The Fed Chairman has been raising interest rates on a regular basis, believing that doing so will bring down inflation to a target level of 2%. But as economic statistics come in, they are not making any sense. Inflation should occur for two basic reasons: scarcity of materials and higher wages. But the numbers are showing that materials are becoming more available and wages are going down, not up.
Many of us in the United States and across the world experienced the fiasco that was the recession of 2008-09. We’ve all learned that it was caused by some very creative ‘banking engineers’ who came up with a new revenue-generating product, namely subprime loans. The result took down financial institutions across the globe. Many people lost their homes. Even entire economies were put in jeopardy.
These creative banking engineers have recently conjured another revenue-generating scheme, and small business owners are quickly buying in, sold on the idea that their business will benefit, without understanding how devastating it will be for them. In other words, the banking industry is doing it to us again, and we’re in for another major fall.
Covid and the ‘great resignation’ has caused an amazing shift from people working for someone else to a resurgence of people trying their hand at small business. And a large majority of those new businesses engage in some form of service.
It’s well known that small business makes up the majority of business in the U.S. The biggest problems they face today are a scarcity of product and a shortage of employees. As I mentioned, the product scarcity problem is slowly being worked through, but solving the employee deficiency has led to an enormous effort to create labor-saving designs.
One of those efforts consists of credit card processing sales folk approaching very small businesses and selling owners on the idea that they could earn 1½% more profit through lower costs by charging the credit card processing fee back to the customer at 3-4% added to the price of the service. Which, therefore, pushes the price of the service higher by 3-4%. Therefore, without any consideration for the traditional causes of inflation (an increase in the cost of labor and materials) the credit card processing companies are forcing 3-4% inflation all on their own.
Okay, as a business owner in this scenario, you get back the 1½% fee that the processing companies were charging you in the first place. But clearly, your price has inflated beyond the government’s target of 2%.
Traditional inflation has been so high that it is starting to affect even those who don’t normally pay attention to prices. And I’ve noticed that the majority of businesses that these sales folks are targeting are service businesses where consumers might normally tip the provider.
So, there’s trickle effect. Most of us are reeling from the increase in prices at the grocery store. In fact, one person I spoke with said she and her husband worked it out that eating out was less expensive than buying food from the grocery store. So, we walk into our favorite restaurant or hair dresser only to find that there will now be a 4% charge added on to our ticket. In this case, the economic indices will show a minimum of 4% inflation for any services that succumb to this new product.
Responsible consumers have two choices. One, pay the 4% and then use that service less often. Or two, take the 4% off the tip that one would normally give to the service person (or 5% because it’s easier to figure). In either case, your service provider earns less income.
And who gets this extra 4%? It doesn’t go to pay the higher prices of the materials, nor does it go to pay higher wages. It goes to the banking industry.
A third option for consumers is to charge more on their credit cards, causing credit card debt to skyrocket. Who benefits from that? The banks.
And then the Fed looks at the economic data and says, “We have to raise interest rates again because inflation is not going down.” Interest rates are their primary tool against inflation. Who benefits from higher interest rates? The banks!
It doesn’t stop there. I’m sure, as a business owner, you have to apply the traditional inflation factors to cover increases in materials cost and offer higher wages to attract good workers. You may even have to raise your prices due to the increase in interest rates. All of these normal inflation factors increase your prices much higher than the 3-4%. How long before we’re paying 8% inflation and experiencing a deep recession when we might have been able to hold inflation at 2% without this newly bank-engineered profit-generation product?
Instead, let’s shop around for a lower credit card processing rate; stop charging that higher rate to the customer and pushing your customers away and, therefore, losing your hard-won employees. Increase your prices only to the amount that enables you to pay your vendors and attract good workers. Together, we can help stem inflation and business losses, and hold interest rates to reasonable levels.
How long before we, once again, lose our businesses and our homes because of some crafty sales folk selling a dangerous product? Please send a link to this article to your congressional representatives. Let’s stop the next iteration of the subprime loan fiasco. Don’t be a party to your own failure! Forward this article to everyone you know who might be in this situation. Please, let’s not let this state of affairs cause further damage to our fragile economy.
Read this article from CNBC about the latest word from Fed Chairman Powell.