. You can trust the Party of tax cuts for the wealthy to prevent a recession that will harm the rest of us.

Saturday Soother, Inflation Edition – June 11, 2022

The Daily Escape:

Blackfish Creek, Wellfleet, MA – June 2022 photo by Jo LF

Wrongo and Ms. Right are on the road again, this time on Cape Cod visiting family. So this column will be brief. We saw on Friday that the Bureau of Labor Statistics gave us more bad news, that inflation jumped higher in May. That caused the Dow to decline by 880 points or about 2.7%.

From the Bondad blog: (parenthesis by Wrongo)

“People who were hoping inflation would abate did not get the news they wanted from the May CPI. Consumer prices rose 1.0% in that month alone. Inflation less energy rose 0.7%, and “core” inflation less food and energy rose 0.6%. On a YoY (year over year) basis, prices are up 8.5%, tied for a multi-decade high with a few months ago. Core prices are up 6.0%, down slightly from their February and March peak…”

Bondad says that this means that the Fed will continue stomping on the brakes. The big question is whether the Fed can engineer a relatively short and gentle recession, perhaps in 2023. Or whether instead, they engineer a good, old-fashioned “bust” that hurts all of us.

A recession happens when the economy contracts for two successive calendar quarters. In the first quarter of 2022, GDP declined 1.6%. If we see a similar result for the second quarter, this will meet the classic definition of recession.

Will that happen in 2022? Maybe. Will it happen in 2023? Probably. It is highly unlikely that the Fed’s actions alone will bring aggregate demand down to normal levels relative to supply.

Republicans are messaging that it’s the Biden administration’s fault that inflation got out of control. But if you remove politics from the equation, the reasons are the pandemic’s severe global economic impacts, and the efforts by both the Trump and Biden administrations, along with the Fed, to stimulate the US economy.

The stimuli led to a booming economy, even though it didn’t help everyone. The Fed’s inability to react quickly then left them behind the curve. Russia’s invasion of Ukraine created an oil shortage, that pushed gasoline prices even higher.

The complex causes of our current inflation doesn’t lend itself to either Party presenting workable solutions in the short term. And they certainly can’t do that by using sound bites. And you shouldn’t expect the media to either provide both sides of the argument, or to detail what’s being offered to solve the problem.

After all, we’re in an election year.

Wrongo will wait a few more days before saying much about the J6 public hearing. We didn’t get to see much of it, but the WaPo says that about 19 million people watched the first public hearing. The preliminary data come from Nielsen and do not include the millions more who watched the hearing on streaming apps or social media, where a few clips of the testimony went viral.

The Post also provided some context, comparing the viewership of this hearing to Watergate and to Trump’s first impeachment:

“….some 71% of Americans told Gallup that they watched some of the Watergate hearings live back in 1973, the first televised hearing of Donald Trump’s first impeachment trial drew only about 13 million viewers in 2019…”

It’s time to let the millions of words about the hearing slip from your mind, and to get yourself into a place of calm reflection. That means it’s time for our Saturday Soother. We’re here on the Cape trying to do just that. The weather so far is fantastic. And we’re scheduled for dinners at two fabulous restaurants over the next two nights, in both cases, eating outdoors.

So, take a few minutes to center yourself by grabbing a chair outside, putting on your wireless headphones and listening to Lili Boulanger’s “D’un matin de Printemps” (On a spring morning). Lili wrote this piece in 1917 when she was 23. Boulanger was a child prodigy, but she battled bronchial pneumonia throughout her short life, dying a year later at age 24.

Here is the piece played in 2017 by the Chicago Youth Symphony Orchestra, conducted by Allen Tinkham at Orchestra Hall, in Chicago:

Saturday Soother – May 7, 2022

The Daily Escape:

Griffith Observatory, LA, CA – April 2022 photo by Mike Holzel

You undoubtedly missed it, but on Wednesday, Biden gave a short speech on the budget deficit and the national debt. You can watch a video of his talk here. You didn’t see it because it received virtually no coverage in the media. From Robert Hubbell:

“….let’s engage in a thought experiment: Ask yourself, ‘By what amount has the deficit increased during Biden’s tenure—rounded to the nearest $1 trillion?’”

