Inflation Is Coming for US Economy — The Two Routes To Inflation

Early August, 2020. Was that some kind of hinge point? The end of an era?

If so, it’s time to dump anything that depends on a stable US dollar — bank accounts…insurance policies…annuities…bonds.

But it’s early days…and this kind of rollover is often not confirmed for years.

No need to worry

Besides, there’s nothing to worry about.

At least, that was the line coming from the White House at a recent press briefing, via Jared Bernstein, a member of the Council of Economic Advisers.

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Janet Yellen is our Treasury secretary. She knows a little something about inflationary risks,’ he reassured us.

But relying on Janet Yellen to protect us from inflation is like asking Stevie Wonder to drive a school bus; it’s asking for trouble.

And it’s why August 2020 could turn out to be such an important date.

Since then, bond yields — an important early warning of incoming consumer price inflation — have been going up. The yield on the 10-year Treasury, for example, has more than doubled from its August 2020 rate of 0.52%.

After 40 years of lowering inflation and bond yields, the tide may have turned, in other words.

If so, in the years ahead, we will see a huge wave of job losses and bankruptcies, as businesses, government, and consumers are forced to refinance debt at higher rates.

We’ll see retirement savings — often resting on a bed of US. Treasury bonds — collapse.

And we’ll see consumer prices rise…as real incomes go down.

‘Don’t worry about it,’ say the experts.

The thinking, if you can call it that, is that the US economy is performing ‘under capacity’. That means there is plenty of slack that must be taken up before prices can rise. People are not fully employed…factories are quiet, etc.

They expect no upward price pressure until everything is going full bore, pedal to the metal. Only then, goes the logic, do business or labour have any ‘pricing power’.

Things need to get better, they believe, before inflation takes hold.

Two routes to inflation

Inflation happens, grosso modo, (according to the classic Quantity Theory of Money) when the supply of goods and services goes down compared to the supply of ‘money’ that bids for it.

That can happen in one of two ways.

Either the economy heats up (cyclical inflation)…and businesses need more labour and raw materials to keep up with the demand. Shortages then arise. Everyone tries to keep up with the whirlwind of getting and spending, leading to higher prices…

Or…the other possibility (systemic inflation) is that the economy cools down. Fake money, false price signals, regulation, bubbles, giveaways, and COVID-19 shutdowns could simply cause a cutback in buyable output…while the supply of available money continues to rise.

Closer look

So let’s look more closely…

Last year, the output of money — as measured by the Federal Reserve’s balance sheet — rose by $3.25 trillion.

The output of goods and services, on the other hand — as measured by GDP (even somewhat faked by a huge increase in government spending) — fell by $300 billion.

This looks like ‘systemic’ inflation to us.

Another way to look at it…

Goods and services are produced by people who work. The number of hours they work (setting aside productivity increases, which are very slow) is a good measure of output.

Well, since the crisis of 2008–09, the total number of hours worked in the US is practically unchanged.

But the NASDAQ — a rough measure of how much hot money is coming into the stock market — is up 500%.

Wacky and weird

And then, there’s the unbridled wackiness of it all.

Two weeks ago, the GameStop saga played itself out…in all its tinselled mania.

And now, The Wall Street Journal reports that since Elon Musk said Tesla had bought $1.5 billion worth of bitcoin, and that the company would soon begin accepting bitcoin in payment for its autos…the market value of the two of them together — bitcoin and TSLA — rose $110 billion on the news.

Go figure.

What we figure is that there’s so much loose change under the seat cushions, it’s becoming uncomfortable to sit down.

Look for prices for just about everything to rise as the real economy — the part that actually produces goods and services — cools down…


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Bill Bonner,
For The Rum Rebellion

PS: In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

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