So inflation is officially not ‘transitory’ anymore.
We all knew it wasn’t transitory but the Fed with its vast power and resources was under the strong impression it was. You can believe that if you will but its easier to embrace that it is easier to apologise than ask permission, especially if 50% of your remit is to control inflation and you have no choice but to let it rip.
What the US needs is 7% inflation because that will squish the debt to GDP ratio back into line over 3-4 years. It is best set to 80% but under 100% and falling will do, because then those in power can point to progress and a 100% ratio is probably the new 80% anyway.
Why 80%? That is where economists say the balance lays for the optimum GDP growth rate and GDP growth is the well spring of taxation and taxation is what pays the bills, especially public sector entitlements which is the core of why folks work for the public sector in the first place. Obviously, that is a cynical perspective, the public sector is there for the benefit of the citizens and I apologise for not recalling that in time before my fingers ran away with me.
I love this chart from Congress. You would expect it to be off some libertarian ‘buy gold’ ‘collapse of the dollar’ conspiracy site, but it is, sadly, not fake news:
That really is an ‘end of times’ projection.
However if you redenominate the currency through depreciation, that oncoming mountain becomes a foothill.
Now I could post a picture of a 100 trillion Zimbabwe note, or some Turkish Lira, or Hungarian Pengo but here are a couple of picture to show that inflation can happen in less exotic countries.
This is a favourite, Japan
A Gold, 1 Yen, about 20 to the ounce equivalent to 1 dollar of Gold in the 1900s when $20 was about an ounce.
Now its aluminium, about 1% of the buying power and 0% of intrinsic value of its old self and this for a currency that has been appreciating for the best part of a generation.
I like this note.
Which was not so Napoleonic when they introduced a new Franc and 10,000 francs became 100 new francs. Between the 1930s and 1960 the Franc inflated 4000% and washed away much of the debt created by WW1 and WW2 which is a yearly rate of about 24%. 24% inflation a year is spicy.
So today the US has 6.2% inflation. Lets say, at least 6.2%, because those hedonic measurements will be hacking down the headline rate as your money doesn’t seem to go anywhere as near as far as it did last year and things seem to have gone up way more than the headline figure. Five years of that chops about a third off the value of money and boosts the GDP numbers, without any real growth, by about the same amount. 6% GDP growth? Wow, it’s a boom! Shame no one is better off.
When you are aware that inflation always is a creature of policy, its no great leap to see its purpose. The NMT (new monetary theory) folks will say, just print money and when inflation gets too hot, push inflation down through tax. This sounds lovely to government, but politicians will print and then fail to tax, because in the end to make tax count you have to tax the bottom of the wealth pyramid and they are going to vote you out. Better to tax the bottom of the pyramid via inflation. People notice tax but are stumped by inflation because they don’t understand it.
So what?
For me the ‘so what’ is, we have now hit the required level of inflation aimed at and inflation will be explained away and massaged down from here on in untill the job of rebalancing is achieved. Printing must and will keep going, so inflation is here to stay at these levels. This debasement rate will be tweaked but it is paramount that GDP and debt normalise so 6-7% CPI will be the rough level inflation will stay for several years. There will be tapering, twisting and tightening but printing will keep on going in one form or another till debt to GDP is back down and this regieme might just keep going indefinitely until the levels of debt/GDP expressed on the congressional projection chart are sustainable.
Stocks are not such a bad place to perch in such an era but ultimately, we are heading into an environment where it will be harder to find growth, protection and liquidity. This is the real danger of inflation, it makes economies less stable, less efficient and inject fragility.
But there is no point moaning, here we are, in the new world of high inflation and we will have to adapt.