Fiscal-Driven Inflation
lynalden.com
lynalden.com
- inflation returning to historical norms
- transient inflation followed by moderate inflation
- transient inflation followed by a return to deflation
- hyper inflation, with or without a loss of reserve currency status for the USD
I'm just sitting here with a balanced portfolio and no leverage hoping to preserve my modest wealth. It certainly will be interesting to watch it play out. What is certain is that somewhere between 75-100% of all the predictions will be totally wrong and yet we will continue to believe the people making the incorrect predictions, especially when they reinforce our worldview.
Case in point, written over ten years ago, in November 2010:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
* https://economics21.org/html/open-letter-ben-bernanke-287.ht...
They were right about none of it. QE wasn't primary aimed at employment: that was what the stimulus was for. Except, in the US, the GOP deficit hawks insisted it be watered down.
> I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
* https://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithm...
And when these folks were talking about "inflation" they were referring to CPI and the risk of Wiemar Germany, not assets. And I wish people would stop using "asset inflation", as it muddies the waters wit regards to what "inflation" means, and there's already another term:
* https://en.wikipedia.org/wiki/Economic_bubble
And the reason why assets are going up is because there are "excess" savings: a bunch of money sitting around doing nothing because there's not much spending. Japan has been in this situation since the mid- to late-1990s:
* https://en.wikipedia.org/wiki/Secular_stagnation
Perhaps someone should start spending so the money is being used for something besides earning interest on interest.
> The currency didn't depreciate relative to other currencies, but is that because it held its value or because other currencies were also QEing their way out of the recession?
So basically another prediction by the inflationists was a no-op.
> and yet we will continue to believe the people making the incorrect predictions, especially when they reinforce our worldview.
I take Krugman’s advice with a grain of salt. In 2002 his suggestion was
“To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
I wouldn’t care but he was the type of thinker who caused people to say Ron Paul was a kook, who warned that the housing bubble was going to burst a couple years before it happened.
Asset inflation is most definitely occurring due to the increase in monetary supply. If I’m sitting in 100k in capital that I’ve saved by being frugal over the last 5 years, it is effectively becoming less and less valuable so I’m forced to spend it on some kind of asset not in hopes that the asset becomes more valuable but because my 100k is becoming less valuable.
To be fair there is much increase in home prices not due to inflation and more due to increased demand with the changes covid brought on.
And here is the legal crime that it brings about, I bought my current house with only 5% down for 350k and it would probably sell now for 390k, meaning my 20k of my frugally saved capital will have a 100% return in one year. You could argue if it lost 10% I would lose 100% of my invested capital but I bought right after I saw Trump turn on the printing presses so I was 99% sure this wouldn’t be like me buying a condo at the end of 2007.... shudder
> [...] And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
> Judging by Mr. Greenspan's remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman's crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.
* https://www.nytimes.com/2002/08/02/opinion/dubya-s-double-di...
People kept bringing up that 2002 statement over and over:
> So did I call for a bubble? The quote comes from this 2002 piece, in which I was pessimistic about the Fed’s ability to generate a sustained economy. If you read it in context, you’ll see that I wasn’t calling for a bubble — I was talking about the limits to the Fed’s powers, saying that the only way Greenspan could achieve recovery would be if he were able to create a new bubble, which is NOT the same thing as saying that this was a good idea. Of course, I know that this explanation won’t keep the haters from pulling up the same quote out of context, over and over.
* https://krugman.blogs.nytimes.com/2010/04/05/me-and-the-bubb...
If you've got a suggestion for person(s) who has been more right / less wrong that Krugman, I'm all ears. The Keynesians, as a general school of economists, seem to me to have best track record over the last ten years. Everyone else (Monetarists/Friedmans, Austrians, Chicago) seems more wrong than them.
