Policy Errors Have Consequences

By John Mauldin


“T.S. Eliot once wrote, ‘Only those who risk going too far can possibly find out how far one can go.’ It seems the US financial system is bound and determined to find out.”

John Hussman, July 29, 2021


“If I was Darth Vader and I wanted to destroy the US economy, I would do aggressive spending in the middle of an already hot economy… What are you going to get out of this? You’re going to get a sugar high, the higher inflation, then an economic bust.”

Stanley Druckenmiller, July 23, 2021


“It’s not riding the tiger that is the problem, it’s the dismount.”

John Mauldin, today


This week’s Fed statement was another non-story. They added a new line about continuing to “assess progress” which some interpret as a step toward tapering. If so, it was a baby step. They’re simply thinking about whether they should start discussing the possibility of making a plan to begin tightening when conditions are right.

This means the Jackson Hole speech in August will likely be a nonevent, and the earliest the Fed will even consider beginning to taper its massive quantitative easing is at the December meeting. Rate hikes are not even a discussion yet.

All this is as predicted in my Federal Reserve Folly letter last week. To reiterate, I believe the Federal Reserve has already made a policy mistake that will lead to great mischief if not a recession, depending on when they normalize. The problem is, they have created conditions that will cause normalization to have its own repercussions.

We are passengers in the Federal Reserve’s monetary policy plane. I fear the turbulence will be consequential. Will Jerome Powell be able to safely land in an airport of his choosing, or will he need to be Sully Sullenberger and find the nearest runway, even if it’s the Hudson?

I am worried the Fed will either let inflation become psychologically entrenched, or wait too long to stop it and spark crisis with a too-hasty response, but there are other possibilities. None are especially good

Endgame Nearing

In a typical week I get dozens of responses to my letter. I read them all and appreciate the thought that goes into them—even those who think I’m wrong, and say so in not-always-gentle ways.

(Incidentally, you can comment by clicking the “Read Online” link at the top of your email. Our website has a comment thread after the letter. Or you can send an email to subscribers@mauldineconomics.com. Our team will forward it to me.)

A letter with distribution as wide as mine has a diverse and often quite opinionated audience. I appreciate the differences of opinion because they force me to think. Strangely, last week’s letter generated almost no disagreement. Some thought I hadn’t gone far enough. Others saw the Fed making different but still severe mistakes.

I may have stumbled on the one thing that unites all Americans: None of us like what the Fed is doing. 

I thought this response from reader “Sagelike” was well said.

[Fed Chair Jerome] Powell is no idiot and he knows what a complete mess things are so if I'm Powell I'd have to ask myself how I need to play this? 

I wouldn't want to be the guy who presides over an economic implosion so I'd just keep the game going to avoid being tarred with that label for all time and, I'd retire in January with reputation more or less intact and leave the mess to someone else…

Debt monetization is the last and only option left on the table at this point. 

Interest rates can't go low enough to spur growth as they are near zero anyways nor can they rise high enough to rebalance the system without leading to debt default and depression. 

QE forever doesn't work so what's left?

Debt monetization and real money printing are the only options left and it's only a matter of when.

So, transitory inflation, then disinflation followed by deflation and another recession. 

The economy is still very weak and long yields are signaling slowing growth already. 

The reflation trade will be brief and I do not believe we're going to get anything close to an economic boom. 

The current expansion looks more like a dead cat bounce.

Politicians panic at that point and introduce yet more massive stimulus and with debt spiraling and deflation taking hold, debt monetization becomes the only option to create inflation.

And that's when we get real, sustained inflation... probably starting sometime next year.

So with my first statement in mind, good policy outcomes are a virtual impossibility and more bad policy almost a certainty and if bad policy is a certainty, the results must therefore be highly negative given our current debt position. 

How it unfolds is anyone’s guess but the broad outlines seem clear: The endgame is nearing.


I don’t know about the “next year” part. 

I think it is also an open question how severe any such inflation will be, given so many other variables. 

An economic slowdown could greatly diminish that particular threat. 

Recessions are by definition disinflationary/deflationary. 

But as I said, even “mild” inflation is a problem if it lasts long enough.

Other responses had different scenarios as far as how inflation and recession and monetization play out. 

Many of my readers are far more certain than I am as to the exact nature of future events. If nothing else, Powell is his own man. 

He resisted Trump’s call for lower interest rates and negative rates, up until the period of COVID when it was appropriate. 

The Fed is clearly data dependent. 

I believe that Powell can look at the data and change his mind, but right now markets want firm leadership and a clear path forward.

Powell is riding the tiger of extraordinarily easy monetary policy. It’s not riding the tiger that is the problem, it’s the dismount. 

That tiger can turn on you savagely.

It’s not like bull riding at the rodeo. There are no clowns to distract the tiger. You better have your exit planned perfectly.

Leadership Vacuum

Powell’s term as Federal Reserve Board chair ends in February 2022. 

We don’t yet know if Biden will reappoint him. 

Ideally, this isn’t a partisan exercise. 

Powell is a Republican, originally named to the board by Obama (while Biden was VP), then elevated to chair by Trump. 

We shouldn’t assume Biden will replace him just for that reason, but he might have other reasons.

My friend Doug Kass has been pointing out the unusual situation of having a former Fed chair, Janet Yellen, in the political role of Treasury Secretary. 

She will of course be involved with Biden’s decision to reappoint Powell or pick someone else. 

She hasn’t disclosed her recommendation publicly.

If it’s not Powell, then what? 

The most likely candidate is Lael Brainard, who is currently the only Democrat on the board. 

But she would have to be confirmed by the closely divided Senate, which is not a sure thing. 

However, I doubt there would be that much of a fight over Powell or Brainard, although there would be some sharp questioning.

This could all get out of control, though. Here’s a handy scorecard to help you identify the players.


