American Idiot

In 2004, Green Day released American Idiot as a concept album or a “punk rock opera,” as they called it. The record follows the story of a middle-class adolescent anti-hero, disillusioned in the new millennium America. The media, the military machine and our federal government were all prime targets for a record that won Best Rock Album at the 2005 Grammys. I’ve been listening to this record with more intent and contemplating the America in which we find ourselves.

ISABELLA WEBER

The New Yorker Magazine rotated their spotlight to Isabella Weber this past week, resurfacing an article , written December 29, 2021 for the Guardian. In a widely disparaged and unpopular take at the time, Weber floated her own rebellious theory that temporary price controls on U.S. corporations would help slow or restrain burgeoning inflation in the United States.

What could be more anti-hero to corporate America than that? After all, the U.S. is the world’s beacon for a consumer-driven, free-market economy. And with COVID-19 variants lurking around every corner during the 2021 holiday season, no one knew when the next shelter-in-place order would come. Furthermore, the Federal Reserve had proclaimed rising inflation to be transitory. Add it all together and perhaps you can see why New York Times columnist Paul Krugman called Weber’s proposal “truly stupid.”

“TRULY STUPID”

While Weber was taking blows of stinging criticism, our Federal Reserve steadfastly continued its Treasury and Mortgage-Backed Securities bond-buying program, artificially suppressing already-low interest rates that would eventually create the current housing inventory desert. Hello, lock-in effect . 85% of all homeowners have the world’s greatest inflation hedge: a sub-5% mortgage rate. The resale market is abysmal and new listings are currently trending at all-time lows, a foreboding sign.

The Fed would continue buying bonds through spring of 2022, and their tapering schedule eventually stretched until June, roughly 1 year ago today. Yes, a year ago today, the Fed still had a hand in buying mortgage-backed securities.

• Where was year-over-year inflation in December of 2021 when Ms. Weber penned her theory, you ask? The year-over-year Consumer Price Index for 12/21 was 7%.
• What’s the Fed’s target rate for inflation? 2%.
• In their December 15, 2021 meeting, voting Fed members elected to keep the Fed Funds Rate at a historically accommodative 0-0.25%.
• And what did our Fed have to say about inflation and jobs in December 2021?

“With inflation having exceeded 2 percent for some time, the Committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment.” The unemployment rate in the United States in December 2021 was 3.9%. You read that right.

Nineteen months ago, per their own statement, our Federal Reserve was keeping interest rates low to reach maximum employment. Fast forward to February 2023, Federal Reserve Chair Jerome Powell warned “if the U.S. job market further strengthens in the coming months or inflation readings accelerate, the Fed might have to raise its benchmark interest rate higher than it now projects.” The Fed has raised the Fed Funds rate 500 basis points since March of 2022 and, today, unemployment sits at 3.7%. The Fed is clear on what they believe: Inflation will be put back in the bottle by driving up joblessness . In fact, within our industry, weekly jobless claims have supplanted the consumer price index as the economic report to watch. Why? Because the Fed has told us we need a job loss recession to stop inflation .

The reality is that less than 63% of able-bodied , non-institutionalized citizens are working or looking for work, The United States has over 10.1 million open jobs and somewhere between 5 to 6 million people seeking them. At last count, Reuters estimates there are 1.8 jobs for every 1 unemployed person. It is altogether futile and destructive to pursue a path of driving up joblessness to bring down inflation, especially when there are documented alternatives.

IGNORING ROOSEVELT

Monday-morning quarterbacking aside and the benefit of hindsight notwithstanding, our Fed (and Congress) ignored not only Isabella Weber, but an even greater precedent for controlling inflation while also striving for maximum employment.

In 1942, Congress and the Roosevelt administration passed the Emergency Price Control Act of 1942 as a “restrictive measure to control spiraling prices while providing economic efficiency to support the United States national defense and security.” Temporary price controls are immediate and removable (by the end of 1945, very few price controls remained). They are not lagging and blunt utilities like Fed Funds rate hikes. And, most importantly, they do not undermine American workers’ jobs. In 1941, unemployment was 9.9% and inflation was the same. By the end of 1943, unemployment was 1.9% and inflation was 3.0%. In December of 1945, unemployment remained at 1.9% and inflation was 2.2%. How did they do it? Not via Fed Rate hikes but rather temporary price controls on U.S. corporations.

