inflation

Liquidity Problems Could Overwhelm Inflation’s Effects

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LIQUIDITY PROBLEMS – 1929 

In 1928 and 1929, the Fed raised interest rates for the purpose of curbing rampant speculation in stocks. At that time, investors could borrow as much as 90% of the stock price for their proposed investment. The banks were just as aggressive as investors and were happy to oblige.

Raising rates did not slow stock speculation by investors or banks, however.

What it did do was cause a slowdown in economic activity. Thus, as economic activity declined, the stock market continued its rise, unabated.

As the decline in economic activity continued, both businesses and consumers were affected negatively. The money was available for investors to buy more stocks, albeit at a higher cost; but, businesses and consumers struggled with liquidity problems.

STOCK BUBBLE BURSTS 

The crash in the stock market brought illiquidity issues to light. Layoffs in the financial industry were numerous and swift. The ranks of the unemployed ballooned.

If you were an investor who had purchased stock with 10% down, it would take only a 20% decline for you to have lost twice as much as your original investment.

Now, imagine the plight of the banks who had lent money to investors using stocks as collateral. The collateral was worth as much as 30% less after one day of trading. Bank failures became almost commonplace during the Great Depression that followed.

FED RESPONSE

As might be expected, the Fed did purchase government securities in the open market and lowered the discount rate. It also assured commercial banks that it would supply needed reserves.

Unfortunately, “too little; too late” became the common descriptive phrase used when referring to Federal Reserve response to the crisis which it had caused. That is because the economic devastation was overwhelming.

Unemployment soared to as much as 25% and prices declined (deflation) by more than one-third. The aggressive, free-spending social programs of the 1930s government could not stop the slide and contributed to the length and breadth of the depression. At the depths of the Great Depression in 1932, the stock market had declined by 90%.

The stock market crash was not the cause of the Great Depression, though. The Great Depression was caused by a Fed policy of higher interest rates. Whatever the intention or merits of the action (the higher rates were imposed for the purpose of curbing rampant stock speculation), it led to a reduction in economic activity which was well underway before stocks crashed.

INFLATION, DEFLATION, AND THE FED 

The Federal Reserve officially implemented an interest rate policy of “higher for longer” almost three years ago. Rates moved up rapidly and bond prices have lost one-third to one-half of their value since then, depending on length of maturity. (see “And So Rates Will Be Higher” – Jerome Powell)

It matters not what the intention was or whether it was correct. What matters at this point are the circumstances in which the Fed finds itself now.

Most, or all, of our serious financial and economic problems are the result of a century of intentional inflation. The effects of that inflation lead to a loss of purchasing power in the currency (U.S. dollar). When the Fed intervenes in the markets either directly (by purchasing or selling securities) or indirectly (manipulating interest rates), it creates distortions which have ripple effects and are amplified.

In addition, those effects are unknown with regards to extent, duration, and timing. Remember being surprised at the higher increases in consumer prices post-Covid and economic shutdown. Those increases are attributable to government (and central banks) actions in response to the ‘pandemic’.

The economic shutdown was forced upon society by government – rightly or wrongly. As a result, the decline in economic activity led to huge financial and economic problems for society, including supply chain issues. These problems were met with phenomenally huge financial largesse (inflation) by governments and central banks, which, in turn, led to higher consumer prices (effects of inflation).

After more than one hundred years of trial and error, it is apparent that…

  1. The Federal Reserve causes the problems and crises with which it continues to grapple.
  2. The Fed is doomed to a role of reacting to crises of varying intensity (worse) and frequency (more often).
  3. Serious deflation and economic depression would overwhelm efforts by government to reverse the effects or contain the damage.

CONCLUSION 

There is no path to financial stability from the current point that does not involve a cleansing of huge magnitude. The cleansing will be accompanied by serious financial and economic pain. The Fed is continually dancing with its own devils amid music which is horribly out of tune. The only option left is to wait until the music stops. (also see If The Markets Turn Quickly, How Bad Can Things Get? )

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

Global Credit Collapse Is Deflationary

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NOTE TO READERS:  “Global Credit Collapse Is Deflationary” was originally published as an exclusive for TalkMarkets on October 29, 2024. I have not changed anything in the article, nor is there any reason to modify or alter what is written below because of U.S. election results.

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All Hail The Fed – A New Day Dawns

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ALL HAIL THE FED!

As investors continue to gobble up stocks and the dollar prices of most assets continue to climb, it would appear that all is well. Concerns about weakening economic activity and recession have been moved to the back burner. Now, the focus is squarely on inflation.

