Inflation: Transitory? Or Just Getting Started?
Ok, so now everyone can see the price inflation I predicted back in August 2020.
Apparently the feds didn’t see that by handing out trillions of dollars, the recipients might spend those dollars, thus creating additional demand for goods. Of course, the problem is that it’s much harder to produce real goods to meet that demand than it is to print paper currency. So, while the demand created by consumers with more paper currency goes up and the supply of real goods doesn’t go up as quickly, prices must rise.
Combine this expansion of the money supply with business shutdowns from the COVID scare, and you really have a supply shortfall. By the way, more shutdowns with each COVID variant will exacerbate the shortages and raise prices all the more.
As prices rise, people want to buy more real assets just to get rid of their paper currency. At some point (no one knows at what point), there will be a mad rush to get rid of the paper and get into anything “real.” You don’t have to look any further than crypto assets, the stock market, collectibles, real estate, and commodities to see where the paper is flowing. Why not gold and silver you ask?
Gold and silver have long been competition for paper currencies and they are traded on exchanges where their prices can be manipulated by central banks and governments attempting to keep their currencies competitive with the precious metals. In the short run this is working. In the long run, it won’t work.
I might mention that there is a movement to offer crypto assets in ETFs and perhaps eventually futures markets. If/when this happens, they may become subject to manipulation, as well.
So, was the Fed right? Are the rising prices transitory, or are they the new normal? In my opinion, they are the new normal, for two reasons.
- The Fed does the U.S. Federal government’s bidding. The U.S. Federal government is the world’s biggest debtor and it’s gone beyond the point of no return. The only way it can pay off its debt is to cheat dollar holders out of the value of their money; i.e. through inflation of the paper currency supply. This has been happening since 1971 when President Nixon closed the gold window, thus effectively turning the U.S. Dollar into a fiat currency. In short, the Fed prints currency whenever the U.S. government needs it…and it needs it more all the time.
- The U.S. government has lost control of its spending and therefore it will spend ever more on boondoggles, until people flee from the obviously declining dollar. Of course, as the government becomes ever more desperate, it will look for more ways to seize the wealth of its subjects. It won’t be content to just seize the value of the dollar, it will raise taxes, maybe even wealth taxes…that would be the worst of all taxes. Talk about an incentive to let your property run down! Then you’ll really see wealth leave the country.
Back to the present…now the Fed is threatening to cut back on its quantitative easing (QE) and raise interest rates. The last time it tried to do that, the stock market started to react adversely and the Fed immediately reversed its course. This will happen again next time and after that, there will be no more talk of tightening the money supply or raising interest rates. We’ll be off to the races. Inflation will run rampant and the U.S. dollar will become worthless. People will have to find a more stable substitute at that point. I don’t know what it will be, but the market will come up with something. Keep your eyes peeled.
Robert F. Sennholz