I wrote something a few days ago on Twitter after I was considering my apple analogy below. The thinking was, “if they could now just increase energy supplies, this should more or less neutralize a lot of inflation we are seeing in the system”. A day or two later, I saw Lyn Alden write something similar, so I wasn’t smoking something funny, I was on to something. She also wrote an excellent piece about 10 months or so ago on different types of inflation that might be of interest for you to review – some are listed below, but organized differently than she presented. I don’t have the link here at the moment – but something you should look up. I think that one way the things I discuss below varies from Lyn’s analysis is I believe some types of inflation are born from monetary inflation – and then you have several types of inflation – which then the end person, at the destination, sees as price inflation. These newborn inflation items then have policies and factors surrounding them which are how this money then filters into the system. The end result is the customer sees higher prices. I’m listing only the major items here.
For example – if lots of money hits the system – you can see an increase in people spending this money – and if energy policy has us spinning up all kinds of nuke plants, this money into this system would then utilize this new energy source and be soaked up here. But when policy keeps supply low, and even lowers it, you can see how excess money in the system simply bids this up. Ideally, inflation is invisible to most of us as you can see more money into the system – which may support more of a population which then triggers more goods needed, and this increase in population essentially fills empty positions in the labor market to keep wages from going hockey stick
What I’m saying might be obvious to some. You then might have “Energy Cliff people” stating adding energy might not be possible. And – they may be right. However – in this case, you could see Biden shutting down drilling, shunning Russian gas, and shutting down nuclear as energy POLICY – which was an input to the inflation. Shutting down nuke plants is not energy cliff stuff, it’s energy policy stuff which leads to higher energy prices.
Above is the M2 money supply – point here is that if it was “steady as she goes”, a lot of the children of monetary inflation CAN soak this money up by supplying more. However, the problem comes when too much is printed too quickly, and the rate of M2 increases far faster than the goods and services can – which is why you saw things like lumber shoot up. This is why I think things like UBI and bailouts are a terrible idea. It throws more gasoline on the fire.
It got me trying to explain how I see inflation to people as very little seem to understand how the system may work. What is very interesting, that is if you are reading this at the moment – people actually don’t have a good understanding of what inflation is, and how to fight it. All of your PhDs out there may all waive that thesis in front of you, but none really have their arms around it or else we would not be at 8.5% today now, would we? That may shock you, but some of the opaqueness of this design I’ll get to at the end, but we need to understand what the hell I’m talking about first.
Below is the system as I see it. I believe this is a unique way of looking at this that does not appear in any text books and is original thought. So burn the below into your brain and reference it for this piece. There’s a PM aspect I’ll get to as well below, so I’m not forgetting about my gold and silver peeps.
Let’s start simple and talk about apples before I dig into the chart above. You have to understand this first principle before we move on.
- Assume you and Fred and Steve each have 1 dollar. $3 is in the system for apples. You each go to the store and an apple is $1. Each of you buy an apple and are happy. With the start of inflation here, we had everyone then getting $2 each. Fred went to the store, had $2, and bought 2 apples. Steve and you went to the store and there was only one apple for the two of you. Steve was a few feet in front of you and bought the apple, meaning there was a shortage of inventory. This presented an imbalance of supply and demand.
- Quickly, producers race to get more apples to the stores which now drove up the price of the apples to $2. They had to build more warehouses, hire more people, and use more trucks to ship goods. The next time Fred went to the store he saw an apple was $2. He was upset, but realized he now had $2 instead of $1, shrugged his shoulders, and bought an apple. But now Steve and you have $2 and while we see the apple was twice as much, we have twice as much money, so price is a RELATIVE thing. There was $6 in the system and 3 apples, so demand was satisfied. Everyone had twice as much money, but the goods did not increase. So the NOMINAL price of the apple went up, but the VALUE did not.
- In most normal functioning economies, all of this expansion led to all of these extra apples. So now there are 6 apples in the system and $6. But they only need 3 apples. One can then see price coming down to move excess demand, and this then contracts the apple economy.
