Some Like It Hot — Letting Inflation Run ‘Hot’

A ship roughly 400 metres long — or about the height of the Empire State Building in New York City — continues to block the Suez Canal. 12% of the world’s seaborne cargo passes through said canal. It’s like having a giant chicken bone lodged in the throat of the global economy.

Actually, it’s more like a blocked artery, preceding a full-on heart attack. The boat is stuck. They can’t get it out. It hasn’t yet led to shortages or rising prices — although it certainly can’t be pleasant on any of the ships that are hauling live animal exports. Is it funny or is it dangerous?

It’s a little bit of both, at the moment. If you were writing a Tom Clancy or John Birmingham-style thriller, you might use it as a plot device. Major global choke point for good is sealed off, seemingly by accident. It’s then used as a pretext to launch naval or land operations, somewhere in the Middle East or North Africa, knowing that seaborne naval support can’t make it.

But who needs fiction when reality is equally compelling? In the year since the pandemic began, we’ve learned that just-in-time delivery of goods and services in a world with supply chains that are thousands of miles long is just asking for trouble. With vaccines rolling out all across the world now, it will be interesting to see if we get back to ‘business as usual’ or if there are changes.

What kind of changes? A Cold War with China could force some ‘relocalisation’ of strategic industries. Take oil refineries for example. In February, ExxonMobil announced it was closing the Altona refinery near Melbourne. And that came after BP’s announcement the previous October that it was closing the Kwinana refinery in WA.

EXPOSED: The truth behind Australia’s ‘miracle’ economy

Once both refineries close, that leaves the entire country with just two working refineries. Viva Energy runs the refinery in Geelong. Ampol runs the Lytton refinery in Brisbane. The government is well aware that the security of refined liquid fuels is now in doubt.

New refineries throughout Southeast Asia — especially in Singapore and China — make it cheaper and more sensible to import refined fuel. Keep in mind these fuels are literally the lifeblood of the transportation network. Without them, the movement of goods across the country — food, medicine, people — would all but stop.

The trouble for Australia is that while it’s cheaper to buy imported fuels from Chinese refineries, what happens if those refineries won’t sell, or will only sell at much higher prices? If you’ve been paying attention, you’ll know Australia’s in the middle of a well-behaved diplomatic spat with China. It all started with Australia supporting a full inquiry into the origins of the Wuhan virus.

China did not take kindly to that. It’s one thing to slap tariffs on Australian wine and beef. It’s another to cut off the supply of strategic resources, without which the economy can’t function. Normal life would grind to a halt (assuming life gets back to normal after the pandemic).

Speaking of which, in the new issue The Bonner-Denning Letter (published later this week) I’ve taken up the issue of inflation. Central bankers around the world are now willing to let inflation run ahead of nominal interest rates. The stated reason is they don’t want to raise rates pre-emptively and kneecap a COVID-19 recovery.

But letting inflation run ‘hot’ — well above nominal interest rates on government bonds, also has the side effect of making debt easier to pay off. And who has the most debt in the world? Governments!

Conclusion: a deliberate policy of inflationism is now in place in the US and Europe. The goal is to make it so gradual that savers and investors don’t notice the incremental increases in their cost of living or the incremental losses in their quality of life. Kill them slowly.

Traditionally, the bond market has sounded the alarm on rising inflation. It’s done so by pushing government bonds yields up — demanding higher rates of interest in compensation for owning government debt the longer maturities. It’s the free-market mechanism for tapping the brakes.

But if you cut the brake lines — which is what yield curve control is — the car picks up speed. There’s no natural feedback mechanism to slow the growth of government debt or the inevitable rise in prices (especially now, as the stimulus payments are being made directly to people who live and spend in the real economy, as opposed to monthly quantitative easing payments, which have only served to push financial asset prices higher).

The pandemic has accelerated government spending and ushered in things that look suspiciously like Universal Basic Income (UBI) and Modern Monetary Theory (spending money into existence). According to my research, the last time there was a similar revolution in money and finance was in the 18th century in London.

That’s when stock markets combined with the relatively new Bank of England and the South Sea Company to lead to a revolution in government debt markets. I wrote about that revolution in this month’s newsletter. The short version: it led to a huge increase in government power and violence.

And today? Sadly, the same thing is happening. A revolution in money, driven by technology, at first promised decentralisation and freedom. But governments and banking institutions have since struck back, expanding their power and reach into private life by redefining what money is, who gets to create it, how much of it to create and how you can use it.

A heart attack in the global economy isn’t desirable. But neither is the birth of a new money system to exert power, surveillance, and control over every decision you make. Next week, I’ll share with you what I think you can do about it.


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Dan Denning,
Editor, The Rum Rebellion

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Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

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