They keep telling us that the Federal Reserve is fighting inflation. Month after month, they say that it is cooling, softening, easing, pulling back, losing its edge, calming down, and gradually going away. These claims have been consistent for 28 months.
And yet when you look at the big picture, the dollar has lost nearly 15 cents of value in the same period. And it just keeps happening.
It’s a tax. A hidden tax. Government is taking from you what it dares not attempt to get directly. So it does it through massive spending and then devaluing the currency.
The Consumer Price Index (CPI) on April 13 came in at a 0.1 percent monthly increase or 5 percent for the year. Once again, the spin is that this is supposedly good news. The “lowest level in two years,” blared all headlines, and it is technically true, once you annualize the overall index. When was the last time you spent your money on an index? You don’t do that—you buy goods and services.
High increases in one sector such as gasoline in the past sets up a situation in which a sudden drop can register as low inflation. In fact, it’s just a correction but nowhere near normal. Let’s say you gained 20 pounds last month but only 5 this month. Are you headed in the right direction? Let’s just say that you are nowhere near losing weight.
Drilling down on the latest data, the easing is entirely due to a decline in the price of gasoline and fuel oil. This is more than offset by 10.2 percent increases in electricity, 8 to 9 percent in food prices, 8.2 percent in shelter (rents and housing), and an incredible 13.9 percent in transportation services such as train and plane tickets. In addition, the price of groceries online in March soared again by more than 10 percent on an annualized basis.
This isn’t good news. It’s a disaster for the poor and middle class and for living standards generally.
Here is the problem with comparing month-over-month changes in the index. The inflationary virus for 28 months keeps hopping from one sector to another, seeming to suggest a fundamental change. But wait it out, and it pops up elsewhere in a form one did not expect.
An intriguing feature of March numbers is the one for used cars. They are down a surprising 11.2 percent, even as new car prices are up 6.1 percent. Why might this be? The big change is in the demand for used cars, and this, in turn, is influenced by a big increase in the price of vehicle repair.
This represents the continued fallout from lockdowns. When they first happened in the spring of 2020, car makers canceled orders for parts and chips to wait it out. Six months later, they were ready to restart their factories. Based on the “just-in-time inventory” strategies of the past, they put in orders. But the chips were unavailable because factories in Singapore and Shanghai had already moved on and retooled for household electronics. They simply were not available.
Rather than wait forever for chips that weren’t available, some manufacturers actually rolled out cars without many features that required microchips. It was chaos throughout the industry, and it took place even as the Biden administration was (and is) putting pressure on for ever more electric cars.
As a result, we had a huge shortage of new cars for the better part of a year. In the fall of 2021, you simply couldn’t find them on the lots. That’s when people started scarfing up all the used cars they could find. Those, too, left the lots. Consumers were left with dregs at very high prices. For the following year, consumers were paying $10K and more for used cars with upwards of 150K miles on them, simply because that was all that was available.
They also bought on credit! These days, people have confidence that 150K miles is just fine—the road life of cars is far beyond what it was in the past—but there are always repairs. They seemed to come all at once, and at a time when there was a shortage of both workers and parts. So the cost of repair was going higher and higher with longer wait times.
Now, here you have a situation in which people had an old car, paying $400 a month for it and $150 for full insurance coverage, and it breaks down. They then face a $4,000 repair bill. Mom and Dad are tapped out. This is a highly stressful situation. If they can’t pay the bill, the lender repossesses the car, leaving the driver without transportation or paying exorbitant prices for Ubers.
These are the real-life effects of lockdown collateral damage combined with the inflation that resulted from the money printing to make lockdowns possible in the first place. It is piling error on error. In the end, it is the consumer who gets pillaged at every step.
This process is continuing, with no end in sight. But isn’t the Fed waging war on inflation? It’s trying, but there was $6.2 trillion in new money printed over two years, and those have to make their way through every sector of the economy and become endemic. There is nothing the Fed can do to repair this damage without creating even more damage through aggressive deflation.
Some $5.5 trillion of that new money landed in the vaults of banks. Lacking viable markets for loans, they bought government-issued debt at prevailing rates only to find that the Fed dramatically increased rates, thus devaluing their portfolio valuations and creating new financial stresses.
![(Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker)](/_next/image?url=https%3A%2F%2Fimg.theepochtimes.com%2Fassets%2Fuploads%2F2023%2F04%2F12%2Fid5189725-1-JAT-2023.04.12-1200x985.png&w=1200&q=75)
Meanwhile, there is lots of talk about de-dollarization and tremendous confusion about what that means. Always keep the following distinction in mind.
There are two ways that you can spend dollars.
You can spend them on goods and services. And you can spend them buying other currencies. Every exchange is governed by a ratio of money to the things you are buying. That is called the price.
When people talk about “de-dollarization,” they are speaking of the price of the dollar in terms of other currencies. Whatever the trends are here, it doesn’t speak to the issue of the dollar’s value in terms of goods and services, domestically and even internationally.
There is no danger right now of the dollar declining in value relative to other currencies. This could change, but there are few signs. However, if Brazil, Russia, India, China, and Saudi Arabia start conducting their international trade relations in non-dollar currencies, it means a reduction in U.S.-dollar-denominated assets in foreign accounts. That’s all it means.
To be sure, this is a huge change, if it does indeed happen. The dollar has been king of the world since 1944. Not even the end of the gold standard in 1971 made a dent in that status. If a huge part of the world abandons dollars and dollar-denominated assets, that seriously changes the stakes for the U.S. federal government and the Fed. We’ve lived through decades in which U.S. monetary profligacy has been exported around the world. There has never been a shortage of markets for U.S. debt.
If de-dollarization advances, that will change, and U.S. consumers will start facing the costs of bad policy immediately. That will mean higher inflation and interest rates and a likely recession that could be deeper than anything we’ve yet experienced.
It also means the end of the U.S. empire. That has good features. There is no reason for the United States to maintain military bases all over the world. On the other hand, huge historic empires such as the United States don’t fall without grave consequences both economic and cultural for the domestic population. Whatever the empire—Aztec, Roman, Portuguese, Spanish, British, or American—the end comes with tremendous suffering for the people who live under the regime.
Domestic price inflation is but a symptom of a larger and more dangerous problem, which is the radical and systematic diminution of U.S. living standards. It is showing up in every area of life today with no end in sight.
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