I don't want to get too into the politics here, but I follow the financial news, and it's hard not to notice how the economic analysis can often be very different based on political affiliations. This letter was published in the Wall St. Journal, and many of the signatories work for the Hoover Institution, AEI, etc. I don't like saying it because it sounds so partisan, but these groups tend to be very concerned about the deficit / inflation / easy money policies during Democratic administrations.
During the same time period, the top economist at the Times was predicting low inflation and a slow recovery, and of course the federal reserve board itself had a different view which is why it took the actions it did. So did wall street / the markets, which did not have high inflation expectations priced in.
How economics is reported in the media is some combination of academic economics / politics / the media, and I'm not sure academic economics is really the biggest issue in that group. I think it's worth listening to what economists think, but it's important to look at their track record to be aware the media may be reporting a minority opinion in the field based on their political leanings.
I wish people would stop using "inflation" in conjunction with "asset". It just causes confusion in what inflation actually means, and there's already a term for what you are referring to:
* https://en.wikipedia.org/wiki/Economic_bubble
> QE is arguably one of the greatest drivers of wealth inequality. If the QE was done to fund social security payments
That is the job of legislators, not central banks.
In the US the Federal Reserve isn't a fairy godmother or genie that can solve all of society's ills. They did what they could and were allowed to make sure the system works. Where was Congress?
> That is basically what is happening now, and commodities have already been putting up 30%+ inflation numbers.
The price of copper tripled between December 2008 and February 2011:
* https://fred.stlouisfed.org/series/PCOPPUSDM
And it led to… precisely nothing. A sluggish recovery which took too long because of a lacklustre stimulus because of the deficit hawks.
These rise in numbers were predicted months ago:
> So what’s going to happen in the months ahead? We’ll probably see a number of transitory price increases, not just because the economy is booming, but also because the lingering effects of the pandemic have produced some unusual disruptions — for example, a global shortage of shipping containers.
* https://www.nytimes.com/2021/03/22/opinion/us-inflation-stim...
A bubble suggests the inherent overvaluation in a natural market cycle. Inflation is used intentionally to differentiate that the price is higher because money was artificially injected, so the normal rules for identifying market exuberance (assuming you had perfect information) are distorted.
> That is the job of legislators, not central banks.
The central banks buy whatever debt the legislators need to be financed, in the real world. During the pandemic, that meant buying insanely expensive (low interest) treasuries to finance stimulus checks, as well as direct economic injections.
> The price of copper tripled between December 2008 and February 2011:
That's one commodity. Indexes exist so that we may prevent this misleading thinking. Law of large numbers, etc.
As I posted a few weeks ago, random length lumber futures are up 200% since the pandemic began. Copper and soybean futures are both up 60%. Industrial steel is up 133%. Industrial silicon is up 70%. Sunflower oil +114%. Wheat +20%. Platinum +29%. Gold +20%. Aluminum +32%. Energy futures +30%. Natural gas +42%.
The real estate market is in a frenzy. SPX is up 25%, despite almost certainly taking a productivity hit as a whole.
Shortages due to shutdowns are a factor, but all the same, if there's a shortage of everything and an excess of cash, what do you get? (...Inflation).
While true, the European Central Bank (ECB) did raise rates at one point. Krugman (a Keynesian) sad this was a bad idea at the time, and that it would cause the recover to stall. And it did.
Because the ECB is generally run by Germans and they have an (anti-)inflation fetish, and so at the first hit of it they 'panic.
Moral of the story: listen to the Keynesian. I've been reading Krugman since ~2008, and he's been pretty right on most of the major monetary/fiscal policy points.
I would say that the consensus view in the U.S./E.U./JP that central banks can run negative interest rates indefinitely is leading to some unsustainable peculiarities. Stocks should not be viewed as the only thing that can be owned, and future growth shouldn't be priced in decades in advance.
First, what does stable money mean. Most people would agree what they mean is that if $5 today gets you a loaf of bread, that $5 will buy you a loaf of bread a year or so from now as well.
