Author: j.giglio

The Shrinking Labor Force

Posted on by j.giglio

The country is in a fragile state – burnt out from three years of pandemic; social upheaval; the war in Europe; and an economy that is cooling under the weight of high inflation, rising interest rates and the scarcity of labor.  The U.S. may have reached the point where its past is more appealing than its present.

So when good news comes along, you might as well seize it. This could apply to a recent announcement by the Bureau of Labor Statistics that the economy added a seasonally adjusted 372,000 jobs in June, well above the 250,000 economists expected.

But this sliver of good news must be set against the continuing cost of living crisis, or “Bidenflation,” as some call it, which is impoverishing working Americans.  The consumer price index rose 9.1 percent in June on a year over year basis, the worst inflation since December 1981.  It is unclear how the Federal Reserve will put the inflation genie back in the bottle without a creating a whole lot of pain.

Education and health services led job creation, followed by professional and business services, and leisure and hospitality. Meanwhile, the unemployment rate remained at 3.6 percent, a touch above the 50-year low reached before the pandemic hit in early 2020. Job growth continues, although fewer people are looking for work.

The Covid-19 pandemic turned the labor market upside down, and it is currently drum tight.  There were more than 11 million job openings at the end of June – up substantially from 9.3 million open jobs in April 2021 and seven million prior to the pandemic.

The pandemic led many people to reevaluate what they want from a job and from life, and it prompted a wave of early retirements.  Others left to start their own businesses.  Still others left to care for children, elders or themselves.  Some people simply threw in the towel and decided to stay at home, courtesy of the taxpayers.

The demand for workers far exceeds the number of unemployed people looking for work.  The labor participation rate – the share of adults working or looking for a job – was 62.2 percent in June, down from 63.4 percent before Covid.

Workers are taking advantage of the tight labor market by switching jobs for better pay, which represents a new source of inflation for many American companies.

Average hourly earning rose 5.1 percent over the last year.  Rising wages could make it harder for the Federal Reserve to tame inflation.  Nearly 79 percent of American workers are in the service sector, where higher labor costs are a large burden.

In addition to a shrinking labor force driving up wages, a steady decline in birth rates is expected in the U.S. and many advanced economies, which will sharply reduce the growth of the labor force.

For example, life expectancy in the U.S. has increased from 1980-2019 and improvements in morbidity and mortality rates will lead to a rapid increase in the number of people who are over 65 and retired.  As a result, dependency ratios – the ratio of the number of dependents to the total working age population – are set to rise sharply.

Put simply, deteriorating U.S. dependency ratios in the U.S. and globally means dependents who consume but do not produce will outweigh those who are working.  In effect, too few people carrying the load.

This translates to lower productivity per capita, an ever-intensifying war for talent and skills, and upward pressure on inflation.

As the supply of labor contracts, their bargaining power will increase and wages will continue to rise.  The growing leverage of labor may have beneficial effects on inequality, but it may manifest an increasing risk of structural inflation.

The Fed Fighting Inflation

Posted on by j.giglio

Prices at the gas pump and in the grocery store are climbing at the fastest pace since 1981.  As inflation spreads throughout the economy, it is proving painful for working families.

The Federal Reserve has raised interest rates three times so far this year and has signaled it plans to keep doing so in coming months.  The country is in the eye of the storm; the price spiral is nowhere close to over.

The Fed is passing off these interest rate increases, in bits and bobs as the British say, as a coherent strategy organized around a defining theme: to fight inflation and put the beast back in its cage without tipping the economy into a recession.

The American public has been told with monotony by various media outlets that the central bank has a laser-like focus on cooling the economy and limiting demand for goods and services, noting that the Fed has not hiked interest rates by 0.75 percentage points in one go since 1994.

The media was so transfixed with this figure that if you had a frequent flyer mile for every time it was mentioned you would have enough miles to circumvent the globe by now.

What is absent from this reporting is that the funds rate is now in the 1.5 to 1.75 percent range.  The Fed plans on the rate reaching a relatively modest 3.4 percent by year’s end.

