Your local business absorbs price increases by passing on the costs to the consumer. People don't have that option.
A reader notes that mortgage rates are back up to "pre-pandemic" levels with rates of 5% or more. Traditionally, mortgage rates hovered around 6% in the good old days. Maybe we are headed back to that.
But in the meantime, what about the folks who just bought a house last year, paid top-dollar and financed it on a low-interest variable-rate loan? "You can always refinance if the rates go up!" the Real Estate Agent and Mortgage Broker cheerfully suggest. However, this is somewhat of a lie. Yes, technically you can refinance - but a much higher (fixed) rate - a rate higher than the increase in your variable rate. Of course, there is little point in refinancing to another variable-rate loan - it will just be at the same rate as your current loan. So this idea that somehow you can "opt out" of a variable rate loan and lock-in a fixed rate later on, only works if rates are going down. When they are going up, well, you are in a bit of a pickel.
In addition to all of that, as interest rates go up, housing prices go down, so if you tried to re-fi at a fixed rate, your house may not appraise sufficiently to meet the lenders debt-to-equity ratios. So even if you could refinance, you couldn't - you don't have enough equity in the house to support the mortgage.
So mortgage payments will go up. And for new buyers today, paying higher interest rates, their monthly payment doesn't go as far. They can't just "make more money" magically to cover the difference. Well, they could, if they cut spending on something else - which would not be good for the economy, either.
It isn't just houses. The price of groceries is skyrocketing - all this talk of "7% inflation" is bullshit. For years now, we've bought WalMart brand hamburger buns - 8 for 88 cents. They are great for making sandwiches of all types, including breakfast sandwiches. About 1/4 the cost of "English Muffins". Well, guess what? The regular kind are now 99 cents and the whole wheat kind went from 88 cents to $1.89 - which is more than double the price before. That's 100% inflation - and it scares the crap out of me.
So... suck it up, right? Well, unlike a company, we can't just "pass on the costs" to our customers as we no longer have customers. Most employees or retirees are in the same boat - they can't just demand more money- in most cases - even if they change jobs.
So what happens when prices go up like this? Well, according to market theories, the demand for products should slacken when prices increase. Once demand dies down, merchants will be forced to lower prices to attract buyers. And with decreased demand, "shortages" in the supply-chain would disappear.
That's the theory, anyway.
The reality is, people are not robots or machines, programmed with Adam Smith's invisible hand. They are irrational and emotional people who will buy just about any piece of crap you can sell them. if you tell them it makes them look cool. They also won't cut back on spending until forced to do so. So the typical American family (and overseas family as well) sees prices going up - on everything from fuel to food to clothes to computers to cars. They should cut back on consumption to keep their personal budget in line. But they don't - not at first anyway. They pay more and grouse about it but keep their spending habits the same. Hey, maybe prices will go back down, right? No need to change!
But what happens is they charge more to the credit card and the balance creeps up. Or, for retirees, they spend more money in their retirement accounts. The immediate effect of the increase in prices isn't felt.
People complain about the price of gas, for example, but don't change their driving habits to save gas. Just driving more rationally can save 1-2 gallons per tankful, and that's with an 11-gallon tank, too. Yet we see people, even truckers, speeding and slamming on their brakes on the Interstate, weaving in and out of traffic and not anticipating stops - all of which waste gas. They bitch about a 10% increase in the price of gas, but won't take simple steps to easily save 10% in fuel usage.
At first.
But over time, people start to sober up. The credit card bill comes due. The IRA statement shows less money that the retiree thought. It seems that "suddenly" the American family has a spending problem and a cash-flow crises. Time to cut back!
So they do. They drive less and drive more carefully. If they are trading in their car, they seek one out with better mileage. They shop more critically and look at prices more and decide that maybe they don't need filet mignon when ground chuck is cheaper. They don't need that new outfit. They don't need all 500 channels of cable or the latest smart phone.
(UPDATE: There are signs this may be happening already. While the price of gas has dropped somewhat in recent days, it was still $3.99 to $4.49 in Florida on a recent trip. We did 60 MPH behind another RV and got an astounding 17.1 MPG with a tailwind. Now usually, in a 70MPH zone, people are whizzing by me at 80. But not today. Few, if any were even doing the speed limit. Perhaps people are starting to figure this out already.)
When people do cut back, it drops demand across the board, which causes companies to lose money, which leads them to laying off people, which in turn creates even more pressures to cut back on spending.
And this could all happen within a matter of a few months. We saw the high-flying real-estate-based economy crash to the ground within a few months back in the waning days of the Bush Administration. Gas went from $5 a gallon in some places, to as low as $1.50 within months as people stopped consuming as much. It was a recession that was triggered in a matter of days, but took more than a decade to dig ourselves out of.
Businesses can temporarily pass on cost increases to consumers, but only for so long. In a way, American businesses are in denial right now as well. By increasing consumer prices, they are "solving" supply-chain shortage problems (and incidentally, making record profits as well) but only for so long. Eventually, consumers run out of money to spend when prices skyrocket. Right now, the local Ford dealer wants over-sticker for some popular vehicles (of which few are in stock). Some consumers grumble and pay the overage. Others select a cheaper model car, a used car, or decide to keep the car they have. But eventually - eventually - something has to give.
Rising interest rates are just one sign - along with this bond "inversion" thing. But I think also we need to think about the labor shortage (something that often precedes recession) as well as shortages due to the war (food, oil, natural gas) which affect our markets (even though we are self-sufficient or export surplus of many of these goods) because global market prices affect local market prices as well - unless subsidized or propped-up by the government.
Since the crash of 2009, the market has gone up, up, and up. Yet so many people, particularly young people, complain they are living paycheck-to-paycheck. The economy has helped a few people, but it doesn't seem like a broad-based recovery.
I guess we'll have to wait-and-see, but pretty soon, I suspect we'll all be cutting back and looking for ways to be "Living Stingy" again.
Just as I thought I would put this blog to bed once it reached 5,000 posts....
