Warning: Inflation Ahead
Just a quick "what might be coming" post. With oil prices near historic records and Bush's Energy Secretary warning that it could be three years before oil prices begin to seriously fall, news of a falling dollar is particularly bad.
The inflation that is coming will probably be felt disproportionately by the poor as gasoline makes up a larger part of their spending, and the purchasing power of their "Walmart shopping" will be greatly undermined if the dollar slides raising the cost of cheap imports. This is really bad news for those on fixed incomes.
And yet the tax cuts for the wealthiest will stay in place. Mainstream America has been convinced that the US no longer engages in class warfare, but the monied interests have been pushing their burden onto the middle class since Reagan.
The inflation that is coming will probably be felt disproportionately by the poor as gasoline makes up a larger part of their spending, and the purchasing power of their "Walmart shopping" will be greatly undermined if the dollar slides raising the cost of cheap imports. This is really bad news for those on fixed incomes.
And yet the tax cuts for the wealthiest will stay in place. Mainstream America has been convinced that the US no longer engages in class warfare, but the monied interests have been pushing their burden onto the middle class since Reagan.
posted by mikevotes at
7:16 AM
14 Comments:
So long as China prevents the Yaun from floating freely, the imports from China will remain relatively unchanged in price excepting for a slight increase due to shipping charges.
You are right that the poor will be disproportionally affected, but it won't be because of the cost of Chinese imports. In a country like Bangladesh, most of the contracts are in dollars anyway, so it takes some time before the weak dollar really means anything to the American consumer.
Even a company like BMW tries to hedge against a precipitous drop in the dollar, so as to stabilize the price in the United States to the best of their ability.
Also, a weak dollar is good for US exports. The Europeans tend to get hit the hardest as their exports become harder to sell to the States.
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Praguetwin, at 8:50 AM
Let me start by saying that you have a good point about China's fixed exchange rate. Lowering the dollar would have small impact on the cost of Chinese imports. Interestingly though, it would make other countries more competitive with China in the US market.
I have always had some contention with the "lowering the dollar benefits the trade deficit" contention.
True, it does make exports cheaper and imports more expensive, but if you look at the huge trade deficit, I'm not sure that a weaker dollar really is a net positive.
Most of the goods imported to America are not competing with US made goods. Cheap pieces of plastic from Indonesia are soooo much cheaper than those produced in the US that I would argue a 10% shift in currency valuation would not really alter the sourcing of them.
What I think would be likely happen is that consumers would buy less of those imports, which could affect the number of units, but would represent a lower standard of living. On the other hand, those that are still bought are now 10% more expensive. So, does the rise in prices offset the decline in purchases? I don't know.
But my point is that it would not substantially shift sourcing, just raise cost and lower the number of units purchased and on essential items, could in fact raise the gross dollars spent going out.
Certainly it would help in US exporting, but because of the lopsided trade relationship, I question whether increased cost of imports might outweigh that benefit.
I know this is economic heresy, but the US trade situation is far outside the neutral models of currency and trade.
Also, something that I think is important is that a long term consistantly devaluing dollar makes foreign business investment in the US a costly proposition lowering investment and capital.
I don't think I expressed this too well, but I hope you get my point.
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mikevotes, at 9:13 AM
Wasn't part of Josh Bolten's Five Point Plan to excite the GOP base(the one glowingly written up by Mike Allen in TIME Magazine a couple of weeks ago) to push for the extension of the Bush tax cuts on capital gains and dividends and the end of the estate tax?
Wouldn't these tax cuts disproportionately help the wealthy while adding to an already scary deficit problem?
Wouldn't these new tax cuts and extensions just be irresponsible policy that will do more harm to the country overall than the temporary political benefits justify?
I'm no economist and you guys are much more knowledgeable about these things than I am. But it sure seems like a bad idea to continue to cut taxes for the wealthiest and fight two simultaneous wars in Afghanistan and Iraq while middle and working class people get squeezed by stagnant wages, high energy prices, rising health care costs, rising college costs, outsourcing, etc.