Source: Wikipedia

On February 5, Powell would stop being chair but still be on the board (the terms are separate) if he chose to stay, which I find doubtful. 

If a new chair isn’t approved by then, one of the two vice chairs would take charge in the interim… except there may not be one.

Vice Chair Richard Clarida’s term as governor expires on January 31, 2022, a few days before Powell’s chair term ends. So he will be gone unless he is reappointed and confirmed by then.

Vice Chair for Supervision Randy Quarles loses his vice chair title on October 13, 2021. His renomination is also uncertain, as is confirmation. Some Democratic senators regard him as too friendly to the banks and are actively lobbying to remove him.

Whatever the White House decides, it would help to do it soon. The Fed needs qualified, intelligent, known leadership. I realize some think Powell is trying to please Biden by keeping policy loose. But Powell is a wealthy man who doesn’t need this job or the headaches that go with it. As noted above, he seemed to have no trouble ignoring Trump’s demands. While I think he’s making big mistakes, he doesn’t strike me as someone who surrenders to political pressure.

Powell has at least acknowledged that at some point monetary policy needs to be normalized (whatever that means). 

The general consensus seems to be that Brainard would maintain easy policy for longer. 

Janet Yellen clearly leaned towards looser policy. 

Biden really needs to make a decision by October so the confirmation process can move forward, especially if he is going to appoint a new chair.

But all this uncertainty is the point. 

Business owners and investors need some idea of what the landscape will look like as they make the decisions that lead to economic growth. 

Making them fly blind isn’t helpful.

Borrower’s Paradise

These things matter because the breakdown, whenever it happens, will be as big as the bubbles it pops. 

They are huge and mostly trace back to monetary policy.

For instance, here’s a look at the “real” inflation-adjusted Treasury yield curve before (the black line, December 2019) the Fed’s assorted pandemic programs, and after (green line, June 2021). 

Note that subsequent CPI numbers make this chart slightly worse.


Source: RSM


Going into 2020, real rates were already negative out to 20 years and a little beyond, but just slightly so. 

Now, with nominal rates lower and inflation higher, short-term real rates are in the -5% area. 

Even 30-year T-bonds are almost -3%. 

Commercial lending rates aren’t quite as low, but in real terms are still zero or negative for top credit risks.

This situation is why we are in what my friend Mark Grant calls the “Borrower’s Paradise.” 

The Fed is incentivizing everyone to leverage up and everyone (especially corporations) is responding. 

The problem is some percentage of these borrowers are in good condition now, but won’t be when something goes wrong. 

Then what? 

Remember, when borrowers can’t repay it’s bad for the lenders, too.

Of course, real rates change. 

If inflation drops or nominal rates rise, real rates become less negative and eventually positive (a situation we used to call “normal”). 

But there is no reason to expect either of those in the near future. 

The Fed seems fine with 5% CPI inflation for an extended period and hasn’t indicated any rate hikes are coming soon. 

Current conditions could persist for a while, and the side effects will keep growing.

(I will note, however, that this kind of yield curve is exactly what the Fed would want if its real goal were to subsidize federal deficits and give Treasury time to refinance existing debt at lower rates. 

We don’t know if that’s their intent but this is what it would look like.)

This “Borrower’s Paradise” extends to businesses as well, and not just blue chips. 

Here is the BofA “High Yield Spread” for the lowest-rated junk bonds. 

The spread is the amount by which these bonds yield more than Treasury debt of the same maturity. 

You can think of it as a measure of excess risk. 

How much riskier than Uncle Sam are these low-rated companies?


Source: FRED


Ahead of COVID-19, the answer was about 10 percentage points. 

It shot much higher, then gradually slid back and is now more like 6 percentage points. 

The riskiest companies can now borrow for about 400 basis points less than they could before the Fed launched all this craziness.

Are they really that much more creditworthy? 

Are their business prospects that much better? 

Doubtful. 

This is a serious twisting of incentives and it’s funding some companies that won’t make it, with great pain for all involved.

Finally, here is a variation of the Fed balance sheet graph I showed you last week. 

This time I’ve added the Bank of Japan’s assets. 

I spent years, and even wrote a book, saying Japan was a bug in search of a windshield because the BOJ was buying everything in sight. 

The Fed was, too, but not as much relative to GDP.


Source: FRED


In 2008 and following the Fed expanded its balance sheet well above the BOJ. The gap later shrank a bit, to the point that in 2018 BOJ assets exceeded Federal Reserve assets. In 2020 both central banks went on a buying spree but the Fed’s was much bigger—and faster. All of which should call to mind The Vapors Turning Japanese tune. It’s happening.

All these distortions and many more are going to be corrected at some point. 

Equity premiums and valuations are at extremes. 

The Fed seems to think it can engineer a gentle landing. 

Count me dubious.

The People Want a King

In a round-robin email conversation with friends about the Fed, David Bahnsen quipped that “the people wanted a king,” referring to the Old Testament Israelites in Samuel’s time who wanted a king. 

Samuel warned of all the problems a king would bring, but they wanted one anyway.

It seems the people want a king in the guise of the Federal Reserve. 

Well, not the people, but banks and the markets and the elites. 

They assume our wise philosopher-kings can sit around the table and decide the price of the world’s most important financial instrument—US dollar interest rates—better than the collective wisdom of the hoi polloi.

I am neither a prophet nor the son of a prophet, and frankly, it doesn’t really take a prophet to point out all the negative unintended consequences of well-intentioned attempts to manage the world’s largest economy. 

They really do think the wisdom in that boardroom where the FOMC meets is superior to the market. 

They have accepted the third mandate of keeping stock and real estate prices moving ever upward.

As Samuel warned, a king “will take the best of your fields and vineyards and olive orchards and give them to his courtiers.” 

