"A 40-Year Trend Comes to an End"
By Bill Bonner
RANCHO SANTANA, NICARAGUA – "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 U.S. 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. “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 U.S. 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 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 labor 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 labor 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 2008-2009, the total number of hours worked in America 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 tinseled 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…
Regards,"
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