Inflation Is “Sticky” — Not Transitory

The Fed Is Wrong Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] Inflation Is “Sticky” — Not Transitory - “The Fed will be proven catastrophically wrong about inflation for the simple reason that inflation isn't transitory, it's sticky”… - There is no alternative… - Then Charles Hugh Smith shows you the sources of “rip-your-face-off” inflation that none dare discuss… Recommended Link [Please Confirm Immediately]( [Read more here...]( Please forgive the urgency, but we don’t really have time to mess around here… That’s because I’ve reserved a spot for you in a Special Profit Briefing this coming [Wednesday, June 16th at 1:00 PM.]( It’s completely FREE — but you will have to confirm your invitation by clicking here. WHAT: Jim Rickards’ First Ever C.O.B.R.A. Tactical Profits Briefing WHEN: [June 16th, 2021 @ 1:00pm EST]( PRICE: FREE to you San Francisco, California June 12, 2021 Editor’s note: The Federal Reserve insists that the recent inflation will prove “transitory,’ as the economy reopens and supply bottlenecks clear. But today, Charles Hugh Smith shows you why he believes the Fed is wrong. Inflation isn’t transitory, says Charles, but “sticky.” [Charles Hugh Smith] Dear Reader, 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. 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. So they leave units empty and try gimmicks such as "free month rent when you sign a lease," gimmicks which leave the skyhigh rent skyhigh. Lenders can then 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 differences, suppliers taking advantage of scarcity, other nations tightening the screws on exports of essentials, and so on. Consider the pool of local restaurants. Many have closed, some new ones are opening, but the reality is all those who can't raise prices enough to cover expenses and make a profit will burn through their cash and close. The survivors will raise prices because they have no choice: there is no alternative (TINA) to raising prices except closing down. 85% of local government expenditures are for labor, and labor costs never go down, they only go up: the ratchet Effect. Public unions are under pressure to secure higher wages and benefits, and the inexorable rise in healthcare costs is squeezing local government budgets. What to do? Raise taxes and fees — there is no alternative (TINA). Jack up parking fees and tickets, double or triple fines, slap on new junk fees, raise sales taxes, property taxes, taxes on mobile phone service — raise them all because TINA. People are awakening to the Federal Reserve's Big Lie, which the Fed assumes will become "truth" if they repeat it often enough: inflation is transitory, blah, blah, blah: wrong, wrong, wrong. People are awakening to the embedded dynamics of inflation and their expectations have already started changing. Those who can't raise prices will close down, those who can will raise prices. The Fed's trick of substituting debt for income has also reached the end of the line. America has built an illusory castle of "prosperity" by borrowing trillions of dollars as a substitute for earnings from being productive. The costs of all these layers of debt can only rise now that interest rates are near-zero while inflation is at 5% officially and 10% or more by any real-world measure. There's only so much disposable income left after servicing debt, and the more debt you pile on, the less income there is to spend on goods and services. The Fed's god-like powers will be revealed for what they really are: artifice and illusion. The Fed is wrong: inflation isn't transitory, it's sticky, and there's nothing the Fed can do about it. They might as well stand on the shore and order the tide to reverse. Below, I show you the sources of “rip-your-face-off” inflation that few dare discuss. And they won’t be resolved by the Fed. What are they, and what are their larger implications for the economy? Read on. Regards, Charles Hugh Smith for The Daily Reckoning Editor’s note: The best way to protect your wealth against the ravages of inflation is with hard assets like physical gold. Gold and silver are REAL money. That’s why we strongly recommend that you own physical gold and silver, as the dollar loses its value. We also recommend you get yours from [Hard Assets Alliance.]( (We actually own a share of it, in the interest of full disclosure). Here are some key facts to know about the Hard Assets Alliance and their precious metals service: - They ONLY deal in high quality bullion - gold, silver, platinum and palladium - They ONLY deal with the best storage and security companies... like Brinks and Loomis - They offer automatic gold and silver savings accounts - They offer gold and silver IRA accounts - They offer corporate accounts for business - They offer Estate and Trusts for holding gold and silver You get the idea. For anyone who wants to invest in precious metals… and own REAL money... [Hard Assets Alliance is the place to go.]