Meanwhile, inflation hit 8.6 percent in May, the fastest rise in 40 years, with more pain to come.  Interest rates are still way below the rate of inflation.  It is crucial that the Fed take the cost of borrowing well above the inflation rate for price pressures to cool.

The reasons behind the current inflation are not hard to fathom, from the global pandemic to supply chain issues and the war in Ukraine.  The expansionary monetary and fiscal policies of 2020 and 2021 surely put a fire under the economy, driving up consumer demand and putting upward pressure on prices.

While it might not quite be true that, as Milton Friedman memorably put it, “inflation is always and everywhere a monetary phenomenon,” it is still a large part of the explanation.  Skip over blaming Putin.  To believe that is to think in political cliché.  Inflation was high before the Russian invasion of Ukraine.

By any normal reckoning, the Fed and others steering the economic ship remained conspicuously in the wrong for a long time when it came to dealing with the rise in prices.  By to-ing and fro-ing and insisting that inflation was transitory last year and hoping it just went away as though it didn’t exist, inflation got out of hand.

For the U.S. to defeat inflation, it will take real leadership.  To put it crassly, the Fed needs leadership like that provided by its former Chair Paul Volcker, the consummate public servant, a rarity on par with Halley’s comet.

As Volker understood it, inflation can be defeated, but it takes a willingness to make tough choices and the minerals to face down critics.  He did everything except kick extra points to deal with runaway inflation, explaining to the public the tough road ahead, the sacrifices to be made and the fact that there was no alternative.

For example, when inflation reached 15 percent in 1980, Volcker understood the need to go for inflation’s jugular and ratchet up interest rates above the rate of inflation.  He raised interest rates to over 20 percent to crush raging inflation.

That gives a foretaste of what the U.S. will experience in the coming years if the Fed does not move more aggressively and quickly to combat inflation.

While predicting the future is beyond difficult, if the Federal Reserve is to get inflation under control, it has a long way to go when it comes to raising interest rates.

Corporate America and Income Inequality in the U.S.

Posted on by j.giglio

Economic inequality, the gap between the rich and poor, has always existed. This disparity has increased dramatically in the U.S. over the last four decades.  Inequality can be measured in many ways, frequently using income.

The Gini coefficient is one of the most utilized measures of how income is distributed across the population with 0 being perfectly equal (where everyone receives an equal share) and 1 being completely unequal (where 100 percent of income goes to only one person). The measure has been in use since its development by Italian Statistician Corrado Gini in 1921.

The United States has a Gini Coefficient of 0.485, the highest it has been in 50 years according to the Census Bureau, outpacing that of other advanced economies.  This measurement finds that the U.S. is the most unequal high-income economy in the world.

The top 1 percent of earners made a little over 10 percent of the country’s income in 1980.  Currently they take home about 20 percent, more than the entire bottom half of earners.

Academicians and politicians argue over whether automation or overseas manufacturing is more responsible for eliminating American manufacturing jobs and keeping wages lower.  The question is debatable, but the answer is surely a mosaic from globalization to automation.

One factor that catches the eye time and time again has been the role of corporate America.  Sure, automation and globalization have transformed labor markets across the globe, but it is important not to overlook corporate America’s role in accelerating these effects.

The late Jack Welch, the CEO of General Electric from 1981 to 2001, captured this reality when he talked of ideally having “every plant you own on a barge”.   He turned the firm from a manufacturing company into more of a financial services firm while offshoring American manufacturing jobs.  In 1999, Fortune Magazine named him manager of the century.

Other leading companies followed Welch’s path. For example, General Motors moved production to low-wage areas like northern Mexico starting in the 1980s.  In 2017 Boeing, America’s biggest exporter, opened a plant in China for its 737 planes.

From both an economic and national security perspective, the US needs to strengthen smart manufacturing and provide good jobs for future generations through effective public policies.  War and the pandemic have exposed the fragility of supply chains. Increasing domestic production of items like energy, food and medicine would better secure supply chains and create high value jobs and support American workers and their families.

