Tag Archive for: Inflation

MMT Is Dead. It Must Now Be Buried for Good

Estimated Reading Time: 4 minutes

In the late 1960s Milton Friedman clarified his famous quip by stating that “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.”

In the first part, we are all Keynesians because the government’s out of control spending has forced us to be. In the latter sense, we are not Keynesians because that spending has decimated our financial well-being. Modern Monetary Theory (MMT) is essentially an offshoot of Keynesianism in that government can spend ad nauseam and commensurately print money without any ill effect. With the historic inflation we are now experiencing, MMT has been thoroughly repudiated. MMT is dead–it must now be buried.

In his basic economic textbooks, Professor Paul Krugman preaches Keynesianism. He teaches students about a government spending multiplier. In his fairy tale, the government spends a dollar and the economy grows by more than a dollar. The student’s first question should be: Where does that dollar of spending come from? The student’s next question should be: If this mystical multiplier were in fact real, then why not spend and spend and spend? The answers are straightforward and form the basis of the repudiation of MMT. A dollar of government spending must come from a dollar of taxation, at some point. On the second, the federal Government believed in both Krugman’s myth as well as MMT, and spent as much as they possibly could. Eventually, the inevitable ending came, and it was not a fairy tale.

If there were no discernible consequence to government spending, then the incentive for any government would be to spray money in every direction. Keynesianism, Krugman’s multiplier, and MMT all attempted to provide cover, and enable government to spend. It is simply impossible, and not in dispute, that at some point, that dollar of spending must come from a dollar of taxation. If there is a budget deficit, the government borrows dollars to make up the shortfall. The government mostly borrows dollars by issuing government bonds. To sustain its insatiable desire to spend money, and to not raise current taxes to unappealing levels, the government issues substantial debt.

In recent years, the debt to GDP ratio has crossed the 100 percent level and is now at a historic high. This creates numerous problems, not least of which is rising interest rates. If the government adds to the supply of bonds, the price should go down, and the yield (interest return) would go up. With that gargantuan debt, rising yields would force the government to spend even more on interest payments, resulting in all kinds of other negative effects on the overall economy.

Enter the magic of Quantitative Easing (QE) and MMT. The Government wants to spend, but not raise taxes too much. It then must issue debt, but not cause interest rates to rise. Well, the Federal Reserve can just step in and buy bonds! Sounds perfect – certainly to government officials who want to spend, and claim they are stimulating the economy. Even better, there is no real limit to how many dollars-worth of bonds the Fed can buy. Trillions upon trillions are possible. The Fed balance sheet rose by approximately $8 trillion over the past 20 years, with more than $4 trillion of that in the last two years alone. There is a crucial problem, and this is where MMT is used to obfuscate: When the Fed buys bonds, it is printing money.

It is a rather straightforward printing press. The Federal Reserve purchases a bond from a seller. The seller delivers the bond to the Fed, and the Fed hits a button to deposit money into the seller’s account. That money is created with a keystroke. The sound of this printing press is Enter-Enter-Enter, click-click-click. And just like that, in the last two years, the Fed “printed” $4 trillion new dollars. The Fed is also by far the largest holder of United States Treasury bonds – with a current balance sheet of more than $8 trillion. But MMT said this is not a problem, and for years and years it seemed to be correct as the Fed was growing its balance sheet with no discernible sign of inflation.

But there was inflation. It simply manifested itself in other places besides consumer prices. Inflation is a monetary phenomenon. It is basic math. If new dollars are added to the total supply of dollars, then the price of everything a dollar can be exchanged for must go up. That is just a mathematical fact – not an economic theory like a multiplier, or printing and spending ad nauseam. Dollars are added, prices in dollars go up. While the Fed was performing QE by adding to its balance sheet and printing dollars, the price of financial assets was shooting to the moon. We witnessed one of the greatest transfers of wealth imaginable to holders of financial assets, from the public at large. Ironically, many who promoted Keynesianism and MMT are the same who grouse the loudest about the wealth inequality that their policies directly caused. Bubbles are inflated with dollars. And since the implementation of QE was the cornerstone of Fed policy, that bubble was not in danger of bursting, because the Fed would simply buy more bonds, and print more money. MMT said it was okay.

Like water, though, money eventually finds its way and breaks the dam. With stocks and crypto and real estate headed to the moon, it was only a matter of time before all that money found its way to consumer goods. Inflation, as we commonly understand it, had arrived. It was mathematically pre-ordained, and yet still somehow unexpected. Historically high. We’re talking 1970s high. Family budget-busting high. Economic growth-crushing high. And all because of the failure to loudly ask and understand those two very basic questions: Where does the money come from, and if the theory actually worked, shouldn’t the government just spend infinite money?

Perhaps those in government simply did not want to ask or understand those questions. It was fun, for some, while it lasted. But it’s over now. Those questions need to be asked, over and over again. Because the answers are obvious, and clear, and indisputable. Sadly, so is the painful solution to our current inflation crisis. The government needs to dramatically reduce spending, and the Fed needs to unwind its balance sheet.

Weaning the government and the Fed off spending and printing will be a lengthy and agonizing process. And entirely necessary. Nobody should be a Keynesian anymore. Certainly not if the goal is to reduce inflation and have a growing, robust, and free economy.

Keynesianism, Krugman’s multiplier, and MMT have all been empirically, logically, mathematically, and thoroughly repudiated.

This article was published by FEE and is reproduced with permission.

Positive Feedback Loops With Negative Consequences – Part 2

Estimated Reading Time: 9 minutes

Editors Note: Janet Yellen, US Secretary of the Treasury said late last week that the US would be out of money by January 19th, and would begin to take extraordinary measures to keep the government afloat until June. The problem is the previous Congress has already approved massive spending but has to go back to the new Congress once again to approve an increase in the debt ceiling. That approval simply gives the US government the authority to borrow more money from new investors so that it can pay the old investors. It is just rolling the debt forward and borrowing additional funds as needed. Markets seem to have taken the problem calmly so far and believe most of the debate is political theatre. As in the past, after some noise, the debt ceiling will be approved, or so it is thought. We hope such views are wrong. Some will call balking at raising the debt ceiling irresponsible and childish. Actually, running up $31 Trillion dollars worth of debt when Baby Boomers are hitting Social Security and Medicare is what is childish and irresponsible. Stopping the country from driving off a fiscal and monetary cliff is less childish than going over the cliff. The combination of a 30% increase in discretionary spending, increased need for defense spending, increased interest costs, and the aforementioned demographically sensitive entitlements, are all driving the US like Thelma and Louise at the movie’s end. Somebody needs to take the wheel and jam on the brakes. We hope the change in House rules, a new Speaker with a spine, will get real spending concessions from the Democrats. Remember as well as we saw with the speakership battle, in a closely divided Congress, a relatively small group of dedicated Congressmen can extract meaningful concessions. This is absolutely necessary for the good of the country.  However, the political battle has the potential to rattle markets. In 2011, it caused some market spasms and lead one rating service to downgrade the creditworthiness of the US. At the end of the day, if we cannot get control of spending, we are all headed for a fiscal crisis anyway.  In 2011, it did little to stop wild spending. We have to do a lot better this time despite the risk to the markets.


