Why is inflation “low”?
1. Velocity of money has not increased.
Why? Because the Central Bank is filling the bath tub with money but Commercial Banks are pulling the plug on the bath by not increasing lending nearly as much.
This has been the case not only in the U.S. but in Japan since the 1990s.
Japanese debt/GDP is > 250%. U.S. debt/GDP > 100%.
How can inflation be created? Why?
1. If the government controls both the Central Bank and the Banking System, it can create as much inflation as society will accept. Governments may want inflation to reduce debt/GDP rather than default on debt.
Examples: France and the UK after WWII – France through the banks/central bank had high inflation from 1944 to the 1950s, the UK did it slowly, from 1945 to the early 1980s.
Each country’s debt to GDP went well below 100%, France quickly, the UK slowly.
The U.S. different. Why does the U.S. not have as much inflation as other countries?
1. The U.S. dollar is the world’s reserve currency– other countries want to hold U.S. dollars, so the dollar has not gone down, but up. If the dollar goes down, U.S. inflation will increase.
2. Most U.S. trade is with itself, in very key areas– energy (oil, nat gas), so price moves up for these do not impact the U.S. as much as other countries.
Look at Turkey for contrast: (1) weak currency others do not want to hold, (2) large energy importer. Turkey has historically had high inflation rates and high debt levels. The UK in the 1970s also had these issues.
What is the downside of money printing?
1. Without controlling where money goes, the easiest place for it to go is into financial assets.
This pushes financial assets higher, so those with financial assets benefit.
So, ultimately, unequal distribution of wealth results. (see charts below)
2. Politization of credit:
Who is worthy of getting govt money/loans – carmakers or speculators?
Who controls money/credit flows? Who decides?
Do citizens want this level government control?
3. The public may not realize their purchasing power is being eroded or know why (food costs, services (college, healthcare) have rates of inflation much higher than goods)
Why are no ‘credible’ economists talking about this?
1. Some are, though the govt and banks have incentives not to (see below)
2. Credible economists are saying there will be inflation, just not immediately.
It takes time for money to flow / demand & supply to balance (years)
3. David Rosenberg: independent economist, does not manage money, provides research.
https://ttmygh.com/hmmminars/ Interview – inflation mentioned at 29.38 and 50.13
“At some point we will get ‘cost-push inflation…demand will at some point stabilize, people do not realize if you have a 3-5 year view…inflation will come back…inflation hit 5% in the late 1930s”
“Most of the world is services, initial impact is a decline in demand, deflationary outcome for now, maybe for a year, but at some point it stabilizes”
“Supply curve will become inelastic – weaker productivity, more regulation, higher costs (inventory, local supply chains)…stagflation”
“Companies will have higher cost structure (airlines, restaurants, movie theaters – less capacity)”
4. Russell Napier:
Publisher of a global macro report, founded a course and finance at the Edinburgh Business school, called a Practical History of Financial Markets, founder of "The Library of Mistakes"
https://podcasts.apple.com/gb/podcast/98-russell-napier-gold-the-euro-and-capital-controls/id1301360737?i=1000474983530
Govts & Banks have incentives for inflation in financial assets yet still have other inflation “appear” to be low:
1. Government has incentives to:
Sell more debt / keep interest rates low –- govt pays less interest (>20% of budget)
Increase financial market values –- more tax revenue from inflationary gains
Keep inflation stats low –- lower social security payments
2. Banks have incentives:
For financial markets to increase
Make money on government debt sales
It is a career-limiting move to speak against the consensus at the Federal Reserve, academia & private industry!!
Wealth inequality by generation is surprising:
