The Great Inflation Scare- Not So Fast.
By this point in time you’ve undoubtedly heard inflation mentioned a million times on TV, social media, in articles and interviews. It’s certainly one of those buzzwords everyone uses but few have a great grasp on. Can’t say I blame them either- can you think of something less sexy than fiscal and monetary policy?
Everyone from your mom to your Uber driver to your primetime news host of choice to the actual Wolves of Wall Street plus that crazy uncle- who hoards gold and silver bars in his basement fallout shelter- seem to all be very spooked by inflation. A rare congruence of people. Have the stars aligned or perhaps are there ulterior motives (money, ratings, politics, etc.) for some ? That’s for you to decide.
Either way, it is always a good idea to consider all angles of an argument when forming your opinion, especially when the prevailing narrative is so uniformly one-sided.
So let’s try dusting off those cobwebs from freshman year econ and take a holistic look at inflation.
Crash Course
Simply put inflation can be categorized as period of time where prices rise while purchasing power decreases. You get less for your money. Doesn’t sound good. It’s what’s scaring the aforementioned motley crew of inflationistas. Luckily for us that is a gross oversimplification. When you’re dealing with an economy the size of the United States very few things are cut and dry with more falling in the camp of incredibly complicated and interconnected. Its best to take a more nuanced approach. Think of it as ying and yang. There’s good and bad. Bad in the good. Good in the bad. The whole thing put together makes up the economy.
So what’s happening to us? After a black swan type of year where the world was forced to endure a once in a century pandemic, we are going through a period of largely transitory inflation (think of it as a one off, meaning it will not to reoccur at the same rate) as a result of the economy reopening from its forced pandemic shutdown. There is a lot of pent up demand from consumers and extra money in the system that people have accumulated throughout the pandemic from forced savings or direct stimulus. The government and Federal Reserve have incredibly accommodative policies via increased fiscal spend and record low interest rates, as well. All of this comes together to create a booming economic set up in our near future.
Word du jour: Transitory
As the economy reopens bottlenecks in things like steel, timber, semiconductors, etc. need to be worked through as we slowly get back to normal. Since everyone is opening up at the same time these types of raw material companies are being inundated with orders while their capacity is still not back to full strength. These bottlenecks are driving the overall inflation number higher than it otherwise would be. Once these get worked through it will stabilize. But don’t take my word for it listen to the Chairman of the Federal Reserve.
You can see evidence below of transitory inflation with the price of lumber. It was artificially driven up by an initial supply shortage as orders came pouring in all at once as the economy reopened. This caused a demand shock since supply was nowhere near back to pre-pandemic levels.. Once the supply gets back up and running you see the bubble pop and prices return to normal. This is what the Federal Reserve projects to happen for most of the raw materials seeing huge inflationary pressures.
Still skeptical? Let’s take a look at what areas are specifically driving inflation so high outside of the bottlenecks.
Rental cars, airfare, gasoline, used cars and hotel rooms drove inflation higher by a mile. Seems to me less spooky and more summer of fun. These pressures will surely subside as people normalize their behaviors..
Also it’s important to understand that inflation isn’t necessarily bad. Most countries want to hit a certain level of inflation because it’s healthy for the economy- as long as it doesn’t outpace growth. In the United States, we have seen inflation trend down below even the Federal Reserve targeted rate of 2% in the years leading up to 2021. It has also stayed relatively flat over the last few decades so there is some room for a fluctuation. This isn’t 1970’s Stagflation where the economy stalled out, OPEC limited our supply of gasoline, the manufacturing sector started its collapse and the Federal Reserve raised interest rates through the roof.
Some examples of healthy inflation come from investments in worker wages, capital improvements and targeted government spending (i.e. infrastructure). There are tangible returns on those investments as they tend to spur further economic growth. Think of it like for every $1 you give me I give you $1.1 back. The key is making sure that return rate is higher than inflation.
When inflation is very low it tends to disproportionately benefit those who have all the money because they can seek out low-risk financial assets to generate low single digit returns that outpace inflation. In other words, it disincentivizes investment in workers, factories and other forms of capital that are directly tied to the real economy and favors speculation in the financial economy (i.e. instead of starting or investing in a business they can park their money in a low risk financial asset that barely outperforms inflation or buyback more company stock to inflate share price).
When you hear someone in finance talking about the real economy versus the financial economy consider the common trope wall street versus main street. Main street is the real economy. Wall Street is more the ‘financial economy’. Sometimes what is good for one is not good for the other. When the incentive structure is set up to more reward investments in the financial economy it can have negative downstream effects on the nations real economy.
Implications
Notice a coincidence here? Worker Wages have stagnated since the 1970s. If wages would have kept pace with productivity the minimum wage would be around $24. Capital investment (corporations reinvesting their money into the country) has lagged as well as corporations have opted to build supply chains and factories over-sea, keep worker wages low and benefits to a minimum. Think your 2 weeks of vacation is nice? Most countries in Europe start with 6- 8 weeks paid and the people won’t accept less. Productivity has increased at a rate of more than 400% when compared to hourly pay growth.