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Economic Growth Or Dead Cat Bounce?

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WHAT ECONOMIC GROWTH?

From its low in 2020, the economy seems to have rebounded reasonably well, generally speaking. Net of the effects of both inflation and higher interest rates, reported statistics seem to indicate that the economy is growing, albeit slowly at times.  Setting aside temporarily the issues of accuracy, revisions, and manipulation, there is plausible evidence of economic growth.

However, a spate of recent announcements by major retailers says that momentum and direction is changing. Target, Walmart, and Walgreens highlight the list of firms that are taking conscious and deliberate action (broad-based price cuts) to attract and encourage increases in customer traffic. Spending, particularly discretionary spending, has declined measurably. (see Thoughts About Target, Retail Sales, And The Economy )

There is also evidence that large firms worldwide are clamping down on employee expenses; namely, travel and entertainment. Cost control is coming back with a vengeance. Question: Are these the delayed effects of serious damage that was inflicted during the forced shutdown of the economy four years ago? If so, might what has been presumed to be potential resumption of a long-term economic growth trend be considered a “dead cat bounce”?

DEAD CAT BOUNCE

A dead cat bounce is a temporary, short-lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. Frequently, downtrends are interrupted by brief periods of recovery—or small rallies—during which prices temporarily rise.

The name “dead cat bounce” is based on the notion that even a dead cat will bounce if it falls far enough and fast enough. (Investopedia)

For our purpose, we are not referring specifically to asset prices, but to economic activity. In order to see if the term applies in this case, or has merit, let’s look at some charts (source) of economic activity. Below are four charts which can be considered indications of economic activity. The shaded areas are recessions. I will make some comments after each chart and then talk about how the term “dead cat bounce” might apply and discuss some possible implications.

Durable Goods Orders (inflation-adjusted) Historical Chart

It is apparent from this chart that people are spending less ‘real’ money on cars, boats, televisions, and appliances. The declining, long-term trend in durable goods orders dates back twenty-five years. Since peaking in 1999, the “prolonged decline” has been interrupted by three “temporary, short-lived” recoveries which were each followed by a “continuation of the downtrend”. Sounds like dead cat bounce(s) to me. Question: How many times can a dead cat bounce?

Capacity Utilization Rate (percentage) – 50 Year Historical Chart

Capacity Utilization refers to the percentage of “resources used by corporations and factories to produce goods in manufacturing, mining, and electric and gas utilities for all facilities located in the United States” (source).  As the rate continues to decline it indicates that production plants and factories are being used less; and, more of them are sitting idle. The long-term decline in capacity utilization dates back to the late 1960’s and is more than six decades old. There are five dead cat bounces which are followed by continuations of the downtrend to new lows.

Auto and Light Truck Sales (number of units) Historical Chart

In the case of auto and light truck sales the volume peak came at the turn of the century. There are two cases since then which could be considered indicative of the term dead cat bounce. While a long-term decline in sales isn’t clearly apparent, neither is there any evidence of a long-term increase. There is, however, a great deal of volatility; past and potential.

Housing Starts (number of units) Historical Chart

The peak in housing starts came in the early 1970s. Since then, there have been four instances of extreme lows followed by extended bursts of activity (“if you build it, they will buy it”).  The chart refers to actual construction starts – not sales, not prices, not units under construction, etc. The long-term trend for housing starts is down and the periods of increase are followed by a resumption of the long-term declining trend. That fits the definition of dead cat bounce.

CONCLUSION 

Long-term economic growth most likely stopped twenty-five years ago at the end of the most productive and prosperous period in U.S. and World history. Since then there has been a series of ups and downs which have taken us broadly lower as far as productivity, abundance, and growth are concerned. Overall quality of goods and services are questionable and customer satisfaction is missing.

Indications that long-term growth is a thing of the past are evidenced by the frequent reversals and declining trends in economic activity shown on the charts above. The latest focus of consumers and retailers on discretionary spending, price conscious actions and policies, customer satisfaction surveys, etc. are warnings that all is not well.

Moreover, what is presumed to be economic growth is not growth at all. Measured progress refers to efforts attempted to recover what was lost and return to where we were before the most recent crisis occurred (pre-Covid; pre-2008 Great Recession, etc.).

The past four years have been highlighted by increases in the effects of inflation, rising interest rates, overblown asset prices, and a general decline in economic activity. Slow growth/no growth is about the best we can hope for. As far as dead cat bounces go, the next one won’t come until after the cat “falls far enough and fast enough”.

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!

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!