Federal Reserve policy is significantly contributing to wealth disparity. 

The courtiers have done well indeed with their king. 

It is no wonder they aren’t grumbling.

The following analogy is not explicit, but it does have a rhyme. 

Fed Chairman Arthur Burns ignored warnings of inflation when he became chairman of the Fed in 1970 (appointed by Nixon), inheriting his position from William McChesney Martin. 

The brilliant Stephen Roach does an excellent job of explaining how Burns ignored the warnings of inflation (loose translation). 

He basically assumed that each of the various components of inflation were transitory, yet by the time he left office, inflation was already in double-digit territory.

Jerome Powell is making that same bet. 

I will be the first to say that the conditions causing the inflation we see today, 

5.4% inflation as of two weeks ago and 6.2% for the last four months, are different. (PCE inflation, which the Fed uses, is up 4% year over year.) 

Burns interpreted both rising energy prices (OPEC) and rising food prices as due to an El Niño, rising fertilizer prices, etc. 

Then he ignored everything else, including rising housing prices. 

All of this, built on his personally created models, was transitory. 

(Roach pointed out that staff was arguing vigorously against it.)

Powell does have a point in that much of the inflation we see today is due to COVID-caused supply shocks. 

Since COVID is “transitory,” the cause of the inflation was transitory. 

Except that wages are sticky, house prices continue to rise as they buy $40 billion a month of mortgage-backed securities keeping mortgage rates low, semiconductor experts expect a shortfall for at least two more years, and I could go on and on.

With rates at zero and QE at an extraordinarily aggressive pace, they are doing the opposite of leaning into the inflation pulse that is quickening in the United States. 

And they are literally showing no concern, at least not in a policy change between now and the end of the year. 

They are talking about it while still adding fuel to the fire.

Perhaps Powell is right. 

Perhaps inflation will be transitory. 

But the longer they maintain this massively easy monetary policy, it will lengthen the time that uncomfortably high inflation is “transitory.”

I think Fed officials believe the economy is still very fragile, and that if they began to even modestly normalize monetary policy, it runs the risk of pushing the economy into a more fragile condition. 

The stimulus money is going to run out soon. 

Eviction notices will start coming out in August and September (unless the moratorium is somehow extended, but then how does that help a severely impacted real estate industry?).

Until we know how the economy is going to react to those events, changing policy today is very risky, at least in their eyes. 

Slowly, one regional Fed president after another is beginning to give speeches acknowledging the problem.

I readily acknowledge that the potential for market volatility when the Fed starts leaning into inflation and/or decides to normalize policy is quite high. 

That is the corner they have painted not just themselves into, but all of us with them.

Washington, DC, Maine, Colorado, and Family

As I’ve mentioned the last few weeks, I fly to Washington, DC, on August 10, then on to Grand Lake Streams, Maine, for the annual economic fishing trip, then to Steamboat, Colorado, for a private speaking event.

My son Trey and his girlfriend are here in Puerto Rico with us this week. 

Overlapping by one day will be Tiffani and her daughter Lively and the boyfriend. 

After they leave, Amanda and husband Allen will show up for the weekend. I am happy to have them near me once again, and may even take a little downtime to be with them.

I’m going to hit the send button as the letter is overly long. 

Don’t forget to follow me on Twitter

You have a great week and I hope you can have some time with family and friends. 

And please note that even though I do sound a little bearish in today’s letter, I really am quite the optimist that the world is going to turn out much better. 

We are going to have so much fun in the 2030s!

Your hoping I’m wrong about the Fed analyst,



John Mauldin
Co-Founder, Mauldin Economics

The Labor Shortage Is Worse Than It Looks, and Help Is Not on the Way

By Lisa Beilfuss

Fadi Achour has had to fill in for service staff at the hotel he manages in Romulus, Mich., as many employees didn’t return from pandemic-related furlough. / Photograph by Nick Hagen


For Fadi Achour, the general manager at Delta Hotels in suburban Detroit, September can’t come soon enough. 

He is operating with less than half his normal staff. 

Room service and overnight cleaning has been nixed. 

The restaurant has limited hours and a bare-bones menu.

When Michigan fully reopened from pandemic shutdowns months ago, Achour called each of his roughly 100 employees, most of whom had been furloughed. 

But most had moved on or weren’t ready to return. 

He raised wages several times as an enticement, but the housekeepers and cooks still didn’t respond. 

Some workarounds, like reducing services, making beds himself, and offering grab-and-go food in the lobby are helping him to barely break even at his Marriott-affiliated hotel. 

With all the cutbacks, only a third of the property’s 271 rooms can be booked.

“We’re struggling,” Achour says. 

“The labor is not there. 

There are help-wanted signs everywhere. 

Everybody is looking at September.”

There are 9.2 million job openings and 9.5 million unemployed in the U.S., with workers quitting their jobs at a near-record rate as companies seek to fill a record number of open positions. 

Employers, economists, and policy makers blame the bottleneck on twin forces they expect to ease this fall: generous jobless benefits that have made unemployment the better economic decision for millions of low-paid workers, and a year of remote learning that has pushed some two million parents—mostly mothers—out of the labor force.

There is a lot of hope pinned on September, when enhanced unemployment benefits expire and schools reopen, and with it the risk of disappointment. 

Behind those factors and the help-wanted placards that dot American cities and towns are deeper problems besetting the labor market, from an aging workforce and a new desire of many workers to be their own boss to a deep skills mismatch and a pandemic that isn’t over, and in fact has been reintensifying.


The expectation that the labor shortage will resolve itself this fall informs the Federal Reserve’s prediction that bubbling inflation—already greater and more persistent than forecast—will be fleeting, or transitory in policy makers’ parlance. 

