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No Inflation Without Income; There’s No Income

Money, economy, income. Those are the three ingredients that make textbook inflation and keep it together. Money flowing naturally through the economy turns into organic income which if out of balance with the rest of the macro factors can create broad-based and sustained consumer price increases. If actually caused by the combination of those three, the result would be the latter two.

Broad-based and sustained.

This does not include whichever malevolent government force forcing its way into one of the economy, money, or income. In the case of Uncle Sam’s last year or so, the use of helicopters were mainly contained to income. While neo-Keynesian Economists think them useful and wise “stimulus” producing lasting effects introducing greater-than-one multipliers, history repeatedly shows otherwise.

Especially recent and relevant history.

You can throw unearned income into any situation, but expecting non-economic doses of Treasury cash to create legitimate economy is a fool’s bargain. That’s because the whole idea has been designed by fools and sold to the public as a bunch of convoluted mathematics rather than sound reasoning backed by observations and empirical evidence.

After the short run effects wear off, what’s left is always what you started with. In the case of the 2020-21 rebound, what we started with was an economic system which appeared more likely to have been gravely damaged by the initial contraction. While a serious issue on its own, contrary to popular belief the US and global economy was already in a bad way even before COVID (ever since August 2007, actually).

Though two concurrent Treasury Secretary’s have thrown massive dollops of the government’s borrowings into this fray, the results are very different from recovery-like. Putting into the context of necessary income derived from hopefully recovering economy full up on money, instead there’s this alarming straight line in private sector income.

Real Personal Income excluding Transfer Receipts, the BEA’s private side income proxy, hasn’t budged since last October.

The latest figures for August 2021, released today, were actually less than July’s; where declines in this series are typically associated with recessions, near recessions at the very least.

Going back to last autumn, over those ten months up to and including August ’21, this crucial income estimate has “somehow” gone nowhere. It is up if only by the tiniest amount (+0.1%) in what’s almost a year without private income growth. How can that be when the last two massive helicopter drops came out during this very same stretch?

They aren’t stimulus. They create activity and more so created a lot of havoc, but the underlying impaired fundamentals remain impaired – the labor market most of all.

This is where inevitably the labor shortage gets introduced; lazy Americans who are foregoing what would have been private earned income to stay on government-funded unemployment vacation (in terms of the data, they’re receiving, supposedly by choice, transfer payments which don’t show up in Real Personal Income ex Xfers).

Even if that was the case, spending has mimicked the other rather than the full personal income included all forms of stipends and transfers. Real Personal Consumption Expenditures are up only 3.7% since last November (before the second helicopter) and are essentially – like private income – flat since March (there’s that month again).

The public view of overall consumer spending likely has been clouded by the incredible artificiality in the goods segment, particularly purchases of durable goods using Uncle Sam’s nickels. Because of that, flat since April may not seem so bad; if we still high up at the same level, then so what if it hasn’t gotten higher?

But when you combine goods spending with still-lagging spending on services (below), the economic picture which emerges isn’t favorable to either the economy or the “inflation” all that intervention reportedly created. Instead, Americans prevented from buying services (like eating out) took to online shopping, swapping one they couldn’t do for the other right on their phones.

And it was therefore in this goods frenzy which temporarily bulged consumer prices (aided in no small part by supply bottlenecks and logistical snafus). As restrictions on all services are removed, consumers are predictably buying fewer goods – especially high-flying durables.


The net of those two isn’t pretty. Into that natural rebalancing, the overall level of total spending, as noted above, remains way less than full recovery and now, over the last five months, no longer even moving in that direction. Thus, for “inflation”, a double whammy of transitory; fewer goods being purchased along with an economic baseline that is just as impaired and at best uneven as we’d thought all along.

Out of these combinations, the current consumer price bulge fails on both accounts – it hasn’t been very broadly based at all (see: Dallas Fed trimmed mean), limited near exclusively to the narrowed part of the goods bucket. And without money, economy, and then income, how will it last once all of the artificiality of intervention more completely dissipates?

This is why it doesn’t appear to be lasting even now. Once Treasury is back to being an actual treasury again, what’s left is “somehow” even worse than when COVID started.

The annual increases in the various inflation indices are still quite high as of these latest updates, as we already knew from the CPI report, yet they are rolling over and won’t remain in the same ranges for much longer – entirely consistent with “transitory.”

As we’ve been saying for most of 2021, the US goods economy was the outlier; and not just when surveying the rest of a really ugly situation globally, it was also the outlier when compared with everything else within the US economy, too! Now that it has begun to adjust and normalize to the true fundamental level of potential, is it any wonder we’re seeing the global economy come right along in the same downward fashion?

This will surprise Jay Powell and the Fed intent on tapering. And they aren’t scaling back their “easy” “money” “accommodation” because of these in-the-past PCE Deflators, getting something right for once, instead looking forward as if the fury in the goods economy is sticking around and the whole other rest of it, services included, is rising up to join the robustness.

In reality, it’s the entire other way around; consumer spending in goods fades back down to the not-recovering level of services.

There was never “stimulus” which primed some pump then handed off to legit, roaring recovery, there was only ever temporary interference which for some little time obscured reality.

This is why, by the way, even in reflationary January and February bond yields globally never really rose that much at any time. The chances for the theory to pan out were never good to begin with. And now, despite the BOND ROUT!!!! of the past week, and a bit less pessimism on this score, there’s still no actual tantrum. Dollar bull, too.

Chairman - Big Ben Bernanke

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