U.S. Economy: The Wheel in the Sky - Inflation, Debt, and Beyond

The Wheel Keeps on turning, for now

In this week's economic overture, we find ourselves caught in the turbulent melody of inflation, debt, and the relentless turning of the economic wheel – a symphony that mirrors the complexities of our current economic landscape as we all have faced about a 20% decline in purchasing power since 2021.

Inflation's Crescendo:

The opening movement features inflation as the lead instrument. The latest report reveals core inflation, excluding food and energy soaring by 4% on a year-over-year basis. Since January 2021, these price surges have accumulated to a staggering 18% in the rise, or aka decline in purchasing power.  A good way of thinking about this; $100k in 2021 now has the same purchasing power as $82k, or if you were making $100k a year, you need to make $118k to keep up with inflation. To get ahead of inflation you would need to be even higher than the 18%.

The financial ramifications of this comes as real wages struggle to keep pace as well. In recent surveys this month, 82% of respondents in a FT-Michigan Ross poll are feeling financially worse off today than in 2020. 

A survey done by Bankrate also stated that 50% of Americans overall financial situation is worse now than it was in 2020.  This comes as many Americans didn’t prepare for a drastic loss in purchasing power that awaited us, and as the famous lyrics by Journey stated, "the wheel in the sky keeps on turning," and so does the inflation wheel, leaving many financially adrift.

Debt Symphony and Discord:

The massive increase in debt and delinquencies are playing out now as Americans, grappling with the inflationary tide, are turning to credit cards (over $1 trillion) and home equity loans rising by almost $10 billion recently even in the face of higher interest rates. However, this financial composition is far from harmonious. Delinquency rates on credit cards, subprime auto loans, and mortgages are on the rise. Subprime auto loan delinquencies, in particular, have reached a crescendo, hitting a record high of 6.11%, the highest level since data collection began in 1994, surpassing every previous US recession. In the lyrics of Journey, the consumer echoes of the struggle: "I can’t take this very much longer, I’m standing in the sleet and rain (of debt and inflation)."

Retail Doldrums:

Major retail players this week such as Home Depot, Target, and Walmart all gave harsh warnings and poor reports on the American consumer. Home Depot reported a -12% decline in earnings, showcasing the fragility in today’s housing market. Target's sales have tumbled approximately -5%, and Walmart's chief financial officer notes a softening trend since October, with uneven sales persisting. Retail sales report this week was also a warning declining -1.6% nominally, and down when adjusting for inflation, revealing a negative trajectory as we all pay more and receive less in return.

Investor Sentiments:

In a surprising shift, prominent investors like Warren Buffett, Michael Burry and George Soros are adjusting their positions. Buffett, known for his bullish stance as “ Don’t bet against America”, has divested from General Motors, Johnson & Johnson, UPS, and trimmed positions in Amazon and Chevron.  These companies he sold would be considered American bellwethers by most.  He redirected this capital ($30 billion) into US Treasury holdings, totaling $126 billion earning a risk free rate of return of 5%, signaling a departure from his customary bet on America. Michael Burry is taking a contrarian note, betting half his portfolio against chipmakers, interpreting their soaring valuations this year as many others on wall street are overlooking supply and demand warnings and piling into a mega chip bubble. George Soros has sold his chip stocks, including Advanced Micro Devices and Nvidia, raising the question: Why are these seasoned investors raising cash while others on wall street are rushing to buy?

As we unravel the economic notes of this week's symphony, the lingering question is: What happens when the wheel in the sky stops turning? The Austrian economic perspective urges us to consider the ramifications of inflationary pressures, mounting debt, and distorted market signals. In the ever-turning wheel of the economy, may our economic compass guide us wisely.

The following graph: Red represents core inflation over the past 12 months as it’s been very high (being above 5% until recently), and wages have been below the rate of inflation for the majority of the time. In summary, makes it difficult for people to just maintain their standard of living from just even 12 months ago.