The Act accomplished fundamental objectives of establishing maximum prices for goods/services and rents, prohibited speculative or manipulative practices and required the administrator to consult with industry members before issuing price regulations. Each regulation required an accompanied statement of considerations upon which it was based. There was even an Emergency Court of Appeals for those who felt unfairly impacted. Sounds oddly progressive. I’m reminded of Woodrow Wilson who said, “the best form of efficiency is the spontaneous cooperation of a free people.”

THAT WAS THEN, THIS IS NOW

In the third quarter of 2022, corporate profits in the United States nonfinancial sector hit a record high of $2.08 trillion, even as 40-year high inflation raged and the Fed hiked rates at the fastest pace in modern history. Following the pandemic-induced two-quarter dip in 2020, quarterly corporate profits surged 80% over the past 2 years.

In November 2022, UBS chief economist Paul Donovan wrote the “Fed should make clear that rising profit margins are spurring inflation.” No such clarity ensued.

In a call with investors, Exxon Mobil CEO Darren Woods stated that “…over the years, the markets will come back into balance…in the short term, everyone will squeeze what they can.” Pepsi chief Hugh Johnston said on his 2022 Q3 earnings call that his company “is capable of taking whatever pricing we need.” Ford’s first quarter 2023 revenue was up 20% from the same period a year before. That’s not the story, however. The story is that revenue was up 20% on a 9% increase in sales. As gas prices soared, Chevron’s profit spiked 240%. Nike profit up 53%. Steel dynamics up 809%. Keurig-Dr Pepper up 83%.

Some have argued that corporate profiteering alone didn’t cause 40-year high inflation and, of course, they are correct. $5.5 trillion of economic stimulus x years of pent-up demand x a federal reserve incorrectly diagnosing inflation as “transitory” x unrestricted corporate profit taking = stubborn, record inflation. With these ingredients, what possible dish could emerge from the economic oven?

UNINTENDED CONSEQUENCES

While the Fed rate hikes were failing to slow inflation, they were simultaneously and quietly eroding pillars of poorly based financial strategy in the banking sector. Banks that were long on bonds suddenly found themselves underwater within their investments, a tenuous circumstance only realized if the investments required liquidation.

SVB, Signature and First Republic banks have all failed in large part due to meteoric pace of Fed rate hikes. These same rate hikes effectively devalued bank bond holdings. First Republic was the second-largest bank failure in US history. SVB, the third largest. Signature was the fourth largest. Ever. The FDIC has spent roughly $23 billion on bank collapses this year.

BAD FORECASTS AND MISGUIDED POLICY

In his March 2023 working paper , Mickey Levy, Chief Economist for Asia and the US, Berenberg Capital Markets, took the Fed to task. “Even as inflation rose sharply and became more pervasive in 2021, the Fed fell further behind in raising its inflation projections and continued to anchor its policy rate to zero and purchase unprecedented amounts of Treasury and mortgage-backed securities (MBS), even though the housing market was booming.” He goes on to state “The Fed would benefit from a formal internal introspection.?Shortfalls must be addressed, particularly its failure to adequately capture the fiscal stimulus and the failure of its financial conditions parameters to capture the extent of the Fed’s monetary accommodation and the surge in money.”

This is America with a dysfunctional and clumsy Federal Reserve.

Where does this leave us in mid-June, 2023? The Fed meets again this coming Wednesday and will likely hold the Fed Funds rate steady this time around. But confidence in our Fed’s policy is waning as feverishly as their commitment to it remains. And Americans’ jobs, along with their pocketbooks, are at stake. As Billy Joe Armstrong put it “Welcome to a new kind of tension, all across the alien nation where everything isn’t meant to be okay.”?