There is one other cycle of importance, that operates somewhat independently of these other trends. That is demographics.

Demographics for much of the past 20 years was a force restraining inflation, but now is shifting towards aggravating inflation. The dependency ratio, that is the percentage of people who live off government benefits is rising rapidly while the number of workers to support this teetering regime is falling. The number of “dependents” on government spending includes both the rapid increase in the elderly who leave the workforce and the rapid rise of people on disability. It is odd as we have moved away from dangerous industrial jobs and to safe office jobs that disability claims should be soaring. It is a combination of liberalization of definitions of disability, poor diet, and drug abuse. In addition, we have almost a third of prime working-age men leaving the workforce. Generous benefits plus the expansion of Medicaid help subsidize their absence. This drop in the workforce not only is expensive for those who do work, but it also tends to force up wage rates aggravating inflationary pressures in the labor market.

In Western welfare states, the bulk of government benefits is triggered by age. For medical benefits, age 65 for Medicare. For Social Security, typically around 66 or so in the US.

The baby boom was not linear but had its own internal booms and busts. The Baby Boom is typically measured from 1946 to 1964.  On average, about 4.2 million births per year. But you know the old adage about averages. The man’s head was in the oven and his feet were in the freezer, but on average, he was comfortable.

The biggest part of the Baby Boom was from 1957 to 1961. Then it started to tail off about by 1965. Births then dropped about 25% and have now fallen below replacement levels of 2.1 children per family.

Assuming age 66 means full Medicare and Social Security benefits for most people, add 66 to 1957. That takes you to 2023. That means starting right now and continuing for the next seven years, an enormous number of Baby Boomers will qualify for benefits, driving up Social Security and Medicare spending. The next few years will see the biggest burden ever placed on the system.

This has been known for some time, but no preparations were made for this enormous increase in expenditures.  Instead, Democrats with the help of RINO Republicans spent as if these burdens did not exist.

Now all the bills are coming due at the same time, putting enormous pressure on spending, and making it very difficult not to run enormous deficits. And remember, deficits have to be financed in some way: borrowing, inflating, or higher taxation.

Social Security has gone into negative cash flow (that means SS taxes collected are not enough to pay benefits), which then forces the system to “sell” nonmarketable treasury bonds which make up the reserves of the system. Without getting too far into the technical weeds, that means the unfunded debt now becomes a funded debt. We will have to borrow and tax additionally going forward to keep paying benefits.

However, the higher the inflation, the more spent on Social Security due to cost-of-living adjustments, another perverse feedback loop.

As indicated, driving many of these feedback loops is the towering deficit, the need to finance it, and the political difficulty of balancing the budget.  The Committee For a Responsible Federal Budget recently put out this chart, which must be studied to be truly appreciated.

Because so much spending is now “baked in the cake”, it would require a cut of 85% in the portion of the budget not in the cake,  to bring the budget into balance.  It would require a 26% cut in all spending in the cake and out of the cake, to get to balance.

How could such cuts be made if Congress can’t even have the guts to cut funding for NPR, which is already lavishly supported by super-rich liberal foundations?  If we can’t find the nerve to cut something as frivolous and redundant as NPR, how could we ever possibly find the political nerve to cut Social Security benefits?

Added to all these trends of increased spending, rising rates, and inflationary feedback loops, wars are always expensive and cost more and last longer than anyone thinks. Having ended abruptly the War in Afghanistan, our leaders immediately got us involved in a war with Russia via Ukraine. Rearming and reshoring our defense supply chains from China will also be expensive.

Most estimates suggest total aid and military operations for Afghanistan came to a tad over $2 trillion dollars. For a 20-year war, that is around $100 billion a year, on average.

According to the Center for Strategic and International Studies, the US alone has spent $68 billion and has proposed an additional $37 billion for Ukraine. That’s over $100 billion and does not include support from the rest of the world. Moreover, it does not include the cost of distortions in food and energy markets created by sanctions, which have tripled the cost of electricity in Europe and the cost of food and energy worldwide.

We have no idea what the final costs will be but you can be sure it will be more than anyone thinks it will be.  Some of these costs are direct, but many are indirect.

Usually, war creates a necessity to ration existing resources and expand resources as quickly as possible. But in our era, we have another cycle working, the extreme environmental movement. It seeks to achieve zero carbon emissions, starving existing energy resources and driving up the cost of food and fuel, just as central banks battle to fund the Ukraine war, rearmament to face China, demographic time bombs, and years of previous reckless spending.

Environmentalism is now embracing “no growth”, and “no babies, which makes all the negative financial and demographic trends mentioned earlier even worse.

How can you support a huge and growing worldwide debt bubble without economic growth and increased revenue to service the debt? How can all the future obligations we are piling up be paid for by a diminishing number of babies?  This is not a good time to become a no-growth fanatic!

Rarely have so many feedback loops with negative consequences come together in the same time period, each with its own intersecting feedback loops.

Rising debt can be dealt with only in three ways. You can pay the debt down, you can roll the debt forward and pay increased interest, or you can default on that debt. All alternatives except default need rising income streams (economic growth), but that is now being strangled by progressive over-regulation and environmentalism.

Government among all institutions has wiggle room in the default option. That one is the depreciation of the value of money (inflation), which can be regarded as a slow-motion default. But make no mistake. It is a form of default.

Because it spreads misery over time and the population, inflation of the currency has been the historic “solution” to government funding problems. However, it really is not much of a solution. It creates class conflict, and radical politics, and has often resulted in war. It all pivots on how severe the inflation is and the strength of the social fabric and institutions of the afflicted nation.

But given where we are, inflation may not be option planners think it will be. Many government benefits are now indexed to inflation, a great way to drive spending higher. Burst the asset bubble and you now have additional costs to rescue banks and other institutions and key industries.

Once the debt bubble reaches a certain size (and we have reached that size), inflation-induced rising interest rates cause asset prices to fall and the economy to slow, impairing revenue streams, triggering defaults, and requiring bailouts. Both in the busts around 2000 and then in 2008, deflation became a serious problem. Defaults in housing (the private debt bubble) wrecked the economy and the banking system, which in turn caused a huge rise in expenditures for bailouts of banks, autos, pensions, airlines, and state governments.

As a further complication, the US is the center of the international financial system and a net huge borrower with a massive deficit in our balance of trade. The dollar is the reserve currency of the world and the currency to settle oil payments. If inflation is let out of hand, the world may well abandon the dollar as it is not a reliable reserve asset.

And what good is there holding bank reserves in dollars if the US government can seize them at any time, with no judicial process whatsoever?

We are already seeing hints of that with central banks buying more gold in 2022 than any year since the breakdown of the international monetary arrangements with the collapse of Bretton Woods in 1971.