It’s a trick question. During Biden’s first year in office, the deficit decreased by $350 billion and is on track to decrease by an additional $1.5 trillion by the end of this fiscal year (9/30/22). It will be the largest single yearly decline in American history. Biden also said that this quarter, for the first time since 2016, the Treasury Department is planning to pay down a small portion of the national debt.

Biden pointed out that the deficit increased for each year of the Trump administration, both before and after the pandemic. Let’s remember that the main driver for deficits during Trump’s administration was the Republican 2017 tax cut for corporations and millionaires. The Trump tax cuts didn’t add any additional revenue, and without any offsetting savings, deficit spending went way up.

After Biden finished speaking, he took a few questions from the press. He was immediately asked about Russian sanctions and the leaked draft of the Supreme Court’s abortion opinion. Biden responded by saying:

“No one asked about deficits, huh?….You want to make sure this doesn’t get covered.”

Why isn’t good economic news covered by the media? Most members of the media seem to be uncomfortable with it. Biden shares responsibility for getting the good news out as well. He should speak to the American people directly, not just indirectly through the press in the middle of the day.

Maybe Ukraine’s Zelensky could be a role model. He speaks directly to his people every day. Had Biden announced paying down the debt and cutting the deficit while seated at the Resolute Desk in the Oval Office, people would know that it was a big deal.

He should also speak about the location and targeting information we gathered about Russia’s cruiser and then shared with Ukraine:

“Intelligence shared by the US helped Ukraine sink the Russian cruiser Moskva, US officials told NBC News, confirming an American role in perhaps the most embarrassing blow to Vladimir Putin’s troubled invasion of Ukraine….The US…was not involved in the decision to strike.”

Despite America’s chicken hawk pundits’ finger-wagging, releasing this information hurts Russia’s already badly-run war effort. It shows Putin’s bad decision-making, poor command structure, and with it a likely collapse of morale. Going public also helps other NATO members see the differences with Trump’s four years of doing everything he could to sow distrust in the alliance.

There is a big country outside of DC desperate for good news. And therein lies the central problem for Democrats. Biden delivered this speech just before a meeting with Olympic athletes. Wrongo bets that this is the last we will hear from Biden on this accomplishment.

Just like FDR used his “fireside chats” to brief Americans on what his administration was doing, Biden should speak directly to the American people when necessary on matters of significant importance to the nation. He needs to discuss his accomplishments at every opportunity—and not just from the East Room of the White House.

Better messaging has to come from the top. If it does, voter support will follow. Oh, and by the way, we had another very good jobs report on Friday. The unemployment rate is 3.6%, and 428,000 new jobs were created last month according to the BLS. But the media only report about inflation.

It’s a continuation of Biden’s record job creation. In his first year in office, there were 6.6 million jobs added to the economy, 60% more than the next highest total, which was 3.9 million under Jimmy Carter. Wait, you thought Trump was the biggest job creator in history just because he said so? Wrong!

You might say that Putin is losing his domestic disinformation war while Biden is losing his domestic information war.

Time to turn off the news for a few minutes, and center ourselves for another rock ‘em, sock ‘em week ahead. It’s time for our Saturday Soother!

Here on the fields of Wrong, our crab apple trees’ blossoms will open over the weekend. It appears that we may not have bluebirds in our nest boxes for the first time in 10 years. A juvenile Cooper’s Hawk is using a box as his perch to survey our mix of woods and open grassland. That has driven many birds away.

So, grab a seat by a south-facing window and listen to Beethoven’s “Triple Concerto in C Major, Op. 56 No. 2” Largo, and Attacca, performed in 2019 by Anne-Sophie Mutter, Daniel Barenboim, and Yo-Yo Ma, accompanied by the West-Eastern Divan Orchestra at Philharmonie Berlin:

China’s Torpedoing the Supply Chain

The Daily Escape:

Spring snow, Mt. Princeton, CO – April 2022 photo by Haji Mahmood

For the past two years, Covid has thrown the global supply chain into a tailspin. Even though the cargo industry’s ships, trains, trucks, and planes worked full-time, we still have shortages. Now, China’s zero Covid policy is increasing both the uncertainty and costs of efficiently operating the still-choked global supply chain.