It's like there are no adults running this country anymore. Remember when Bush and Cheney took over from Clinton and Gore and said "The adults are back to run things"? Given the economic, foreign, and energy policies pursued by Bush/Cheney, you'd have to say the country's actually being run by adolsecents.
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Reality-Based Educator, at 9:37 AM
The answer to all of your series of questions is Yes.
I'm often amazed that the Republicans have used values(read hate) to get so many working class people to vote directly against their own economic interests. Again, it goes back to the "Southern Strategy" when the Nixon campaign reached out into the Southern Democratic base, flipping the existing political geography, by tapping into southerners against civil rights.
That segment of the Repubs exists to this day whetehr it's gays, affirmative action, or immigration. These people vote for their prejudice rather than their interests.
Mike
Mike
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mikevotes, at 9:49 AM
Picking up on the fixed exchange rate, one should realize that the efforts of Schumer and Pelosi (?) to get China to revalue their currency is not the pancea they make it out to be. Certainly it will help close the trade gap (I hear you that it may not do as much good as they say, but certainly the buying of non-essential goods from China would be reduced which would help), and it would help other countries who don't have the luxury of controlling their home currency, but who are in the unenviable position of competing with China.
However, the price of Chinese goods would go way up resulting in a drastic lowering of the standard of living for most Americans. The "Wall-Mart Effect" we could call it.
I'm still trying to get reliable data on government revenue. I know that when the tax cuts were first put into place, there was a drop-off, but reveue has been higher than expected as of late. Conservatives argue that it is spending which is creating the huge deficits and not the tax cuts. If you have a source, please let me know.
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Praguetwin, at 10:41 AM
Mo, I don't have a source, but since your looking for data on the "successful" tax policy and that's the message they're trying to push, I would think that if you're looking for economic data, maybe the whitehouse site here:
http://www.whitehouse.gov/cea/ or maybe search for the home site of Larry Lindsey Bush's top economic adviser.
If you're looking for revenue information, I'm not too sure, but I would think irs.gov or treasury.gov should have some reporting of estimates and collections from the past year.
Another option would be to go after the outside forces that promote Bush's economic policies, you would think they would have papers and articles promoting the success of Bush and that might be easier to find.
two big ones would be www.AEI.org or www.heritage.org.
I'm not exactly sure what you're after, but they should all have raw numbers that support that position.
If you're looking for anti bush, I'm not too sure. There are lefty think tanks that focus solely on budget issues, but they don't get the same kind of funding as the right sided ones. Maybe go to truthout.org or somehwere like that and search past articles. Even if you don't find exactly what you want, from the bios of the authors, you will probably find affiliations to websites and organizations that have it.
All just off the top of my head. Hope it helps.
Mike
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mikevotes, at 11:08 AM
A couple of thoughts.
First, when you have slowing growth due to increases in interest rates and energy costs, coupled with inflation due to a single commodity (oil), you have a Fed which has to continue to increase interest rates regardless of growth rate to control that inflation. This is called stagflation and causes a spiraling recession. That's what we're on the edge of.
Under normal circumstances, the slow-down would result in lower demand for oil and reduced prices .... that is if the cost of oil is high due to supply/demand imbalances.
But it's not.
It's high due to fear. And the risk premium doesn't readily respond to Fed policy.
Second, it's important to remember that the measures of "inflation" are ridiculous. Even the overall CPI and PPI are not reflective of everyday life. Are you personally paying less for anything anywhere? I'm not.
It's impossible to have guns and butter. We tried in the 60's - 70's and paid dearly with interest rates in the serious double digits while in recession. You can defy the laws of economics for awhile, but not forever.
However, those who are wealthy don't care. A simple shift out of the stock market to real estate and short bonds solves the problem for them while the rest of the country loses asset value (long hand for gets poor). There were some smart wealthy folks that bought 30 year treasuries back in the 70's and 80's at > 15% who made a nice living for years.
Care to guess where my investments are going?
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Greyhair, at 11:39 AM
Greyhair, I'm so glad you chimed in on this, I was hoping you'd show up. You generally have an analysis a good level or two beyond mine.