Further aggravating the problem, the US has militarized the international monetary system by seizing Russian bank reserves and forcing them out of the international payments system (the SWIFT payments system).

Other countries such as Saudi Arabia, India, Brazil, and especially China, have taken note of the hazard of getting crosswise with the US. It could happen to them next. This quite naturally sets in motion a desire to seek better alternatives and not be subservient to the US.  In other words, we have shown the big international buyers of our debt that they are fools to fund us in the future.

Those who militarize money can only expect others to retaliate in kind. That risks the US losing its “exorbitant privilege” of being able to issue the reserve currency. We remain the only country that can “pay” for both internal and external debt by printing money. We lose that subsidy and it will quickly become a very expensive world for us.

How all this works out is difficult to know. It is not clear that inflation can work as a policy choice because of the dangerous trends that decision self-actuates.  Inflation can’t reduce the debt burden when its very existence is adding to debt at the same time. What investors need to appreciate is that the “long-term problem” of debt and deficits is now coming due. The future is becoming the present. 

There will be some combination of inflation, recession, default, or expensive and crushing debt service. You can’t waive the debt away. One man’s debt is another man’s asset. You can’t get one man out of a burden without imposing it on another.

That is the price you pay for short-sighted and stupid financing decisions. Political leaders run on a 2 to the 4-year political cycle, so they have had the incentive to get the political benefit of big spending today and defer the cost to the ether of the future. They worry about the next election and don’t make decisions for a stable future. Let the kids pay for all the benefits. Just get me elected today. That works for a while until there are too few kids to pay the bills, or they wake up. It has been a very successful game of kicking the can down the road.

The problem is, we are rapidly running out of road. We are all about to get kicked in the can really hard.

We say this because most of these feedback loops are now self-sustaining and almost immune from normal politics.

If demographics are not destiny, it is about as close as you can get.

Even if wisdom and political will could be found, you can’t pass legislation stopping compound interest. You can’t pass a bill to stop people from aging. And, there is no legislation you can pass to stop the business and credit cycle.

From both a political and investment standpoint, the next several years will likely prove to be turbulent and difficult to deal with. There is simply no way of getting out of this without pain.  The huge spending by Democrats in the past few years has likely put any kind of easy solution out of reach.  

Trends had already bought us to the edge of the cliff but this latest burst of sheer irresponsible budgetary excess has pushed us over the edge.

Thus, the consequences of these feedback loops are to put us between the alternatives of inflation and deflation, both very serious outcomes that can wreck society and political stability.  Financial crises seem to be coming closer and closer together. We are already working on the third one since the turn of the century.

Inflation or deflation? Boom and bust. As suggested, how this works out depends on the strength of institutions and social cohesion when these things occur. How would you rate social cohesion, institutional trust, and confidence in our government at this time?

Positive Feedback Loops With Negative Consequences – Part 1

Estimated Reading Time: 5 minutes

Editors’ Note: Debate over the budget and deficit spending has been a staple of American political debate since they became chronic with Lyndon Johnson and the Great Society. Too bad it has in recent years just become background noise for both political parties because the stakes for America are very high. However, as this article indicates, there is a time when the argument that “someday this is going to kill us” comes due. Unfortunately, because of demographics and their impact on entitlements, rising interest costs, war spending, and reckless social spending, the future is now – the present. This week, the fight over the debt ceiling begins and it will resurface in June. The Democrats have gotten a 30% increase in discretionary spending. Running a trillion-dollar deficit has now been normalized. Will the Republicans show the nerve necessary to curtail spending and set the nation on a course to avoid the inflationary/deflationary crisis described below? Moreover, it may be too late for any actions to avoid significant societal and economic pain. The debt ceiling fight basically is Democrat blackmail. Either accept all of our past excesses or we will shut the country down and blame the Republicans for the crisis. In the past, Republicans have allowed the framing of this crisis to make them look irresponsible and heartless as the last confrontation in 2011 demonstrated. Can Republican leadership find a way out of this blackmail trap? We are about to find out.


All dynamic systems have feedback loops, either negative or positive loops. For example, the sun heats the earth. Heat and humidity form clouds and push them higher with updrafts, which create rain and partially block sunlight, cooling the earth and providing moisture for another cycle. This is a negative feedback loop and is a mechanism in nature for the regulation or maintenance of a specific state of nature.

In comparison, many feedback loops in nature are self-reinforcing and are referred to as positive which tend to a definitive endpoint, such as the death of a living entity. We have a number of these operating in the economy right now related to Federal intervention in the economy. Not only have many become self re-inforcing, but they also intersect with other feedback loops creating even bigger positive feedback loops with serious negative consequences.

In the case of US government finance, we now have some feedback loops that are increasingly dangerous and out of control. This disequilibrium could also spread to foreign governments and the private sector as well.

Let’s take a look at some that are obvious and some not so obvious.


With a total deficit federal debt now over $31 trillion and growing, the cost of rolling over the US debt is rising because the debt pile to finance is both getting larger and the cost of interest payments is rising.  Both trends require more debt to be financed and the more debt that is offered to the markets, the lower the price of bonds and the higher interest rates will otherwise be unless there is offsetting demand for those bonds. The more money paid out to service the debt, the less money is left for the government to spend on other things.



Thus, higher interest rates will help create higher rates, a self-feeding trend that some refer to as a doom loop.

You can sell more debt if there is more demand ready to take the increased supply. We don’t expect the government to go broke. They will be able to finance themselves. The question is at what interest rate will the government be completely funded and who else is damaged by the government’s voracious appetite for funds?

Unfortunately, some of the big buyers of bonds are publicly either pulling out of the market or becoming sellers. For example, the FED has expanded its balance sheet by buying huge quantities of bonds, but now the FED itself is a net seller as it reduces its holdings in an attempt to staunch inflation that it created. We have moved from Quantitative Easing (FED buys bonds) to Quantitative Tightening (FED sells bonds).

Big foreign buyers of US debt such as Japan, Saudi Arabia, and particularly China, are also cutting back on what they buy and, in some cases, have become net sellers as well. To make bonds attractive to buyers of any sort, they must pay a superior yield and the bondholder must feel secure that they will be paid in a currency that holds reasonable value.

More supply and less demand mean lower bond prices which is just another way of saying higher interest rates. Higher rates in turn beget more borrowing, resulting in higher rates again, hence a self-reinforcing cycle.

Higher rates mean lower bond prices, so it hurts those institutions like pensions and insurance companies that already own bonds at higher prices. This is one of the reasons a typical 60% stocks and 40% bond portfolio last year delivered the worst results since 1871. The bond portion, which was supposed to “diversify”, was almost as weak as the stock portion.

A higher rate structure also has the potential to destabilize pensions since they have low cash holdings and must meet obligations, by selling investments bought at higher prices. You recently saw a pension crisis in England that caused the fall of a conservative government that was just elected. In fact, it was the shortest-serving government in British history.

Moreover, higher interest rates impact all debtors and all borrowers, not just the US Treasury. Private borrowers also have to refinance at higher rates and thus increased interest payments have to come out of corporate or household cash flow and are thus not available for other things. Ask any recent homebuyer how rising rates have increased monthly payments. Higher interest rates depress company profits. That is why rising rates tend to slow down economic activity.

Foreign governments are also borrowers and for those not well-financed, a generally higher rate structure could cause some defaults among those borrowers that don’t have a strong balance sheet.

Central banks around the world are raising interest rates to deal with the worst inflation in 40 years. That puts pressure on economies worldwide. The idea is that only a recession can relieve the pressure on inflation. That is not a very good policy option, is it? You basically substitute the pain of recession for the pain of inflation. Either way, you are inflicting pain on the citizens because governments spent too much money and central banks financed their excesses.

However, the recession itself creates another set of feedback loops with negative consequences. A slower economy causes a drop in tax revenues, making the deficit larger. That deficit must be financed either by borrowing more (increasing the supply of bonds and increasing interest rates) or currency debasement (inflation), which with some delay, results also in higher interest rates since borrowers want to be paid back in real inflation-adjusted terms.

Government revenue streams are tied to taxes collected and taxes collected are tied to economic activity. An unemployed worker or a shuttered business pays fewer taxes than before. This dependence can become extreme.  In California for example, 49% of income taxes are paid by 1% of the population.  That 1% is the stock and real estate speculators. So, the “everything bubble” created by the FED, drives government revenue. Pop that bubble and a lot of revenue dries up quickly, causing state and federal budgets to go into deficit. Those deficits have to be financed.

Besides causing tax revenue to drop, a recession triggers an internal flaw in the social entitlement welfare states of the US, Canada, and Europe. The worse the recession, the more people fall into the “social safety net.” This causes social expenditures to rise, right as revenue is contracting. This causes budget deficits to bulge everywhere, already aggravated by the previously mentioned problems in government finance.

It remains to be seen if the FED can continue to reduce its balance sheet and “pivot” with the growing decline in foreign purchases of US Treasury paper.  As the video below explains, US debt finance needs relative to global GDP growth creates some serious issues.

The Prickly Pear New Year’s Resolution

Estimated Reading Time: 2 minutes

Most of us look at the end of the year, reflect on the past, and look into the future. Many of us have resolutions to do things better in the coming year.

At The Prickly Pear, we look at the economic horizon and we see storm clouds. That does not bode well for a society that is already badly divided and where one side seems to delight in unleashing criminals on the rest of us.

Economic trauma tends to make social stability more difficult in any case, but especially so when lawbreaking has been made into a form of acceptable social protest.

Therefore, we plan to use more space in the coming year on two topics: personal finance and personal safety.

We will explain later in greater detail why personal finance needs to be front and center. But the short version is this: given the recent election results and the betrayal of the House Republicans by Mitch McConnell, we just don’t see any principled and effective resistance to further spending on top of the excesses we have already seen. The result will likely be a recession and a severe debt crisis.  Likely we are too far along in this debt crisis now to resolve it without great pain. We had each better take care of ourselves or we won’t have much left with which to help the country.

In terms of crime, the Democrats have an agenda to change both the prosecutorial system, and the prison system, and attempt to redefine crime for the sake of ‘equity’. Couple this with probable privation, and you have a toxic mixture quite likely to lead to rising crime and a risk to private and public safety.

Therefore, we will be producing more articles on both subjects and increasing the number of videos on the subject as well.

We don’t wish to start off the new year on a pessimistic note, but we prefer to think of it as enlightened realism.

The good news is the debt crisis will likely be the only thing that brings our political elite to their senses. The bad news is, the rest of us are going to have to get through it.

If you prepare well and the worst does not happen, no harm, no foul. However, if you get caught blindsided, you may not be able to recover. Thus, a good dose of realism is the best posture to take at this time.

The Price of Easy Money Now Coming Due

Estimated Reading Time: 4 minutes

The Crazy Stuff & Asset Prices that arose during Easy Money are coming unglued as Easy Money ended.

The era of money-printing and interest-rate repression in the United States, which started in 2008, gave rise to all kinds of stuff, and the easy money kept going and kept going, and all this money needed to find a place to go, and then money-printing went hog-wild in 2020 and 2021. And the stuff it gave rise to just got bigger and bigger, and crazier and crazier. And much of this stuff is now in the process of coming apart, I mean falling apart, or getting taken apart in a controlled manner, and some stuff has already imploded in a messy way.  And we’ll get to some of this stuff in a minute.

All this money-printing and interest rate repression finally gave rise to massive consumer price inflation, and now we have a real problem, the worst inflation in 40 years, and way too much money still floating around all over the place with businesses, with consumers, with state and local governments. This means that this raging inflation has lots of fuel left to burn, and the government is making it worse by handing out hundreds of billions of dollars for all kinds of stimulus spending, from the new EV incentives to $50 billion handed to the richest semiconductor makers.

And some state governments are handing out inflation checks or whatever – in California, households can get up to $1,000. And they’re all spending this money, and thereby throwing fuel on the inflation fire. We’ve already seen automakers raise the prices of their EVs to eat up the EV incentives, and there we go, more inflation.

The poor Federal Reserve has to deal with all this, and it’s out there raising interest rates far more than anyone expected a year ago, and it’s doing quantitative tightening, and it’s saying all kinds of hawkish things, but the markets are blowing it off, and they’re not taking it seriously, which means that the cold water the Fed wants to throw on financial conditions, and therefore on inflationary pressures, isn’t getting there, and it has to throw a lot more cold water on it, so higher rates for longer, and maybe for a very long time.

So now we got all the stuff that money-printing and interest-rate repression gave rise to, and this stuff must have continued money-printing and interest-rate repression to exist, but now we have soaring interest rates and the opposite of money-printing: quantitative tightening.

Perhaps the most spectacular creation of the money-printing era is crypto. It started with bitcoin in early 2009, just after the Fed’s money-printing got started. And the promoters fanned out all over the social media and everywhere and touted it as an alternative to the dollar and to fiat currency in general and to what not, and people started hyping it, and promoting it, and they’re trading it, and the price shot higher.

And then come the copycats since anyone can issue a cryptocurrency. Suddenly there were a dozen of them, and then there were 100 of them then 1,000, and suddenly 10,000 cryptos, and now there are over 22,000 cryptos, and everyone and their dog is creating them, and trading them, and lending them, and using them as collateral, and all kinds of businesses sprang up around this scheme, crypto miners, crypto exchanges, crypto lending platforms, and some of them went public via IPO or via a merger with a SPAC.

And the market capitalization of these cryptos reached $3 trillion, trillion with a T, about a year ago, and then when the Fed started raising its interest rates and started doing QT, the whole thing just blows up. Companies go like POOF, and the money is gone, and whatever is left is stuck in bankruptcy courts globally possibly for years. Cryptos themselves have imploded. Many have gone to essentially zero and have been abandoned for dead. The granddaddy, bitcoin, has plunged by something like 73% from the peak. The whole crypto market is also down about 73%.

