Why You Shouldn’t Bet on Inflation

Does this chart look bearishThe Wall Street Journal put on a full-court press of inflation blather yesterday, shilling the Fed and a mainstream consensus that higher prices for everything loom in our future. Here’s one of the headlines from Wednesday’s edition: ‘Yes, Central Banks Can Create Inflation. Just Ask Argentina”.  And here’s the headline I would offer in response: ‘No, Central Banks Cannot Create Inflation. Just Ask Europe and Japan’. The other headline, atop a column by one Ken Brown, read as follows: ‘No One Believes It, but Inflation Is a Pretty Good Bet’.  In response, I offer the chart above. If inflation were coming, the long-term bond would reflect it with a bearish chart (bond yields correlate inversely with price). Does the chart look bearish?  Not hardly.  Even to someone who knows nothing about charts, T-bond futures look like they are headed to the moon.

Huge Potential for Bond Bulls

I’ve been predicting for years that interest rates on 30-year U.S. Bonds, currently around 2.70%, are headed to 1.64% or lower. If so, the futures contract shown in the chart is bound most immediately for 186^15. This implies that anyone betting on inflation, as Mr. Brown has suggested, is going to get killed.  Betting on deflation, on other hand, offers some of the juiciest odds that can be found in the investment world. If interest rates were to fall below 2% as I’ve been predicting, the capital gains potential of T-Bonds is enormous — on the order of 20% or more per year if the drop occurs over the next 18-24 months.

Here’s another headline from yesterday’s Journal: ‘Fed Signals No Rush to Raise Rates’. Now there’s an understatement.  The Journal embarrasses itself when it implies that a rate hike is still possible. When the Fed tried to pretend it could walk the walk a couple of months ago, raising administered rates by a token 25 basis points, it set off a panic in global markets that could conceivably have snowballed into a crash like the one in 2007-08. We’re that close. Under the circumstances, talk of a rate hike is about the stupidest thing I’ve ever heard.

  • mary April 29, 2016, 2:34 pm

    Ben, thanks for your thoughts. I have to disagree, however. My understanding is that “inflation is always and everywhere a monetary event.” Since the Western oligarchs became wild inflationists (see John Jay’s thoughts–Johns, I’d love to see a time line of your spreadsheet) they have worked overtime with the propaganda that rising prices is inflation and falling prices is deflation. Everyone has fallen for their line. It’s hogwash. Inflation is monetary, period.

    At various times due to asset bubbles bursting–because of, not in spite of or contrary to inflation– we’ve had falling asset prices. (Houses are still down from the peak in most of the country, I think.) Falling prices in one part of the economy does not mean that the money supply isn’t going up. We can have a stock market crash, yet the cost of Wheaties and milk go up. I fail to understand why people don’t admit this. WE ARE LIVING IT.

    Another phenomenon occurring is that people “don’t have enough money.” This, again, is a feature of inflation. It’s not because the money supply isn’t going up, but because their incomes are not keeping up with inflation. Wages never do and now rentier income doesn’t, either. Also, velocity has gone down due to the fears of asset price collapses, not due to the fear that the money supply will go down.

    I agree with Rick that hyper inflation is rare and that tptb will likely avoid it, but here’s the thing. I’ve read the books about Weimar, too. Fergusson said that the German officials did not set out to cause hyper inflation. They were responding to the calls from the unions and others that the workers DID NOT HAVE ENOUGH MONEY, despite the printing presses running overtime. Do you see something in common with our situation and Weimar? I think that hyper inflation is never a policy choice, as Rick cogently points out. However, it happens. Why? It’s due to tptb thinking that falling asset prices and wages not keeping up with the cost of living is deflation, so they gun the money supply.

    In other words, the Western oligarchs are doing the exact same thing as the Weimar officials.

    Be that as it may, I cannot understand why people who bemoan the wild expansion of credit keep talking about deflation. ?!? Unless and until the credit bubble bursts, this is obviously inflationary. I know Rick says that tbpb won’t be able to gun the money supply enough to offset a collapse in credit, but we shall see. I make no predictions. They dodged the 2008 bullet by changing the rules, and as desperate people, they’ll do it again. How is a mystery to me. I’m not in their speed dial. 😉

    &&&&&&&&

    (Hyper)inflationists never like to discuss the nitty-gritty details, Mary. They seem to think they can win arguments by throwing around by-now meaningless phrases like “gunning the money supply.” But what, really, is “gunning the money supply” supposed to mean? Central bank stimulus to date amounts to perhaps $20-$30 trillion, but the only inflation it has created is in the housing market, stocks and bonds.

