Inflation Is Dead. Long Live Deflation!

If you did a double-take reading that headline, you're not alone.  As strange as it may sound, inflation has already been beaten for the most part, and now the underlying trend has shifted in the opposite direction.  First, the second derivative of price level (with respect to time) has turned negative many months ago, then the first derivative turned negative on a monthly basis more recently in December.  Inflation has apparently peaked in June 2022.  And consumer demand has been falling for many months now as well.  While we had two consecutive quarters of real GDP growth following two consecutive quarters of real GDP shrinking, we are still not out of the woods for a potential recession in 2023 either.  There is always a lag before the actual effects of monetary policy kicks in, usually at least two quarters, sometimes as long as four quarters.

The M2 money supply literally shrank for the first time since 1960 as well in 2022, albeit following an unprecedentedly high growth rate in 2020-2021.  Usually a shrinking money supply does NOT bode very well for the economy.  And that is a result of both fiscal and monetary tightening in 2022.

And while the labor market remains "tight", there is no real "wage-price spiral", and never was in recent years, since while wages rose, they rose less quickly than prices did overall.  Thus, no spiral happened. 

And while China's reopening will stoke pent-up demand for goods and services globally, which is inflationary, that same reopening will un-snarl any remaining snarls in the global supply chains, which is disinflationary, especially now that their "exit wave" of the virus has finally peaked and fallen.

After all, as we have noted before, the REAL root cause of the recent inflationary episode was the repeated and protracted global supply chain disruptions caused by the lockdowns and shutdowns, which of course greatly shrank supply of many goods and services.  And the unprecedented levels of money printing to paper over the predictable consequences, which (upon reopening in the West) stoked demand for goods and services at the same time that supply remained reduced, was like gasoline on the fire, worsening the supply-demand mismatch.  Of course, without printing all that money, and/or without eventually reopening, there would have been a full-blown Greatest Depression, and the architects of the lockdowns and shutdowns would have all been sent to the guillotine within a matter of weeks.

(The Russia-Ukraine war clearly didn't help, as both the war and the sanctions created artificial scarcity of oil and gas, but the general inflationary pressures were of course already there before the war began.)

Honestly, had the entire world simply "adopted the flu strategy" from the start of the pandemic, the supply chain disruptions and other economic effects would really not have been any worse than the 1957-1958 or 1968-1969 flu pandemics.  (Yes, you read that right:  we literally had WOODSTOCK in the middle of a pandemic!)  And while some fiscal and monetary stimulus would probably have been necessary, it would have been only a fraction of what was done.

It's not like the FERAL Reserve can actually do anything about supply chains anyway.  Hiking interest rates and/or shrinking the money supply can obviously quash demand, of course, but does absolutely zilch about the underlying cause of the inflation, which turned out to be largely transitory.

Thus, all signs strongly imply that the FERAL Reserve needs to stand down and stop QT and stop hiking interest rates, and start cutting them yesterday.  Seriously.  But given their tendency to overcorrect, they probably will do so in that regard.  And given how deflation is more harmful than inflation, they need to answer the "clue phone" before it's too late!

And Congress may even need to get a new round of stimulus checks ready as well, since they may be needed sooner rather than later to cure an incipient deflationary spiral.  And of course, they need to stop playing "chicken" with the debt ceiling yesterday!

UPDATE:  And now that the FERAL Reserve raised rates yet again, the above applies a fortiori now.

Don't Do "The Volcker" Again! (Part Deux)

As the FERAL Reserve is still committed to raising interest rates no matter the cost, even if it means deliberately engineering a recession, in an attempt to quash the worst inflation in 40 years, we would like to warn them as follows:

Stand. Down. NOW.  And prepare to reverse course a full 180 degrees, and soon.  Especially since the latest figures show that prices actually FELL slightly in December.  And with a looming recession all but certain now, they should be CUTTING rates now.

And the same goes for their Quantitative Tightening (QT) as well, which of course amplifies the effect of raising interest rates by literally sucking money out of the economy, thus shrinking the money supply.  And it doesn't take a rocket scientist to see that, since there is exponentially more debt in the overall economy in 2022 compared with 1982, even a fairly modest increase in interest rates can have a much larger adverse effect now compared to back then.

Paul Volcker, former Fed chairman, (in)famously raised interest rates as high as 20% in the early 1980s, and it technically "worked" to quash inflation.  But it came at a terrible price:  not only a pair of really bad recessions with millions of jobs lost, but the resulting damage also inflicted serious sequelae upon the broader working class that persist to this day as well, both in the USA as well as abroad.  The first time, one could say it was naive at best.  Doing "The Volcker" a second time, however, would be downright stupid, if not utterly malicious, narcissistic, and even sadistic.