Crypto was one of the places where liquidity from money printing went to, and now that the liquidity is being drained ever so slowly, the whole space started to collapse.

Another thing that came about during the era of money printing was an immense stock market mania, and when the money printing went hog-wild starting in March 2020, the stock market mania went hog wild with it.

We at Wolf Street tracked a bunch of these stocks, crazy IPO stocks, and stocks that went public via a merger with a SPAC over the past few years, and they shot higher and they spiked on a wing and a prayer with nothing there, companies that were losing tons of money, that didn’t have a business model, that didn’t have anything, and they were suddenly worth $10 billion or $30 billion or whatever.

It was all driven by what I call consensual hallucination and the effects of money printing and interest rate repression. Those were the fundamentals.

But then in February 2021, when inflation started to heat up, causing the Fed to brush it off, well that February 2021 was when that craziness peaked, and many of these stocks then collapsed by 70% or 80% and over 90%. We tracked over 1,000 stocks traded in the US that have imploded by 80% or more from their highs within the past couple of years…..


Continue reading this article at Wolf Street.


Real Wages Fell for the Nineteenth Month in a Row in October as Inflation Remained Entrenched

Estimated Reading Time: 4 minutes

The federal government’s Bureau of Labor Statistics released new price inflation data today, and according to the report, price inflation during the month decelerated slightly, but remained near 40-year highs. According to the BLS, Consumer Price Index (CPI) inflation rose 7.7 percent year over year during October, before seasonal adjustment. That’s the twentieth month in a row of inflation above the Fed’s arbitrary 2 percent inflation target, and it’s eleven months in a row of price inflation above 7 percent.

Month-over-month inflation rose as well, with the CPI rising 0.4 percent from September to October. October’s month-over-month growth also shows some acceleration in monthly price inflation growth. Month-to-month growth had been approximately zero in July and August.

October’s growth rate is down from June’s high of 9.1 percent, which was the highest price inflation rate since 1981. But October’s growth rate still keeps price inflation well above growth rates seen in any month during the 1990s, 2000s, or 2010s. October’s increase was the eighth-largest increase in forty years.

The ongoing price increases largely reflect price growth in food, energy, transportation, and especially shelter. In other words, the prices of essentials all saw big increases in October over the previous year.

For example, “food at home”—i.e., grocery bills—was up 12.4 percent in October over the previous year. Gasoline continued to be up, rising 17.5 percent year over year, while new vehicles were up 8.4 percent. Shelter registered one of the more mild increases, with a rise of 6.9 percent, according to the BLS.

The rise in shelter, however, was an increase in October over September when shelter prices rose “only” 6.6 percent, year over year. In October this year, shelter prices were up 6.9 percent year over year, and 0.7 percent, month over month. This was the largest month-over-month increase since March of 2006 and was the largest year-over-year increase since July of 1982. The CPI is finally starting to reflect the enormous surges in costs that many renters have been experiencing in recent years.

Meanwhile, so-called “core inflation”—CPI growth minus food and energy—has hardly shown any moderation at all. In October, year-over-year growth in core inflation was 6.2 percent. That’s down slightly from September’s growth rate of 6.6 percent, which was the highest growth rate recorded since August 1982. October’s year-over-year increase was the fifth largest recorded in 40 years.

The White House used this slight moderation in price inflation growth to crow about how the administration has somehow reduced inflation. According to the White House press release: “Today’s report shows that we are making progress on bringing inflation down, without giving up all of the progress we have made on economic growth and job creation,” he said. “My economic plan is showing results, and the American people can see that we are facing global economic challenges from a position of strength.”

In spite of the fact that month-over-month inflation actually increased, the administration once again selectively annualized the monthly inflation numbers in order to claim that the inflation rate is “2 percent” in spite of year-over-year growth that surpasses the Federal Reserve’s target rate by more than 5 percentage points.

Rather, it is a bit early, to say the least, to announce a victory over CPI inflation. Throughout 1975 and 1976, CPI growth decelerated rapidly, falling from 12 percent in December 1974 to 4 percent in December 1976. Yet, by early 1980, CPI inflation had risen to over 14 percent. At the time, Federal Reserve (Fed) chairman Arthur Burns had used the mid-decade decline in price inflation as an excuse to embrace more easy money. The Fed pushed down the target policy interest rate, and within 5 years, inflation had surged even higher.

Unfortunately, both the White House and Wall Street are both hoping for a replay of the Arthur Burns protocol of the mid-70s. Any small reprieve in inflation rates will be put forward as an excuse to once again have the Fed push down interest rates, and perhaps even ramp up quantitative easing. This will be pushed with the argument that the US is headed toward recession, and the country needs low interest rates and east money to ensure a “soft landing.” If inflation continues to ease even slightly, we can even expect mounting international pressure against the “strong dollar” which has been surging ahead of other currencies thanks to the unwillingness among other central banks to abandon their own easy-money policies.

In other words, now is a time of mounting danger that the central bank will return to the same failed policies of the last 25 years in which it turns to ever larger monetary stimulus in order to prevent recession-fueled deflation. The markets are even now banking that the Fed will take a more dovish turn now that CPI inflation has slightly fallen. For example, mortgage rates fell sharply on Thursday in the wake of the new inflation numbers’ release.

Yet, Americans continue to get poorer as price inflation continues to outpace growth in wages. In October, average hourly earnings grew by 4.86 percent. Given that price inflation surged by 7.7 percent, that real wage growth of about -2.9 percent. That’s the nineteenth month in a row during which real wages fell.

Meanwhile, the jobs data shows few signs of improving. In October, the number of employed persons in the US fell by 328,000, and remains below the February 2020 peak. Moreover, according to the Bureau of Economic Analysis, disposable income is lower now than it was before the covid panic, coming in at $15,130. That sum was $15,232 during February of 2020. Meanwhile, the personal savings rate in September fell to 3.1 percent. That’s the second-lowest level since 2007. Credit card debt, in contrast, reached new highs in September and is now well above its previous 2020 peak. More recent news is hardly better. Meta (Facebook) announced it is laying off 11,000 workers this week, adding to continuing job woes for the tech sector. Home construction and home sales activity is set to show big declines, which will lead to layoffs in real-estate related industries.

Price inflation is indeed likely slowing, but it is slowing as a result of a struggling economy. The White House may soon find it is celebrating much too soon.

This article was published by Mises Institute and is reproduced with permission.