From Bloomberg:

“We expect a bigger mess than last year,” said Jacques Vandermeiren, the chief executive officer of the Port of Antwerp, Europe’s second-busiest for container volume, in an interview. “It will have a negative impact, and a big negative impact, for the whole of 2022.”

Bloomberg says that China accounts for about 12% of global trade. It’s recent Covid lockdowns have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. And since US and European ports are already swamped, this new outage will leave them vulnerable to additional shocks.

China is home to six of the world’s 10 largest container ports. It’s the global economy’s most important manufacturing hub. While most countries have decided to learn to live with the Covid, Beijing has maintained its Zero Covid policy, where even small outbreaks can shut down large population centers and slow economic activity.

It’s taking an average of 111 days for goods to reach a warehouse in the US from the moment they’re ready to leave an Asian factory. That’s similar to the record of 113 set in January 2022 and more than double the time that the same trip took in 2019, according to Flexport Inc., a freight forwarder.

Julie Gerdeman, CEO of supply-chain risk analytics firm Everstream Analytics says:

“Once product export activities resume and a large volume of vessels make their way to the US West Coast ports, we expect waiting times to increase significantly…”

You’d think that after more than two years into this pandemic, America would have realized that single-sourcing much of our industrial production to a dictatorship is a bad idea. One with enormous consequences when something goes wrong.

But we haven’t. US Treasury Secretary Janet Yellen has advocated for what she calls “friend-shoring” meaning reducing our dependence on China and Russia. Brian Ehrig, a partner at the consulting firm Kearney is co-author of a report that found 78% of CEOs are either considering reshoring or have done it already. He says that relocating supply chains:

“…might cost more, but if you can make smaller quantities that you can then sell at closer to full price, you can actually completely change the game…”

Le Monde reminds us that capitalism has created hidden dependencies in Ukraine. It is the main producer of the wiring harnesses that hold together the many electrical cables in a car. They quote Christine Lagarde, president of the European Central Bank (ECB) in a speech in Washington, DC: (brackets by Wrongo)

“Ukraine produces one fifth of Europe’s [harness] output,”

These parts are low value added, but essential in the construction of cars, a perfect outsourcing target for capitalism. Globalization isn’t going to die; but maybe it can evolve. Much of that possible shift hinges on convincing consumers to accept higher prices for the certainty of supply.

For example, once the CDC finally gave us unambiguous advice about wearing masks, there was a huge rush to open mask production facilities in the US. But now they’ve all closed, because it’s cheaper to make masks in China.

Dictatorships can ensure that labor remains cheap. That’s great for capitalists, not so good for people who needed masks in 2020 when China decided to keep most of them for their population. Or, now, when China is still willing to shut down its economy to stop a Covid outbreak.

And, despite all the good will in the world, nobody will make masks in the US if it means their five-dollar boxes of masks go unsold because everyone is buying the one-dollar boxes. Instead, they will complain about how the company asking five dollars is a bloodsucker.

We’re told that capitalism works. That it just does. That just-in-time supply cuts costs for consumers. But does it?

Art installation by Steve Lambert – 2013, Times Square, NYC

It’s proven not to work during an emergency. But what are the chances of re-shoring ever happening? Business school really only teaches one thing: Short-term profits rule and everything else is irrelevant.

After all, America is a business, not a country.

What should be readily apparent is that despite the CEO poll above, our corporate masters are certainly not thinking about systemic change to supply chains. Nor will they, as long as the focus is reducing costs as low as possible for maximum shareholder gain.

The point is that unless business is incentivized otherwise, don’t expect the supply chain to get any better. That incentive must come from the government in the form of tax policy or subsidy.

Saturday Soother – April 23, 2022

The Daily Escape:

North Landing River, near Virginia Beach, VA – April 2022 photo by Erik Moore

Our media ecosystem is overwhelming us. Some of the information is accurate, some is bogus, and much is intentionally misleading. And that’s a deliberate strategy. While it didn’t originate with Steve Bannon, he perfected it with his thought that:

“…the Democrats don’t matter….The real opposition is the media. And the way to deal with them is to flood the zone with shit.”