Once extra jobless assistance ends as of Sept. 6 and parents send their children back to school, the logic goes, labor-force participation will pick up, companies will staff up, supply chains will thaw, and upward pressure on wages—and overall inflation—will cool.

“We’re struggling. 

The labor is not there. 

There are help-wanted signs everywhere. 

But if the labor shortage persists past the fall, the consequences could be pernicious. 

A more persistent problem that caps growth while stirring inflation complicates already-complicated monetary policy, which includes $120 billion a month in Treasury and mortgage-backed securities purchases launched as an emergency measure early in the pandemic. 

As workers demand increasing wages to meet rising costs of shelter, groceries, and other household goods and services, both wages and prices run the risk of spiraling higher.

For investors, a lasting labor shortage presents a host of potentially negative outcomes. 

It heightens the risk of a more aggressive monetary-policy response, as Dallas Fed President Robert Kaplan has warned—and the risk of a policy mistake. It promises to weigh on corporate profitability. 

And ultimately, it makes the nightmare scenario of stagflation more realistic.

“It’s very likely that September will come and go and the issue won’t resolve itself,” says Ed Yardeni, president of Yardeni Research.

Fadi Achour, general manager of Delta Hotels by Marriott in Michigan, vacuums and tends bar—tasks that used to be handled by employees who’ve been slow to return from the pandemic. / Photographs by Nick Hagen


Dismal Demographics

Right before the pandemic struck, the unemployment rate was at a 50-year low of 3.5%. 

And employers were then just starting to recognize that labor was in short supply, Yardeni says, owing to demographic trends that have been years in the making and are only getting worse.

Around the start of the 2007-09 recession, the birthrate in the U.S. began to fall. Ronald Lee, an economist and demographer at the University of California, Berkeley, expected a temporary drop, but the decline has continued to about 1.6 births per woman from 2.1 about a decade ago. 

Covid has exacerbated the trend. 

“This is extraordinary and unprecedented for the U.S.,” says Lee, adding that the decline translates to population growth that is roughly a half-percentage point slower per year and thus on track to turn negative over coming decades.

The impact of slowing population growth on labor supply hadn’t been so apparent before the pandemic because many baby boomers worked past the traditional retirement age of 65. 

In July 2019, Pew Research Center said the majority of U.S. adults born between 1946 and 1964 were still working, with the oldest among them staying in the labor force at the highest annual rate for people their age in more than half a century. 

But now the oldest boomer is turning 75, the working-age population is falling for the first time in U.S. history, and the pandemic has led many older workers to retire ahead of schedule.

Geoffrey Sanzenbacher, an economics professor at Boston College, found that 15% of those over age 62 were retired a year after the coronavirus took hold in the U.S., up from 10% a year after the 2007-09 recession started and 13% right before the pandemic. 

As companies expect workers to return in the fall, he says another wave of older workers may choose to retire if they can no longer work remotely.

‘My Dream Was to Walk Away’

Tamara Gruschke, shown with newborn goat Cupid, epitomizes the many workers who broke away from traditional jobs during the pandemic and don’t intend to return. / Photograph by Zack Wittman


It isn’t just older workers walking away from the labor market, nor is it only low-paid service workers. 

An hour outside of Tampa, Fla., Tamara Gruschke has been raising dairy goats for six years, using excess milk to make soaps, lotions, and scrubs. 

She had been looking for a reason to leave her job working for Veterans Affairs when Covid hit. 

Her business—Olive Drab Farm, named for the color of military gear and her olive grove—took off, with sales doubling to six figures as quarantined consumers splurged on personal products.

“My dream was to walk away from that job,” says Gruschke, 40, adding that she won’t return to the traditional workforce if she can help it. 

“My perspective has changed. 

I’m not reliant on anyone but me and am responsible for my own future.”

It is unclear how many departed workers like Gruschke are gone for good, and how many will return with the expiration of enhanced unemployment benefits. 

Still, there is some evidence that continuing claims for jobless insurance have fallen faster in states that ended the extra payments ahead of the federal Sept. 6 expiration. 

Aneta Markowska, chief economist at Jefferies, says such claims have fallen 24% since mid-May in the states that have already cut the extra $300 a week, compared with a 0.7% increase in states that haven’t. 

The data are limited, though, since some 70% of people receiving benefits live in states that haven’t yet cut the additional payment.

Gruschke’s Olive Drab Farm sells goat milk soap, scrubs, and lotions. / Photograph by Zack Wittman


Not everyone is optimistic that the end of pandemic unemployment insurance will meaningfully improve companies’ hiring prospects. 

Companies are increasingly competing with the likes of Amazon.com (ticker: AMZN), which has raised entry-level pay to $15 an hour. 

A record number of new businesses launched during the pandemic as workers turned into entrepreneurs. 

Immigration, the lifeblood of many services companies, dropped significantly in recent years. 

Retail day trading is still booming along with the stock market, keeping many who became amateur traders during the pandemic on the sidelines.

Achour, the hotelier in suburban Detroit, says the Biden administration’s monthly child tax credit of up to $300 is a new deterrent for some would-be staff who had been expected to return to work when their children return to school.

Meanwhile, doubts are growing that millions of moms will return to work in September. 

Many families have established new norms over the past year, and many parents still harbor virus concerns, says Misty Heggeness, economist at the U.S. Census Bureau, as Covid variants spawn and mask mandates are revived.

While employment among working women without children has almost returned to prepandemic levels, mothers with school-age children are lagging, she says. 

She is skeptical that trend will meaningfully change in September. 

“School opening in the fall isn’t going to be the savior for getting people back to work,” says Heggeness.

“I think we’re underestimating the fear people have with the virus,” she says, adding that it’s plausible some parents will hold back children in the fall if virtual learning is an option and if parents themselves remain reluctant to return to workplaces. 

