Inflation has been in the news recently, many think that this is transitory due to comparisons from last year when the world was shutting down. Some think that this is just first gust of wind in a coming storm.
Those who think this is transitory have many good arguments and I think there is a decent chance they are correct but all of their views are based on a steady state view of the world. There are long-term trends at play that if they continue mean inflation is inevitable. What are these trends?
Increased US and Global Debt: The US national debt is closing in on record levels, levels not seen since we fought a world war. In addition to this debt we have promises in Social security and Medicare. When you combine these things there is no mathematical way to pay for all of them as is. Something has to give. Some believe that taxes can close the gap but even taxing the top 1% at 100% of their income would not close the current budget deficits (ignoring covid items). Inflation is literally the only way out of this, using inflation we can reduce the burden.
Increased use of Stimulus: Starting in with the stock market crash of 2000 we have seen ever increasing use of interest rates, money printing and stimulus items to help make things better as quickly as possible. With the internet bubble, we simply had ultralow interest rates. This helped to spark the housing bubble and then the financial crisis. During the financial crisis many were apaled at the $800 billion bailout of banks (which was paid back). Also the introduction of zero interest rate and the first use of the fed printing money to a limited extent. Next up we have Covid, where the US Government depending on how you look at it spent 8 trillion to keep things running. Three data points may not be very robust data, but each time the medicine works the likelihood of it being used again and with even more force seems to be a reasonable assumption.
A view that inflation is not a bad thing: Given what is going above there are many out there who see having a little inflation as a very good thing to help bring things back in line. They are rooting for it, encouraging it. We have seen the Federal Reserve state they will now target an average of 2%, so if things go over for a while no big deal. So we are getting many people rowing in the same direction now. But the problem with this attitude is that inflation maybe like adjusting the water temperature in an unfamiliar shower… cold… turn knob… cold… turn knob… cold… turn knob… cold… turn knob hard… cold… HOT!!!!!!!!!!! Thinking we have a fine tune control over this kind of things has been shown historically to be inaccurate.
Large amounts of Cash: Finally with all what we have seen above and the reaction to covid and previous stimulus, we know have record amounts of cash sitting in people’s and corporate accounts. As a wise person I heard once said, all of this stimulus, and cash being poured into the system is kindling for inflation. Meaning that it does not directly cause inflation, but it is what will allow inflation to burn hot and fast. But to get a fire you need a match…
Covid the trigger: Here is the more speculative portion of this analysis. Could this be wrong, ohh absolutely, but that would only mean that the trigger is later and the kindling more. What Covid has done is disrupted everything, the transitory inflation it has caused may if it last long enough trigger a new mindset for individuals. What if the collective begins to actually believe that their cash will be worth 10% next year? Do you sit on your big pile of stimulus money or do you decide maybe I should go buy something right now? And say that supply chains are still disrupted, things are not easily produced, we see shortages of things? Does that add further sparks into this nascent fire?
For those who are not onboard with this analysis, then just look at asset markets. Inflation is already here in a big way and has been for a while. The “smart” money is already moving. In the next post we’ll talk about what a normal person can do to help protect themselves if all of this should actually come to pass.
As a side note this may sound apocalyptic but its not, many people in many different eras have gone through inflation and come out the other side, but its usually not a fun thing.