Three Things That Are Killing Silver

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Over the years (and decades) silver travels a path fraught with excitement and disappointment. Both the excitement and the disappointment stem from three things that are killing silver – unrealistic expectations, inflation, and time.

UNREALISTIC EXPECTATIONS

The unusual conditions leading to the explosion in the silver price in the late 1970s are unlikely to happen again in a similar context…

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Destruction Of Money Keeps Inflation In Check

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DESTRUCTION OF MONEY 

The “biggest collapse in the money supply since the Great Depression” continues unabated at this point. (See Ryan McMaken’s article here.)

The decline in the money supply is nearly three years old and dates back to April 2021.

This decline is a destruction of money and is the opposite of what might be expected if one is looking for evidence that could support some of the more extreme expectations and projections for inflation and its effects.

That is because most, if not all, of the analysis about inflation and its effects focuses on the supply of money and its seemingly unlimited growth.

Discussion about money creation by governments and central banks almost universally excludes mention of the demand for money.

DEMAND FOR MONEY 

Money has a demand side, too. We are not talking about the demand for goods and services. We are talking about the demand for money, itself. People need money to pay taxes and transact business; to save and invest.

As long as the supply of money is relatively stable and sufficient to finance existing normal economic activity, then the result is price stability. Without price stability, the economy cannot function reasonably.

Since the inception of the Federal Reserve, excessive growth in the money supply has led to a ninety-nine percent loss of purchasing power in the U.S. dollar.

Currently, though, the money supply is not growing. It is shrinking.

A SHRINKING MONEY SUPPLY 

A shrinking money supply is directly opposite to that which has happened which has made the U.S. dollar nearly worthless compared to a century ago.

It is also not supportive to arguments that the U.S. dollar is about to collapse and that hyperinflation is on the way.

Without the continual infusions of “new” money,  the previous inflationary “highs” cannot be maintained, let alone increased.

If a shrinking money supply continues, the end result is deflation. (see An End To Inflation – Three Possibilities)

WHAT IS DEFLATION? 

Deflation is the exact opposite of inflation. The result is a stronger currency. Instead of losing purchasing power, your dollars would buy more – not less.

Deflation is not bad. However, some of the accompanying economic effects would be very difficult to endure. The U.S. dollar would go further, but there would be fewer dollars to go around.

There would be huge price reductions in real and financial asset prices, depressed economic activity and high unemployment. Conditions would rival and probably exceed those of the Great Depression of the 1930s.

Fortunately, at least for now, we are not there yet.

CONCLUSION 

An infusion of new money might temporarily reverse the shrinking money supply and its negative economic effects, but that is not necessarily a good thing.

Think of it this way. Would you recommend a new fix to a drug addict who is undergoing withdrawal symptoms resulting from curtailing their drug use and attempting a return to sobriety?

Intentional inflation by government and central banks in the form of cheap and easy credit has created artificial financial highs, bubbles in asset prices, and a false sense of economic security.

You cannot ignore fundamental financial and economic law forever. Sooner or later (more likely sooner), we will all pay the price. (also see Gold And The Shrinking Money Supply)

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 Price, Inflation, Dollar Collapse, & BRICS

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GOLD PRICE, INFLATION, DOLLAR COLLAPSE

Expectations for gold to move higher in price are often tied to worsening inflation and a possible collapse in the U.S. dollar.

That sounds logical and there is historical precedent to support such expectations; but, some clarification is necessary first.

DEFINITION OF INFLATION 

Inflation is the debasement of money by governments and central banks. The inflation is intentional and all governments inflate and destroy their own currencies.

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Everything Peaked in 1980 – The Waning Effects Of Inflation

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EVERYTHING PEAKED IN 1980

Both gold and crude oil peaked at all-time highs in 1980. Those highs are still intact when the effects of inflation are accounted for. Below are the charts for both gold and crude oil…

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No Fear Of Inflation; Threat Of Deflation

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FED HAS NO FEAR OF INFLATION

The Fed wants to have their cake and eat it too, but the cake is stale. Jerome Powell’s remarks in testimony before the Senate recently provoked considerable attention.

Responses, interpretation, and analysis by observers were many and varied. Unfortunately, no one learned anything different from what they thought they knew before Powell’s testimony.

The Fed is well aware of the problem. It is systemic in nature and goes far beyond corporate due diligence, bank liquidity, and the safety of your broker.

Most everyone else (with the exception of Janet Yellen, Ben Bernanke, and Alan Greenspan) thinks they understand the problem, but their limited understanding doesn’t allow for the subtleties of Fed Chair behavior.

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