And some employers are already altering their September reopening plans, with Google parent Alphabet (GOOGL), for example, pushing back the return to October and requiring vaccinations.

Even for parents of young children who want to return to work, the child-care options may not be there. 

Many day-care centers closed during the pandemic, and many others have limited capacity given demand or staffing shortages.

When Amy Rudolph Nordstrom reopened Little Wonders Child Care in Erie, Pa., after months of closures last year, she raised hourly pay to $10 from $8 in an effort to poach workers from other employers, and in turn increased the rates she charged families. 

Bidding wars for workers ensued, Rudolph Nordstrom couldn’t hire enough qualified staff at rates she could afford to pay, and she permanently closed her day-care business in July. 

The calls are still flooding in for care, she says, as other centers in the area are similarly short on labor and unable to meet demand.

Workers have more leverage than they have had in decades, especially in the lower-paid service industries hit hardest by the pandemic. 

At a time when the pool of available workers is already shrinking because of structural issues, employers have had to compete with unemployment insurance that, in Pennsylvania, for example, translates to about $15 an hour over a 40-hour workweek. 

The minimum wage there is $7.25 an hour. 

At that rate, a worker would need to work 89 hours a week to afford a modest one-bedroom rental in Pennsylvania, according to the National Low Income Housing Coalition. 

That suggests prepandemic wages are increasingly insufficient to meet the rising costs of shelter, food, and other necessities.

Wage-Price Spiral

Higher pay is good for the economy until it isn’t. 

The worry is that companies pass the cost of rising wages on to consumers, who then demand higher wages, driving prices higher still. 

The answers to how fast and for how long pay continues to rise will help determine how quickly workers come back. 

This could spell the difference between inflation that is transitory and inflation that isn’t.

A sign of the times outside Achour’s hotel on a recent day. / Photograph by Nick Hagen


As prices soar, catching policy makers and Wall Street economists off guard in both their speed and endurance, the Fed has started to emphasize inflation expectations. 

If consumers see rising prices as a temporary effect of the reopening, spending behavior won’t change and inflation itself will remain anchored.

At least that is the outcome central bankers are counting on. 

“Indicators of longer-term inflation expectations appear broadly consistent with our longer-run inflation goal of 2%. 

If we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal, we’d be prepared to adjust the stance of policy,” Fed Chairman Jerome Powell said during his press conference Wednesday.

Reality, however, keeps undermining theory. 

Inflation expectations are at 4.8% and 2.9% over the next one year and five years, respectively, according to the University of Michigan’s consumer sentiment index. 

An 11% rise to $71,403 from November 2019 in the so-called reservation wage—the average lowest wage a person would be willing to accept for a new job—suggests inflation expectations significantly above the Fed’s 2% target aren’t so temporary.

“Powell saying inflation expectations are well anchored is just not credible,” Yardeni says. 

“Time is not on their side. 

The longer they wait [to tighten], the greater the likelihood it becomes more of a wage-price spiral.”


Yardeni says the consensus view that the Fed is largely right will be challenged by wage data through the rest of the year. 

He now puts the odds of a wage-price spiral at 35%. 

Two months ago, he placed those odds at 25%. 

A year ago, they were at zero.

Against this backdrop, companies are already looking to adjust to new realities to defend margins against rising prices—not least of which is labor, usually a company’s biggest expense by far. 

First, cost pressures are prompting layoffs that have been easy to miss amid plentiful help-wanted signs. 

Recently, General Mills (GIS) said it would cut about 1,000 jobs, while small employers like Rudolph Nordstrom let go of employees as they close their doors. 

The decline in initial jobless claims, a leading indicator of employment, has sputtered.

Second, automation is increasing. 

Productivity gains sparked by shortages are something of a shock absorber when it comes to inflation, and rising productivity inevitably leads to the creation of new jobs. 

By the same token, such productivity gains threaten to eliminate a swath of currently unfilled jobs. 

The faster dash toward automation puts nearly half of the seven million jobs yet to be recovered from the pandemic at risk—potentially leading to a permanent labor-demand shortfall over the next three to five years, says Lydia Boussour, economist at Oxford Economics.

“Most industries have responded to the pandemic by urgently adopting productivity-enhancing technologies, and we don’t expect firms to abandon these labor-saving tools,” Boussour says. 

The productivity boost will inevitably lead to the creation of new jobs, she adds, but not before destroying some in the process.

Illustrating the acceleration in automation: Capital spending on information-processing equipment rose 5.7% in 2020, almost double its average after the financial crisis, as companies deferred traditional investments in other equipment and structures, which fell roughly 12% last year, Boussour says. 

Meanwhile, an October 2020 McKinsey Global Institute survey found companies digitized 20 to 25 times as fast as they had previously considered possible, and a World Economic Forum poll done in the same month found more than 80% of business executives are accelerating plans to digitize work processes, while 50% of employers expect to accelerate the automation of some roles.

Productivity is a wild card on which policy makers are relying to cool inflationary pressures. 

The trouble, though, is in balancing the near term with the long term—especially when the former helps determine the latter.

Investing in technology takes time and there is immense pressure to meet demand now, says Markowska of Jefferies. 

That means firms will largely remain focused on hiring in the more immediate term. 

“The fact is, there are more jobs than people looking. 

I don’t know how these wage pressures dissipate completely,” she says.

The Fed’s Policy End Game

The Fed’s supposition that easy monetary policy can heal the labor market’s pandemic-induced scars means dismissing long-brewing structural issues including worsening demographics and a widening gap between labor supply and demand. 

It assumes that the impact on work from enhanced unemployment benefits and the disrupted school year have been as dramatic as blame suggests—and that those kinks sufficiently reverse next month. 

And it assumes that the pandemic, still ongoing, hasn’t changed the labor market in some irreversible ways.


