Reporting on the Federal Reserve’s non-committal commitment to raising interest rates is beginning to reek of desperation. Hacks (including yours truly) are practically begging for something to chew on rather than the constant “wait and see” diet served up by the Fed’s chairwoman, Janet Yellen, and her buddies.
Maybe the much-hyped rate rise will be announced in September, when the Fed’s board are due to meet again. If not, it will be December, because raising rates without giving reporters a chance to grill Ms Yellen after all this time would be an unspeakable cruelty.
Officially, the Fed is keeping rates on hold because inflation has not yet reached its target of 2 per cent, even though events in China and the eurozone might be where their real concern lies. Either way, the official rate of inflation is a handy excuse for doing nothing even if it might not be a particularly accurate reflection of the real costs of living. Which it isn’t.
It’s easy to believe that the cost of certain goods has risen slowly over the last decade, particularly for high-tech goods where manufacturing technology and outsourcing may have even resulted in some deflationary pressure. Food is surprisingly expensive in the USA, probably significantly more so than in the UK on a constant currency basis, but it’s also believable that food price inflation is reasonably low. Technology inflation is constantly changing but the shift has been where money is spent rather than the amount – more on phones with data plans, less on cable television.
So, inflation in goods is low and that appears to be true. But services? Service inflation in the US is where ordinary people are feeling the pinch: home, car and health insurance, none of which are part of discretionary household spending unless you are willing to risk everything you have, are all rising steadily and in many cases spectacularly.
Rent is out of control in some cities, such that only newly-minted tech workers can afford much more than a friend’s sofa. Of course, to join that particular club you need a degree from a good school or a lot of luck. However, the cost of higher education in the US, even at publicly-funded state universities, has risen exponentially over the last two decades and is currently rising at about 50 per cent more than the official rate of inflation. Tuition costs at private universities are rising even faster, at close to double the official rate of inflation, and that’s before poor students have paid for their rent, food and textbooks.
So while Ms Yellen might worry that inflation isn’t high enough for the Fed, for most ordinary people the struggle against the rising cost of living is real. Of course, that’s part of the deal – Governments like to see inflation staying low because that means things like welfare remain cheap.
Essentially, there are two distinct rates of inflation in the US: one for the upper middle class and above, another one for everyone else, something that has been greatly exacerbated by the uneven gains in income over the last decade. Raising interest rates will hurt everyone, but especially the majority on lower incomes who are already suffering in the inflation fast lane.
If you pay rent each month rather than a mortgage, if an education is something that isn’t going to be paid by your trust fund or if your pay check only just covers your outgoings, inflation is real and it is much higher than 2 per cent.
The Fed needs to re-think, not for the first time, about how it calculates the real cost of living.
Masters’ unlikely route to redeeming her reputation
When your public reputation takes a beating, it might be good advice to think long and hard about how to get it back. For financiers, taking gigs running crypto-currency operations and questionable car loan operations possibly aren’t your best bets. Or are they?
After a period out of the limelight, Blythe Masters, former head of commodities at JP Morgan and once one of the youngest managing directors in the bank’s history, is back in it. She is attempting to revive a reputation blighted by her involvement in Credit Default Swaps, derivative financial products that were at the centre of the 2008 bank collapses. Not all her fault, far from it, but as their alleged inventor she became one of the most famous faces of the resulting recession. Since March, Ms Masters has taken two new jobs – one as chief executive at Digital Assets, a privately-held electronic currency trading platform, and another as non-executive chair at Santander Consumer, an American arm of the Spanish bank Santander. The latter makes most of its money from subprime car loans, considered by many to be another house of cards waiting to collapse.
Talking at a digital currency conference in New York this week, Ms Masters threw plenty of red meat to Bitcoin enthusiasts by claiming that virtual currencies could have a “gigantic impact” on markets.
She did not explain exactly how, but adding another layer of esoteric risk to markets that are already toppy could indeed have a gigantic impact, but not necessarily in a good way.
Many people have become Bitcoin sceptics – mainly through boredom. The crypto-currency has been around since 2008 and has been the currency of the future ever since. When that future arrives is anyone’s bet, but with real currencies facing real problems it’s hard to see fake ones taking off. Maybe that’s the point. If Greece is going to consider ditching the euro for the drachma then maybe someone, somewhere will consider ditching whatever currency they are trading in for Bitcoins.
As for Ms Masters’ reputation, if she can revive it through financing used-car dealers and underworld tech currencies, she will indeed have proven herself to be a Master of the Universe. Good luck with that.Reuse content