Inflation is a cumulative phenomenon
Inflation is still a problem. It's a problem for consumers, it's a problem for businesses, it's a problem for politicians, and it's a problem for the central bank.
The August PCE index
And keep in mind the inflation rate ticking down a few basis points really solves nothing. It just means the rate of increase slowed a bit. But consumers aren't dealing with one month's inflation in a vacuum, they are contending with the cumulative inflation of the past six years. Overall prices are up about 30% since 2020. If you spend any time buying groceries, or buying anything really, you know the feeling.
If you look at the average hourly and weekly wage growth, both for overall employees as well as nonsupervisory and production staffers (about 80% of the work force), wages appear to be keeping up with inflation. Both are up more than 30% over the past six years. But as I said about the banking industry earlier this week, what looks great from the top down
A debt-service firm called Money Management International noted that the total amount of debt its customers are managing through the firm has topped $1 billion, mostly in credit card and personal debt, for the first time in 13 years. The firm said it has 60,000 customers, its highest number since 2017. Essentially, more people are looking for ways to handle larger debt loads. That says something about the economy.
We always talk about the economy as if it's one thing, but it's really just the combined reality of 350 million different little economies. The word economy after all comes from the Greek word oikonomia, which literally means household management. Some of those households are doing very well; some aren't. "It's a recession when your neighbor loses his job; it's a depression when you lose your own," Harry Truman once said. The economy is not a monolith, something worth keeping in mind.
Assets are better than tests
The Federal Reserve
Banks, which have long been agitating for reforms, were generally on board, but there were some critics of these new rules.
"Disclosure of the stress test models and annual public comment processes on model changes and scenarios will make the stress tests less responsive to emerging risks," one critic argued. "Calcified models will also allow banks to optimize their balance sheets to the test, rather than focusing on underlying risk."
That critic was Michael Barr, who is currently a Fed governor. He was the only member to vote against the new rules.
The stress tests are a fairly useful exercise, I suppose, but it's important to remember they are exactly that, an exercise. There is no guarantee that in a real crisis things will play out the way the tests project. In fact, there is every reason to believe in a real crisis things will happen much differently than the tests project.
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In fact, it's pretty clear that in the wake of the Crisis of 2008, banks came up with their own plan for avoiding the next crisis, and it didn't involve taking tests. The best way for a bank to protect itself against a crisis is to have a balance sheet so big it can withstand any travails. JPMorganChase's Jamie Dimon dubbed this a "fortress balance sheet," and it really does seem to be the MO of most big banks. It makes them literally too big to fail.
The top four banks in the U.S. today comprise 35% of the nation's deposits, up from less than 8% in 1994 (and 25% in 2008). The 46 next largest banks comprise another 30%. There are more than 4,200 banks in the country, and 50 have well more than half the deposits.
Stress tests are nice. Monster balance sheets are better.