Let’s say you have a closed economic system which only produces bread, has 10 producers, and $100 in total. Those 10 producers create 20 loaves of bread, so a loaf of bread is $5. But what happens if they are hit by a meteor and 5 of the producers die. Now you still have $100 but only 10 loaves can be produced. So what would it mean to keep the price of money stable? If you still force a loaf of bread to be $5, after the first 10 loaves are bought, you’re out of loaves ans the remaining $50 have effectively inflated away to be worthless. Instability of currencies, therefore, is a natural consequence of imbalances between the supply of money and the production of goods and services.
The US has actually done a tremendous job keeping the USD fairly stable, by printing more money to account for growing economic output (due to a variety of reasons, technology being one of them).
That being said, there is always a bias towards low inflation as opposed to low deflation, because deflation can be an economy killer. If the value of cash increases with time (in other words, if $5 today buys you 1 loaf of bread, it will get you 2 loaves of bread a year from now), then the risk adjusted returns from any investment needs to be that much greater for an investor to invest.
Even a small percent or 2 of deflation can have an oversized effect that would lead to a significantly smaller economy.
But here’s the thing. Those are Investments. The point of currency is not to be an investment. If it was an investment it wouldn’t serve its goal as currency. The point of currency is to facilitate quick and easy exchanges of services and goods.
And a deflationary currency pretty much becomes an investment and so loses its purpose as a currency. That’s exactly what’s happening to the likes of Bitcoin. They are almost entirelt investments and not currency anymore thanks to its deflationary (and volatile) nature.
Also, “savers” are not being penalized. People who are hoarding currency, ie, the unit of exchange, are being penalized. They can very well go ahead and save their money in actual investments, as opposed to in a token of exchange.
If a country ran a deflationary currency, it would slow down the economy significantly, which would put inflationary pressure on the currency. It’s not even clear to me how you would maintain a deflationary currency without periodically taking people’s dollars and destroying them (unless we fall into a paradoxical situation where making economic activity harder helps increase the amount of economic activity...there mah actually be some areas where this works, such as Veblen goods, where a “deflationary” currency might work).
Is it? It’s not like merchants across the economy were going to accept Bitcoin, but decided to hold onto it instead. Nor was the economy using Bitcoin to trade goods and people started hoarding Bitcoin instead.
“If a country ran a deflationary currency, it would slow down the economy significantly”
The US experienced GDP growth during many years of price deflation and a dollar backed by gold during the 1800s and after the Great Depression. The economy grew a lot through periods of volatile consumer prices (high price or inflation or deflation) for over a century. The historical record does not seem to me to support a link between deflationary prices and lack of economic growth. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580289
Also, “savers” are not being penalized. People who are hoarding currency, ie, the unit of exchange, are being penalized.”
Call it whatever you want, money losing purchasing power over time means it cannot be used as a vehicle for real savings. “Hoarding money” as you call it is a requisite for investment. Investment cannot occur without deferring consumption. All investment must come from saving wealth from consumption. When currency is inflationary it drives real savings towards other assets, like stocks, real estate, etc., and this effect strengthens the more inflationary the currency. It creates a situation like the one we have now, where investment in stocks is not about capitalizing entrepreneurial ventures, but parking savings to avoid debasement. Buying up property and stocks to preserve capital is not investment in the sense that capital is being used to increase production of things consumers want or need (real investment), but to avoid loss.
Funding innovation is a hedge.
Ideally federally backed mortgages would be issued on security of the minimum replacement cost of fixed capital rather than on comparable sales price. If it costs $150,000 in labor and materials to replace a small house and fixtures with a new home of equal utility, but comparable sales price is appraised at $400,000, creating money through federally backed mortgages to sustain the valuation does not really create more money for private sector innovation, it creates asset gains for passive investors which are making money without innovating.