Now, if everyone knew money was about to increase 2%, that gradual increase to the system works its way through as is absorbed – where you have minor oscillations in supply/demand. My example above was extreme, as it can show you how a spike in money can disrupt the system and will create a wave of sorts downstream with spikes and troughs of supply. This is one thing I had seen at the end summer.
These ripples are called the bullwhip effect…
What you are seeing above is normal economic activity – expansion and contraction of money, credit, etc – within a range. This can happen several ways. The “printing” we talk about a lot is federal spending – which creates debt. We sell Treasuries with the idea of paying that back with future tax revenues. But during COVID, we then had the Fed buy Treasuries to ensure liquidity in the system and keep interest rates low, which gave them Treasuries as an asset, but put $5-6T on their balance sheet. The fed is now trying to “unwind” this and sell them back. Given the Fed’s purchases kept rates low, it’s no secret when the Fed stopped buying and is now selling, that rates would go up. That’s the high level view here – as the mechanics much further than this are above my pay grade. It doesn’t mean I can’t look at the system and see the cracks.
In the above example case, an equilibrium was met with dollars and apples – but had an extreme percent increase/decrease for understanding the mechanics of the mechanism. When there is a demand for the goods, the prices go up to reflect this. More supply hits the shelves to meet this demand at the elevated prices, but eventually the supply and demand meet up and you have $2 apples, as long as that $6 remains in the system. What you and I might also see now is Fred knowing inflation is extraordinarily high and while he only needs 1 apple, buys 2 in order to stock up for when apples go up to $2. This is what me and a lot of others did preparing for this time.
But….it gets a bit more complex here, it seems. Let’s dig in to some energy.
It’s the energy, stupid
I am of the school where “It’s the energy, stupid”. I didn’t used to be, but over the last 3 years it does seem to be that everything revolves around energy. Think about the primary uses for energy – such as oil. You have…
With working in a factory, think about machines that need to perform work. Fuel is burned to make combustion and this explosive force pushes the equipment to do work. This can also be with regards to the work needed to generate electricity, which is then transferred over wire to do the work. With heat, imagine natural gas (or fuel oil) burning to heat your home.
In the example above, this is a big picture way of looking at the inflation problem. But the economy gets complicated. There’s the apple market, the orange market, the pear market, etc. And this might be one of hundreds of thousands of markets overall. There’s two things you now need to consider with inflation
- The energy market allows for all other markets to exist. Without energy, you cannot get raw materials, move any of it through a supply chain, power anything, or sell anything. Your business requires lights to turn on, computers to work, and machines to function. Current policy seems to be removing energy production faster than new production can come online and the money coming into the sector is far surpassing the supply. Profits go up as price goes up – and what that SHOULD do is entice energy company to capitalize on the higher prices and expand production. While many want to take “windfall profits” – this is the money that is supposed to be used to then put back in the ground with drilling/exploration/development. At other times when they are gluts, these companies lose their asses.
- When inflation hits, the extra dollar does not go to Fred, Steve, and you at the same time. It starts with Fred, and THEN gets to Steve and you. This is the Cantillion effect. So let’s assume Fred gets the extra dollar and then is able to buy a $1 apple but now has $2. To him, the effective price of the apple is a 50% discount. Likewise, Fred takes 2 apples, and price goes up to $2 per apple – Steve and you now see a $2 apple, but your wages have not gone up to $2 so the apple is twice as expensive. Companies rush to capitalize on $2 apples and go to produce more – this requires a lot more energy to meet market demands, up and down the apples, orange, pear (sic) markets.
In the above apple example, a form of homeostasis is met when all three get the extra $1 (via wage inflation) to then make a happy supply and demand. But what happens is those that get the money first, get more goods and services and then the downstream effect has others getting that money. If you KNEW inflation was coming 18 months ago, would you have stocked up like me?
It gets more complicated
As I mentioned above, all of these markets function using energy. So perhaps hundreds of thousands of markets may be reliable on the energy SECTOR, which may then comprise markets like natural gas, hydropower, oil, nuclear, etc. Then there may be futures markets as derivatives on this.
