Like most people, I have a favorite charity. Mine is local.
Over 40 years ago, a number of churches in the area realized they were all trying to fight poverty and homelessness, but were all individually very inefficient. So they combined their forces and, through the efforts of several remarkable individuals, developed a program that houses families with nowhere to live, provides thousands of meals a day and distributes toys to more than 30,000 children at Christmas.
It is remarkable. And unfortunately, their “business” is growing.
No longer do they see the perpetually poor or people who have been homeless for many years. Nowadays they receive in families that were living firmly in the middle class less than a year ago, but now have no income and no home.
This is the extreme of where inflation and deflation collide, and it’s called austerity.
Welcome to the world the Fed built.
The papers are full of stories like this, including one recently of “dumpster-diving” for food… a phenomenon that has become so common in Spain that grocery stores have resorted to locking their dumpsters to fight the possible spread of disease.
Citizens are being crushed by the weight of job loss and wage reduction (both deflationary), while at the same time experiencing higher prices for food, energy, health care and education (all inflationary).
This is now a world where central banks use their only tools — monetary instruments — to fight a slowdown and end up crushing the poorest among us in their misguided attempts to help.
The situation is easy to see but hard to fix.
Our economy, like most around the world, grew at an incredible pace due to several factors, including the explosion of debt. As the debt burden increased, it became harder to maintain.
When the debt-driven demand dried up, there was nothing there to take its place. This led to falling demand, causing job losses and wage reductions. But the debt still had to be paid.
While this is a textbook example of a balance sheet crisis where deleveraging follows over-leveraging, none of those words convey the pain of seeing a family sitting on the floor in a hallway with nothing to eat and nowhere to sleep. That’s the human face of “deleveraging” and it is harsh.
So Congress takes a swipe at fixing it with stimulus, but the money is quickly absorbed into the existing system of subsidies and tax breaks. Little of it makes its way down the line.
Of course, Congress cannot “fix” the debt deleveraging. It’s something that must happen after a debt bubble.
So the Fed steps up to the plate. Using the only tools they have, the Fed prints money with abandon, trying to force liquidity into a credit market already dripping with cash.
But the problem isn’t liquidity, it’s solvency. There’s too much debt — for governments, for states, for cities and for people. Digging out requires shifting the equation of who has the money.
The Fed’s only tools tend to take from the poor and give to the rich.
The Fed creates inflation by pushing down the currency, which they hope will stimulate consumption and demand. Of course, what it does is raise prices. When demand doesn’t magically occur, the prices are still high, particularly for base commodities like food and energy.
Those in the bottom quintile of earners — those in the bottom 20% — spend 60% of their income on food and energy. You can see how this would be painful, particularly when their income falls or remains flat.
Of course, the fed’s actions also push up the prices of financial assets, like stocks. This goes a long way toward repairing the balance sheet of people who own such things, which probably does not include anyone in the bottom 20% of earners.
And so the battle between inflation and deflation continues every day. While the generals sit back at headquarters and argue about progress made or ground lost, it is the foot soldiers on the front lines, those most at risk in our economy, that suffer the most.
P.S. Harry will be on Bruce Weide’s radio show “Save Some Money” this week. It will air on Sunday at 5pm PST.
Ahead of the Curve with Adam O’Dell
By comparing the two figures, the number of advancing stocks versus declining stocks. I’m able to identify the various cycles of the market.