Why inflation will continue for years ahead.
Political hacks blame greedy producers, but where markets are allowed to function, prices are always a function of supply and demand. Econ 101.
Simple, right?
Supply and demand for the US Dollar drives consumer price inflation. Supply and demand dynamics for the dollar are felt across all products; beef, eggs, milk, rent, real estate, diesel, and giant container ships of plastic junk floating in from Asia.
The equation is MV = PQ, where M represents money supply, V is money velocity (capturing demand), Q is quantity of goods produced, and P is price level.
Jargon aside, this means two things-
- The more money created, the higher are prices.
- As money changes hands more frequently, that also increases prices.
Money creation
Prices left the barn, and the Fed is now trying to dial back the money supply to contain them without breaking the economy, the so-called ‘soft landing’, an elusive, mythical, Pegasus-like unicorn that dances with angels on the head of a pin.
No one’s ever experienced a soft landing, but the wide-eyed, mouth-pieces-for-the-state bloviate about it, while the powerbroker’s position for the short side.
Here in reality, debt-based systems have two gears: Growing, or collapsing.
In eight weeks, five big banks have collapsed: Silicon Valley, Silvergate, Signature Bank, Credit Suisse and last week, First Republic. That’s what happens when the money supply contracts. Here’s the chart-
https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
Base money supply can’t turn down without trouble. In economic terms, when that sucker starts to fade, the whole shithouse goes up in flames.
The system we have, that’s just what it does. It’s a feature.
Think of it like musical chairs. There are never enough chairs, because every chair is an IOU for two chairs. That’s what happens when money is debt.
We don’t have to create more money tomorrow, but if we don’t, we get a deflationary depression. And if we do (and we will), food and gas prices will rise.
With all their PhDs and MBAs, they must know it’s a doom loop.
It’s not hard to figure out. But if they knew this, why would Powell or Yellen even take the role of Chairman of the Federal Reserve or Treasury Secretary?
Maybe Doomberg is right-
“In a corrupt system, leaders who achieve political power are selected for their unique combination of fervor and ignorance. They genuinely believe they know better, and they absolutely are that dumb.” Yikes, are we ever in trouble…
Money velocity
In February ‘21 when inflation was low despite massive money creation, we warned it would roar back after velocity was lifted from pandemic lockdowns-
As doors opened, the money picked up speed, and prices shot the moon.
Even as inflation is now ‘slowing’, this doesn’t mean groceries are pricing down. They’re just growing at official rates of 5% instead of 10%.
That means they’ll double in 14 years instead of seven.
Although, if you’re someone like me who doesn’t think fajita night and hotdog night are comparable (so it isn’t really a price increase, because everyone had beef) or that your new car didn’t really cost more (because it’s that much better than the old one), then you can double the official “CPI” measure of inflation.
Like the New York Times, the CPI is contorted by goal-seeking bureaucrats to tell you what to think, rather than trust your lying eyes.
On the edges, money velocity is psychological, reflecting our trust in the currency. Once people realize inflation is not going away, it can jump.
At first, you stock up on tuna fish at Costco, before prices go up yet again. But as price increases accelerate, confidence can be lost completely.
Then it’s game over, even if they stop printing.
In a hyperinflation, people trade out of currency for real goods – gold, silver, copper, canned beans, vehicles, firearms, ammunition, lumber, land, textiles, turnips, whatever they can get – just as soon as they receive a paycheck.
That economy doesn’t function very well. There aren’t many cushy job opportunities in that economy. We don’t get to put our pronouns on our email signature. There’s no ping pong table in the breakroom. There is no breakroom.
Let’s just hope the lights are on at the grocery store.
The special risk in America unlike when this happens elsewhere in the world as it has every time it’s tried (when humans get cute and use fiat for money), it’s not just domestic confidence we need. We need the confidence of foreigners (even as we poke sticks internationally and create dollars by the dumpster load).
Trillions are held overseas, and could flood back like a Tsunami.
Yes, there’s some Chicken Little in that, and no, it won’t happen tomorrow. There’s still plenty of demand for dollars, but smart countries are clearly positioning away into gold and natural resources, creating bigger markets for their own currencies.
As sovereign individuals, need to think similarly, to protect our own wealth and educate our children.
Alternative systems
Why was our system designed this way? Frankly, it wasn’t.
Though most of us are raised to believe today’s money is just what it should be, and the only way it could be, that’s not the case at all.
We’re living in a historical aberration.
For 5,000 years, what’s worked best as money is gold or silver. Paper notes or digital representations can work too, if exchangeable at fixed rates. That is called a “gold standard”. Article 1, Section 10 of the US Constitution calls for that-
“No State shall… make anything but gold or silver coin a legal tender”.
Only since August 15th, 1971 have we used a debt-based, fiat system. This has fueled a cancerous financialization, a hallowing of America with debt, crony boondoggles of endless war, bloodsucking bureaucracy, and bloated kleptocracy.
America’s founders understood the importance of money backed by gold or silver, that’s why they wrote it into the Constitution.
Thomas Jefferson called it, and here we are: “If the American people ever allow private banks to control the issue of their currency (as was decreed with the Federal Reserve Act of 1913), first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”
Like gold or silver, Bitcoin is a beautiful, groundbreaking, modern alternative sharing many of the same properties. Like Robin to Batman, or Batman to Robin.
The most important concept to grasp about gold, silver and Bitcoin (why they make for better money) is that their supply is limited organically; none can be conjured by stuffed shirts to pander to their whims and constituencies. They must be earned through work, trade, or in the case of government, obtained by taxation.
Today’s money lacks that accountability, that fairness. It’s rotting our social contract, and with it our values. Prices will rise because the system requires it.
Now put your head back down. Nothing to see here.
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