If there is a demand for more apples to satisfy the empty shelves that Steve and you have seen, more people must be hired, more trucks must deliver goods, more apple picking equipment is needed – metaphorically, of course, over all sectors. We have seen this as countries have opened up post COVID. And JUST at this point, as if someone game planned this, Russians invade Ukraine and OPEC won’t produce more. The US had $5 gasoline prices.
There are two ways to address this:
- You see inflation and you make the cost to borrow capital much higher. This has an effect of strangling the entire system of capital, and with this, it’s a “demand destruction“. The “shortages” of apples will fix themselves because the cost to buy new equipment is too high, the cost to transport is too high, and the price for the apple is then out of reach. So apples are then no longer bought and prices, in theory, come back down to $1 to meet the new demand. This essentially is creating a deflationary impulse (recession) to cool an economy.
- You can supply the energy needed to satisfy the demand so everyone gets $2 apples. Energy Cliff supporters could point out that OPEC and others “can’t” produce more, but in this instance, it appears policy-driven. If you can produce this energy, this will flood the market with apples and then when each Steve, Fred and you have your one apple each, the price will stay at $2 due to the amount of money in the system that has not changed. What we have seen, however, has been policy issues that have driven the cost of this energy sky high – and they tried to then fix the policy blunder by trying to threaten OPEC to produce more as well as pull millions of barrels out of the strategic petroleum reserve (SPR).
So there really was two choices here – choose demand destruction of the ENTIRE system by aggressively pulling money out of the system starving the Treasury markets for liquidity to push up yields as well as increase Fed Funds rate to dry up asset price inflation OR you actually increase energy supplies to let production work and allow for the money to fully work through the system which could then increase wages – which would then eventually lead to a recession as homeostasis is found. My contention here is they did the worst option – allowed for all of this money to get into the system, allowed for capital investment with this money to increase production everywhere – which jacked up prices – and then before the price shelf can be normalized, they are pulling that capital back out of the system. This is going to be devastating as pretty much any economic expansion over the last two years appears to be in the crosshairs of getting reduced to ashes.
Monetary Inflation gives birth…
My contention is the INITIAL inflation was based on the money supplies – monetary inflation. This had downstream effects that are CHILDREN of this inflation. Not peers. When you see Fred gobble up the extra apples, it’s sort of what happens at the top of our money pyramid with defense contractors, health care conglomerates, big Agra, big Pharm, big Media, etc. But this does create more jobs – at first. It creates more demand because those people are gobbling up apples at 50% off. It does have a way of working through the system, eventually, to find a new “price shelf” if you will. The apples of 100 years ago that were a nickel are now a dollar because the energy needed to create that apple takes more effort to produce (which can be measured in gold within about a 20% variable range) and the energy prices are what creates new shelves. This is why the whole “cold fusion” thing keeps getting pulled out of the closet, beaten like a dead horse, and put in it. Because if energy was “free”, you could make things for a lot less.
When this monetary inflation hits the system, you can then see a few things happening:
- With more money, you can see how this can create more demand due to Cantillion effect of people at the top buying goods up, driving up prices for everyone else. Imagine a concept where gold is $1600 and central banks are buying this up with printed cash, knowing in a few years this will be $3000 per oz. Those at the top of the money pyramid can buy in cheap, then sell later and that that capital and re-deploy into their next scheme. This creates ASSET inflation. Imagine interest rates are lower, you can then buy more house until the price of homes move up.
- With more demand, capital is needed to fund expansion and workers. This then searches for the cheapest means of sourcing capital. This leads to WAGE inflation. It also leads to tech innovations to produce more with lower wage costs. Consider computers, automation, and now AI.
- More capital funding to expand, this leads to more energy being bought to run more factories, make more widgets, and deliver more goods. I believe this leads to ENERGY inflation. Countries can the manipulate their energy policy to control supply/demand. Consider countries in Europe now that are shutting off nuclear power as a policy and then this drives up nat gas prices.
- The end result of the three inflations above, with policies and tech, lead to PRICE inflation (a culmination of the above children.