For example, semiconductors (chips) are foundational for many industries, as everything digital has transformed all sectors of the economy. Bear in mind that digital technologies are disrupting entire industries and blurring industry boundaries.  Still, the US is suffering from a severe shortage of semiconductors.

While the US global share of semiconductor manufacturing capacity was 37 percent in 1990, the number has fallen to an alarming 12 percent today.  The US has become an outlier in an industry that is a major engine of U.S. economic growth and job creation.

The US has grown dependent on other countries that provide government subsidies and incentives to make it easier and cheaper to manufacture semiconductors.  The European Union is planning to provide the industry with $48 billion over 10 years.

More importantly, China is investing $100 billion into the sector. The Chinese government is funding the construction of more than 60 new semiconductor fabrication plants and is poised to have the single largest share of chip manufacturing by 2030.

When push comes to shove, the political class should remember that the US must be the world leader in advanced manufacturing: “Not only the wealth but the independence and security of a country appear to be materially connected with the prosperity of manufacturers”.

Who said that? The never less than interesting Alexander Hamilton, of Broadway fame in his Report to Congress on the Subject of Manufactures in 1791.

Why the U.S. should be concerned China is making moves in ‘America’s backyard’

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The United States is losing ground to China in the battle for influence in Latin America and the Caribbean (LAC). The People’s Republic of China (PRC) is strengthening its relationships in the region often called “America’s backyard”.

China’s growing footprint in the region has raised concerns in Washington that the PRC is leveraging its economic might to further its strategic goals and displace American dominance in the region.

As General Laura J. Richardson, commander of the United States Southern Command, testified before Congress in March, “The PRC continues its relentless march to expand its economic, diplomatic, technological, informational, and military influence in LAC and challenge U.S. influence in all these areas”.

The region is increasingly important to China in both economic and political terms.  It possesses an abundance of natural resources and raw materials, and a productive environment for trade and investment.

In addition to securing strategic resources, expansion in the region helps China increase its sphere of influence and achieve certain political goals in the global geopolitical chess game by challenging the U.S. in its own neighborhood; one the U.S. overlooked for years as it focused on the Middle East and elsewhere.

The PRC is now South America’s top trading partner and a major source of foreign direct investment and lending in energy and infrastructure.  It is also forging cultural, educational and political ties.

For instance, in 2000, less than 2 percent of LAC exports went to China. By 2021, that number had risen to $450 billion.  China is currently the second largest trading partner for LAC after the U.S., and LAC-China trade is expected to more than double by 2035.

Another Chinese objective is to use economic agreements to isolate Taiwan by persuading LAC countries to abandon diplomatic recognition of Taiwan’s sovereignty.  Currently, 25 of the 33 Latin American countries recognize the PRC rather than Taiwan.

The COVID-19 pandemic further elevated China’s status in the region. Beijing supported Latin America early on with large shipments of masks, personal protective equipment, medical supplies such as ventilators, diagnostic test kits and vaccines to curry favor with the various countries.

In September 2013, Beijing officially launched the trillion-dollar Belt and Road Initiative (BRI), using a name that harkens back to the famed Silk Road.  It is at the center of Chinese foreign policy and includes a web of investment programs that seek to develop infrastructure and promote economic integration with partner countries. It represents a direct threat to the US because China is seeking to use it as a connective link with the whole world on its path to becoming the global superpower.

Since 2017, 21 LA countries have signed on to the Belt and Road Initiative and more are expected to join.  In the face of China’s footprint in LAC, the Monroe Doctrine seems to have been forgotten.

In response to China’s impressive trajectory in LAC, President Biden, who took the lead on LAC policy during the Obama administration, and the G-7 leaders agreed in June 2021 to launch a global infrastructure initiative, Build Back Better World (B3W).  This initiative is consistent with the view that China is a strategic competitor to the U.S. in the global superpower game that some call a new Cold War.