    Having read Fergusson, you must be aware that the Weimar hyperinflation was propagated with physical cash money. We don’t use much of that any more, and that poses a key problem for the ‘helicopter-drop’ crowd. You could argue that the fraudsters at the Fed would simply have the banks add a zero or two to everyone’s credit line. But just try to play that forward. As I’ve noted here many times in the past, the clearing system that makes plastic money “work” is exquisitely fragile, based as it is on ignorance and egregiously misplaced trust.

    Anyone who would argue the case for hyperinflation should be made to explain first of all what will happen to mortgage debt. Will we someday peel a few megabills from our money clips to pay the balance due on our homes? When you’ve finished with that question, Mary, please tell me how a hyper-expansion of credit would interact with such incipiently deflationary black holes as pension funds, Social Security, Medicare and life insurance? They all pay in cash, as you know, and trying to hyperinflate away their obligations — i.e., stiffing beneficiaries — would start riots.

    RA

  • Chuck D April 29, 2016, 9:06 am

    not to change the subject…but how long will this issue remain unattended to: http://www.chicagotribune.com/news/opinion/commentary/ct-illinois-pensions-bankruptcy-congress-retirement-perspec-0429-jm-20160427-story.html

    &&&&&&

    This article fudges disaster. It correctly talks about how pension obligations will continue to grow exponentially. But the solution it proposes — “reform” — is just a euphemism for the extremely drastic benefit cuts that would have to be made.

    I’ve argued that we’re on track for a civil war between taxpayers and public-pension beneficiaries. As things stand, the former will be working until they are 80 to pay the benefits of tens of millions who have retired, or are about to retire, at 55. The taxpayers will ultimately win for one simple reason: the money does not exist — will NEVER exist — to make good on pension promises. The private-pension system is headed for a disaster of its own, since it is still promising benefits that are based on 8% returns. RA

  • Ben April 29, 2016, 2:55 am

    mary: It may seem a contradiction of terms, but we do in fact suffer the effects of deflation as much if not more than the effects of inflation. This is so, because every single fraction of a penny that comes into existence does so through the creation of a debt. Debt burden has a deflation-like effect, in that people have even less to cope with, let alone spend, in face of inflation. We get the worst of both worlds, as predicted by Thomas Jefferson…

    “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.”

  • John Jay April 28, 2016, 2:34 pm

    That’s a good one Rick!

    War on Poverty indeed!

    I am going to work on a spreadsheet, starting right after the Thanksgiving Coup of 1963, listing year by year the major events that got us to this fine mess.

    You know, like the end of 3 cent postage stamps, the end of silver coins, the end of 20 cent gas, the end of guys celebrating when they reached the maximum contribution to SS for the year! Not to mention when we had a positive trade balance, last one was in 1974 I believe!

    Oh, as well as the introduction of Credit Cards in 1966, and Casino Gambling outside of Vegas, and the State Lotteries!

    You saw it all, just like I did!

    How far we have fallen since then!

  • John Jay April 28, 2016, 11:54 am

    Some historians maintain, only half jokingly, that Southern Italy never really recovered from Hannibal.

    It is beginning to look like the USA will never recover from the path LBJ led us down 52 years ago.

    Inflation?
    Deflation?
    In either case, or even half and half, anyone over 50 years of age will agree it has been a catastrophe for sure!

    &&&&&

    But wait. How about the War on Poverty? Would you deign to suggest that the $100 trillion (give or take a few bucks) spent on it did not actually win the war? RA

  • mary April 28, 2016, 3:55 am

    Rick, Do higher bond prices really mean deflation? The fed is manipulating the full yield curve. I see inflation in just about everything I buy, both in terms of price/oz., package sizes shrinking, and quality dropping. Taxes up, insurance UP, education up, repairs up. No inflation?? You must be joking. The FED and friends are running a grand psyop, manipulating all interest rates, goosing asset prices with easy money and buying futures–think oil, gas, grains. They are trying to continue the “slow burn” as Catherine Austin Fitts calls it, but they are likely to cause a disaster. What kind, I don’t know. But we can have low interest rates, high bonds prices and a higher cost of living. We’re living it NOW.