The medium-term outlook—the next two to three years—is what the Fed cares most about, and it is driven by what happens in the labor market, Markowska says. 

Looking ahead to fall employment data that will set the stage for that medium-term outlook, investors face the challenge of predicting how Fed officials will respond as the economy’s biggest question starts to get answered.

One outcome, Markowska says, is that quick absorption of job-market re-entrants cools wage pressure. 

Such relief will only be temporary, though, as quick hiring would bring the economy to full employment sooner than forecast and result in an even tighter labor market, complete with longer-term wage inflation. 

Markowska says such a scenario probably wouldn’t affect the timing or pace of tapering of $120 billion in monthly Treasury and mortgage-backed securities purchases, but it could mean more aggressive rate increases once the central bank begins to lift rates.

That is presuming the Fed can and will eventually raise interest rates. 

Labor shortages persisting well beyond September may present officials with a veiled trump card: If millions remain on the sidelines as a result of structural issues and ongoing pandemic concerns, labor-force participation will remain weak and unemployment high.

Since the Fed has signaled to investors that it is prioritizing the employment side of its dual mandate, as opposed to the price-stability side, it is easy to see how ongoing labor-supply problems could underpin continued easy-money policies and an ongoing bull market.

Lisa Shalett, chief investment officer at Morgan Stanley’s wealth-management unit, puts 60% odds on Fed action by year end. 

She expects the labor shortage will push wages high enough to prompt tightening by then, and says rhetoric to that effect would be enough to cause a stock-market correction of 10% to 15%. 

Most at risk, she says: the Nasdaq 100 and long-duration secular growth stocks.

Shalett puts 40% odds on a policy mistake. 

“It’s entirely possible the Fed digs its heels in and rejects the data,” she says, letting inflation steamroll, spurring more tightening than would otherwise be necessary.

That’s not to say investors don’t react at some point to rising inflation that would accompany a more lasting labor shortage, no matter what Fed officials say. 

The bond market’s ability to tighten financial conditions would increase if the Fed begins to taper monthly asset purchases later this year, as is widely expected, because doing so would diminish the central bank’s own impact on bond yields.

Some say attempts to predict the timing of policy action is futile because tightening itself isn’t realistic. 

Consider the cooler-than-expected increase in second-quarter gross domestic product, reported on Thursday. 

Supply constraints, at the core of which is the labor shortage, are limiting growth as companies can’t restock fast enough and face rising costs to replenish inventories.

The surprise GDP slowdown supports the Fed’s view that the economy hasn’t yet made the “substantial further progress” officials deem necessary for tapering, but it came with the uncomfortable fact that prices of goods and services hit the highest levels since 1983.

With no plans to take steps to slow inflation anytime soon, the Fed is “telling the markets and hedge-fund titans the playbook from here: It is safe to run commodities prices up even higher,” says Richard Farr, chief market strategist at Merion Capital Group. 

“Inflationary pressures are beginning to choke off growth. 

You can therefore make the case that the Fed itself is hurting the job market by not addressing inflation.”

The Fed might have it both ways, then, until it has it neither way. 

For now, officials will wait for fall data. 

What doesn’t happen in September may wind up mattering more than what does. 

If workers don’t return to work in meaningful numbers in the fall, the Fed will be forced to confront the inflation that the labor market is both stoking and responding to—bringing market turbulence, one way or another.

Silvio Berlusconi: Italy’s great survivor plots a succession plan

Despite Forza Italia’s return to government, the long-term prospects of the party as well as the family business are uncertain

Miles Johnson in Rome and Silvia Sciorilli Borrelli in Milan 

© Getty Images


Standing in the sun outside Milan’s San Raffaele hospital last September, Silvio Berlusconi, the great survivor of Italian politics, recounted the story of his latest remarkable escape.

“I told myself: ‘You have got away with it again’,” the tanned and grinning tycoon told his cheering supporters, recounting his battle with Covid-19. 

Having contracted the virus on holiday at his villa in Sardinia he developed double pneumonia while already recovering from a heart attack. 

Berlusconi, who for decades has seduced Italy with tales of entrepreneurial daring and stamina, insisted that his viral load had been “the highest among tens of thousands of patients” at the Milan hospital.

The message was clear: after holding his business and political empire together through multiple scandals, legal investigations, business feuds and electoral setbacks, the man they call Il Cavaliere was not going anywhere.

The 84-year-old Italian magnate, who has unexpectedly returned to government this year, is now planning his last act: succession.


Talking to journalists after a meeting with Italy’s president in 2018, the leaders of centre-right coalition Giorgia Meloni, left, of the Fratelli d’Italia party, Matteo Salvini, right, of the far-right party Lega party and Silvio Berlusconi, centre, of the Forza Italia party © Tiziana Fabi/AFP/Getty


The February earthquake in Italian politics that saw Mario Draghi, the former president of the European Central Bank, become prime minister of a national unity government, has given Berlusconi an unlikely reprieve. 

Having been out of office since 2011, the new coalition brought Berlusconi’s Forza Italia, now the smallest of Italy’s rightwing parties, back into power and gave him three ministers.

Back in the limelight once again, he is looking to cement his legacy. 

In a bid to secure a long-term role for his political party, Berlusconi is negotiating the formation of a centre-right political bloc — in what could be the last big gamble of his political career.

“It is my final objective, which I have been thinking about since 1994 and which today can finally be achieved,” he told Fortune Italia last week.

His political return could also provide a fillip to the family media business which has struggled over the past decade when he was out of power amid deep structural changes to the industry.


Silvio Berlusconi addresses a rally in Rome in 2019 © Andrea Ronchini/NurPhoto/Getty


The question facing one of Europe’s longest-standing and most controversial politicians and businessmen is what will remain after he is gone.