B3W seeks to offer an alternative to China’s BRI. Its goal is to advance infrastructure development in low -and middle- income countries, including LAC. It is an international extension of the White House’s domestic Build Back Better proposal.  The LAC is the first region on the B3W’s radar.

How the initiative will be implemented to compete successfully with China in LAC is an open question.  What is clear, however, is that the superpower rivalry is good news for LAC countries.

History may show Latin America to be among the winners of the new Cold War. The U.S. will now pay the requisite amount of attention to the region and provide welcome resources.

 

Putin’s tactics in Ukraine rival Stalin’s engineered famine in the 1930s

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Vladimir Putin’s brazen and barbarous invasion of Ukraine is reminiscent of the artificially engineered famine Soviet dictator Joseph Stalin used in 1932-1933 in an attempt to extinguish Ukraine.

Stalin unleashed a famine referred to by Ukrainians as the Holodomor (“killing by hunger”) to break Ukrainian resistance when they refused to cooperate with the Russian system of collective agriculture.  Like Putin’s actions today, it was an act of genocide.

Just as energy is Putin’s gold, grain was Stalin’s. He strove to gain control over Ukraine’s fabled breadbasket to finance his ambitious industrialization and militarization plans by forcing millions of peasants onto collective farms.

When the people resisted, Stalin deployed the secret police and military to ruthlessly crush what he considered to be Ukrainian nationalism, while continuing to requisition grain for export in exchange for hard currency and engaging in the widespread persecution, deportation to the Gulag, and execution of the non-compliant.

During 1932-33, Ukraine suffered mass starvation.  Nearly four million people, about 13 percent of the Ukrainian population at the time, are estimated to have died of famine in a land of unrivalled fertility.  Many in the international human rights community consider the famine genocide.

Today, Russian tactics in Ukraine, such as indiscriminate bombing of civilian areas, is fueling a death toll not witnessed in Europe since the days of Stalin and Hitler.

Put bluntly, after the Russian invaders were forced to withdraw from Bucha, a small town in the Kyiv region, the graphic images of mass graves, tortured and mutilated bodies, executed civilians with their hands bound behind their backs suggesting they had been first been taken captive and then killed, of streets covered with corpses, provided photographic evidence of Russia’s open and horrific war crimes.  The available evidence makes it unlikely that these people died as a result of collateral damage resulting from a military exercise.

While many Ukrainian allies expressed shock and grief, the Russian president dismissed the accusation that his army committed war crimes in Bucha, accusing Ukraine of staging the atrocities.  Another example of the numerous official fictions Putin monotonously propagates.

 

President Biden, who previously called Mr. Putin a war criminal, and Ukrainian President Volodymyr Zelensky have accused Russian forces of committing genocide in Ukraine.  Zelensky said Putin was trying to “wipe out the idea” of a Ukrainian identity.

Moscow has categorically disputed the genocide claims and accused the U.S. of hypocrisy over its own crimes. The International Criminal Court in the Hague has opened an investigation into alleged war crimes and crimes against humanity in Bucha and elsewhere in Ukraine.

Genocide is regarded as the gravest crime against humanity and has a strict legal connotation.  The 1948 United Nations Genocide Convention defines it as crimes committed “with intent to destroy in whole or in part, a national, ethnic, racial or religious group”.   It is exemplified by Nazi efforts to eradicate the Jewish population, during which more than six million Jews were killed.

Genocide is harder to prove than other violations of international law because it requires evidence of specific intent.  While proving intent beyond reasonable doubt is difficult, genocide is recognizable.  Russia has targeted and killed civilians; is reported to have forcibly deported hundreds of thousands of Ukrainians, including children, to Russia and bombed a maternity hospital.  Given the scale of Russian violence genocide warnings need to be taken seriously.

As evidence of Russian atrocities are revealed, one after another, use of the term genocide echoes the holodomor, the genocidal tactics favored by Stalin in the 1930s to starve the Ukrainian people.

The blame lies with Putin.  He is trying to re-absorb Ukraine into Russia, push back against NATO expansion into Eastern Europe, and regain Russia’s position on the world stage.

