Spending Is Not Inflationary; Inflation Is Not Transitory

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IS GOVERNMENT SPENDING INFLATIONARY?

When the terms ‘spending’ and ‘inflation’, are used in the same sentence, it is usually in reference to government spending habits. For example, Congress recently approved massive, additional amounts of financial aid for Ukraine and Israel. Thus, we might say that “government spending is inflationary”.

President Biden’s ongoing attempts to cancel student loans have been labeled as reckless and inflationary. The support payments and financial aid programs associated with Covid economic shutdown were termed “highly inflationary”.

Lack of fiscal restraint on the part of government can be harmful, damaging, and demoralizing. In some cases, it is downright deplorable. Lack of fiscal restraint can lead to bankruptcy and loss of confidence.

The spending, however (even deficit spending), is not inflationary; nor, are accelerating wage demands and higher prices for consumer goods and services, higher housing costs, etc. Excessive government spending and the higher cost of living are not inflationary; they are the effects of inflation.

INFLATION, GOVERNMENT, AND CENTRAL BANKS

Inflation is a creation of government. All governments intentionally create inflation to foster and support their own spending habits. Governments create inflation by expanding the supply of money and credit. The ongoing inflation of the money supply leads to a loss of purchasing power in all the money in circulation. The loss of purchasing power shows up in the form of higher prices for goods and services. The higher prices are incorrectly referred to as inflation, but they are NOT inflation. The higher prices for goods and services that result from the loss of purchasing power are the effects of inflation.

Today, the role of government in the creation of inflation has been replaced by central banks. The United States Federal Reserve has been creating inflation since its inception in 1913. It efforts have resulted in a dollar that is worth one penny compared to the dollar of a century ago.

Nearly all of the things we commonly refer to today as inflation are not inflation at all. They are the effects of inflation that has already been created by the Federal Reserve via expansion of the supply of money and credit. Without this inflation the government would not be able to spend the multiple trillions of dollars it does to support its egregious spending habit.

INFLATION IS NOT TRANSITORY

Treasury Secretary Janet Yellen and Fed Chair Jerome Powell have received blowback from their comments a few years ago regarding inflation being transitory. When inflation is defined correctly as “the expansion of the supply of money and credit by governments and central banks”, then it is clear that inflation is not transitory. That is because inflation is an intentional, continuous, and ongoing practice of all governments and central banks. In other words, inflation never stops; so it cannot be transitory.

When Ms. Yellen and Mr. Powell made their comments, the term “inflation” was used to describe the surge of higher prices that happened post-Covid economic shutdown. A significant portion of those higher prices resulted from supply chain disruptions which have nothing to do with inflation. The portion of higher prices for goods and services attributable to supply chain disruptions would have occurred with or without the effects of inflation. Since supply chain disruptions are temporary, their effects (shortages, higher prices,  etc.) are also temporary; or, in this case, transitory.

It is my opinion that both Powell and Yellen were thinking about supply chain issues when the comments were made. If that is the case, then their comments were not entirely incorrect. There are two problems with that interpretation, though.

The first problem concerns the ratio of how much of the increase in prices is allocated to the effects of inflation and how much is the result of supply chain problems. I think it is reasonable that the subsequent decline in the rate of increasingly higher prices is due to lesser stress from supply chain bottlenecks and the delayed startup in economic activity.

The second problem has to do with accuracy/timing. How much of an impact on prices for goods and services can be expected from any known increase in the money supply? Even given the temporary nature of supply chain disruptions, how long will resolution take and how long before more positive effects of increasing economic activity materialize?

CONCLUSION 

Governments and central banks create inflation intentionally and continuously. The effects of that inflation result in a loss of purchasing power of all the money in circulation. The loss of purchasing power shows up in the form of higher prices for goods and services.

The effects of inflation are unpredictable in timing (usually delayed) and magnitude. The Federal Reserve is engaged in a battle to contain the negative effects of the inflation which they created. Egregious government spending is enabled by the inflation (increase in the supply of money and credit) that is created by the Federal Reserve. The spending, itself, for all of its negativity, is not inflationary. The inflation is not transitory because it never stops.