This is why the ongoing cultural war works so well for Republicans. There’s always some petty war going on between the Parties that’s stoked by the media. And it’s almost always about cultural issues since Republicans really don’t have a policy platform, and don’t want to go against large corporate America. When you go against corporations, you lose the money needed to get elected.

But we should see the big corporations as our common enemy. Time Magazine has an article about how overtime pay has disappeared:

“If it feels like you’re working longer hours for less money than your parents or grandparents did, it’s because you probably are. Adjusted for inflation, average hourly wages have actually fallen since the early 1970s, while average hours worked have steadily climbed. American workers are increasingly underpaid, overworked, and overwhelmed.”

One reason is the loss of overtime pay:

“If you’re under the age of 45, you may have no idea that overtime pay is even a thing. But…middle-class workers used to get a lot of it….That means that [for] every hour you work over 40 hours a week you work for free, contributing…a giant pool of free labor that modern employers have come to expect and exploit. Profits are up, real wages are down, and income inequality has soared to its highest level since the Gilded Age.”

Overtime pay was one of the great New Deal reforms. It was a core provision of the Fair Labor Standards Act (FLSA). The FLSA set the minimum wage at one-half the median wage and the overtime threshold at three times the minimum—an amount equal to 1.5 times the median wage.

But both the minimum wage and the overtime rules began to change in 1975, and rising income inequality since 1975 is responsible for a $50 trillion upward redistribution of wealth and income from the bottom 90% households to those in the top 1%. Here’s a chart showing the impact of losing overtime. Productivity goes up, but is completely decoupled from income:

Source: chartr

The Economic Policy Institute has a tool called “Company Wage Tracker” that allows you to select any big corporation and see what percentage of their employees make below a certain wage. For example, it shows that 51% of Walmart employees earn below $15/hr.

The NYT wrote about Mary Gundel, a manager at a Dollar General store in Tampa, FL who was fired for speaking out about the chain’s policies regarding overtime and short-staffing:

“The store used to have about 198 hours a week to allocate to a staff of about seven people….But by the end of last month, she had only about 130 hours to allocate….With not as many hours to give to her staff, Ms. Gundel often had to operate the store on her own for long stretches, typically working six days and up to 60 hours a week with no overtime pay.”

Ms. Gundel was working 60 hours a week and making $51,000 a year. That means she’s making only a little more than the minimum wage. Dollar General is one of the most profitable retail chains in the country.

Prices are going up everywhere across America, and corporations are making proportionately more income. This is what the Democrats should be focusing on, standing up for workers, doing what is right as opposed to groping for answers to the Republican’s culture war issues.

There’s plenty that’s wrong in America. But what’s wrong doesn’t see the light of day alongside all of the pissing contests about Critical Race Theory, or predator grooming or LGBTQ issues. These are ginned-up to make sure you won’t pay attention to what’s really going on.

Something seems to be brewing. We’re seeing halting attempts at unionization at Starbucks and Amazon. Those employees want a better life; they want to have a seat at the table about the future of the company.

We need to remember that without the “essential workers” the country grinds to a halt. We need to support those who try to organize. We need to wrest some economic power away from politicians and big businesses. And finally, some faceless people who are sick of being wronged are trying to do just that.

Enough for another week. It’s time to let go of the news. It’s time for our Saturday Soother. On the Fields of Wrong we’re preparing our vegetable garden, although it will be a few weeks before it’s warm enough for the plants to survive. We had an overnight temperature of 32° earlier this week.

Now, grab a seat by a large window and listen to violin soloist Soojin Han play Chopin’s “Nocturne No.20 in C# minor” in August 2019. She’s playing on a 1666 Stradivarius:

It sounds beautiful.

Chopin composed the piece in 1830, but it was published in 1875, 26 years after his death. It was featured in the movie “The Pianist” in 2002.