Can his children guide the family’s media empire through the challenges of a transformed advertising market and threats from US streaming giants like Netflix? 

And does Berlusconi’s much diminished political party, which has shaped Italian politics since the early 1990s, have a future without the businessman who built it in his own image? 

Or will it simply fade away?

“No one inside Forza Italia really believes that the party can exist in a meaningful way without Berlusconi,” says Daniele Albertazzi, an academic at Birmingham University. 

“If he named a successor he could have helped the party survive after him, but it remains entirely dependent on his personality and even his funding.”

Anti-political platform

Even before the day in 1994 when the then 57-year-old Milanese tycoon stunned Italy by declaring he was “entering the playing field” of national politics, Berlusconi had always operated in the messy intersection of power, media and business.

As he spoke, the sclerotic and corrupt party system of the so-called First Republic was collapsing. 

Berlusconi’s Forza Italia was built on a single, powerful idea years ahead of its time: aspirational anti-politics.

“If you listen back to that speech now it is all still there, he hasn’t really changed a single word over his career,” says Albertazzi.

“He says, ‘I am an outsider, I created an empire for myself and I can do the same for you. The politicians are corrupt and have betrayed you, and I am the man to lead the country’.”

Yet support for Forza Italia has collapsed since Berlusconi was ejected from office in 2011. 

Having won 30 per cent in the 2013 election, Berlusconi’s share of the vote fell to 14 per cent in 2018 and the party currently polls in the single digits, overtaken by a new generation of rightwing nationalists led by Matteo Salvini’s League and now Giorgia Meloni’s Brothers of Italy.

‘Today Berlusconi is our leader,’ says Antonio Tajani, a senior Forza Italia leader and a Berlusconi loyalist since the early 1990s © Fabio Frustaci/EPA-EFE

Michaela Biancofore, one of 11 MPs who left the party to join the spin-off and known as one of Berlusconi’s staunchest supporters, says the party is no longer the same after Tajani’s ‘takeover’ © Angelo Carconi/EPA-EFE


For its entire history, Forza Italia has been built around the image of Berlusconi. He has not named a successor and many in Rome believe it risks melting as soon as he is gone.

But Antonio Tajani, a senior Forza Italia leader and a Berlusconi loyalist since the early 1990s, says his party has a deep bench. “We have many young MPs working towards the future,” he says. “But today Berlusconi is our leader.” 

Tajani, a former president of the European Parliament, describes how Berlusconi runs the day to day business of his party via Skype from his 17th century Villa San Martino.

“He is very active and very engaged. Getting Covid was a problem for two or three months but his health is much better now, and I want to be optimistic.”

But in May, former Forza Italia member Giovanni Toti, the governor of the Liguria region and an ex-Mediaset news editor, launched a breakaway centre-right party named Coraggio Italia, triggering a mini-exodus of Forza Italia lawmakers. 

Michaela Biancofore, one of 11 MPs who left the party to join the spin-off and famed for being one of Berlusconi’s staunchest supporters, says the party is no longer the same after what she calls Tajani’s “takeover”.

“I’m leaving after Berlusconi left . . . Of course he’s still there, he’s the leader, but there are people who take advantage of the opportunity of being close to him, using him like a plasterboard cut-out,” she told Italian daily La Repubblica. 

‘I played the piano and he sang well, Yves Montand, Frank Sinatra,’ says Mediaset chair Fedele Confalonieri, recalling the former premier’s crooning days © Marka/Universal Images Group/Getty


Berlusconi is currently locked in negotiations with Salvini’s League about a form of merger of the two parties that would create a single rightwing group in what could be his last throw of the political dice. 

“Our task is to build a republican party, like the US one, where the centre and the right [work] together to rule the country,” Berlusconi said, speaking virtually at a party event last month.

A merger would allow Berlusconi to leverage what is left of his political influence inside a bigger tent, and likely extract favourable terms from the League ahead of general elections in 2023. 

Yet there is disagreement in the Berlusconi camp over the move, with some Forza Italia loyalists fearing its more centrist platform will be devoured by Salvini’s anti-migration politics.

‘The hate campaign against my father hit our companies,’ says Marina Berlusconi © Pier Marco Tacca/Getty

After their father fell ill with Covid, rumours began to surface in the Italian press of a row between Marina and her younger half-sister Barbara © Daniele Venturelli/Getty


While Tajani believes “this is an idea for the future”, the three Forza Italia ministers in Draghi’s government oppose the initiative. 

Fedele Confalonieri, chair of Mediaset, the broadcaster Berlusconi founded in the late 1970s and which would become Italy’s first privately owned national TV network, is also against the idea.

“I told Berlusconi I don’t agree,” he says. 

“Forza Italia’s identity is liberal, truly liberal. 

Of course, if you don’t water yourself down, everything can be done, but these operations must be prepared over time”.

Business leverage

Berlusconi’s media empire has always been deeply interconnected with his political power. 

By controlling the largest commercial broadcasters in Italy, he could ensure blanket favourable coverage for Forza Italia. 

When in office, he was subject to multiple legal challenges over conflicts of interest.

In the mind of his eldest daughter, her father’s political career has been a hindrance to their family business.

“The hate campaign against my father hit our companies,” says 55-year-old Marina Berlusconi, the eldest of Berlusconi’s five children and chair of the Fininvest family holding company. 

She describes “constant accusations of [some kind of] conflict of interest which in reality never existed [and] that only ended up undermining our business strategies”.

Others have disagreed. In 2014 a group of economists published research showing that, based on an analysis of quarterly advertising expenditure between 1993 and 2009, Mediaset’s market share had consistently increased during the years Berlusconi was in power and declined when he was not.

While domestic legislation is arguably less critical for Mediaset now than in the past, a loss of influence in the corridors of power may also be felt in the boardroom.