(also see Investors Re: Rate Cuts – “So You’re Telling Me There’s A Chance”)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Investors Re: Rate Cuts – “So You’re Telling Me There’s A Chance”

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INVESTORS AND RATE CUTS

When it comes to cuts in interest rates, investors stubbornly cling to the notion that “no” means “yes”. In the movie, Dumb And Dumber, Lloyd Christmas (Jim Carrey) asks the lovely lady he is pursuing what the odds are that the two of them might get together; and, makes a point of telling her to “give it to me straight”. She replies “not good”. She further clarifies that the actual odds are “more like one in a million”. Not to be deterred, Carrey, in character, replies “So you’re telling me there’s a chance”. Here is the clip https://www.youtube.com/shorts/cbrTKw50X6U

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Gold, Oil, Wheat, & Stocks Since 2020

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GOLD, OIL, WHEAT, STOCKS 

Financially speaking, the markets have been all over the map in the past four years since the onset of Covid and the self-inflicted wounds from forced economic shutdown. I went back to August 2020, five months after the festivities began,  and pulled up some charts which show the price action since then for gold (money), wheat (food), crude oil (energy), and stocks (S&P 500). I will make some comments after each chart and provide observations at the end of the article. We’ll start with gold…

Gold Prices (August 2020-April 2024)

Peak prices for gold reached in August 2020 at or near $2000 oz. were not exceeded until late last year, more than three years later. Currently, gold is up about eighteen percent from its average closing price ($1971) in August 2020. At one point, in October 2022, the gold price was down by a similar amount and percentage.

Oil Prices (August 2020-April 2024)

Since August 2020, the price for a barrel of crude oil has risen sharply from $51 to a current price of $83; an increase of sixty-two percent. Almost two years ago, though, the price was at $114. There has been a decline of twenty-seven percent since then.

Wheat Prices (August 2020-April 2024)

The price of wheat soared from $5 per bushel to $12 (up 140%) in barely a year and one-half; then collapsed by almost sixty percent. Currently, at about $6 per bushel, wheat is up twenty percent since August 2020.

S&P 500 Index (August 2020-April 2024)

The S&P 500 stock index has risen by forty-four percent, increasing from 3500 to 5048.  At one point in 2022, stocks had dropped one-third in price almost wiping out previous gains after August 2020. The relentless move higher afterward is quite impressive, regardless of fundamentals or logic to the contrary.

THOUGHTS AND OBSERVATIONS 

By late 2020, most markets had risen quite assertively from their Covid-induced lows. There was no let-up in sight, though. Oil, wheat, and stocks continued their runs upward without hesitation. Gold refused to join the party and the others soon topped out and followed suit with all of them dropping for most of 2022 as higher interest rates took their toll on the markets.

Beginning in late 2022, rumors, hints, and speculation about the possibility of a Fed pivot sent stocks and gold higher. Wheat and oil prices continued lower for the time being.

At this point, wheat is the biggest loser, down fifty percent from its peak in February 2022, net of its recent rebound from the $5 level. That seems somewhat surprising. The effects of inflation have shown up in higher prices for goods and services, especially food and groceries. It seems reasonable that a healthy portion of the earlier wheat price increase was attributable to the effects of inflation. Supply chain disruptions likely accounted for much of the balance. So, why the sharp reversal and decline in the wheat price afterward? I don’t see evidence that food prices are coming down. Are wheat speculators deflationists?

The descent in oil prices was arrested last October when Palestinian militants attacked southern Israel from the Gaza Strip. Iran has shown its cards, too. As long as tensions remain high in the Mid-East, oil prices will be more vulnerable to upside shocks. But the downside could be just as shocking, depending on the circumstances. We saw an example of that with the economic shutdown during Covid. Without further escalation of fighting which could disrupt oil supplies and deliveries, might oil prices be much lower right now, along with wheat prices?

The rising cost of money (higher interest rates) has had observably negative effects on the financial markets. Higher prices for stocks seem more anticipatory of the beneficial effects of lower interest rates if/when they happen. It doesn’t  seem reasonable that stock prices could keep making all-time highs while bond prices flirt with twenty-year lows and have been decimated by higher interest rates. The booze isn’t as cheap as before, but it is still available for now, apparently.  That could change quickly. If it does, stock prices could drop faster and farther than bonds, or, anything else.

Gold has been the least volatile of the group. The increase in the gold price of eighteen percent doesn’t seem to warrant the enthusiasm that it is being accorded. Rather than cause for celebration, it is a merely a reflection of the most recent effects of inflation – the loss of purchasing power in the U.S. dollar that has occurred over the past four years. At $2338 oz. today, gold is still cheaper than its August 2020 inflation-adjusted price of $2375 ($1971). Gold’s price action is supportive evidence of its role as a long-term store of value.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Gold Stocks vs Gold – Choose Gold

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GOLD STOCKS VS. GOLD

The long-term underperformance of gold stocks compared to gold itself is clear and indisputable. A matter of remaining contention is whether or not beleaguered investors in the not-so-shiny metal stocks will ever recover from more than twenty years of disappointing and largely negative results. It isn’t just the poor relative performance, though; holding gold mining stocks has been a losing proposition in its own right.