( [Go here to open an account with the Hard Assets Alliance today.]( It’s totally FREE to get started. The Daily Reckoning Presents: “The rip-your-face-off sources are scarcities that cannot be filled by substitution or globalization”… ****************************** The Sources of Inflation Few Dare Discuss By Charles Hugh Smith [Charles Hugh Smith]Since the word inflation is so loaded, let's use the more neutral (and more accurate) term, decline in purchasing power: an hour of your labor buys fewer goods and services of lesser quality than it did a decade ago or a generation ago. While the conventional discussion focuses on monetary inflation, i.e. expansion of money supply, the real rip-your-face-off sources have nothing to do with money supply. The rip-your-face-off sources are scarcities that cannot be filled by substitution or globalization. Consider skilled hands-on labor as an example. Let's say some essential parts in essential infrastructure require welding. There is no substitute for skilled welders. But wait, doesn't economic dogma hold that whenever costs rise, a cheaper substitute will magically manifest out of a swirl of dust? That dogma is false in cases such as skilled labor. The only substitute for a skilled welder is another skilled welder, and while theory holds that there will be cheaper welders who can be brought in from elsewhere, this is also not true. Due to deficiencies in education and a cultural bias against manual labor, there is a shortage of skilled welders virtually everywhere. But wait, can't we just offshore the project? Globalization always lowers costs, right? So by all means, load your busted boat trailer on a container ship to China, find a welder in Shanghai to do the work, and then ship the boat trailer back. Weeks later, you discover the plan and the specs weren't followed, so all the time and money was wasted. It would have been so much cheaper and faster if you'd just paid the welder in town a few extra bucks and had it done right in a few hours. But wait — we'll just automate welding and have a robot do it all for next to nothing. OK, fine, pal — you manufacture the robot and program it to trundle out to the busted boat trailer, examine the breaks and do the welding so it actually works again. Go ahead and do that (at gargantuan expense), and then let's see the robot do it right in dozens of different jobs in all sorts of situations, and then add up the cost of all that compared to the relatively low cost of an experienced welder. Meanwhile, back in the real world, people with high levels of craft skills and experience are scarce, and the fantasy of robots replacing them are untethered from reality. Central banks can conjure trillions of dollars out of thin air but they can't conjure up experienced, motivated workers willing to work for lousy pay. As I noted recently, the minimum wage would have to double to even get close to the purchasing power of the minimum wage I earned two generations ago. If an economy can't pay its workers enough to live, it doesn't deserve to exist and should be shoveled into the dustbin of history. Fans of automation are rarely if ever the people tasked with designing, manufacturing and programming robots. Fans of automation don't recognize any limits on the cost and efficacy of automation because their faith in technology is quasi-religious. But in the real world, there are many tasks that don't lend themselves to automation. If automation was as cheap and easy as many seem to think, then why does Amazon need 1.3 million human employees? In terms of automation, what could be easier than vast warehouses, vehicles and delivery? Amazon certainly has the money and talent to automate everything that can be automated, so why is Amazon hiring hundreds of thousands of humans and boosting wages for 500,000 humans? Although it's heresy to true believers in automation, humans are cheaper and create more value than robots in many settings. Simply put, there are limits on the cost effectiveness and value creation of robotics and automation. Recommended Link [Eerie Signal From Caribbean Island (Massive Consequences for American Financial System)]( [Read more here...]( While stuck on an island in the Caribbean… “America’s No. 1 Investor” recorded this prescient message. In the first few minutes, he lays bare everything wrong with America today… What’s coming next… And how you can prepare. [WATCH NOW: America’s #1 Investor Posts Blistering Exposé]( A strong case can be made that automation has drastically reduced the quality of services and created the illusion of effectiveness. For example, you go online, check the inventory in your local outlet, drive down there and discover a bare shelf even though the online app indicates dozens in stock. Where is the value in this travesty of a mockery of a sham? Those at the top of the wealth-power pyramid avoid the systems they profit from like the plague. Abysmal customer service, poor quality goods, apps that don't work — that's all the debt-serfs