Economist Explains Why ‘Americans Are Being Absolutely Crushed Right Now’

Estimated Reading Time: 8 minutes

Editors’ NoteWe hope readers will take the time to either read or listen to the podcast below. In so doing, remember that we got here because of policy decisions. It was the FED that was discontented with 1 1/2% inflation and wanted it above 2%, remember? It was the FED that agreed to monetize huge quantities of debt, allowing politicians free to spend their heads off without disturbing interest rates and the housing market. And it was the Democrats who primarily gave us a Covid-related lockdown, kept it in place the longest, and then attempted to bail out the economy they had crushed with wild debt-financed federal spending and sent checks out to everyone. The result was an unprecedented bulge in the money supply (up 40%). They then ignored the problem calling it “transitory”, and then inflicted more pain with their Green New Deal energy policy. This left the world dependent more than ever on Russia. Sensing his opportunity, Putin struck out at Ukraine. Now we have war in the midst of a worldwide slump. When management screws up this badly, you fire them. Ballots for mail-in voters (80% of Arizona voters, 90% in Maricopa County) were mailed on 10/12 and are arriving across the state. Don’t forget the current misery is the direct result of bad policy, bad governing philosophy, and ideological excess. They wanted to transform America all right. Transform us into a Third World nation! Well, you now have the opportunity to have your voice heard. Let them hear you, loud and clear. Much hinges on the narrow control Democrats have in the U.S. Senate. Therefore, from both the national and Arizona perspective, while all your decisions are important, the most important decision you will make will be regarding Arizona’s U.S. Senate seat. We urge you to send Mark Kelly back to his home in Tucson. It is a nice town. He will like it there.


The U.S. Bureau of Labor Statistics reported on Thursday that the consumer price index rose 0.4% in September, showing that inflation remained at a near four-decade high of 8.2%.

“Today’s report shows some progress in the fight against higher prices, even as we have more work to do. Inflation over the last three months has averaged 2%, at an annualized rate,” President Joe Biden said in a statement.

EJ Antoni, a research fellow for regional economics in the Center for Data Analysis at The Heritage Foundation, couldn’t disagree more.

“This is just the latest example of how Americans are being absolutely crushed right now by these higher prices. And it’s not yachts and caviar that are driving these increases. It’s necessities. It’s the basic staples,” Antoni says.

“It’s eggs, bread, milk. We’re not talking about filet mignon here. We’re talking about ground beef. And sadly, Americans are really paying the price for what has been going on the last two years in terms of the government just spending, borrowing, and printing trillions and trillions of dollars,” says Antoni.

Antoni joins “The Daily Signal Podcast” to take a deeper dive into what the consumer price index means, and how it compares to the producer price index, and even offer some spending advice ahead of the holiday season.

Listen to the podcast below or read the lightly edited transcript:

Samantha Aschieris: Joining the podcast today is EJ Antoni. He’s a research fellow in regional economics in the Center for Data Analysis here at The Heritage Foundation. EJ, thanks so much for joining.

EJ Antoni: Samantha, thank you for having me.

Aschieris: Of course. Now, let’s just dive right in. The consumer price index number came out Thursday morning. It showed an increase of 0.4% in September and 8.2% since last year. Kick us off here. Break this number down for us.

Antoni: Sure. I mean, this is just the latest example of how Americans are being absolutely crushed right now by these higher prices. And it’s not yachts and caviar that are driving these increases. It’s necessities. It’s the basic staples. It’s eggs, bread, milk. We’re not talking about filet mignon here. We’re talking about ground beef.

And sadly, Americans are really paying the price for what has been going on the last two years in terms of the government just spending, borrowing, and printing trillions and trillions of dollars.

Aschieris: And did we see any sort of relief from this number? Were there any index decreases, basically?

Antoni: No. None of the major categories went down, sadly.

And one of the things that has been keeping the index down the last several months has been the drop in gasoline prices. But now that we’re going into the winter and there’s going to be an increased demand for things like home heating oil, for example, and the fact that we now have OPEC decreasing production, and at the same time, the Biden administration won’t let domestic producers increase our own production, all of this is going to come together to mean higher energy prices.

And so the one thing that has really been keeping the index in check, more or less, is now going to be let loose as well.

Aschieris: Yeah. It’s only October and I’ve already had to put the heat on. So, I’m not looking forward to this winter.

Something I also wanted to ask you about was the producer price inflation number that also came out this week. It came out on Wednesday. It showed an increase of 0.4%. Now, how do these two numbers compare?

Antoni: Sure. The producer price index measures the prices that businesses are having to pay, whereas the consumer price index is going to measure the prices that you and I have to pay. And what happens is that over time, these numbers tend to track together. And the reason for that is because as costs increase for businesses, they pass those costs on to consumers.

And what we’ve seen during the Biden administration is that those costs for businesses have actually increased substantially more than the costs for consumers. In fact, the producer price index, the PPI, has been higher than the CPI every single month of the Biden administration in terms of those year-over-year changes.

So that means there are already tremendous price increases basically baked into the cake in the economy right now, so that even if prices for businesses were to magically flatline, which obviously isn’t going to happen, but even if it did, there’s going to be continued cost increases that will be passed on to consumers in the months ahead. So, unfortunately, there’s no relief there, either.

Aschieris: Yeah. And it was interesting because President [Joe] Biden talked about the CPI number in a statement that the White House put out. He talked about that it showed some progress in the fight against higher prices, even as we have more work to do. Something that we had talked about before the interview was the core consumer price index increase. What’s the difference between just the consumer price index versus the core consumer price index?

Antoni: The core consumer price index is going to exclude food and energy. And you may say, “Why on Earth would you want to exclude those things, because everybody needs food and energy?” And that’s true. But food and energy prices are notoriously volatile. So, when you exclude those, you can get a better sense of what the overall price level is doing.

And over time, sure enough, both the CPI and the core CPI tend to track together. One may be a little higher or a little lower, but over time, it all averages out.

Well, we’ve seen energy increase so fast for the last two years that we haven’t really had enough time yet for all of those costs to fully trickle down into other parts of the economy.

For example, the price of diesel fuel has been through the roof, which means that truckers are having to charge more and railroads are having to charge more for transporting literally everything you get off a store shelf. And so now, those costs are being passed on in earnest to consumers at all levels of the economy.

And now, core CPI has hit a 40-year high, just like the headline CPI number has been hitting 40-year highs.

Aschieris: Yeah. I want to talk about that a little bit more. Do you anticipate these numbers to continue to get worse or do you think we’ve seen the worst?

Antoni: Well, just like CPI really hasn’t caught up to PPI, also, the core CPI has not caught up to CPI. In other words, we still have a lot of food and energy costs that are going to trickle down everywhere else in the economy. So, no. Unfortunately, I really don’t see any signs of relief for the consumer.

Aschieris: I want to shift a little bit to some other concerns that Americans are feeling, and they’re facing a recession. Earlier this week, President Biden was in an interview with CNN’s Jake Tapper. He said that he didn’t anticipate a recession, but even if there was one, it would be basically a slight recession. First and foremost, what indicates a recession? And are we in one already?

Antoni: Certainly. When we talk about recession, we’re talking about the economy contracting. And it’s actually not uncommon for economic activity to decline for a single month or even a single quarter, a three-month period. In certain cases, it actually happens routinely every single year.