- You can see how once money hits the system, if policies are not aligned – you can have imbalances in one soaking up all of the money. For example, we saw massive stock price and housing price inflation, not much wage growth. Now, we see energy issues and this money is sloshing out of stocks to then cover energy prices. Wages are growing due to the production demands, but current policies now are about to create demand destruction and wipe out those jobs – rather than deal with policies that can keep this money in homeostasis amongst these inflation children.
- Not pictured is that with this, you have friction in the system with taxes, which drives government revenues – which enables them to sell debt in the form of Treasuries, etc. Inflation is good business for them as long as the economy doesn’t run too hot or too cold. Too much or too little inflation is not good for governments. Monetary policy here helps make money easier to get, or harder to get, which is a lever on inflation/disinflation/deflation. But Monetary policy is all the Fed can help with – governments need to assist with policy for extracting raw materials as well as energy policy. The 2% inflation target, I believe, then helps to understand the value of the treasuries down the road in 5-10-30 years when you do the “future values” finance calculations of money. If a 10yr is 5%, you can then take that 5% yearly payoff and invest it – and you can then see how much spending power you lose if inflation is 2%. This delta you make up by investing that 5% profit into stocks at 10-20% profits. This is why debt is a good game, it’s safe so you won’t lose your principal and you can grow it using yields at a faster rate than inflation at 2%. But at 8% inflation, that risk now starts to shift towards trying to find assets that will soak up that inflation and can be liquid, like gold.
Fork in the road with monetary policy
“Keep cost of borrowing capital low to allow increased monetary supply OR to increase rates and discourage further expansion.”
I believe at issue here is this. I believe that with the ABUNDANCE of money being available, AND the Russian/Ukrainian war, the cost of energy went up TOO drastically. This did not allow for the homeostasis of apples and dollars. What this did then was make apples cost $5 instead of $2, metaphorically speaking, while wages are still only able to buy apples at $1. This was an “in your face” inflation with first shrinkflation, now just prices running hot.
With this, my contention is that a lot of money that was in the different markets started flowing to the energy markets – but policy also restricted supply. I believe a combination of “green” policies, OPEC+, and Russian/Ukrainian war has elevated energy prices by denying the supply allowed to market. Meaning – the money was not really allowed to flow all the way through the system so Steve and you could have that $2 to buy an apple. You still have $1 and the apple is now $5. What my contention here is, is that spec money was the first to go. You saw a trillion or two disappear from these markets – Cryptos, NFTs, SPACs, beachfront homes. Next will be leisure, and we can see that in AirBnB. Next is big tech and cars, which we are also seeing as we speak. Next is just about any company that produces widgets, and you will see mass layoffs everywhere, and soon. With high energy costs, and price inflation to the consumer, demand is getting killed and money is being drained from the Asset pool and from consumers wallets (as seen with price inflation). You could also see how rates have gone up now dropped new mortgage applications down 90% and is about to take away all equity you built up over the last 4 years. So energy – had it been able to keep up with demand of the markets, could have allowed a soak up of this money. POLICY created this mess. Now by draining the pool of all money, it’s being sucked out of the consumer to flow back up. Where someone is going to then balance the books and “destroy” the money out of the system.
To me, instead of using a hammer to kill a fly over a fly swatter, they took a nuke at the Fed. Why? Because the government to make policy which may control assets, wages, and energy is asleep at the wheel and I don’t think any of them have a clue as to their part in this design. I’m hoping every member of Congress can read this to understand each of their roles in this inflation mess, and how all of them pass off this responsibility to the Fed. The Fed is a one trick pony – add more liquidity to the system with lower rates, or reduce liquidity in the system with higher rates. It is incumbent upon our lawmakers to navigate policy to protect the citizen from price inflation. They have been derelict in their duties, mostly because none of them have any idea how they fit into this puzzle.