Monday Wake Up Call – April 3, 2022

The Daily Escape:

Makapu’u Lookout, Oahu, HI – January 2022 photo by TwoBongs on Tour

Let’s talk about the “Wealth Effect”. It’s the notion that when households become richer as a result of a rise in asset values, such as stock prices or home values, they spend more and stimulate the broader economy. The idea is that consumers feel more financially secure and confident about their wealth, even if their income and costs are the same as before.

This concept has been endorsed by two recent former Fed Chairs, Janet Yellen and Ben Bernanke. It’s simply another term for trickle-down economics.

In 2019, after nearly 11 years of the Fed’s policy of adding money to the economy, by “Quantitative Easing” (QE), the National Bureau of Economic Research (NBER) did a study on the Wealth Effect, to quantify how much richer the rich would have had to become to have x% impact on the overall economy, and how long this boost lasts before it fades.

They found that QE makes 10% of the population a lot richer, producing immense concentration of wealth at the top 1%, and mind-boggling concentrations of wealth at the billionaire level. After which, there were some very muted trickle-down effects on the economy.

Wolf Richter used the Fed’s wealth distribution data to create a chart he calls the Wealth Effect Monitor. The Fed divides the US population into four groups by wealth: The “Top 1%,” the “2% to 9%,” the “next 40%,” and the “bottom 50%” to report on wealth.

Richter divides this data by the number of households in each category, to obtain the average wealth per household in each category. Here’s his chart for the past 21 years:

Note the immense increase in the wealth for the 1% households after the Fed’s latest QE effort that began in March 2020. They have been the primary beneficiaries of the Fed’s policies since 2020.

True to the Wealth Effect’s concepts, the Fed’s policies helped to inflate asset prices, and thus only asset owners benefited: The more assets held, the stronger the benefit. Here’s Richter’s analysis of average wealth (assets minus debts) per household, by category in the 4^th quarter, 2021:

“Top “1%” household (red): $36.2 million
The “2% to 9%” household (yellow): $4.68 million
The “next 40%” household (purple): $775,000
The “bottom 50%” household (green): $59,000

The Fed doesn’t provide separate data on the 0.01% and the Billionaire class, but they were the biggest beneficiaries of the Fed’s monetary policies. The top 30 US billionaires have a total wealth of $2.12 trillion, sliced into 30 slices for a wealth of $70.8 billion per billionaire, according to the Bloomberg Billionaires Index.

Compare that to the bottom half of the US population (the “bottom 50%”) who have a combined wealth of just $3.7 trillion, divided into 165 million slices for each individual. The way percentages work, you would think that households in the bottom 50% would have the largest percentage gains since they start from a lower base. But because they own fewer assets, when adjusted by population, they stay mired in last place. From Richter:

“When the wealth of the bottom 50% increases by 5%, they gain about $3,000. And when the average wealth of the top 30 billionaires increases by 5%, they on average gain $3,500,000,000.”

Sunday Cartoon Blogging – April 3, 2022

The latest monthly jobs report shows 431,000 jobs were added. The report marked the 11th straight month of job gains above 400,000, the longest such stretch of growth in records dating back to 1939. So far in 2022, the economy has created 1.69 million jobs. That’s in just three months. By any fair measure, it’s an extraordinary total.

We are still about 1.6 million jobs below the number of employees in the workforce in February 2020 just before the pandemic hit. At the current average rate for the past six months, it will take three more months to get back to that level.

Leisure and hospitality jobs, which were the hardest-hit during the pandemic, rose by 112,000, but are still 1.5 million below their pre-pandemic peak. They comprise most of the jobs that are still missing in the economy.

Wage growth, which averaged 5.9% in the 2nd half of 2021, was up again, now showing a 6.7% year over year gain. Aside from April 2020, this is the highest wage growth in 40 years. And aside from three months in 2019 and 2020, the unemployment rate was the lowest (or equal to the lowest) in over 50 years.

The blemish is inflation. Most likely, inflation-adjusted wages have risen by 1% or less in the last year. On to cartoons.