I agree on the measures of inflation being non representative, but there are also other distortions that affect commodity prices. As example, one of the things I keep expecting to go up because of oil is beef, and yet it largely hasn't because of mad cow fears have almost killed us exports creating an outsized domestic supply. On the other hand, there are far fewer items on sale in my grocery store.
And, that's a good point about the irresponsiveness of oil prices to the fed.
Also, just a general question, I'm assuming from the guns and butter comment that you feel that Johnson in Vietnam and the great society was the main cause of the stagflation of the 70's. I assume you're also extending that to include the current situation. So, the question is, assuming that modern America is unwilling to pay for extended wars as they go on, do we need to start factoring stagflation into war modelling?
I feel pretty firm in saying that if you had told Americans before this Iraq that it would have cost them $400/year per taxpayer for 8 years that we never would have gone to war. If this were in the public debate, would the US still go to war?
And how would you calculate the economic costs of this in order to accurately assess the costs of Iraq?
Just freewheeling.
Mike
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mikevotes, at 1:06 PM
Good point. Gosh, was SecEnergy AWFUL on Meet the Press.
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Bravo 2-1, at 2:33 PM
Greyhair... you beat me to the stagflation punch. I'm old enough to remember the days of gas "shortages" and 12% mortgage rates. I see similar indicators on the horizon, but this time we already have personal and public debt stretched to perverse levels so thier's no elasticity in the consumer market.
Blend consumer debt and greed with a government (Bush + Rubber Stamp congress) cheerleading corporate interests instead of family security and it could get ugly real fast. I'm talking a social seismic tipping point in public attitudes not dissimilar to what happened with the tidal wave of public support Bush rode following 9/11. But the same tide that washes on to the shore will just as easilly wash you out.
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-epm, at 2:37 PM
I'm really too young to rememeber those days very well. I was 8-12 during the Carter years and so my interaction with interet rates was pretty small.
But I do have a crystal clear memory of being hot(houston) while sitting backwards in the "way back" of the wood paneled green station wagon waiting in line for gas. Being irritating to my mom, as kids are prone to do when they're uncomfortable.
Honestly, I don't know how any of you parents out there do it.
Mike
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mikevotes, at 3:16 PM
During the 70's, I had a VW Bug that held about 10 gals and got like 30 mpg. Even with that, I hated waiting in gas lines for hours for a fill up. I ended up living on a ten speed bike. And yes, I even had the proverbial experience of waiting in line only to have the station close due to being out as I neared the pumps.
As far as stagflation and war modeling ... it seems like it *should* be cooked into the process given the pandering by pols to voters. As back then, there were plenty of voices saying it wouldn't work economically ... and plenty who saw the boogieman commie behind every tree. Guess who won the P.R. war on that one? Unfortunately, our collective learning from such experiences seems to span around 30 years.
I blame Johnson and the Democrats for the guns/butter thing. Additionally, we were unlucky enough to get hit with skyrocketing gas prices (AHHH!! gas over $1.00 per gallon!). Does this scenario sound familiar?
As far as mortgages, epm, I can do one better. When I went to buy my second house, a new home loan was 17%. If you didn't "assume" an existing loan, you just didn't buy anything. Of course, real estate fraud's prolifigated all over the place.
As has been mentioned, the U.S. economy was in a much stronger place, fundamentally, in the 1970's than now. So a period of stagflation looks like the best case scenario now .... unfortunately.
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Greyhair, at 3:42 PM
I really don't like this thread. It's scaring me.
Fortunately, I'm not one of those in an ARM. I got one as rates were falling, then refi'ed just after the bottom. But that's one element that really scares me. Alot of people are way out on a limb on their house values, and in a place like Houston with huge new built suburbs way the hell out, we could get a nasty ripple effect.
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mikevotes, at 5:17 PM
I bought my first home in '83. I think the interest rate was 12.something per cent... and that was a discount rate.
Today, I have a 5% mortgage with 10 years left on the note. If I can just get through the next decade...
What's killing me is tuition costs. I'm in the middle class bullseye: too strapped to just write a check, and too well off to get assistance.
By
-epm, at 9:43 PM
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