And the USA was actually one of the luckier countries.  Canada, for example, set interest rates even higher still, and kept them higher for longer than the USA, and they got even higher and more persistent unemployment as result, and inflation persisted longer as well.  It was a complete lose-lose proposition for them.  So don't do it again!

As the old adage goes, when the only tool you have is a hammer, everything starts to look like a nail.  And this particular tool is like swatting a fly with a sledgehammer, or burning down the house to roast a pig.  And worse, it is fundamentally the wrong tool for the job.  Most inflations, including this one especially, are caused by shortages of goods and services.  The only real cure is to solve the shortages, something higher interest rates simply cannot do no matter HOW high they are (at best it reduces demand and squeezes "inflationary psychology" out the system, and at worst it simply exacerbates the "cost-push" side of inflation when kept too high for too long).

And Rodger Malcolm Mitchell notes that governments can easily solve shortages by purchasing at a premium whatever goods or services happen to be in short supply, which incentives production, and then re-selling them (or giving them away) at a loss.  Higher interest rates do absolutely zilch for that.

Of course, we would not have gotten into this situation had our "leaders" not imposed  lockdowns in a futile attempt to control an airborne respiratory virus, and then tried to paper over the inevitable and predictable consequences by printing ludicrous and unprecedented amounts of money that overwhelmingly went toward further enriching the already ultra-rich.  Had we instead adopted the time-tested "flu strategy" from the get-go, with or without a more moderate stimulus package for We the People, we would not have gotten in this predicament in the first place.  Yes, there may have been some leftover problems in the bond markets and especially the repo market from 2019, and the virus would have been somewhat disruptive to the economy, (like the 1957 and 1968 flu pandemics), but nothing even in the same league as what happened with lockdowns.  And from what we have learned the hard way, death rates would have been about the same or even lower.

(No really, cumulative excess all-cause death rates for countries, states, and communities that largely ignored the virus, or at least eschewed lockdowns and more-restrictive NPIs, were actually within error bounds or even lower than for their much stricter neighbors or national/regional averages.)

When you try to "burn the village to save it", eventually the village will return the favor.  It is simply the law of cause and effect, also known as karma.  Sooner or later, you always reap what you sow.  And as the saying goes, hindsight is quite literally 2020.  Will the Fed answer the "clue phone"?

BONUS POINTS:  The Brownstone Institute has an excellent article discussing how the combination of lockdowns and the aftermath (forced massive supply crunch) + stimulus (massive demand boost), followed by the Russia-Ukraine war and sanctions, unleashed the worst inflation in 40 years.  You mean you can't just paper over a massive supply crunch with more demand?  And that war and sanctions are both negative-sum games in which everyone loses to one degree or another?  Gee, who woulda thunk it?

The money supply has been shrinking at a record pace in recent months, thanks to the FERAL Reserve's Quantitative Tightening.  Usually a shrinking money supply portends recession, historically speaking. 

Of course, the other elephant in the room is corporate greed.  They ultra-rich and mega-corporations are taking in record profits, so it is not simply that they are passing higher costs of doing business onto the customers.  An excess profits tax would be the best way to curtail this sort of inflation, as would a one-off wealth tax on the very richest folks, much like several countries did after WWII.  Keep in mind that Trump himself actually proposed such a wealth tax back in 1999, and not a trivial one either, so the MAGA crowd would be truly hypocritical to oppose it.

FEBRUARY UPDATE:  It looks like inflation is largely beaten now, and the real looming threat is deflation. 

2023: The Year Of Reckoning

It's 2023 now, and the ever-insightful Michael P. Senger wrote an excellent article about how this should be the year of reckoning.  Reckoning for what, you ask?  Well, here is a partial list:

• Lockdowns
• Forced antisocial distancing 
• Forced school closures
• Forced business closures 
• Mask mandates 
• Jab mandates and passports 
• Jab injuries and deaths 
• "Run death is near" and other harmful snake oil
• Midazolam
• Denial of actual effective treatments and prophylaxis 
• Blatant censorship and blacklisting
• Lies, lies, and more lies
• Tyranny
• Reverse Robin Hood Economics
• Worst inflation in 40 years
• And finally, having the GALL to gaslight everyone about it

In a nutshell, CRIMES AGAINST HUMANITY. And no, that is NOT an exaggeration at all, with the body count alone being proof positive.  The powers that be, and their sycophantic lackeys, absolutely must be held accountable, yesterday, with NO AMNESTY.

Otherwise, this will only happen again and again in the future.  Precedents have a way of sticking around.