Business & Investment

“Inflate or die”

This week I explored Pampa. We believe that is the direction of the United States. Chaotic and split politics. A government that plays the people for fools. Runaway spending. A pile of unpaid debt. Sustainable and sometimes exorbitant inflation.

Are you there already?

do not understand. But we need to be close.

The United States is currently trapped between two very familiar features of the Argentine landscape: rocks and hard spots. ‘Inflate or die‘, How did the late sage, Richard Russell, explain it? You can continue the party by printing more money, or unplug and calculate the results now, not later.

There aren’t many metiers who benefit from age. All we can think of is finance. Richard Russell. Charlie Munger. Paul Volcker. Henry Kaufman. A young investor can imagine whatever he wants. But old timers are skeptical and suspicious. They have seen too many great businesses broken, too many political promises not kept, and too many innovations that later failed.

Born in 1927, Henry Kaufman is one of a small group of analysts who are still quick and in the spotlight. In the 1970s, as Chief Economist at Salomon Brothers, he became known as Doctor Doom for criticizing government policy.

But then, in 1980, Paul Volcker, the last honest central banker in the United States, far outstripped inflation. Prices were rising at a rate of 14%. Volker unplugged. He set the Fed’s main lending rate at 20%. Within a few months, inflation improved. And in 1982, Kaufman learned that the trends of the last three decades (towards rising inflation and higher bond yields) had reversed. He told investors the worst was over. He was at that time. He’s probably back again now.

As shown before diary… If you intend to stop inflation, you must also stop inflation expectations. And that means anticipating inflation, rather than lagging behind as inflation rises.

Today, in order to anticipate inflation of 7%, the Fed needs to raise key lending rates by 10%, or about 1,000% higher than it is today. It will shock the financial world … and stop inflation in that trajectory. It will certainly shock us too!

Does the Fed do that? Kaufman:

I don’t think this Federal Reserve and this leadership have the stamina to act decisively. They work in stages. In order to change the market to a more non-inflationary attitude, it needs to be shocked. Interest rates cannot be raised little by little.

In this regard, the Fed has already stated itself.

The Fed’Data dependent‘, Fed Governor Jerome Powell said. It doesn’t guide. Continue where’data’ guides it.

but why? Does the Fed’s Jeff lack Co Jones? Do their hundreds of PhDs lack brains? Or is there anything else happening? Let’s see if we can connect several points.

Beer guzzler and wine snob

As we saw the other day, beer drinkers traditionally tend to pay more debt than wine lovers. The United States is divided into two countries. A person who drinks beer from the flyover country. A person who drinks wine from the coast. I’m not going to pretend to be accurate, but it’s unlikely that you’ll find a good Saint-Emilion at a roadside truck restaurant in Oklahoma. You find it in the fashionable precincts … the place where decision makers live and work.

In the United States, wine drinkers make the rules. Those who drink beer obey them.

Are you confused? Irrelevant? Is this just a joke?

Here’s the punch line: Inflation is the most obvious drawback of printing extra money. Inflation is a tax … and it costs the most to the beer drinker, not the deciding factor. In other words, this is a very “regressive” tax.

If you make a million dollars, you can spend just $ 100,000 a year on inflation-sensitive consumer goods, including the occasional “Grand Cru” from Bordeaux. So, if you go up 10%, you’re paying an inflation tax of $ 10,000, or 1% of your income. It’s a trivial matter. It’s hardly worth the attention.

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But if you make $ 50,000, you probably spend all your income on consumer goods (food, fuel, beer, rent, etc.). A 10% increase in price will reduce purchasing power by $ 5,000. This is equivalent to a tax rate of 10%. As a percentage of income, it’s ten times that of a rich companion. And you feel it. As a result, you are significantly poorer.

And it’s not the companion who has a can of Budrite in his hand that is trying to answer the question, “Inflate or die?” It is the people who dominate and influence the government — the media people… the parliamentary people… the university people… and most importantly the Wall Street people.

For these people, inflation does not hurt their daily lives … it does not dent their balance sheets. In contrast, the real economic contraction will have a big impact on them. They got the most from Lollapalooza, which prints the Fed’s money. When the bubble bursts, they are big losers.

The value of the entire stock market is US $ 48 trillion. The top 10% own about 80% of it. Since 2009, they have made about US $ 32 trillion in profits on the stock market alone.

The real bear market will erase at least half of that. According to our calculations, this is a loss of about US $ 3 million for all families in the top 10%. And if the Fed refuses to come to the rescue with more press money, the loss can be permanent rather than “temporary.”

Will it be inflated or will it die?‘1% annual inflation tax? Or will you lose US $ 3 million in a few weeks? Which do you think you are going to?

nice to meet you,

Bill Bonner,
for Daily Reckoning Australia

PS: Our publication The Daily Reckoning is a great place to start your investment journey. Let’s talk about the big trends that drive the most innovative stocks in ASX. Learn all about it here.

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“Inflate or die”

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