Inflation is coming, no matter what they tell you

In a sense, it’s been with us a long time. Why is the gold price  more than eight times higher than it was twenty years ago. Why do house prices continue on their upward spiral. Why are crpyto-currencies exploding against all rational expectation? The answer is inflation.

The governments of the world have been able to claim over the course of the past decade or two that inflation has been broadly under control in the western world and in the broader global economy. Basket cases like Zimbabwe and Venezuela are outliers, pariahs to the global economic order anyway.

But the claim that inflation has been under control is based on consumer prices rather than asset prices. Homeowners will know that having low-to-zero consumer price inflation while house prices hurtle skyward can give a nice warm sense of economic security. But for those not already on the housing ladder, the shine is rather taken off stable food and clothing prices by the stark reality that a place to live is increasingly unaffordable.

In short, like so much in the financial system, inflation and its measurement has become a scam designed to benefit the properties middle classes who see their power in other areas ebbing away inexorably.

But all that’s about to change, and if recent news is anything to go by, quite quickly too.

Chinese inflation numbers came in overnight, and showed that while consumer price inflation is duly conforming to the pre-established path set out for it, and is holding at or below 1%, purchasers price inflation, which measures the cost to businesses, has rocketed to over 6%.

Establishment economists, noting similar trends in the cost of construction in the US and UK, will argue that it’s just a coronavirus-related blip. Lumber, for them, might be a case in point – hitting new highs in the US because the virus curtailed production while at the same time people stayed at home and purchased materials for home improvement projects.

If it was just lumber, or even if it was just lumber, copper and a couple of other commodities, then that argument might hold water. But it isn’t. Everything’s on the move, and not just by a few percentage points either. Copper’s at an all-time high. Spot iron ore has never been higher. Gold is showing signs of pushing back up towards the record prices hit last summer. And all the while, more and more fiat currency is flooding into the global economy, as governments continue to print money hand over fist.

How much are these fiat currencies really worth? It’s a pertinent question, because when most  major currencies are being devalued at the same time all boats will fall. Put another way, it’s really hard to derive any meaningful measure of value of the dollar by comparing it, say, to the pound or the Euro, when those currencies are also being devalued. Of course, if central banks all devalue roughly at the same rate, then some comparison might be warranted. But so too would the charge that by acting in concert the central banks are rigging the system.

So, if you can’t meaningfully measure the value of one currency against the other, how can you value them? The answer is, of course, assets. And it’s no surprise to see, as we’ve already noted, that property and commodities have been marching upwards in terms of their currency valuations for years. Because, it’s not just a coronavirus issue. Governments and central banks have been jigging the numbers at least since the global financial crisis, and there is some argument to be made that it’s been going on all the way back to when Nixon took the US off the gold standard.

Equities are assets, too of course, and it’s on the same inflation paradigm that equity markets have been hitting new highs too. Every buyer of equities is also a seller of currency, so here too we see the active hand of policy-driven inflation at work.

Note too, that when equity markets do crash, governments simply crank up the printing presses even more, and market recovery follows fairly quickly.

Is this a good thing? The great fear amongst economic policy makers is another 1930s-style recession. That’s been avoided in the post-war years – although there have been ups and downs, total economic meltdown has been averted. Protectionism too has been staved off, albeit that there was a stunted attempt at reintroducing it under Donald Trump.

So the system continues to function, or at least stumble on. But there is a cost. If the young continue to be financially as disenfranchised by asset inflation as they have been over the past 30 years or so, there will be little incentive amongst the next generation to support the status quo. Rioting is now a commonplace in several parts of America, and don’t believe the headlines that it’s all racially motivated. Nihilism is in there too.

So, if the new round of money printing does end up finally breaching the levée, and the inflation which has previously been contained at the level of assets and purchasers spills out into the consumer space, it might turn out to be seriously destabilising. Proponents of modern monetary theory have had it their own way thus far, but their days could well be numbered. People are beginning to question the ultimate legitimacy of fiat currency, and those questions are only going to get louder.

Story by ProactiveInvestors