Infrastructure? Last time we seriously spent in that area Dwight Eisenhower was president. That’s why our roads, bridges, airports, rail and ports have been slowly and consistently eroding for decades. In the last comprehensive study done in 2019 the United States ranked 13th in the world in infrastructure. If you think that sounds impressive do not forget that the trend is down and we started in 1st place by a mile.
These types of investments into the real economy are often dogged as inflationary, wasteful and just too damn expensive by Wall Street, the super-rich, corporate America and the politicians that do their bidding but that couldn’t be further from the truth. It’s really just the classic tale of ‘do as I say not as I do’. A lot of people wondered why during the worst parts of the pandemic Wall Street was exploding to all-time highs and breaking all sorts of records well it’s because we printed 4 trillion dollars support the financial markets through quantitative easing , bailouts and lowering interest rates to record lows. A trillion dollars is impossible for the human mind to comprehend, let alone 4. A trillion: a thousand billions.
Forget about bringing a gun to a knife fight; they said hold my beer and brought an Apache helicopter to a fist fight. Just look at the charts below and you’ll see the recovery off of the Great Recession and the one from the prior year. One word comes to mind: parabolic. They didn’t just get enough cash to stabilize the market; they got enough cash to make historically large returns in record time. Printing and pumping 4 trillion dollars in no strings attached money into the financial markets sounds pretty inflationary to me? Wonder why the word was mum on The Street? Makes you think inflation wasn’t such a big deal then.
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Now the point isn’t to be anti-Wall Street or business or anti anything for that matter. The point is to recognize hypocrisy when you’re being sold a particular bill of goods for a specific purpose. Keep in mind all this happened while you had to fight and claw for the right to get a $1200 and $2000 check to last you an entire pandemic. Meanwhile other countries fully guaranteed people’s wages during the entirety of the shutdown, along with providing healthcare. Why couldn’t we do that? Because they took all the money for themselves. That 4 trillion went straight to expanding our debt and causing inflation in its own right. They got their money, like they always do. Don’t fall prey to their disingenuous cries.
And some readers are rightfully thinking well it’s important that the stock market does well because all of the American’s have their retirement accounts directly tied to the stock market. Right. However, it’s important to keep in perspective that while 52% of Americans are invested in the stock market to some capacity the top 10% of incomes own 70% percent of all stocks. Conversely the bottom 60% of earners owned just 7% of all stocks. So it is evident that any benefit in the stock market disproportionately benefits the top 10%.
Keep in Mind
Sometimes terms like inflation can be used as scare tactics to stop potential reforms from going through that will undoubtedly benefit every day, working people. They don’t want them passed because it’ll be paid for in the form of taxes or regulatory adjustments that impact them. It’s important to remember these people are negotiators so often when they say something it is put through that calculus so sometimes taking what they say at face value is a bad idea. It’s like going into a negotiation, offering no counter and happily taking the first offer you get.
If they’re allowed to get a no strings attached, 4 trillion dollar cash injection, taxpayers who actually foot the bill should be afforded the right to have some things that actually would benefit them. It turns out that targeted spending on infrastructure and expanding the middle class- while possibly inflationary- actually generates a net positive effect on the economy and country as a whole.
Ace up the Sleeve
Still not convinced that the inflation scare is blown a little out of proportion? There’s still one ace up our sleeve. And it’s Jeff Bezos- just kidding. Well kind of. Dr. Evil doesn’t need his ego feathered anymore so we’ll settle just for a tacit atta boy. Companies like Amazon, Microsoft, Alphabet, Zoom, Docusign, etc. are innovating so fast that they are removing costs from the economy which actually makes things cheaper for people and businesses (there are certainly monopolistic issues that arise that can hurt consumers in other ways but just speaking in a purely inflationary way). As it turns out technology is the single strongest deflationary force in the history of the world and the United States is the hub.
We are in the midst of another technological revolution that is equivalent to the industrial revolution that took place roughly 250 years ago. The pandemic actually accelerated the shift, forcing companies to adjust on the fly and cram through 5-10 years of slow moving corporate innovation into a year. All of this will help to counteract any inflationary forces that arise.
Looking Forward
I just want to take a second to clearly state inflation is a serious force in any economy and must be taken seriously. It is just important to consider the whole picture. The coverage has been incredibly one sided and skewed towards sensationalism and scare tactics. The situation is being monitored incredibly closely by the Federal Reserve. They have access to the best, most accurate, real-time data available.
All facts are pointing towards a transitory period of inflation followed by slightly higher inflation than we have been accustomed to over the last decades. There are signs the rate of inflation is already starting to cool.
If that higher inflation comes in the way of increased worker benefits, pay and better infrastructure it will be a net positive for everyone involved. The goal should be for us all to have a constructive dialogue and debate further investments on their merits rather than blanket fear mongering. Nuance, while more work, is important.
Cheers!
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