For example, if you want to go from December to January, the economy always contracts because all of that retail activity that’s concentrated around the holidays goes away. Employment goes down. And so we seasonally adjust for all these different factors. In other words, we try to take out all of the seasonally predictable factors that go into the economy.

So, what we’re left with at the end is an answer to the question of, what would this month or this quarter look like if it had happened any other time of the year? Even with all that taken into account, the first half of the year, not just a month, not just a quarter, but two quarters in a row, six months, the economy contracted. So, we’ve already had the recession.

At this point, it’s not a question of, are we going to have a recession? It’s, are we going to have a double dip? In other words, the third quarter looks like it’s going to be positive. But then after that, all bets are off because everything that I see is pointing to continued decline.

Aschieris: Now, as we head into the holiday season, as you just mentioned, what should consumers, what should Americans be aware of this holiday season?

Antoni: Oh, wow. That’s a good question. One of the things that Americans are going to increasingly need to be aware of is the cost of financing debt. What I mean by that is interest rates continue to rise.

To put into perspective how much of an additional cost this is causing consumers, if you look at the median-priced home when Biden took office and compare that to the median-priced home today, the mortgage on that has gone up about 80%.

I mean, it’s just absolutely devastating. People can’t afford homes anymore. And sure enough, the Atlanta Federal Reserve’s home affordability index is down over 30% because of that.

In terms of, again, that median-priced home, if you add up all your mortgage payments over the course of a year, they’ve increased by about $10,000 a year because of a combination of the price of the home going up and the interest rate now doubling in literally a matter of months.

But it’s not just homes. It’s going to be credit cards. It’s going to be student loans, auto loans. All kinds of debt are getting more and more expensive.

As tempting as it may be when you’re doing your holiday shopping, for example, to splurge, remember how much more it’s going to cost you in terms of trying to pay off that credit card.

Aschieris: Yeah. It’s going to be a crazy holiday season, for sure.

One final question for you, and it might seem like a pretty big ask. But if you could do anything, in your opinion, what is the No. 1 thing that you would suggest or advise the Biden administration to do to reverse the course that the country’s headed on in terms of the economy right now?

Antoni: Balance the budget immediately. Right now, as the Federal Reserve is hiking up these interest rates—and as we just said, that’s causing a tremendous amount of harm to Americans, they would not need to hike the rates nearly as hard or as fast if we had a balanced budget.

But right now, we have a Congress and president that are working at cross purposes to the Fed. And the more they spend and the more they borrow, the more the Fed has to slam on the brakes. And so if they—they being the Congress and the president—could stop the reckless spending and borrowing, then that would solve a tremendous amount of our problems and have an incredibly positive impact on bringing down inflation.

Aschieris: Well, EJ, thank you so much for joining the show today. I really appreciate you taking the time to provide some insight. Thank you so much.

Antoni: Samantha, thank you for having me.


This Podcast comes from the Daily Signal (Heritage Foundation) and is reproduced with permission.

This Inflation Will Be Tough to Get under Control

Estimated Reading Time: 3 minutes

It’s like a dam broke. And now higher interest rates and mortgage rates for much longer, with lower asset prices, as the Everything Bubble gets repriced.


So now the media suddenly focuses on this big problem I’ve been screaming about for many months: Inflation has shifted from energy and from goods tangled up in supply-chain issues to services where there are no supply chain issues.

A great example is insurance. I guarantee you that there is an unlimited supply of insurance, and yet health insurance costs spiked by 24% over the 12-month period, and auto insurance jumped by 9%.

It’s small stuff too. I just got a 20% increase on my broadband service that I subscribed to a year ago to replace Comcast, which had doubled its monthly fee a year earlier.

Other service prices jumped too. Motor-vehicle maintenance and repair jumped 9%, rents are spiking, and all kinds of service providers are jacking up their prices, and consumers are paying them.

Yet gasoline prices have plunged from their highs in June, and many supply-chain issues that drove up prices of some goods have been resolved, and lots of commodities prices have come way down.

So now we’re dealing with inflation in services. This type of inflation means that something has seriously changed in the economy, and how the participants in that economy – so that’s consumers, businesses, and governments – are reacting to price increases. And how they’re reacting is that they’re paying those price increases.

Businesses are paying them because they know they can pass them on to their customers. Consumers are paying them because they’re getting raises, and they’re still flush with cash from all the pandemic money, from the PPP loans, the mortgage payments and rental payments they didn’t have to make, and from the gains in real estate and from the cash-out refi last year, and from the gains in stocks and cryptos, though those gains have started to dissipate.

And governments at all levels sit on huge amounts of pandemic-era cash, and this cash is getting spent, and so wholesale prices go up and businesses pay them, and consumer prices go up, and people pay them. And it happened suddenly, starting nearly two years ago.

For many years, central banks have engaged in massive amounts of money printing and interest rate repression. The Bank of Japan started this over two decades ago, and it bought up a big portion of the government’s debt, and it repressed interest rates to zero, and in recent years below zero. It got away with it for years, and there was essentially no consumer price inflation.

And then during the Financial Crisis, starting late 2008, the Federal Reserve in the US started printing large amounts of money and it repressed short-term interest rates to zero, in order to bail out the bondholders and stockholders of the banks, and to inflate asset prices in general, to inflate stock prices, and bond prices, and real estate prices. And that didn’t trigger a big wave of consumer price inflation either.

And when the European Central Bank saw that neither the Bank of Japan’s money printing, nor the Federal Reserve’s money printing triggered consumer price inflation, but just asset price inflation, it too jumped into the game and printed huge amounts of money and repressed interest rates to zero, and then below zero.

And central banks of smaller countries were doing it, and just about everyone in the developed world was doing it…..


Continue reading this article at Wolf Street.


The 5 Cities With the Highest Inflation in America

Estimated Reading Time: 3 minutes

In each of these cities, inflation is higher than 10 percent.


My wife and I recently were out for our morning walk and she commented on how weird inflation is. Some prices are sky high, she observed, while others have barely budged.

A carton of eggs is up 33 percent over the last year, while tomatoes haven’t changed at all. Airline flights are through the roof, but the cabin we rented on our last vacation was several hundred dollars less than in previous years. Our electric bill is soaring, but her personal care products and my son’s new sneakers were about the same (or less) than what she had previously paid.

It’s clear that prices are a complicated business, and not just because value is subjective. The cost of producing and distributing goods in an economy is incredibly complex, something no single person can possibly understand, let alone calculate.

While the basic economics of inflation tend to be simple—increase the money supply and, all else equal, money becomes less valuable—the specifics of inflation can be complex and difficult to understand, because economies are complex and difficult to understand.

We see this not just in the fact that some products and services are impacted by inflation more than others. We also see it by the fact that inflation is rising in some places more than others.

While recent data released by the Labor Department show that inflation slowed down in July (8.5 percent annualized), it remains hot, especially in certain places. A recent report by WalletHub found that in many US cities, prices are 10 percent higher than a year ago.

