A Real Life Inflation Horror Story

November 11, 2021

People like scary movies because you get to jump on a psychological thrill ride for a couple hours. 

But after all the shrieking, you get to leave the theater and go back to your normal life.

The things that go bump in the night in real life are usually just the neighborhood racoons out for a poke through your garbage. 

Because monsters aren’t real. 

Or are they? (And maybe people just don’t want to acknowledge them.)

Right now inflation is a boogeyman that’s grabbed everyone’s attention… From the economists in Washington, who are “monitoring” it, to consumers like you who are paying for it. 

The Fed is calling it “transitory” saying it’ll go away on its own.  Like movie monsters, it’s not really real.

But there is a real life monster when it comes to inflation…

What Most People Know as “Inflation”

For the past 40 years, we’ve been subject to what’s known as “cyclical” inflation.

This is the kind of inflation that occurs during expansions and contractions in the business cycle. It’s totally normal and to be expected. 

According to its “mandate,” the Federal Reserve is supposed to use monetary policy to maintain a sort of a homeostasis where inflation goes, pegging it to roughly 2%. (As of last year, they waved the white flag a bit and suggested their new target should be 2.5%. Whatever.)

Look at the chart below and you can see year-over-year CPI. There have been spikes here and there, but for the most part, inflation has fluctuated around the 2% level fairly regularly for the last roughly 40 years.

Consumer Price Index

source: tradingeconomics.com

But there’s a different beast where inflation goes…

The Real-Life Monster: Secular Inflation

Secular inflation occurs when multiple breakdowns in the economic and financial systems occur.

The 1970s was such a decade, and it became known as the “Great Inflation.” (It actually started in the mid-1960s and didn’t end until the mid-1980s.)

First, there was bad fiscal policy on the part of the government. President Johnson’s massive deficit spending on his Great Society and the Vietnam war (spending which lasted into the 1970s) put the country in a massive hole.

Then there was bad monetary policy. Going into the 1972 presidential election, President Nixon ordered his hand-picked Federal Reserve Chairman, Arthur Burns, to push rates lower to spark short-term economic growth. It’s claimed that Nixon said, “We’ll take inflation if necessary, but we can’t take unemployment.”

There were artificial market manipulations that tried to control the overall economic situation. Nixon also imposed wage and price controls that exacerbated price increases when they were finally lifted.

Finally there were two huge disruptions in the supply chain of oil (the Saudi embargo of 1973 and the overthrow of the Shah of Iran in 1979) that led to rationing and soaring energy prices.

These are not part of the typical business cycle.

This is what “secular” inflation looks like…

Consumer Price Index: 1969-1981

source: tradingeconomics.com

If you look at the current situation today, you’ll see a lot more that’s comparable to the 70s…

Sensible monetary policy has been abandoned to effectively slap the defibrillator paddles on the economy. 

Look at the Fed Funds chart in the last letter I sent you. Rates were pushed to ZERO and have been held there for the past 12 years. When Fed Chair Powell tried to tap the breaks and normalize rates in 2017 and 2018, Donald Trump pushed him to put the Fed’s foot back on the gas.

Fiscal policy is out of control. Literally. 

In 2008, Hank Paulson asked the U.S. Congress for $750 BILLION to save a crashing global financial system. Back then that was an UNTHINKABLE AMOUNT!

Today, since the 2008 crisis, the Fed now holds over $8 TRILLION in monetized debt on its balance sheet.

Over the last 18 months, Congress has appropriated a total of $4.7 TRILLION in COVID-19 relief spending.

And Joe Manchin says he’s open to discussing $1.5 trillion in “human infrastructure” spending (as opposed to the administration’s $3.5 trillion version).

In what universe is saying “I’ll go $1.5 trillion” fiscal sanity???

Supply chains are in disarray (and that’s putting it mildly.) Shortages in certain products are squeezing prices everywhere.

And the labor market is struggling to return to pre-pandemic levels.  This has led employers to offer higher wages and other incentives to attract workers — which will ultimately show up in prices.

Today’s economy isn’t typical.  But it is the reality the Fed has to deal with if they hope to keep inflation “transitory.” 

Otherwise they’ll have a real monster to deal with…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily