Inflation Cresting But Not Over

Yesterday, September 13, 2022, the U.S. inflation numbers came in hot. Down went the stock indexes and the S&P 500 was showing -2% down.

In a strange way this is simply history repeating itself. Generally people are lead to believe inflation is bad and that governments work hard to keep it at bay and that inflation simply falls from the sky like some ancient plague. While governments struggle to control it, it will only go away when some miracle occurs or a hero arises to slay it.

This was the narrative of the 1970s.

What is really going on is that governments create inflation to renege on their borrowings when those borrowings and promises and deliveries of entitlements are too much to bear.

If there is a war and debts get out of control, then inflation follows. The run of inflation up to the 1980s was simply governments flushing hideous levels of debts from the second world war. It is even admitted as such now that there is sufficient distance from those events to protect the “guilty.”

The pandemic period created a similar financial aftermath and the same medicine is being delivered.

One side effect of this is governments get addicted to the printing press having seen it rescue the situation in times of great emergency and every time they have a problem they reach for the same remedy. The stimulus hammer makes every problem start to look like it’s solved by an inflationary nail.

Let’s take energy prices. They are a problem. Let’s look at inflation, it is a problem. However, one fixes the other. With screamingly high energy prices inflation disappears in a flash of recession. If you don’t print 500 billion euros like Europe will to sooth the situation you will instead keep high energy prices and get general inflation with rising prices for everything else. However, the printing press is irresistible.

If you increase the money supply without an increase in things to buy with the new money you get inflation. If you stop printing new money, inflation stops. So if you take the huge amounts of money printed in the pandemic and just stop printing, more inflation elevates prices for a time and then inflation stops. You don’t have to raise interest rates or do anything fancy; you just have to stop inventing more money.

How hard can that be?

Very hard indeed, because these countries have nasty deficits and those ‘budget gaps’ get filled with printed money. There is no easy way out of that. Only economic growth and inflation can get the numbers back close to balancing…. Or of course a catastrophic reboot. I don’t use the fashionable word ‘reset’ because there is no going back. There won’t be a reboot so inflation is simply the way ahead for quite some time.

How long depends how much politicians can be kept from the printing presses and that is looking really shaky right now with the U.S., Europe and the U.K. reaching for the paper tray simply because they can. If they can be kept away then inflation has two to three years to run. If they are going to keep bailing out voters for votes then it will run for a very long time indeed.

The target rate for inflation is 2%-3% but the real rate is 4%-6% and if the politicians run amok it is going to run at the current levels until further notice.

Remember, high interest rates do not solve inflation—go look at interest rates in Turkey, etc. What kills inflation is a lack of money at any price.

We should now be going through a period where inflation crests followed by another period of inflation floating down to 2%, or rather until government debt to GDP is around 90% and the yearly deficit is about 3%. If governments are now addicted to cranking out cash to buy votes, inflation is going to go on far longer.

As such that is what to look out for and it’s a tough, ugly environment for investors and a worst one still for savers.