Below is a list of the five cities where inflation is the highest, according to the latest Consumer Price Index (CPI) data.

1. Anchorage, Alaska: 12.4%

2. Phoenix, Arizona: 12.3%

3. Atlanta, Georgia: 11.5%

4. Tampa Bay, Florida: 11.2%

5. Baltimore, Maryland: 10.6%

Following the release of the government’s inflation numbers on Wednesday, many suggested the US economy may be at an inflation “turning point.” Hopefully this is true, but it is far from certain.

An abundance of historical evidence shows that governments are far better at creating inflation than curbing inflation, a phenomenon that has plagued (and even destroyed) civilizations ranging from the Roman Empire to 20th Century China and beyond.

“I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments,” the Nobel Prize-winning economist F.A. Hayek once observed.

This is why Hayek saw it as imperative to take the control of money “out of the hands of the government.” History shows that those in power spend beyond their means, and these debts eventually come due. When they do, rulers turn to money printing or other forms of currency debasement, eroding its value (sometimes slowly, sometimes rapidly).

The US is a long way from the hyperinflation that crippled Weimar Germany—where in 1923 a single US dollar was worth a trillion marks—and plagues Venezuela even today, but inflation is a patient killer. Over time, it eats away at retirement accounts, pensions, wages, and savings, and as my colleague Peter Jacobsen noted last year, working-class and poorer Americans are the ones least able to protect themselves from inflation and most likely to feel the difference.

Most Americans don’t need an economist or politician to point out the harms of inflation, especially those living in Anchorage, Phoenix, Atlanta, Tampa, and Baltimore.

What they need is sound money, but it’s clear that is something they will not get as long as the government controls it.



This article was published by FEE, Foundation for Economic Education, and is reproduced with permission.

Inflationary Vice

Estimated Reading Time: 4 minutes

Samuel Gregg, in his article on the French economist, Jacques Rueff, provides a timely reminder that inflation is much more than merely an economic phenomenon. It also has profound social effects. This, of course, was recognized by Keynes himself in the book that made him famous, The Economic Consequences of the Peace. He recognized that inflation functioned as a transfer of wealth from creditors to debtors, thus upsetting the previous social equilibrium; and he also quoted Lenin to the effect that the debasement of the currency was a sovereign method of producing revolutionary change.

Not all inflation is equally dramatic, of course. The grandfather of a German friend of mine once owned a portfolio of mortgages on valuable properties and soon found himself in possession of pieces of paper of less value than yesterday’s newspaper. Apparently, he took this loss philosophically and never turned to political extremism; he was later sent to Buchenwald. Not everyone in these circumstances stayed sane or decent, however.

But even less catastrophic levels of inflation have profound psychological, or perhaps I should say characterological, consequences. For one thing, inflation destroys the very idea of enough, because no one can have any confidence that a monetary income that at present is adequate will not be whittled down to very little in a matter of a few years. Not everyone desires to be rich, but most people desire not to be poor, especially in old age. Unfortunately, when there is inflation, the only way to insure against poverty in old age is either to be in possession of a government-guaranteed index-linked pension (which, however, is a social injustice in itself, and may one day be undermined by statistical manipulation by a government under the force of economic circumstances, partly brought about by the very existence of such pensions), or to become much richer than one would otherwise aim or desire to be. And the latter turns financial speculation from a minority into a mass pursuit, either directly or, more usually, by proxy: for not to speculate, but rather to place one’s trust in the value of money at a given modest return, is to risk impoverishment. I saw this with my own father: once prosperous, he fell by his aversion to speculation into comparative penury.

When inflation rises to a certain level, it is prudent to turn one’s money into something tangible as soon as it comes to hand, for tomorrow, as the song goes, will be too late. Everything becomes now or never.

With the concept of enough go those of modesty and humility. They are replaced by triumph and failure, the latter certain almost by definition to be the more frequent. The humble person becomes someone not laudable but careless of his future, possibly someone who will be a drain on others insofar as he has failed to make adequate provision for himself – even if, given his circumstances, it would have been impossible for him to have done so. For notwithstanding technical progress, automation, and robotics, we shall need people of humble and comparatively ill-paid employment for the foreseeable future.

Inflation plays havoc with the virtue of prudence, for what is prudence among the shifting sands of inflation? When inflation rises to a certain level, it is prudent to turn one’s money into something tangible as soon as it comes to hand, for tomorrow, as the song goes, will be too late. Everything becomes now or never. Traditional prudence becomes imprudence, or naivety, and vice versa.

Inflation comes in more than one form. For quite a number of years, it took the form of asset inflation, while the prices of consumables remained relatively constant or actually fell. This, in western societies, was the result, it seems to me, of a concatenation of at least two factors: the expansion of money while keeping interest rates low, and globalization that allowed everything to be produced as cheaply as possible. The former allowed governments to run on deficits without apparent consequences for years at a time, while the latter allowed the less well-off to think that they were living in times of little or no inflation. 

Asset inflation, though, has certain social and psychological consequences. First, it puts the meaningful accumulation of assets for those who do not already possess them out of reach. (I speak, of course, in generalities; there are always exceptions). This in turn has the effect of transforming a society divided by permeable classes into a fixed caste society. There have always been advantages to being born in a well-off household, but asset inflation encourages them to become hard-wired, so to speak, into the social fabric.

Asset inflation fosters delusions in those who benefit from it. I sit in my house and grow richer, though of course, the house remains the same, with the same number of square feet (beside which, I have to live somewhere). I look at the value of my investments and hug myself, though in fact, their value has no relation to their yield, which overall remains much the same. I am richer only if I sell them – and then, what do I do with the money?

Nevertheless, I am richer on paper, and for some dizzy people this feeling of wealth encourages sumptuary expenditure, often on credit. Why not take out a loan when interest rates are low and asset prices rising? At one time in the not terribly distant past, my bank offered me $40,000 to pay for a holiday of a lifetime. Why not, when my house was increasing by far more than that every year? Luckily, I have lived (and live) a life of sufficient satisfaction that the concept of a “holiday of a lifetime” has no meaning for me: I cannot even imagine what it would be.

The inability of people at a lower level in the social scale to make any meaningful provision for themselves from savings, as well as the fact that so much is taken out of their hands by the state, means that their income is, in effect, pocket money of the kind that a child receives from its parents. They spend up to the hilt and even beyond, and remain economic minors. Gone in my lifetime is the idea that debt is to be avoided, that it is discreditable to live entirely on credit, and shameful not to repay. If you have no assets worth speaking of, the bailiffs have nothing to seize, and creditors can whistle for their money.

We have entered a more ‘traditional’ phase of inflation. No one knows how long it will last, or how serious it will be. But the very unpredictability creates anxiety even among those who have no real need to feel it – or rather, whom events will show to have had no need to feel it.

Inflation has not merely economic or social consequences, but moral and psychological ones too.


This article was published by Law & Liberty and is reproduced with permission.