Many Russians have long been suckers for greatness.

In the process, Putin has turned Russia into an international pariah.  Given what he has done, the thought of anyone in the West negotiating with him is difficult to stomach.

Do Economic Sanctions Work

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When Western policymakers want to influence an outcome and military intervention is deemed too risky, economic sanctions are a favorite non-lethal tool in their bag of tricks. The war in Ukraine is the latest example of their use.

Attacking a country’s economy through sanctions can be a way of hitting your enemy where it hurts—in the pocketbook. And it’s a lot easier than going to war. The question is whether sanctions cause as many problems as they solve.

Economic sanctions are not a novel concept in international diplomacy. The aim of weakening the enemy through the material deprivation of its population long predates modern times. In fact, it dates back to the ancient Greeks, when Athens imposed a trade embargo on its neighbor Megara in 432 B.C. that helped trigger the Peloponnesian War.

Economic sanctions come in different forms depending on the desired outcome. Besides economic and trade sanctions, these measures include targeted actions such as arms embargoes, freezing assets, commodity restrictions and travel bans on key individuals and organizations.

These sanctions can be imposed by a single country or multilaterally, by like-minded nations, or international bodies such as the United Nations and the European Union. Sanctions can be wide-ranging, banning all transactions with a specific country, while targeted or smart sanctions aim to minimize collateral damage to the general population and instead focus on specific individuals or entities believed to be responsible for offending behavior.

The economic sanctions placed on Russia following its invasion of Ukraine are the widest ranging ever placed on a major economic power. Will they work? Restrictions on Iran, Venezuela, and North Korea, for example, impoverished their populations but haven’t led to political change.

To take just one example, the war in Ukraine has put pressure on European energy markets where supply and demand were already being disrupted. Consider will the European Union’s (EU) proposed oil sanctions on Russia weaken Putin’s ability to finance the war? Fossil fuel exports provide the revenue for Russia’s military buildup and brutal aggression against Ukraine.

The 27 members of the EU buy a quarter of their oil and more than 40 percent of their gas from Russia, paying $450 million per day for oil and $400 million per day for gas. There is no consensus yet among EU members on stopping Russian gas imports.

The EU recently stopped Russian coal imports, and after dithering over a decision to sanction Russian oil imports, the EU Commission has committed to weaning itself off Russian oil. The President of the Commission announced that oil imports from Russia will be banned after six months and refined petroleum products by the end of the year, ratcheting up its efforts to cut off a key source of funding for the Kremlin.

This was the EU’s sixth package of sanctions against Moscow, and its biggest and costliest step yet toward supporting Ukraine and ending its dependence on Russian fossil fuels.

Now the EU is struggling to replace that oil. It is also making a big bet that Russia will not retaliate by turning off natural gas supplies, as they have already done with Bulgaria and Poland for refusing to pay in rubles. Just as Europe hopes to find new oil suppliers, so Russia is working hard to line up alternative buyers such as India to minimize the impact on their bottom line and to continue to take advantage of higher oil prices to compensate for lower volume.

China is a likely market. Last year a third of Russian oil exports went to China. While Russia relies on oil and gas exports for 45 percent of its revenue, according to the International Energy Agency, it may well be that the EU’s oil ban won’t cause large and lasting damage unless China joins the Russian oil boycott, and that is highly unlikely.

But it’s very likely that the proposed ban will hurt the European economy and Europeans are going to have to deal with higher energy prices.

The war in Ukraine and COVID-19 pandemic could spell the end of globalization

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Times are changing. The global pandemic and Russia’s unprovoked invasion of Ukraine have sparked debate on the future of globalization — nations trading with few barriers, focusing on the industries and services they do best.

The war in Ukraine has strained ties between countries that were already under pressure due to the coronavirus pandemic. It has exposed the risks inherent in economic interdependence among nations with different ideologies and security interests.  It may well be that globalization as it has been known is dead in a post-COVID-19, post-Ukraine war world.