A brief history of recent misspeaks:

Biden tries a different way to get Putin:

Florida’s Governor DeSantis says the mouse is the real enemy of kids:

This Thomas’s dinner conversation is straight-up ok:

Fox hires Caitlyn Jenner, but there were unforeseen issues:

Free Brittney:

Will Sanctions Hurt the Dollar’s Role in Trade?

The Daily Escape:

Cherry Blossoms, Univ of Washington, Seattle, WA – March 2022 photo by Erwin Buske Photography

One of the most important elements in the undeclared war between the West and Russia is how sanctions are changing both international trade and the international payments system.

The West has basically frozen Russia out of both. First, by taking Russia out of the SWIFT payments messaging system, and second, by sanctioning Russian banks and the Russian Central Bank. Third, by seizing Russia’s currency reserves that were held in the West.

All of this means that Russia can’t easily accept dollar/euro payments for exports and then convert them into rubles for use at home. By losing access to the international currency markets, it’s become impossible for Russian businesses exporting their energy, goods, or commodities to get paid. This may be a historic moment in economic history.

By freezing hundreds of billions of dollars of Russian reserves, the Russians no longer can access those dollars or euros. Sanctions mean that even the dollars and euros they could create through trade cannot buy much in the countries that support the sanctions.

Naturally Russia is looking for work-arounds for this dilemma. Selling the West anything in dollars or euros no longer makes sense: They can’t use them at home without exchanging them for rubles. And sanctions make that very difficult, since they’re closed out of our banking system.

There are two ways around this. Either use Russian banks that are not banned from SWIFT or go through an informal third-country currency exchange. Russia’s first effort is to only accept payment in rubles for its exports to “hostile nations”. That is, those nations who have imposed sanctions because of Ukraine.

In order to buy Russian oil and gas which they desperately need, Europeans will have to pay in rubles. That means either selling dollars/euros for rubles or selling them for yuan (China) or rupees (India), two countries that are not part of the sanctions regime.

The West’s move has the potential to upend the world’s trading system which today relies on payments in dollars. The dollar has been the world’s principal reserve currency since the end of World War II and is the most widely used currency for settling international trade. The dollar represents about 62% of global trade, down from much higher levels before the euro was established. The other important currencies are the euro at 20.1% and the Japanese yen at 5.7%. China’s yuan is at just 2.0% of trade settlements.

It is increasingly likely that Russia’s move will result in a further “de-dollarization” of trade. Recently, there have been new attempts to abandon the dollar. Saudi Arabia and China are planning to use the yuan in a new oil deal. Russia and India are negotiating to pay for trade in rupees.

China’s energy trade with Russia uses the dollar. Chinese energy imports from Russia soared 47.4%, an increase of more than $52.9 billion from 2021. This accounts for more than 65% of China’s total imports from Russia. Since the sanctions, both countries have stated their intention to move more of this trade to yuan.

A new multilateral financial system is emerging before our eyes. Who the participants will be, and what rules they will follow, are up in the air. The dollar will remain primary between the US and its allies, but alongside it, there could develop Russia-yuan, Saudi-yuan and India-yuan arrangements for trade in oil, minerals, and industrial products. Shifting just part of the global oil trade into the yuan is potentially huge. Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s GDP last year.

We’re likely to see more trade occurring in more currencies, probably on a number of exchanges. We will see the world realign into different trading and monetary blocs, like there were in the past.

However the Ukraine war is settled, the Russian claims that the US has shot itself in the foot about the dollar’s dominating role in trade has a ring of truth. In the past, the US took Iran’s reserves after the Shah was overthrown. We froze Afghanistan’s foreign reserves earlier this year and now the West has done the same to Russia. A few years ago, the UK froze Venezuela’s gold in the Bank of England.

These systems are built on trust, and for the next few decades, trust may be lacking. So we’re looking at the possibility that there will be two quite different geo-political philosophies operating as trading partners as the non-US world develops its alternatives to the dollar as the world’s dominant trading currency.

China’s Reaction to Putin’s War

The Daily Escape:

Snow on the Fields of Wrong, March 10, 2022 Sand on the beaches of Florida, March 2022

(This is the last column for the week. New content next week will be light and variable as Wrongo and Ms. Right make our annual pilgrimage to Florida to visit Wrongo’s sisters.)

