Conrad Black: "None Of This Can Go On Much Longer"
There has been considerable discussion in the past couple of months about the rate of inflation in the United States, and polls now show that 85 percent of Americans are concerned about inflation. This is a demonstration once again of the wisdom of the average person.
While the United States, and to a lesser extent the West generally, is being subjected to a variety of threats and disappointments, and there is a natural aversion to highlighting additional negative developments that could be looming, it would be comforting if we heard anything from the secretary of the Treasury or the chairman of the Federal Reserve about the current apparition of a gigantic financial bubble over the United States.
In the past year, the United States has had a money supply increase of 25 percent, an unprecedented event. What was originally billed as slight and self-correcting inflation increases are now gathering into a continuing and growing storm cloud, only thinly disguised by the unrepresentative composition of the official consumer price index. Year over year, hourly pay scales have risen by 7.5 percent, new cars cost 10 percent more, used cars and new homes are 20 percent more expensive, and rental accommodations are 12 percent more costly.
These increases all fall short of the money supply increase, and they all appear to be stoking up rather than settling down.
There has been a gradually rising 12-year buildup in equities values, only briefly interrupted by the tight V of the COVID interruption. This rise has been sustained by extraordinarily low interest rates, which are going to become extremely difficult to maintain as the rate of inflation increases; we can’t really expect the lending community to lose money and to loan money at rates below the rate of inflation.
The excellent stock market performance of these past years and the problem that now impends are based in part on the extraordinarily high levels of profitability in the American corporate sector. Where once the chief preoccupation of executives and directors of large companies was market share, it has latterly been profitability, and this has been assisted by the official American toleration of a higher-than-usual level of cartelism and informal price-fixing within industries. This has generated very high profits, and these have been powerfully reenlisted in the economy, but by any traditional standards, current American levels of profitability cannot be sustained.
These levels have reached unheard of proportions and are 80 percent above those in the rest of the world. The most remarkable characteristic of this market is that about 85 percent of this super-profit the United States is enjoying is produced by a small number of huge high-tech companies. There never has been anything like this in economic history: Apple has the largest market capitalization of any company in the world, and its sales have risen by 50 percent in the past year.
Normally, companies of this immense size are mature and do very well with a sales increase of between 5 and 10 percent a year. The great U.S. high-tech companies retain an immense potential for sales and profit increases, but no company in any market can run up 50 percent increases indefinitely long after it has become the largest corporation in the world.
American inventiveness, optimism, competence, the Trump tax system, and the fact that the United States has about two-thirds of the world’s most advanced research universities are all factors that militate in favor of the continuation of this trend, but it’s impossible to imagine that it can continue at this rate indefinitely.
Many traditions have been broken and buried by changes and innovations, but J.P. Morgan’s famous assertion that “like a tree, the market cannot grow to the sky” retains some validity.
Because of the extreme vulnerability of almost the entire U.S. public sector to increases in interest rates, that tool, which was always a blunderbuss anyway, of increasing interest rates to reduce demand and ultimately reduce inflation, although each one-point rise in the lending rate initially adds half a point of inflation, is not really available to managers of fiscal and monetary policy now.
https://www.zerohedge.com/markets/conrad-black-none-can-go-much-longer