The war has had a big impact on the global economy, especially as supply chain shocks threaten everything from energy supplies to auto parts to exports of wheat and raw materials, and sent prices skyrocketing.  It has also raised concerns about food shortages because Russia and Ukraine are among the major breadbaskets of the world.  Many countries have banned the export of food grains, fearing supply disruptions and higher prices due to shortages.

The CEO and chairman of Black Rock, the world’s largest asset manager, said in a letter to shareholders last month that “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.” He added that companies and governments will now be forced to further “reevaluate their dependencies and reanalyze their manufacturing and assembly footprints.”

The pandemic dramatically demonstrated vulnerabilities in long supply chains and made countries look closer to home. While it is impossible to predict the outcome of the war, Russia’s invasion of Ukraine on Feb. 24 has upended a world order that has been in place since the end of the Cold War in the 1990s. It signals changes to globalization as the world has known it.

The combination of technology and a relatively stable geopolitical landscape promoted steady expansion of global trade over the last 50 years. In 1970, trade accounted for 25% of global GDP, meaning one quarter of all goods produced were traded with international partners. By 2000, global trade had doubled to 50% of all goods and services produced.

But the trend toward globalization recently started to run in reverse. The world trade share of GDP output peaked in 2008 at 61%.  In 2020, global trade accounted for just 51.6% of worldwide GDP, the lowest since 2003.

Even before the pandemic, the 2008 financial crisis dealt a blow to globalization, as cross-border investments, trade, and supply chains all contracted.  In the last decade, globalization has suffered multiple setbacks in the form of Brexit, the US-China trade war, the pandemic, and now the Russia-Ukraine war.

The conceit that economic interdependence promotes political stability has been shaken. Russia, the ninth largest economy in the world, is being economically isolated from the West, which has responded to Russian aggression with harsh economic sanctions. Consider that the European Union is Russia’s main trading partner, accounting for 38 percent of its exports. Of course, this is partially neutralized by its dependence on imports of Russian gas and oil.

Governments and corporations are recognizing the limits of having supply chains spread out in multiple locations.  For instance, shortages of surgical masks and personal protective gear at the outset of the pandemic in 2020 showed the vulnerability of the world’s dependence on Chinese factories for all sorts of goods.

All this means global trade may have crossed the Rubicon and is heading toward cold war-era trade blocs, one led by the U.S. and the other by China.

Globalization may not fully recover from the pandemic and the war in Ukraine.  A version of it based on different principles and moves away from pure efficiency to consider security, reliability, and partnerships may be in the offering.

Billionaire Tax

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The return of inflation has changed politics. For months the Federal Reserve and the White House dismissed inflation as the dog that had not barked in over 40 years. Inflation has now started to spiral out of control and the country may be on the brink of a recession.

Inflation is one of the main reasons why Biden faces record low poll numbers and Democrats may lose control of both the House of Representations and the Senate in the November mid-term elections.

The president’s political response has been to include a “Billionaire’s Minimum Income Tax” in his $5.79 trillion fiscal 2023 budget proposal.  Despite the name, it would require that households with a net worth over $100 million (the top 0.001percent of U.S. households) pay a rate of at least 20 percent on their income as well as unrealized gains in the value of assets like stocks and bonds. The Biden Administration refers to the name of the proposal as a “billionaire minimum income tax” despite the $100 million threshold.

Attempting to impose a minimum tax rate of 20 percent on the likes of Jeff Bezos and Elon Musk may be good politics in an era when the prevailing wisdom is that the super-rich don’t pay their fair share of taxes, but this proposal is highly questionable from a governing standpoint.   Essentially the proposal is taxing gains from their wealth.

It is beyond debate that the gap between the richest and the poorest Americans has widened in recent decades. According to the Pew Research Center, in 1970 upper income households had a 29 percent share of US aggregate income. By 2018 it was 48 percent. Middle income household income was 62 percent of the total in 1970, by 2018, it was 43 percent.

It gets even worse when you look at wealth inequality. The richest 1 percent of the population owns 56 percent of all US equities.  The least wealthy 40 percent of the population owns no assets at

all—nada.