Subsequent to the meeting between Putin and Xi Jinping in Beijing at the start of the Winter Olympics, the Chinese government’s statements and actions about Putin’s War in Ukraine have been a kind of doublespeak.

With its public statements, China’s been supportive. The foreign minister has referred to Russia as its “most important strategic partner.” China hasn’t endorsed Russian sanctions and its state media seems to repeat a lot of Russian disinformation about Ukraine.

On the actions side, the Chinese government has called for an end to violence and has promised to send humanitarian aid to Ukraine.

One thing that hasn’t been public is Chinese financial institution’s hesitancy about new deals with Russia. Chief Investment Officer magazine (CIO) quotes Yuan Jiang, a Chinese PhD candidate at Queensland University who specializes in Russia-China relations:

“Currently, the risk is simply too huge…”

Jiang said that traditionally, only state-funded institutions or large corporations would transact or directly invest in Russia, but even these institutions were wary of Russia:

“Russian markets are full of political corruption and other dangers…”

China’s financial sector has been leery of being caught up in the Western sanctions. Two major Chinese state-owned banks are now restricted from financing Russian commodities, according to Bloomberg. Reuters reports that the Bank of China in Singapore stopped financing Russian oil trades.

CIO also reports that some banks with partial Chinese state ownership have also been backing out of Russian deals. The Asian Infrastructure Investment Bank, which has many Asian governments as shareholders, suspended its business in both Russia and Belarus after the invasion. Similarly, the Shanghai-based New Development Bank, which has China as one of its founding members, also has terminated its business with Russia.

Now Russia is barred from participating in SWIFT, the global financial messaging system. In the past, China’s large banks have complied with American sanctions against Iran and North Korea because of the importance of clearing via SWIFT. The Chinese distancing from Russian transactions makes it clear that Beijing intends to continue complying with this Western sanction.

The Russians are looking to China as a lifeline in the midst of the sanctions. And the Chinese government is providing some help. China’s UnionPay card service will serve as an alternative for credit and debit card holders now that MasterCard and Visa have ended the ability of Russian citizens to use their cards abroad. UnionPay is accepted in 180 countries.

But China is shying away from a full rescue. Former US Treasury official Peter Piatetsky said in an interview with RadioFreeEurope:

“China can essentially do one thing here, which is to buy more Russian goods, but they don’t seem to be willing to do that….Russia doesn’t have that many different goods that China is willing to buy….The relationship between Russia and China is very transactional….They both dislike the US and dislike the US-led world order, but aside from that, I don’t think there’s much there.”

China could buy up Russia’s oil that’s no longer going to Europe if it wanted, but it doesn’t appear to be doing so, at least not yet. According to Jiang, ultimately the US has much more to offer China economically:

“Investing in the West is much simpler and more secure. No more unnecessary economic risk, not many political factors, and more transparent…”

And importantly, the US is China’s largest trading partner. The US buys 16.75% of all Chinese exports, creating a relationship that the Chinese government can’t afford to lose. Although ideological differences might dominate headlines, the US-China relationship is strategic for both.

It’s likely China will continue to keep Russia close and expand the relationship should relations with the West shift. And since the stated US strategy is to use Ukraine to destabilize Putin’s hold on power, China worries that it’s next.

Jiang says that Beijing is particularly afraid of “color revolutions,” a phenomenon in which popular uprisings result in regime change:

“Moscow and Beijing share almost indistinguishable views on the potential domestic and international security threats posed by color revolutions, and both nations view these revolutionary movements as being orchestrated by the US and its Western democratic partners to advance geopolitical ambitions.”

Despite the havoc that Western sanctions have brought on the financial system, China’s strong economic relationship with the West will help it keep Russia at arm’s length. If anything, the Ukraine war has shown just how much China relies on the West for its economic prosperity.

China and the US are particularly intertwined financially, and despite ideological differences, China will continue to prioritize its economic relationship with the US.

The Wrongologist

Geopolitics, Power and Political Economy

Category: Economic Policy

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