The tightening of monetary policy along with these terrible energy policies will create “demand destruction” and wipe out a LOT of stuff before they slam on the brakes. The problem is, there’s a lag effect here and anything they do in December, might not be felt until a year later. IF we start seeing “pain” in December, you need to understand it’s going to get far worse, for a very long time, before it gets better. But this can also take down the whole damn thing with a massive deflationary impulse due to the RATE of tightening. Just as we saw the massive money addition shoot inflation to the roof – taking away this $6T punch bowl will have the exact opposite effect. Credit is seizing, which is not only having the effect of stopping all expansion, but now asset prices will be deflating because no one can use leverage to buy them at these elevated prices (think housing). So people that got “wealthy” with high amounts of equity in their houses will most likely lose a good portion (or all of it plus more) of this upcoming.
So why doesn’t this always happen with monetary expansion? First – the RATE OF INCREASE of M2 shocked the system and we saw things like NFTs and cryptos soak up a lot of this. But the policies our government had, had no understanding of how to properly get this money into the right areas to avoid price inflation to the consumer. Additionally, I believe that there were actors here that perhaps game planned what would happen in a pandemic, and IF it happened, what’s the playbook to then capitalize on this event to then go after your enemies. I’m NOT saying they released the virus. I’m saying that I believe all governments have play books to run to position themselves stronger against their enemies. And, in our case, we printed $6T. Some generals in some countries saw us print money and it triggered a response to attack energy. Given our country is now so wrapped around “green” policies, all it took was a push of the dominoes to send us into a spiral. And we fell for it. As the BRICS gets stronger, NATO is getting fractured.
It’s the energy, stupid.
Let’s now look at a deflationary constant of our markets…
Technology and deflation – how this counters wage inflation
You can see how costs of energy would go up over the years. But why doesn’t the cost of goods go vertical, always? Well, in a “normally” functioning economy, you can see how monetary policy of loosening and tightening can have an effect at the margins, over time. Mild bull and bear markets to stabilize the economy. But these vast rate hikes in such a short time I believe are about to have catastrophic consequences. I believe monetary policy should have gradually tightened, but in conjunction with an energy policy to prevent that market from going vertical. The energy policy was way too tight, and I believe that is the major error of the Biden administration. I’m trying to call balls and strikes here. I just believe the administration, and that of the European Union – has been “anti-energy”. This had predictable results – especially when most of Europe was so reliant on Russia for nat gas and you just pumped $6T into the system to slosh around. It will find a home.
But there’s another aspect here – technology breeds efficiency with respects to energy. If you think about 50 years ago in an office, you had this…
All of the work they could do might be able to be done like this today…
Technology improvements allow us to do more work, with less energy. Consider mining in the 1800s?
With today’s capabilities?
You immediately focus on the diesel machines – but think about how much more work is done per joule of energy. The first thing you think of is “deflationary” in the extent that you would lay off workers – but these workers can be productive in other areas, with newer applications of technology. Our nation’s innovations and efficiencies have allowed us to prosper, along with rewards for the best and brightest ideas. This formula can keep us strong – even in the face of BRICS. Europe, I’m not so sure about.
I don’t want to get into math and physics as these articles don’t go well with math, but let me just point out perhaps 100 people with pick axes can move 50 tons of dirt in a day. These trucks with 1 operator might do that in an hour. All of those people needed to get to work. They all needed food to eat. And that was the summation of work that 100 people could do in a day. With technology improvements, in theory, those 100 people could move exponentially more dirt – but we don’t have that kind of demand, so these people are now working in IT, flying planes, working in accounting, law enforcement, etc.
My point is that technology advances have helped our societies become more productive, but they need the energy to continue to perform that output of work. You can think of it as deflationary – but overall, it creates more productivity. So less people are needed to do existing work, but as long as new technology keeps coming along, we can re-deploy human capital to better paying jobs with more training. This is where you can ultimately say “wage inflation is good” – as it is also great for the tax base and our country’s ability to produce more, with less people. This wage inflation soaks up a lot of the capital and then price inflation is NOT passed on to the consumer because if wages are increasing by 4% and price inflation by 2%, you can see how a consumer can then buy more goods with his paycheck.
If that energy is threatened, you can have all of the money in the world you want to expand a business, but if the energy isn’t there, then productivity of the world goes into the abyss. Price inflation passed on to the consumer, and this is the drain you have seen of the middle class for 40 years. It’s death by a thousand paper cuts over 40 years. The middle class has been eroded.