Rather than waiting for a taxpayer to sell an asset and tax those gains, the administration plan would allow the federal government to start collecting revenue now. The proposal raises complicated questions about how the IRS and taxpayers would assess the value of assets that are not publicly traded.  It would be more efficient to simply tax the profits from sales of stock and other assets at the same rate as ordinary work income.

Another basic question is whether Biden’s proposal would raise the $361 billion over a decade that the White House says it would. Taxes based on capital gains coming from tradeable assets such as stock and bond prices are certainly more volatile than income earned by taxpayers. What are the assumptions about stock and bond prices over the next ten years that are behind the $361 billion projection and how do you value non-tradeable assets?

Broad-based taxes are more likely to deliver projected revenues than those that focus on a subset of the population. But Biden promised during the campaign that he would not raise taxes on anyone making less than $400,000 a year, effectively locking out 98.2 percent of taxpayers from any proposed tax increase.

Like the COVID-19 pandemic, Russia’s war in Ukraine has contributed to stagflation pressures in the United States and other advanced economies where prices are increasing beyond what many ordinary people can afford.

Global food prices set a record last month according to the United Nations. People are on edge. The only certainty when people go food shopping these days is the price will be cheaper today than tomorrow.

Inflation is a very real problem, but Biden’s political response of proposing a minimum income tax on the ultra-wealthy doesn’t address it.  Instead, it is all about political virtue signaling.

With household budgets stretched due to inflation, the Fed finally raises interest rates

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The Federal Reserve (Fed) has chosen to do the bare minimum when it comes to raising its benchmark interest rate. Last month’s 0.25 percentage point increase was no more than the markets had expected.

It was the first time the Fed has raised rates in more than three years and marked a reversal of a zero-interest rate policy and injecting unprecedented levels of cash into the economy. Still, real interest rates – nominal rates adjusted for inflation – remain extremely low. Taking interest rates to near zero has caused one of the greatest asset bubbles in history. The Fed has its hands full to achieve a soft landing and get inflation back to its 2 percent target over the next three years.

That may be the triumph of hope over experience. After all, the Fed ignored all the warning signs, spending much of the last year telling Americans that inflation would be but a transitory problem.

The Fed feared that a larger hike would hold back the economy. On the contrary, the real threat to economic growth and living standards may come from a sustained period of high inflation, not small changes in short-term interest rates.

Inflation skyrocketed to 7.9 percent over the past year, according to the February report from the Bureau of Labor Statistics (BLS), the fastest increase since January 1982 when the U.S. economy confronted the twin threats of higher inflation and reduced economic growth.  Excluding food and energy, both of which moved sharply higher during the month, core inflation still rose 6.4 percent, the highest since August 1982.

Wherever you look, prices of essential materials, products, and services are shooting up at rates unseen in a decade or more. The most recent inflation problems have also been compounded by fast-rising gas prices.  In February, gasoline cost 6.6 percent more than in January, which translates to a nearly 40 percent annual increase.

The White House has largely blamed the inflation problem on supply chain disruptions during the COVID-19 pandemic, corporate greed, and now Putin’s war.  Blaming Putin is utter nonsense.  For sure oil prices have increased over the last two months, but consumer inflation rose from 2 percent to over 7 percent in the last year.

Food, housing, cars, recreation – it has all gotten more expensive.  This is attributable to an unprecedented government spending blitz coupled with persistent supply chain disruptions that have been unable to keep up with stimulus-fueled demand, particularly for goods over services.

That’s putting upward pressure on wages. But although wages are increasing, inflation is rising faster, meaning that workers are falling further behind.  Inflation-adjusted average hourly earnings fell 0.8 percent in February, contributing to a 2.6 percent decline over the past year, according to the BLS.

After allowing for inflation, the Fed funds rate is still exceptionally low, especially in real terms.  Indeed, with the CPI measure now expected to top 8 percent, raising nominal interest rates by just a quarter of a point hardly even counts as monetary tightening.  A larger hike would have sent a clear signal that the Fed is serious about getting inflation under control.

