Taps Coogan – October 12th, 2021
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Yours truly has written dozens of articles since the start of the Covid Pandemic warning that the massive increase in the US money supply, combined with the first large scale examples of helicopter money, would lead to much more inflation than the monetary policy response to the Global Financial Crisis (here, here, here, here, here, here, here, here, etc…).
When inflation started to spike this spring, and Fed officials and economists started dismissing it as a ‘base effect,’ we pointed out the obvious fallacies of that argument (here, here). For starters, not one of the various official measures of inflation turned negative year-over-year in 2020, meaning that there was less of a ‘base’ to compare to than there was in 2016 and nobody was crowing about base effects in 2017.
When mainstream economists then reacted to rising inflation by noting that it was likely transitory, with the implication being that ‘transitory’ meant a couple of months, we scratched our head.
When market participants started pointing to falling treasury rates this summer as evidence that inflation was poised to drop, we pointed out why that argument didn’t make much sense (here, here, here). In one article discussing the fact that the Treasury was draining the excess balance in its Treasury Account at the Fed instead of issuing new treasury debt, temporarily suppressing Treasury yields, we noted “There is another $400 billion or so of extra money still in the Treasury’s account, so this game isn’t over. Let’s hope that when it is over, inflation won’t still be hovering around 5%.” That game is now over and CPI inflation is still around 5%.
We have also been very careful to note that the overall landscape of the economy and demographics do in fact remain deflationary. Too much debt, aging and shrinking populations, rising taxes, tightening regulations, financial bubbles, etc… are all powerful deflationary forces. Way too much stimulus and Covid related supply chain problems have overcome those forces, so far.
For that reason we have repeatedly warned that:
Here is the paradox. Transitory inflation will be persistent so long as the Fed believes that it is transitory. The moment the Fed starts worrying that inflation is persistent, it will prove transitory.
The most powerful deflationary force in the financial universe is the collision of a highly indebted & over-financialized economy and tightening monetary policy.
As we have noted for years, the greatest threat to markets would be if the Fed ever believed that it had ‘succeeded’ in creating persistent inflation.
So, with much horror, we now observe as many of the mainstream economists and policy makers who spent the last year talking about base effects and ‘transitory’ supply chain problems are now noting that inflation might not be quite so transitory after all.
As the Fed and mainstream economists increasingly view inflation as persistent, you should become increasingly concerned. After years of warning in the future tense that we’d eventually reach a point where the Fed felt that it had to chose between inflation and markets, we’re getting uncomfortably close.
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