Inflation Risk Takes Center Stage (Part I)

Over the past couple of weeks, we’ve been seeing more and more mainstream headlines about inflation fears being on the rise, both in the US and in Europe. Central bankers on both sides of the Atlantic have been doing their best to assuage these concerns, promising that they have everything under control and that the situation will without a doubt normalize soon. Still, all these assurances have failed to convince the markets and many investors are starting to see the cracks in the much celebrated “recovery” from the covid crisis.

End of the road?

Even by the heavily biased and inaccurate metrics used by central bankers and mainstream analysts and economists, such as the CPI, inflation is certainly picking up and there are plenty of reasons to worry that it may not be easily tamed anytime soon. Of course, for those of us who have been monitoring and keeping track of the much more relevant bigger picture, this has been clear for a long time. Common sense and high school level economics also pointed to that conclusion. With interest rates at rock bottom, an unprecedented printing and spending spree, what else could have possibly happened? When you flood the system with “free” cash, all chasing the same goods, how could prices fail to rise? 

Many of us, especially precious metals investors, have seen this coming for years. We also understood, when the covid crisis truly took hold, that the real destruction had not become apparent yet. All the business closures, the bankruptcies, the millions of jobs lost, all that we saw over the last year, will arguably be nothing compared to the incredible damage that an inflationary scenario can bring about. Its impact on wages, on savings, on the very means of survival for all ordinary citizens has the potential to create deep and wide economic devastation, that could very easily boil over and snowball into a social and political crisis too. 

Of course, most citizens, voters and consumers, have so far failed to grasp the severity of this threat. The lack of economic understanding and poor public education certainly contributed to this, but so did the lived experiences of most people so far. For so long, central bankers have been pursuing aggressively expansionary policies and politicians have been pumping freshly printed money into the economy to keep their voting blocks and their allies happy. Over the last decade, this trend accelerated dramatically and still, inflation was nowhere to be found. At least that’s what central bankers, mainstream economists and the financial press reported, so that’s what the majority of the public believed. Naturally, in all their analyses and commentaries they conveniently avoided mentioning the elephant in the room, i.e. asset price inflation, which has been rampant. It caused massive distortions in the markets and led to absurd valuation levels, eventually threatening the entire financial system.

“A problem for another day”

It was only a little over a year ago that Bloomberg Businessweek released an issue with a cover proclaiming that “Inflation is dead”. It might have seemed like an absurd statement, but it reflected the consensus at the time, the idea that it is possible to keep on spending and printing without consequences. This notion is even more widespread and familiar now, as it is the central tenet of Modern Monetary Theory (MMT), the nonsensical and populist school of economic thought that is taking over Western politics. Especially over the last year, we’ve been hearing these sorts of arguments more and more – that deficit spending is not just viable and sustainable, but also necessary and a sign of a good and responsible government, or that developed economies can never default because they can always print more money to pay their debts.

MMT, which is basically just a political strategy pretending to be an economic theory, promotes a vision of a utopian society ruled by a wise and benevolent government that can simply print and spend its way to prosperity, to equality, to the total eradication of poverty and strife, and to whatever other higher ideal we all aspire to. It also promises that there’s no downside at all, no side effects, no price to pay for any of this. Job guarantees for anyone who wants one. Universal basic income for those who don’t want one. Free healthcare, free college, free housing. Free lunches for everyone, forever. This is the main message of MMT, and as ridiculous and childish as it might seem to most rational people, in the world of politics, nothing can compete with “Free”. 

As MMT grew in popularity and as its core ideas spread and infiltrated even mainstream analyses and conversations, the whole concept of excessive spending or the problem of over indebtedness took a back seat. As for inflations, as can be expected in this climate, it was simply not seen as a real issue. For hard-line MMT supporters it was a mere boogeyman, an imagined threat, but also within more moderate circles it was seen as a problem for another day. 

Especially during the escalation of the covid crisis, after the lockdowns and the global economic freeze, the “whatever it takes” attitude prevailed and “rescuing” the economy was all that mattered. This may seem extremely shortsighted and naive, at first glance. What sane man would use poison as a cure, and save a patient for one day only to guarantee his demise the next? It might begin to make more sense once one realizes that the effects of inflation are not exclusively negative, not for everyone at least.

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In the upcoming second part, we’ll look at the effects of inflation for a big-picture perspective, while we’ll also examine what investors, savers and ordinary citizens can do to protect themselves over the long term. 

Claudio Grass, Hünenberg See, Switzerland

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