March 11, 2021
I’ve been pounding the table for weeks now about the serious, increasing threat of inflation in this country…
Well, the proof is in the pudding, as they say.
The government released its Consumer Price Index (CPI) yesterday, and although many don’t want to admit it, the cost of U.S. consumer goods and services is about to soar – while the cost of food and energy has already gone way up.
Wednesday’s CPI reading showed that inflation jumped to 1.7% (from 1.4%) in the past year.
I realize a lot of Left-leaning political economists don’t think that’s a big deal… Princeton’s Paul Krugman says the “Fed can handle it” if inflation gets out of control. I’d like to believe the Fed could, too… However, history has shown that the Fed is always late to the party.
By the time these inflationary problems really take off, there’s little the Fed can do. You have only to consider the rate hikes Paul Volcker once needed to put in place to realize inflation is not an easy thing to tame.
Argentina, Brazil, and Venezuela have all learned this the hard way. In Venezuela, the Maduro regime recently announced it would introduce a banknote worth 1 million bolivars – the largest note in the country’s history.
One million bolivars in a single bill… And guess how much that equals? $0.53 U.S. cents.
Let the record show, a government cannot print its way to prosperity.
New Data Indicates Inflation
New data here at home shows inflation is creeping into our economy.
For the month of February, we learned that prices on U.S. goods jumped at their fastest pace in six months.
Gasoline prices are rising significantly – up 6.4% in February. Fuel oil, meanwhile, jumped 9.9% in the month.
Now, some politicians want to tell us, “Don’t worry about it! It’s nothing!”
But I’m not buying that.
Here’s why… Though many politically motivated economists on the Left want more stimulus because they fundamentally believe in a socialist-style model in which economic success comes via government handouts, wealth transfers, and even a constant printing press at our U.S. Treasury… this model is never the answer.
Capitalism has historically raised more people out of poverty than any other system in the world. So it’s critical right now that we remain true to our American capitalist, freedom-loving values.
Knowing that we want a meritocracy and an economy that provides opportunity for all, we need to ward off inflation.
Yet, these political-economic types insist you need to look at the core inflation number, which strips out fluctuations in foods and energy costs. I disagree. After all, it’s food and energy costs that are the most basic costs for the American consumer, and also for the American producer of goods.
The cost of food at grocery stores went up 3.5% last month, while food consumed at restaurants increased 3.7%.
When food and energy costs go up, we run the risk that inflation will spill over into the rest of the economy.
Recommended Reading: Don’t miss next gen crypto tech: “ID Coin”
Next digital revolution in world-changing crypto tech is “ID Coin.” One potential gov’t announcement could make it mainstream news. Critical info here.
The Biggest Stimulus in History
We have a $1.9 trillion stimulus bill that is about to be signed into law, with $350 billion making its way to states. (New York and California will receive the most money – surprise, surprise.) And, hey, Joe Biden and company made sure that there was something for nearly everyone. Lawmakers got their money for their pet projects, and what average American doesn’t want an extra 1,400 bucks?
Biden tells us we are “at war with the virus.” And I hate to break it to him, but the very good news is… that battle is (thank goodness!) coming to an end.
We have not one, not two, but three vaccines in circulation, and multiple states opening up. From Connecticut to Texas, governors across the country are increasingly allowing businesses to return to 100% capacity if they so choose. Heck, even Governor Gavin Newsom in California is feeling the pressure and says Disney can reopen on April 1.
So, with spring on the way, vaccines being circulated, and businesses reopening, do we really need the $1.9 trillion in stimulus?
No, we do not.
And since the stimulus is not desperately needed, it will have an inflationary effect, unlike anything we’ve seen in a generation.
As I told you recently, this is bad news for savers because your savings will mean very little when a cup of coffee costs you $30 instead of $2.
Investors Are Betting on Easy Money
Thanks to yesterday’s “tame” core inflation rate – and an unwillingness to recognize the reality of the overall inflation rate when accounting for food and energy prices – investors are optimistic that Jerome Powell and company will keep their liquidity measures turned on.
It’s unlikely that the Fed will feel pressured to curb pending inflation since the core rate suggests inflation is muted.
The Fed is wrong not to acknowledge the overall rise in CPI thanks to food and energy costs moving higher. Of course, it doesn’t really want to see it, either. It’s a tough job being a central banker… After all, you have the economy in the palm of your hand. Why not goose it by leaving rates low for record periods of time?
At the risk of sounding like a broken record from the 1970s, we could soon find ourselves in an environment of higher prices and little growth.
Though inflation was near-zero throughout the pandemic (and there were times that some folks even worried about the potential for deflation), that’s not a concern today. With too much money in the system, inflation is bound to creep in.
Yields on the 10-year Treasury bond have already been creeping higher in recent months, with yields touching 1.6% recently. And massive borrowing from the federal government is causing some investors to lose interest in Treasury debt, which will trigger higher rates.
Higher interest rates on U.S. debt means higher rates on car loans, mortgage loans, and any other kind of loan consumers and businesses may seek.
The Bottom Line
It’s not all bad. There’s good news here, too… Our economy is healing. And while we will look back on the year of the pandemic with sadness, we now have viable vaccines and are beginning to reopen as a country – and that is a tribute to American capitalism.
Why would we turn our back on capitalism now, after all it’s done for us?
The political environment in which we now live is a dangerous one… with serious and possibly severe economic consequences.
- The merry band of Redditors who hopped onto GameStop were less motivated by giving a middle finger to the establishment and were instead inspired by something far more primal: the chance to make money.
- The terms “market discipline” and “investing fundamentals” don’t exist in the WallStreetBets generation’s vocabulary.
- The rise of the retail investor and Wall Street’s democratization means people with little money can now act like banks, buying mortgage-backed securities and CDOs if they wish.
- Redditor financial guru Keith Gill could become the Warren Buffett for millennials.
- What’s the next GameStop? That’s akin to picking which video will go viral next on TikTok.
Love us? Hate us? Let us know how we’re doing at [email protected].
Publisher, American Consequences
With Editorial Staff
March 11, 2021