Inflation is something a large majority of Americans have not experienced in any meaningful way. Those who are under 50 have no memory of the high inflation rates from 40 years ago, so the current price increases come as a shock.

While the consensus view is that the Fed will raise the benchmark interest rate six times this year, these passive increases may be too little and too late to get inflation under control. The longer the Fed waits to raise rates aggressively, the harder it will be to bring down inflation and the worse it will be for the American economy and the living standards of ordinary people.

Whatever Putin’s motives, nothing justifies Russia’s invasion of Ukraine

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Vladimir Putin is not crazy. He has not lost touch with reality. He is evil, a KGB thug, murderer and war criminal, and he knows what he is doing. Many believe that he will stop at nothing to recreate the Russian Empire. Others believe that Putin is vehemently opposed to NATO expansion.

Whatever his motives, nothing justifies Russia’s horrific invasion of Ukraine. It is a flagrant violation of international law that has resulted in a humanitarian disaster. It seems strange now that anyone ever imagined that Putin might not invade Ukraine.

The West is told that Putin has made a strategic mistake in thinking his military could overwhelm Ukraine, capture Kiev within 72 hours, decapitate the Ukrainian government, install a pro-Moscow puppet regime and face little popular resistance. But he knows he can achieve his objectives by behaving badly.

On Aug. 8, 2008 Russian forces began the invasion of Georgia, marking the start of Europe’s first war of the 21st century. The conflict itself was over within a matter of days, but the repercussions of the Russo-Georgian War continue to reverberate.

The international reaction to Russia’s military campaign in Georgia was remarkably muted. It minimized Russia’s bad behavior, with Moscow suffering few negative consequences. The invasion of Georgia should have been a wake-up call to the international community.

Understandably, Putin interpreted this accommodating approach as an invitation for further acts of aggression in what he perceived as Russia’s traditional sphere of influence. The 2008 invasion of Georgia was a Beta test for future aggression against Russia’s neighbors and a dry run for the tactics and strategies that would later be deployed in the 2014 invasion of Ukraine: launch a cyberattack, a disinformation campaign, and an all-out effort to meddle in a country’s domestic politics. Six years after the Russo-Georgian War, Russia embarked on a far more comprehensive military campaign against Ukraine which again went unchecked.

Even after the illegal annexation of Crimea in 2014 and the launch of Moscow’s war in eastern Ukraine, the U.S. and Europe still failed to acknowledge that Russia had become a revisionist power seeking to establish its dominion over the eastern half of Europe.

One can only speculate whether firmer Western responses in 2008 and 2014 could have prevented the tragic events of 2022. Now Ukrainians are paying the ultimate price. Based on the West’s behavior, Putin could only have concluded that the benefits of invading Ukraine would exceed the costs.

Europe and the U.S. keep learning the wrong lessons; their weakness begets weakness. Showing restraint and searching for a diplomatic solution encourages Putin, who has no retirement plans, to exploit the West’s vulnerability and double down.

Putin is holding the world to ransom. Few thought he would actually invade Ukraine, but he did just that. Why would you put anything past him, including widening the war leading to a nuclear Armageddon? An economically cornered Russia coupled with continued Ukrainian resistance could cause Putin to escalate.

Putin understands that the U.S. and Europe will not resort to measures such as a no-fly zone that could lead to direct conflict with Russia and risk nuclear war over Ukraine, which is not a NATO member. He knows full well that nuclear brinkmanship has prevented the West from bombing his army into the ground. The result would be World War III. After all, Russia has nearly 6,000 nuclear weapons, with an estimated 1,600 active and deployed.

Will all this end with a diplomatic solution in which Russia withdraws its forces in exchange for Ukraine’s neutrality? Who knows? It is too early to start considering the shape of things to come. As Yogi Berra famously put it: “It’s tough to make predictions, especially about the future.” This is especially true when your calculations depend on the actions of an evil man.