The Fed Is Wrong: Inflation Is Sticky

The Fed will be proven catastrophically wrong about inflation for the simple reason that inflation isn't transitory, it's sticky: when prices rise due to real-world scarcities and higher costs, they stay high and then move higher as expectations catch up with reality.

Consider the dynamic of Fed-inflated bubbles raising rents. The house that once sold for $200,000 is sold to a pool of investors for $800,000, and the property taxes, insurance, and debt service rise accordingly: even though the house didn't change, thanks to the Fed's bubble, the entire cost structure is higher.

So what happens next? The investors jack the rent up to cover the higher costs. As for refinancing to lower the monthly mortgage payment--that trend has reached the end of the line. As inflation gathers steam, mortgage rates can only go up, not down.

As for getting the county assessment office to lower the valuation on the house--good luck with that. The Ratchet Effect is in full force: assessed values rise easily and decline with great resistance.

So rents stay high even as real estate values decline. Landlords can't drop rents without triggering panic in their lenders, and so they leave units empty and try gimmicks such as "free month rent when you sign a lease," gimmicks which leave the sky-high rent sky-high so lenders look at the numbers and are assured that rents are high enough to cover their mortgage payments and other expenses.

Consider the orchard left to die during the drought. The farmer won't be replanting that orchard--it's simply too risky to assume there will be sufficient water in the future and prices will stay high enough to compensate for the heightened risk. So supply drops as marginal producers drop out and survivors avoid risk by not expanding production. Prices stay high.

Consider deglobalization. Having outsourced essential components, U.S. corporations are at the mercy of factors beyond their control: currency arbitrage, suppliers taking advantage of scarcity, other nations tightening the screws on exports of essentials, and so on.

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Disclosures: None.

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William K. 5 days ago Member's comment

"Transitional" means "not permanent", it does not mean short lived. Quite a large difference there. Certainly it is sticky and hard to remove, though.

The intrinsic flaw is that the fools keep offering an explanation that some people believe. Is there a solution? During the rebuild, after the total collapse, when a new arrangement is being created, there needs to be limits set on the existence of such as the federal reserve bank, and the assurance that anyone who wants constant inflation be forever banished from all financial business activity.

The problems with the approaching collapse will reduce the population quite a bit, and so whhatever remains will be different from what we see now. I certainly hope it will be better.