will ever experience. Those who own the systems know how awful it all is and they never touch any of the goods and services they pour into the slop buckets of the commoners. Few seem to have noticed that we're already on the downside of Peak Globalization: labor costs are rising in China, too, for the same reason labor costs are rising here and elsewhere. The number of people willing to do dirty, boring, difficult work for low pay and no benefits is diminishing. Some of this scarcity is due to demographics, as the workforce shrinks, some of it is increasing opportunities for flexible gig work that pays as well or better, and some is a rejection of the status quo. Apologists for the wunnerfulness of globalization also fail to take into account the nationalization of critical resources or resources being cut off for geopolitical reasons. Nice copper mine you got there, but now it's ours, and we're raising prices. Go find a substitute for copper, cobalt, rare earths — gosh, there are no substitutes? Wait a minute, economists promised us scarcity was impossible because there's always a substitute. In the real world, essentials for which there are no substitutes are scarce, and the world is awakening to the power of those who control these essentials. Globalization was always based on the notion that there was always another place to stripmine, but now the entire planet has been stripmined, put under the plow or clearcut. The primary source of cost-cutting and profit-boosting — lowering quality and reducing quantities — have reached limits. If the package gets any smaller, we'll need a microscope to see it. Cutting corners has been going on so long that there are no corners left to be trimmed. Shrinkflation has reduced cereal boxes such that the boxes are not wide enough to stand up on the shelf. Producers have to raise prices to maintain profits, period. And anyone who lets profit margins slip is cashiered, to be replaced by someone who won’t. So let's review the sources of inflation: — Scarcities of labor across the board. (see job openings chart below). — Deglobalization/Peak Globalization. — Cost and value-creation limits on automation. — All the corners have been cut, now prices have to rise or companies will bankrupt themselves. — People are abandoning the status quo hamster wheel. Few are willing to acknowledge these sources because they run counter to the fantasy world narrative that's spinning the frenzied hamster wheel. Purchasing power is prosperity, and since purchasing power is in free-fall, so is prosperity — at least for the bottom 90%. Trillions in free money have masked the decline temporarily, but what's transitory isn't inflation — it's the illusion of prosperity that's transitory. And that's why nobody in a position of power wants to discuss prices being driven by scarcities caused by actual physical limits. Those who think prices can't double or triple haven't experienced scarcities caused by actual physical limits. There are no substitutes for essentials or skilled labor. Globalization has already stripmined the planet and central banks can't print experienced workers willing to work for rapidly devaluing wages in dead-end jobs while billionaires pay pennies in taxes. We're getting a real-world economics lesson in rip-your-face-off increases in prices, and the tuition is about to go up — way up. Regards, Charles Hugh Smith for The Daily Reckoning Ed. note: Save yourself the tuition costs! The best way to protect your wealth against the ravages of inflation is with hard assets like physical gold. Gold and silver are REAL money. That’s why we strongly recommend that you own physical gold and silver, as the dollar loses its value. We also recommend you get yours from [Hard Assets Alliance.]( (We actually own a share of it, in the interest of full disclosure). Here are some key facts to know about the Hard Assets Alliance and their precious metals service: - They ONLY deal in high quality bullion - gold, silver, platinum and palladium - They ONLY deal with the best storage and security companies... like Brinks and Loomis - They offer automatic gold and silver savings accounts - They offer gold and silver IRA accounts - They offer corporate accounts for business - They offer Estate and Trusts for holding gold and silver You get the idea. For anyone who wants to invest in precious metals… and own REAL money... [Hard Assets Alliance is the place to go.]( [Go here to open an account with the Hard Assets Alliance today.]( It’s totally FREE to get started. --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Charles Hugh Smith][Charles Hugh Smith]( is an American writer and blogger, and serves as the chief writer for the blog "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites, and his commentary is featured on a number of sites including Zerohedge.com, The American Conservative, and Peak Prosperity. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. 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