The media business is now formally in the hands of his children. 

“I consider myself the luckiest of daughters,” says Marina Berlusconi. 

Pier Silvio, her younger brother by one year, is chief executive of Mediaset and also sits on the Fininvest board, as do their half siblings from their father’s second marriage to Italian actress Veronica Lario, Barbara and Luigi. 

Eleonora Berlusconi, the middle child from the Lario marriage, does not hold an executive role at her father’s companies.

Marina, who is married to a former first dancer of Milan’s La Scala and built a reputation as a fierce negotiator, says she has learnt business at her father’s side for decades.

“I’ve had the privilege of observing him from a close range and [have understood] his method and his values,” she says. 

“His skills are so unique that genetically inheriting even only part of them would have been miraculous.”

Pier Silvio Berlusconi, Mediaset’s chief executive and younger brother of Marina, at a press briefing in 2017 © Miguel Medina/AFP/Getty


After their father fell ill with Covid, rumours began to surface in the Italian press about a bitter row between Marina and her younger half-sister Barbara. 

The family has staunchly denied any rift, presenting a united front to the public.

Yet the media empire Berlusconi’s children will inherit from him finds itself in a much diminished position in an industry transformed from when their father pioneered commercial television in the 1980s. 

While Mediaset continues to dominate domestic commercial broadcasting, it has merely kept its share of a steadily shrinking pie. 

As Italy’s economy has flatlined for two decades, Mediaset’s revenues fell from €4.3bn in 2010 to €2.6bn last year.

“The Italian TV market is a shadow of what it was pre-financial crisis,” says Richard Broughton, research director at UK-based Ampere Analysis. 

The total Italian advertising market spend, including TV, online, print, radio and out of home, was worth around €9bn a year in 2007, he says, but had shrunk to €7bn last year.

At the same time, an increasing amount of advertising spend in Italy is going to online platforms such as Facebook and Google. 

In 2008, television ads made up 48 per cent of the total Italian market. Today that share has fallen to 39 per cent, according to Ampere.

As new entrants such as Netflix steal viewers from incumbents, and newly enlarged foreign competitors such as Comcast, which acquired Sky in 2018, and Warner Discovery pump billions of dollars into a global content war, analysts say it will be a Herculean task for Mediaset to keep up. 

“Falling revenues mean you can’t spend as much on original content as international competitors, so you risk losing more viewers,” Broughton says. 

“It is a very difficult problem to solve. 

This is a problem for many broadcasters in Europe but the Italian companies are in a more perilous situation.”

Confalonieri, the Mediaset chair, has been Berlusconi’s friend and ally since their 1950s adolescence in a booming postwar Milan.

“We went to the same school, we started hanging out because of our shared passion for music. 

I played the piano and he sang well, Yves Montand, Frank Sinatra,” he says. “We stayed friends for our whole life even though I fired him from our little orchestra when we were 19.”

Berlusconi, and his media empire, according to Confalonieri, are in rude health.

“Mediaset is doing well,” Confalonieri says. 

“Of course it has to face the competition of the various Amazons and Apples but our distinctive characteristics are always valid.

If you want entertainment and news you go local, not global. 

Domestic politics or news about your next door neighbour are always more interesting than world news.”

Marina Berlusconi says the family remains deeply committed to commercial television, and believes that her strategy of building pan-European scale will repel the American tech giants. 

Mediaset has operations in Spain, and has a stake in German broadcaster ProSieben.

Pier Silvio Berlusconi attends Mediaset’s general assembly to adopt its plan for a European holding company in January 2020 © Miguel Medina/AFP/Getty


“The digital revolution is upsetting and it is twice as difficult to face OTTs [‘over-the-top’ providers such as Netflix], for their incredible strength but also for the total absence of limits and rules in which they are allowed to operate,” she says.

“Mediaset is among the main protagonists at a European level. 

We believe it has a solid future before it and we can make it even stronger thanks to the international mergers we are working on.” 

Following the truce with French conglomerate Vivendi, Mediaset is ramping up plans for a Netherlands-based pan-European broadcaster.

However, it is not clear if this strategy will work, given the lack of synergies between European broadcasters and their audiences’ different languages and viewing preferences.

“Germans don’t tend to want to watch Italian shows,” says Broughton. 

“You can plough lots of money into an Italian original but it will do well in Italy and not anywhere else. 

Cross-border consolidation of broadcasters in Europe might address some problems but it is not a short-term fix.”

‘The Berlusconi way is dead’

As Berlusconi enters the twilight of his career, his family and allies continue to battle over his legacy. 

For his numerous critics he is a proto-Trumpian billionaire-outsider whose misrule of Italy seeded both the anti-politics of the Five Star Movement and also the high technocracy of the Draghi government.

“He is the father of the idea that politics and politicians are dirty and need to be replaced by something else,” says Albertazzi.

For Marina Berlusconi, the country’s travails in the decade since her father left office is evidence that his critics misunderstood the complexity of running the country.


Back in the limelight once again, Berlusconi is looking to cement his legacy © Vittoriano Rastelli/Corbis/Getty


“In the face of all these changes across the past 10 years, many people, including the most hostile to my father, began asking themselves some questions,” she says.

For Confalonieri, Berlusconi has already become a historical figure.

“When Berlusconi approaches the end of his career, and we’re getting there, he’ll be portrayed as a great businessman who went into politics with an entrepreneurial mentality . . . applying techniques and opinion poll strategies to politics”.

Yet the world he and the teenage crooner Berlusconi inhabited, long before social media and Netflix, is gone. 

The question for the next generation of Berlusconis to answer is whether the magic can continue as their proximity to political power fades.

“These guys are from a different world,” says Albertazzi. “The businesses may continue but the Berlusconi way of doing politics is already dead”.