I mentioned above how energy is the economy, stupid, but you need raw materials to build and repair things. Think of homes. Above, you can see how low interest rates and more money in the system can compete for the same amount of homes, and drive up prices. But when you look under the hood – you are seeing the materials to build these houses went vertical. Think about the ESG initiatives now with how extracting and producing raw materials has gone up. Not only do you have terrible energy policies driving costs of producing raw materials up, but you place policies and regulations on these industries that also drive up costs. These costs have to be passed on, or companies will go out of business. You then have hostile environments to permitting, and lack of quality resources to develop creates risk in the system of producing raw materials.
We have seen this with silver – as the number of silver primaries has pretty much all but disappeared over the last decade. The price of these goods is suppressed with a futures market, where legit hedging which allowed free price discovery has been obliterated by the proliferation of algo selling and high frequency trading. This DOES make mining more efficient – where those who have scale may succeed, but also pushes innovation with technology to do more, with less. However, these markets now have a flaw, and that is a disconnected between the physical and paper markets. With this – you then perhaps see markets go vertical on short squeezes. You see things like lumber, corn, palladium, nickel, lithium – all of these things can just go hockey stick up one day. I believe HFT must be banned from commodities futures. To me, this will stabilize the markets and allow for resource expansion with higher quality deposits, where they can be found. I believe the HFT has suppressed virtually all markets and this mechanism is about to die a horrible death. Why? This acts essentially as a mechanism to drain liquidity from markets we desperately need abundance to keep prices low to the consumer. By restricting these developments with functional price caps, the bankers that are shorting to oblivion make bank, and the lack of these resources drive up price inflation to the consumer.
But these policies and price information inputs then go into the asset inflation equation. If you bought a house in 1980, and it costs 4x what it did then, did the house appreciate in value by 4x, or did the USD devalue by 75%? You can see that today, it may cost 4x that cost to build that house. So asset inflation more or less can make you a rich person if you sell that house now for a 4x, but where are you living? That price inflation happened over 40 years, and not five, so wages were able to increase over those 40 years – but rates came down to make the assets more affordable. One can see a sustained high interest rate environment for the next 10 years which should increase wages and suppress asset prices. “Stagflation”.
You can also see how companies like Apple, Amazon, etc can go 100x or so over 10-20 years if you just hold. These companies have business models that print cash – but at some point when recessions hit, these companies will start to come down in value as people sell off to pay for mortgages, rent, food. I believe we are in the midst of many of these coming back down to earth with realistic P/E ratios in sight.
With gold and silver, you can see how gold went up like 58x from 1970 until today. Give or take. This shows how the dollar had depreciated against that metal. Is gold or silver a better inflation hedge than a house? Perhaps not – but one can say that it is far more liquid – and that LIQUIDITY I believe is why gold significantly outperformed housing. Cryptos were more liquid than gold, which is why you could have seen them soaking up a lot of the asset inflation. If you are buying gold today at $1700, you aren’t really trying to do a 2x in a year. If you buy gold, it’s probably a 20-30 year hold as an insurance policy against your fiat currency.
So we might WANT asset inflation if you already own things. If you are a 22 year old trying to buy a house, you don’t want asset inflation. The good news is, I believe the reversal of the balance sheet with the Fed is about to have asset prices smashed. To me, gold will hold up better than most. Especially if this is a fear play of a depression, war, or a war on the USD.
Where do we go from here?
To me, it is clear that monetary inflation starts all inflation. What happens downstream of this, then has to do with policy – “fiscal policy”, if you will. For example, all anyone saw in 2009 after the GFC was asset inflation. You can see how stock markets went up 5-15x since 2008, and have since corrected a bit. Below, you saw the S&P go up 8x in 12 years. Normal? No. This is where GFC absorbed cash – in the bull markets. Which were in a sense only bull markets due to near zero interest rates. That time is over.
