Stagflation Is Here – Monetary Inflation and Economic Depression
austingwalters.com
austingwalters.com
You can't say the savings rate goes up while also saying that increased spending via stimulus is causing inflation. You can only have one or the other. Those are at complete odds with each other.
The far more obvious explanation is that the supply side has "collapsed" and that should be obvious and the problem isn't monetary inflation, it's just in time manufacturing causing extreme bullwhip effects.
Think about car manufacturers canceling their semiconductor orders. If they hadn't done this, car prices wouldn't have risen as much as they did.
The real question is, are our car manufacturer executives stupid enough to keep canceling semiconductor orders? If yes then enjoy stagflation for years to come, if not then you will have to wait until semiconductor manufacturers catch up with the new orders.
Go one step further and bomb all car factories. You're going to see hyperinflation in used car prices.
If you are smart about it you can create money without a corresponding debt (aka printing money i.e. something the Fed isn't doing right now) and spend it on building semiconductor plants and then end up with deflation as prices of semiconductors drop, therefore using an increase in monetary supply to explain inflation will always cause problems because there are so many exceptions.
Yes, this means if Zimbabwe were to print money and use that money to support farmers it would actually get rid of its hyperinflation.
All the input costs have increased, dramatically. They then have to charge more downstream. The additional costs are then going to be absorbed the the consumers (other businesses and end customers).
The consumer has been given super cheap loans or checks in the mail and can now afford an increased expense.
Now everything costs more - inflation.
Note: much of the money went into game stop, amc, crypto, etc and didn’t necessarily go towards more production.
However, free money won’t be available forever. Will wages rise? Not necessarily as fast, especially with high transportation and raw material costs. So wages likely won’t rise as quickly.
Due to the higher input costs, many businesses will have to close, further suppressing wages.
At the end of the day, we could have stagnant wages, lower adjusted gdp, with increased inflation.
Now, to your point — it’s possible businesses stay open and even expand, increasing wages. You’ll still see inflation, just no depression. However, that doesn’t seem likely given these price increases in raw materials, transportation, etc seem to be increasing and there’s no addition release of capital on the consumer side.
Finally, if the FED tries to decrease inflation it’ll reduce economic growth. The treasury also cannot sell more bonds on the open market with these decreased interest rates — no one is willing or can buy enough. At the end of the day, we will have trouble not printing money to cover the debt — increasing inflation. I don’t think there’s a method of not printing our way out of debt.
No one knows for sure, so I feel all discussions have their merits
- We will see a total of about 50-100% inflation. This is not necessarily a bad thing, given the amount of debt in the system. People's mortgage, educational debts, and credit card debts will be lightened.
- The dollar will fall in value relative to world currencies. This makes sense since the US no longer has a monopoly on much of anything. There is no business like the US automotive/manufacturing post-WWII, or tech in the eighties and nineties. The US is a superpower mostly out of velocity.
I don't think this necessarily results in a depression, unless we mess up. This could be healthy or unhealthy, depending on the cards we play.
I don't see a world in 30 years where a SWE in the US makes $350K and a SWE in China/India makes $10k, or where unskilled labor in the US makes $40k, and unskilled labor in India/Africa makes $1k.
The key question is how we get the the new world. This could be through an economic collapse in the US, or through pretty healthy changes. I just don't know.
E.g. 50-100% inflation is enough to trigger a spiral to hyperinflation, depending on how we react.
The only thing that's weird is that everything has become more valuable because everything has become more scarce because every supply chain got hit at the same time. You don't have people avoiding high lumber prices by switching to steel because the steel prices have likewise increased. If you want to build a house right now, you're going to have to build it out of something rarer than you had to 2 years ago. Normally people would just not buy the house, and then construction companies would have to fire people and sell off assets, which would reduce their capacity to build homes even after lumber prices fell back down. But with the injection of cash the demand is maintained and the builders are able to weather the storm.
Now it's possible and indeed likely that the amount of cash injected is not exactly the right amount to maintain business as usual - there likely will be over production of certain high demand goods which will create a glut in the market after supply chains return to normal, and at the same time workers hired to do these superfluous tasks will be laid off when demand falls after the money printers stop. Cheap goods and higher unemployment mean lower pressure on increasing wages. Further, companies who invested too heavily will either be bought or sell off their assets for pennies on the dollar, leading to increased consolidation. To finance this expansion, odds are a lot of financial assets purchased now will be offloaded. When the dust settles people may see a legitimate decrease in purchasing power, but this change is still far off in the future and will be much less acute than the current situation.
Inflated asset prices mean that some people think they’re richer than they are and they might soon find out otherwise (consider the drop in cryptocurrency). In the meantime, it’s hard to see how easy money for all sorts of investments discourages spending on things that will actually fix supply bottlenecks, eventually.
There is lots of silly stuff going on at the same time, granted, and sometimes it’s a bit harder to tell the difference.
As an aside, the lumber price increases seem historically anomalous. Going back as far as I can, the price increases seem like an order of magnitude bigger than typical price variation. With other commodities, the price increases seem in line with past variation (at least in the last few decades). It seems like the lumber trends are worth paying attention to, almost like oil prices in the 70s (but again maybe that supports the author in a circumstantial way).
First you need to plant trees years in advance before you harvest them, then green lumber needs to age for an extended period of time before it can be used. If you for some reason have to stop felling trees for a few months, a few months later you're going to have a shortage; and while you can cut down those trees later, if people start panic buying there are only so many trees ready to be felled. Luckily forests are spread out over many areas and logging does not depend on any suppliers that represent a single point of failure, so the odds of every logging operation getting disrupted at the same time is astronomically low - unless there's a global pandemic or something.