Requiring federally backed mortgages and equity loans to be issued on at least half security of fixed capital whenever the comparable sales price exceeds 200% of the replacement cost would not starve the private sector of money, it would simply encourage investors not to throw away the industrial base economy the innovation economy was built on, or to at least fudge asset valuations higher by writing up the labor replacement cost rather than the intangible benefits so wages tracked productivity gains more closely.
Honest question: Who do you hear suggesting hyper inflation is coming? I personally cannot think of many people publicly making this claim
To be fair, I would say even Dalio would expect strong inflation but not hyperinflation from what I've heard from him.
The idea of hyperinflation meaning 20%-50% increases in prices month over month is nonsense. People point to countries like Germany at the end of WWI as if it’s relevant or telling - it’s not. The circumstances are so completely different you might as well argue we’ll have deflation because of it. Pure nonsense.
There’s some concern about asset prices, though. Again, this is general inflation, however.
I’d love to see a well-reasoned argument saying we are heading toward hyperinflation (somehow the U.S. only). But… I’ll believe it when I see it.
That might possibly happen in the next few decades, but obviously this is quite far from what others have been talking about (money-printing and QE leading to hyperinflation)
Is it really? It is probably one of the countries that rely less per % of GDP on imports: https://en.wikipedia.org/wiki/List_of_countries_by_trade-to-...
And it would be massively beneficial to whatever currency replaced it. Unlike nuclear war, there is potential for a winner. That is what makes this scenario somewhat plausible. Long term China’s objective is to replace the dollar as a world reserve currency.
A rapid shift would I think only occur after an alternative reserve currency were more obvious, and I think you’re right about a slow unwinding at first. However if it passed a tipping point the latter end of an unwinding scenario would I think be very fast.
The consumer inflation we have currently is due to increase in prices of raw materials and not necessarily due to printing money but due to labor issues.
Japan had QE with money printing for close to 40 years now and stagnation, not inflation is their problem.
Major currencies, including USD, are no longer pegged to gold since the 80s so all studies prior to that are no longer relevant for inflation. And currencies like USD have virtually unlimited appetite. If the central bank prints out one trillion dollars it will be taken up by couple of Bezos & Zuckerbergs.
if anything, the whole pandemic is a good case study for Universal Basic Income.
All sovereign nations "money print" to pay bills. All bills, all the time. That's how the accounting works. It's not a relevant issue.
And that causes a cascade process of spending, which becomes somebody else's income less tax. Over a series of hops (transactions) that spending all disappears in tax - whatever the tax rate. The question is how many transactions that takes, and whether the economy can undertake this transactions (and you can work that out by looking at the number of people without work that want it).
Tax rates change the amount of transactions in the hops.
Beyond that it is down to whether everybody spends everything they get the instant they get it. If they don't and they 'save', then that automatically causes a 'deficit'. That saving/deficit combo then attracts an interest rate. QE does nothing other than alter the interest rate the saving/deficit combo attracts.
It seems strange that people get excited about levels of saving. Isn't that a good thing?
You seem to be implying that these are two unrelated phenomenon. I would say that claim goes against almost every school of economic thought I am aware of.
The idea that printing money just moves prices up directly as if by magic is not a claim I've ever heard and that almost certainly is not what Lyn is claiming. Increasing prices of raw materials is one of the most base cases in terms of potential effects of printing a ton of money (increased demand chasing a fixed supply).
So I would say the idea that inflation is either due to input price increases or printing money is a completely false dichotomy.
https://fred.stlouisfed.org/series/M2SL
I wouldn't say there is any consensus at all, but that's why we have capital markets. If you believe price levels are going back down and we'll return to normal you are free to take the other side of the trade from me.
That’s not what people mean when they say inflation is “transitory”, they mean inflation will be high now (prices will rise) and will be low later (so prices will not continue rising). I don’t think people think there will be deflation (prices return to old ones).
