"Marie Antoinette Is Alive and Well"
by Jim Rickards
"How are you enjoying the rampant inflation we’re seeing? Well, Teresa Ghilarducci, a professor at the New School for Social Research, thinks you should just deal with it. She should be awarded the Marie Antoinette Prize for arrogant comments made just before a revolution.
Just to refresh your memory: Prior to the French Revolution, in response to a report that French peasants had no bread, the former Princess Marie, wife of King Louis XVI, is reported to have said, “Let them eat cake.” Cake is the English translation of la brioche, a kind of bread enriched with butter and eggs and considered a luxury. For 230 years, “Let them eat cake” has been the symbol of out-of-touch elites with no sympathy for everyday people and no sense of the difficulty in their lives. Now comes Professor Ghilarducci to raise the bar...
Just Ride the Subway, Eat Lentils and Let Your Pet Die: She’s dispensing advice to Americans struggling with declining real incomes and out-of-control inflation. She begins by saying her advice is for those making less than $300,000 per year. That’s about 99% of the population, but Professor Ghilarducci probably doesn’t know any of them. In her elite world, she and her friends make at least $300,000 and many make far more. So she’s writing to the U.S. peasants. What advice does she give?
She writes, “Those most affected will adjust to inflation in the classic way by shifting away from relatively expensive items toward close substitutes.” In other words, the peasants will have to lower their standard of living.
She suggests not using your car as much and taking public transportation. That's fine for professors who live in New York City (although I doubt Ghilarducci goes in the subway much because of the platform pushers, slashers and armed robbers), but it doesn’t work for the vast majority of Americans who live in suburbs or rural areas.
Prices of meat are going up and they’ll go up more. Ghilarducci’s advice is to eat “tasty meat substitutes” like lentils and beans. If you’re a pet owner, she suggests skipping veterinary care.
So there you have it: Take the bus, eat beans, skip the new clothes and let your pets die. Ghilarducci’s advice is repugnant. Still, it serves the purpose of reminding all of us how snobbish and detached the elites really are. My advice is to ignore professors, don’t listen to government officials, stick to common sense and vote all of the politicians, Republican and Democrat, out of office the first chance you get.
The Fed Is Far Behind the Curve: Unfortunately, inflation is likely to get worse. At the Fed’s March meeting, they raised rates from 0.00% to 0.25%. But with annualized inflation running at 7.9% (and even higher for energy prices), the Fed’s move was pathetically small. It simply highlighted how far behind the curve the Fed actually is.
Chairman Powell has signaled to markets that the Fed will move repeatedly and aggressively to fight inflation. He has admitted that Fed forecasts of inflation in mid-to-late 2021 had been far off. He seems determined to make up for lost time. At the March meeting Powell said, “We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”
This is a clear signal that the Fed may raise interest rates as much as 0.50% at a time and do so at multiple meetings. The chair of the Fed does not make announcements of this type without following through. But is it enough?
The Fed Would Need 8% Rates to Tackle Inflation: Even if the Fed raises rates 0.50% in May and June, and then continues with 0.25% interest rate increases at the July, September, November and December meetings, that only brings rates to 2.25% by the end of this calendar year. Yet inflation is running over 7.9%. That means even with those interest rate hikes (which haven’t happened yet) real rates will still be negative 5.4% in December, (2.5 – 7.9 = -5.4).
How can you stop inflation with negative real rates? You can’t. The Fed would have to push rates to 8% or higher to get back to positive real rates in a world of 7.9% inflation. Obviously that’s not happening. Federal budget deficits would explode and a severe recession would commence before the Fed even carried out that plan. Federal budget deficits would explode and a severe recession would commence before the Fed even carried out that plan.
Be Careful What You Wish for: The Fed struggled for years to achieve a 2% inflation rate. But they should have been careful for what they wished for. Now, in relatively short order, inflation is running hot at 7.5% and the Fed is way behind the curve. The problem is, once inflation expectations develop, they can take on lives of their own. Once they take root, inflation can strike with a vengeance. Double-digit inflation could quickly follow. That’s because double-digit inflation is a nonlinear development.
What I mean by that is, inflation doesn’t go simply from two percent, three percent, four, five, six. What happens is it’s really hard to get it from two to three, which is ultimately what the Fed wanted. But inflation can jump rapidly from there, as we’ve seen. Many are trying to blame supply chain disruptions and the Russian invasion of Ukraine. While these are factors, the causes are almost irrelevant. Once inflationary expectations set in, they can be very difficult to dislodge.
“The Inflation Horse Has Jumped the Fence and Is Running Wild”: Inflation is not only a monetary phenomenon (with all due respect to Milton Friedman), but also a partial function of behavioral psychology. It’s very difficult to get people to change their expectations, but if you do, it’s hard to get them to change back again.
The bottom line is, inflation can spin out of control very quickly. If people believe inflation is coming, they will act accordingly en masse, the velocity of money will increase and soon enough the inflation will arrive unless the money supply is severely constricted. That’s how you get these rapid inflation increases.
So is double-digit inflation on the horizon? It’s possible. Just to be clear, I am not making a specific forecast here. But if it happens, it could happen very quickly. We’re already at 7.5% and the Fed is far behind the curve. The inflation horse has jumped the fence and is running wild. This is another reason why having a gold allocation now is of value. Because if and when inflation is double-digits, gold will be inaccessible."
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