Below is a chart which shows the relationship of the HUI (NYSE Gold Stock Index) relative to the price of gold…

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I Bought A Stock (AU) At 20; Now It’s 23 – Am I Rich?

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I BOUGHT A STOCK (AU) AT 20…

…Now, it’s 23. I must be rich. That sounds ridiculous and it is. But, that is how some gold bulls sound when talking about “new highs” for the yellow metal. At least one analyst mentioned the “four year wait” for gold’s breakout, so let’s go back to 2020. More precisely, August of 2020. If anyone had bought a stock which was predicted to “break 20 and go straight to 30” would it have generated the same excitement that predictions for gold to go from $2000 to $3000 did? Not likely; but that did not stop the torrent of predictions and hyped expectations for the rocket launch that some expected. Calls for $5000, $10,000, and higher stoked the fever and emotions of anxious investors.  Alas, we all had to wait for almost four years. Now, those same anxious investors are hoping the rocket launch hasn’t aborted – again.

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Chair Powell’s Speech Re: Fed Independence

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In Fed Chair Powell’s speech this past Wednesday, he spoke about Fed monetary policy and also talked about the role of the Federal Reserve. In addition, he referred directly to the matter of the Fed’s independence and the necessity of maintaining that independence. In effect, he warned Congress about efforts to involve the Fed politically or to attempt modification of the independent monetary policy role of the Fed.

Below are selected excerpts from the speech which are followed in turn by my comments…

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What Happens To Gold Price If The Fed Doesn’t Cut Rates?

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GOLD PRICE IF THE FED DOESN’T CUT

With the increasing gold price of late comes the assumption that the expected cut in interest rates will open a torrent of cheap money that will bring the U.S. dollar down with a thud.  But, what would happen to the gold price if the Fed doesn’t cut interest rates?

What seemed like a universally expected event may not be as likely as some have assumed. In fact, the Fed has a history that includes examples of pivots and re-pivots; or, ignoring the presumed pivot and staying the course.
You can read more about the possibility that the Fed might not cut interest rates in my article Investors Are Too Anxious For Rate Cuts.

In this article we will address the implications for gold if the Fed doesn’t cut interest rates. It matters not what the reasoning is behind such a possibility. What matters is that much of what has happened to prices for gold, stocks, bonds, etc., is based on the presumption that several interest rate cuts are forthcoming, possibly before the end of the year. Hence, there is a potential shock for investors who have relied on that presumption, as well as the particular logic mentioned in our opening paragraph above, should the Fed not follow through.

IMPLICATIONS AND POSSIBILITIES

Ignoring for now the finer (and more critical) point of inflation-adjusted returns, both gold and stocks are at all-time highs. What might happen to gold if a “potential shock” becomes a reality? It depends.

To the extent that a more significant portion of money used to fund the purchase of gold recently was done so based on the presumed cuts in interest rates and a clear change in direction, then we could see a significant decline in the gold price; at least temporarily. This might also happen if interest rate cuts are delayed. Market participants in both stocks and gold would likely see any inaction or hesitancy by the Fed regarding interest rate cuts as negative for their investment outcomes and expectations.

Another possibility is that any effects on the gold price could be muted. That has more to do with other factors, not interest rates. For example, if the prevailing thoughts dominant in the minds of those placing a larger portion of the money flowing into gold is not based on concern about interest rates, rather on anything else, then it is entirely possible that the gold price might show little reaction to non-cuts in interest rates.

OTHER FACTORS, SUMMARY

Some buyers in the gold market are not thinking so much about interest rates. Their concerns have more to do with the continual loss of purchasing power in the U.S. dollar. The erosion of U.S. dollar purchasing power is the result of ongoing inflation, which is the intentional debasement of money by governments and central banks. The continuous expansion of the supply of money and credit for more than a century has resulted in a dollar which has lost ninety-nine percent of its purchasing power.

Over time the gold price is historically correlated to that decline in the purchasing power of the dollar. Gold is real money and a long-term store of value.

Whether buyers of gold are individuals (retail investors), speculators, hedge funds, governments, or central banks; and whatever the reasoning behind their purchases, which reasoning is quite often temporary; in the end, it is still all about the U.S. dollar. (also see U.S. Dollar Best Of The Worst; Gold Best Of The Best)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Investors Are Too Anxious For Rate Cuts

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INVESTORS ARE TOO ANXIOUS FOR RATE CUTS

Anxious investors seem to be expecting more than has been “promised” regarding interest rate cuts. Some (quite a few) seem overconfident that the long awaited pivot is a done deal. In addition, anticipated results from the expected cuts are already built into the markets to a large degree. Here are some thoughts worthy of consideration…

1) Suppose the Fed cuts rates later this year, but not as much as expected. Is cutting interest rates 1/4 or 1/2 percent all that is necessary to kick the gravy train into high gear?

2) Is a Fed pivot a temporary thing? Maybe the Fed cuts a quarter point once or twice, then re-pivots and begins raising rates anew.

3) What if the Fed doesn’t cut rates at all?

ANTICIPATION IS MAKING ME WAIT

(Thank you, Carly Simon, for the perfect subheading.) The possibility of three rate cuts in 2024 has been amplified to mean that the Fed will cut rates this year – 2024. The rate cuts most everyone is expecting are the same rate cuts that were assumed and expected for most of last year – 2023. Isn’t it possible that rate cuts could be postponed again? How long can elevated stock prices and other assets maintain their lofty levels based on the expectation of lower interest rates which continue to be expected but not realized?

IF THE FED PIVOTS, MIGHT IT BE TEMPORARY? 

Overlooked in the rush by everyone outside of the Federal Reserve to talk interest rates down are comments by Fed Chair Powell which include the phrase “higher for longer”. Those who are so intent on expecting lower interest rates might do well to consider not just the possibility, but the likelihood of rates remaining higher for longer. 

Rates were intentionally forced lower by the Federal Reserve over nearly four decades prior to the official announcement their campaign to raise interest rates in March 2022. During those four decades the Fed moved back and forth both higher and lower regarding interest rates, but all changes in direction were temporary within a long-term decline in rates lasting nearly forty years.

The emphasis on “lower for longer” took interest rates close to zero and created an addiction for cheap money and credit. The artificially low interest rates that fueled the addiction were not normal. They were abnormally low historically and created huge bubbles in asset prices. Financial and economic volatility increased and the U.S. dollar suffered a loss of credibility and purchasing power.

As a result, the Fed was forced to change its interest rate policy to protect and defend the dollar. Not out of a patriotic sense of duty, but in order to save the financial system. It may be too late for that.

That brings us to our final point. What if the Fed doesn’t cut interest rates?

WHAT IF THE FED DOESN’T CUT RATES?

It is very much a possibility that the Fed might not cut rates at all. The inclination to do so seems to change from week-to-week and month-to-month along with changing economic data and statistics. Jerome Powell has been consistent in his comments that “higher for longer” is the game plan. Maybe rates get kept at current levels for awhile longer.

At their current level, interest rates are still abnormally low on a historic basis. Historically normal interest rates average 7-8 percent. We are not there yet. And with the extreme lows for interest rates experienced for several decades, there is a significant amount of inefficient allocation of money and resources that needs to be reallocated. That will result in varying degrees of financial and economic pain.

CONCLUSION 

The Federal Reserve has a history of market intervention and manipulation. The Fed’s interest rate policy is a manipulation ‘tool’. The market intervention and manipulation is ongoing. The overriding purpose is to create and sustain an environment that enables banks to continue to lend money and collect interest in perpetuity.

Often, though, application of the ‘tool’ is a defensive reaction to unintended and unexpected financial and economic events. For many years now, the Fed has been occupied with battling the negative consequences of it previous policies and actions. They may be in the driver’s seat, but the vehicle is out of control.

Stormy seas are ahead. If the Fed cuts too soon or too much, the cheap bubble juice will create more inefficiencies and extreme volatility. Right now, just the expectation of a return to cheap and easy money/credit has blown bubbles in almost everything priced in dollars. At some point, bubbles get popped. That is something the Fed is trying to avoid.

Interest rate cuts are not a sure thing. Investors could be in for a nasty surprise. (also see Federal Reserve and Market Risk)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care

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The money supply continues to fall, but investors don’t seem to care. They are convinced that their success is connected to a potential Fed shift in interest rate policy. Nothing else seems to matter. That is partially attributable to the fact that, as the financial markets continue their upward trajectory, less and less attention is paid to the deteriorating economy. And, the deterioration is getting worse.

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System Liquidity Risk – Cash Is Preferred & Appreciated

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SYSTEM LIQUIDITY IS THE BIGGER RISK – “CASH IS PREFERRED AND APPRECIATED”

There is quite a bit of debate right now about whether inflation’s effects will worsen again soon; or, whether the inflation threat has been minimized and “disinflation” will prevail. Don’t look now, but the specter of a liquidity crisis is looming in the background.

The situation is such that a liquidity crisis of epic proportion might overtake all of us in our arguments about the quantity and extent of inflation’s effects. My concern was heightened this past weekend when I drove to a small, local restaurant to pick up a take-out order.

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