I'm still skeptical that this will actually be the case: once "sticky" prices like wages or consumer durables start going up, it puts more money in consumer pockets, which means they can spend more, which means businesses can raise prices, which gives employees leverage to demand more CoL increases. Cue wage/price spiral. And we're already seeing these increases in wages, consumer durables, and advertising, with no signs of a Fed tightening yet.
The anatomy of the 1970s inflation wasn't a uniform increase in all prices across the board: it was a set of transient price increases in specific industries, which then abated but were followed by price increases in other industries, which again abated but were followed by increases in wages (in some professions - income inequality increased dramatically in the 70s) and financing costs. We didn't realize inflation was a problem until it started showing up in mortgage rates around 1977 - inflation dropped rapidly from 1974-1976 (from 12.2% - 4.8%), and it appeared that it was a transitory problem resulting from the 1973 oil shocks.
All I am saying is that printing USD has almost no effect on inflation especially since money nowadays inherently has no value after being de-coupled from gold.
Maybe if everyone across the word suddenly got $1 million dollars, we could be seeing inflation.
I believe that as long as people spend their money to buy goods without saving up (debt of a country)and economic outputs remains consistent, printing money does not necessarily cause inflation.
I am interested to know if printing excessive money in a functioning economy ever caused inflation after the 70s, to be proven otherwise.
https://static.seekingalpha.com/uploads/2012/7/14/426795-134...
Venezuela money supply:
http://fingfx.thomsonreuters.com/gfx/rngs/VENEZUELA-ECONOMY/...
Venezuela inflation rate:
https://i.insider.com/5b368d86ce37b21c008b4892?width=600&for...
1990s Russia inflation rate and money supply, in table form:
What, everyone would sit at home, do nothing while debt to GDP rises dramatically?
The problem is not simply the debt, its also with how we measure GDP. NIPA is broken and counts ground rent, late fees, and interest on loans created for speculation on intangible assets as output rather than overhead.
Generally prior to recessions when real GDP appears to be going up its really already dropping due to malinvestment and over-financialization. For instance during 1980s asset bubble in Japan corporations previously only involved in manufacturing started opening divisions to speculate in real estate and stock market.
So your statement implies that a typical American family is losing over 40% of its purchasing power year over year.
This is, quite obviously, not the case.
Inflation-protected treasuries are trading with about a 2.5% premium in yield. So if you can buy bonds, and sell inflation-protected bonds, you can make money if the inflation rate is below that.
You are talking about inflation, albeit maybe really severe inflation.
Also you are off by an order of magnitude regarding where inflation figures are at. As another commenter mentioned, I think you might be misunderstanding that those figures are annualized
I-bonds for small-time investors in the US. They have some nice tax benefits for holders. TIPS for big-time investors.
Global stock index funds. That saves you the trouble of buying and holding foreign currency and they pay dividends while you wait for the inflation apocalypse. Even domestic stocks have a good chance of coming out ahead.
Others have mentioned gold and silver. Those can be bought like stocks with GLD and SLV. Likewise you can buy real estate investment trusts if you aren't in a position to buy actual real estate. Those usually pay nice dividends.
If you're really worried about real hyperinflation, you should go find the best deal on bulk-purchases of every non-perishable thing you intend to use for the next year. You might be surprised at the investment return you get on buying a 5-year's supply of wine or t-shirts.
1. Hold a more stable currency, maybe GBP or JPY. It also means you need earn your salary in those same currencies. Move your other assets like equity etc to the same currency. I don’t think anything can be done about the pension account, unfortunately.
2. Switch to other forms to store value, preferably liquid, such as gold. Assume the hyperinflation will last for 2-3 years and calculate the gold you need to buy.
Though the chances of USD hyper inflation in our lifetime (next 40-50 years) are vanishingly low based on what I have read. USD is still by far the most powerful currency, to an extent that last March there was a global flight to the refuge of USD triggering insane scenarios like negative oil prices and equities tanking.
The next generation, however will have to be prepared for a bipolar currency, USD and CNY.