Inflation-fueled boom is turning to bust
By Mark Luedtke
Publication date: 022817
As we left Walmart this morning, my girlfriend noticed Subway was advertising footlong subs for $6. Not long ago those subs cost $5. It’s getting harder and harder for government to deny the price inflation we all feel in our bank accounts.
Every day the Dayton Daily News writes about how great the economy is, but the authors of those articles can’t differentiate between wealth-destroying, inflation-fueled bubble activities and real, demand-driven economic growth. For example, the DDN reports on new restaurants popping up nearly every day. But it also reported this: “Restaurants in Ohio brought in almost $1 billion in sales last year, but consumers didn’t go out to eat as much in the first month of 2017,” it wrote. “A new survey by the Ohio Restaurant Association and the Cleveland Research Company found restaurant owners saw weaker consumer demand in January after a strong fourth quarter that ended in December. That increase was due in part to the mild winter weather.”
So while demand is falling, supply is increasing. The consequences are inevitable: falling prices and bankrupted businesses. This begs the question of why so many restaurants are being opened if they can’t be supported by demand. The answer is artificially low interest rates. When the Federal Reserve (Fed) artificially holds interest rates below market value - the Fed has held interest rates near zero since 2009 - it sends the wrong signal to entrepreneurs. The low interest rates prompt them to borrow money to create new businesses like restaurants. When interest rates inevitably rise, many of those businesses are exposed as being unprofitable and forced into bankruptcy.
The resources and labor expended on these doomed businesses are being squandered. These malinvestments wouldn’t have been made if interest rates were determined in the market instead of being set artificially low by central bank fiat. This is how central banks create boom-bust cycles which destroy wealth while making the bankers and the ultra-rich richer and the rest of us poorer.
The damage is done during the boom. The bust, painful as it is, is the healing correction.
The signs of impending bust are everywhere. The DDN recently reported, “A jump in traffic fatalities last year pushed deaths on U.S. roads to their highest level in nearly a decade even as Ohio bucked that trend, registering a decrease in fatal crashes in 2016,” it noted. “The last time there were more than 40,000 fatalities in a single year was in 2007, just before the economy tanked, the AP said. There were 41,000 deaths that year.”
The Fed’s bubble-money creates a wealth-effect - people feel wealthier although it’s only an illusion - so they travel more. More goods get shipped on the roads. That produces more fatalities.
The San Jose Mercury News offers another bad indicator. “The technology industry’s job growth in the [Silicon Valley] region has dramatically decelerated, according to this newspaper’s analysis of figures released by state labor officials and Beacon Economics. Tech’s annual job growth throttled back to 3.5 percent, or 26,700 new jobs, in 2016. That’s much slower than the 6 percent annual gain of 42,300 jobs in 2015, or the 6.4 percent gain in 2014,” it reported. “And while the industry’s 3.5 percent growth last year is still a sturdy annual pace, Bay Area technology companies have already disclosed plans to slash about 2,000 jobs in the first three months of 2017.”
Closer to home, the DDN coos, “Local home builders are enjoying a resurgence, hitting their highest number of permits pulled for single-family homes in a decade.”
While that sounds like good news, it’s a negative indicator. The DDN continues, “The 2016 single-family homes number is the association’s highest since 2007, when 2,159 permits were pulled.”
So the economy has reestablished the highest point of the housing bubble in 2007, right before it went bust. That’s not good.
On a related note, Dubai announced it will open a new, rotating skyscraper in 2020, setting a new bar for the skyscraper index, or as some call it, the skyscraper curse. Building the tallest skyscraper in a region is strongly correlated with an impending bust, let alone the excess of a rotating skyscraper.
I’m reminded of 2000 when President Clinton’s and Fed Chairman Greenspan’s economy was declining, but the crash didn’t happen until President Bush was in office, so he got blamed. President Trump will be blamed for President Obama’s and Fed Chairman Bernanke’s impending crash.
Originally published in the Dayton City Paper.
Originally published in the Dayton City Paper.