That money stayed more or less locked in these items with 401ks, etc. But if you saw the Dow was at 7,000 in 2009 or so and saw it hit 35,000 last year, that’s a 5x in your portfolio in 13 years. Perhaps some of that asset inflation is now also leaking into other areas. One can say the policy this time with inflation with stimmies also contributed to massive price inflation – because it skipped the children and went directly to Joe Sixpack. Think about how RobinHood took retail cash and bid up GameStop in gamma squeezes? That’s not normal, and it turned our markets into a joke. That too, will stop.
With wage inflation, you can see how globalism allowed for wage inflation to be managed by simply sending those jobs overseas. Computers then allowed for more automation of a lot of work. Once can also see now with globalism dying a slow death, that supply chains are disrupted, and it may cost more to get goods now due to labor costs in other countries which might be higher. If we are in a trend of de-globalization, one can see wage inflation here for some time. This is good for Joe Sixpack, IF that asset money of the “rich” transfers to a working middle class in wage gains.
Lastly, with energy inflation – money is flowing into these scarce resources but governments are pretty much making policies to restrict supply, so what the hell did they think would happen? I am hoping to have a conversation about the Energy Cliff and discuss risks to the system – but what part governments also have in this. Why are they shutting down nuclear plants everywhere?
It is clear to me, if they wanted to fight inflation, this is what you do.
- Monetary policy – 25 basis point raises per quarter. There’s a lag time on this, and we have zero clue how bad things are going to be in 1 month based off of January’s raise, let alone the effect 10 months from now on the most recent 75 basis point run up. Sad point here, but I actually have more economics classes than the chair of the Fed – who is a lawyer. I believe this is your giant cruise liner to start to change a direction, but what they have done recently with the 75 pt hikes is going to wipe out a lot of people. Lots of pain coming with that. I don’t think they properly conveyed the right word with “pain” coming. More like, “fire and brimstone”.
- Fiscal policy – slow down government spending by 2% a quarter until inflation is back to the 2-3%. Hard caps on budgets. Balanced budget amendment in Constitution to prevent one party from buying votes or another party from crashing the economy. They need to slowly turn off the tap. BOTH parties need to understand some form of austerity as our lawmakers are spending like drunken sailors year in and year out.
- Resource extraction policies – if inflation runs over 4%, then reduce restrictions and regulations to encourage more supply to market. If it’s under 2%, increase them to discourage supplies and get prices back up. Right now, they are crushing demand AND making it cost more to get things out of the ground. Eventually, you find policies that are “just right” in a goldilocks zone of 2-4%. ESG makes sense on the largest of the largest – which then allows smaller to mid sized companies compete.
- With asset inflation, you can see how things can increase in values quickly over time – in tough times, make cap gains taxes very high for the rich and perhaps 0% for anyone that makes less than 250k per year. This allows for selling, but can put air brakes on selling to prevent collapse and can allow for people to take gains on assets to spend into the real economy in bad times. In good times, make cap gains taxes very low to encourage more assets to free market from the rich, and remove the 0% from under 250k to what it is now to encourage lower wage earners to save in good times to build their nest eggs.
- Energy policies – in times of high inflation, increase taxes on energy to slow economies and decrease usage of cheap energies (coal). In times of low inflation, remove taxes and increase production of cheap energy. Continue to add nuclear to baseload everywhere. AS you stand up capacity, draw down fossil fuel baseload. This means nuclear power plants go up, and THEN close coal and nat gas plants.
- Energy inflation – I believe the policies above can prevent spikes and cliff drops in prices to keep markets stable. Increase of energy production should be gradual, and should be looking at everyone building nuclear. I can see a lot more electrification coming, and I believe many homes will switch to heat pumps and away from nat gas.
- Wages – Universal Basic Income is plain silliness and not serious. When times are high with inflation, increase taxes on wealthy and capital gains. When times are low with inflation, decrease taxes on wealthy and capital gains. If we are in a globalist scenario, you are outsourcing jobs overseas. In a non-globalist scenario, build factories that use automation that steal jobs from overseas and hire engineers, programmers, logistics personnel, and maintenance teams to run them.
I believe anyone that tells you they KNOW everything about inflation, they are lying to you. I believe many people have a LOT right about it, but there’s like 300 PhDs at the Fed, and this is the best they can do?