Inflation: This Time It Really Is Different

 

Both political parties have managed to dodge the bullet. Government deficit spending, borrowing, and money creation by the Fed have gone relentlessly up with no repercussions in either inflation or interest rates. In fact, those skyrocketing deficits and money creation have been rewarded with little inflation and historically low-interest rates. Lefties have even concocted Modern Monetary Theory (MMT), a formalized economic theory that says that the US can create all the money it wants with impunity. Feel free to spend away!

But interest rates have recently increased (dragging down the stock market) and I’m afraid that’s just the beginning. This article from AIER makes a convincing argument that the chickens have finally come home to roost.

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  1. Kozak Member
    Kozak
    @Kozak

     

    As was noted by @JackShepard in another thread 70% of the money supply was created in the last year.

    • #1
  2. DonG (2+2=5. Say it!) Coolidge
    DonG (2+2=5. Say it!)
    @DonG

    It is always important to distinguish between real and nominal interest rates. 

    We have been seeing inflation show up in the stock market and bitcoin for a year.

    The linked article is very good and highlights two underappreciated things:  interest on reserves (which is a subsidy to big banks) and the savings glut from a demographic fluke.   The one-child policy and the general decline of birth rates in western nations is going to show up as a savings famine.  That will mean a big increase in real interest rates and slower growth.  With the huge money supply increases that will make for Stagflation!

    • #2
  3. Miffed White Male Member
    Miffed White Male
    @MiffedWhiteMale

    Interest rates make no sense right now.

    I had a small 1-year CD that was paying 1.5%.  It renews next month.  The highest interest rate available on any of the CDs from the same provider was 0.2%.  But I could get 0.3% in their straight savings account.

    So why would anyone tie up their money in a CD when they could keep it in a demand account and “earn” more (not that .3% is earning…)

    • #3
  4. Miffed White Male Member
    Miffed White Male
    @MiffedWhiteMale

    Just checked again (the provider is Capitalone).  As of today, the 5-year CD is paying .4%.  1-year is paying .2%.    Straight savings account also paying .4%.   Those are all increases from just a week or two ago.

    • #4
  5. Ekosj Member
    Ekosj
    @Ekosj

    Miffed White Male (View Comment):

    Interest rates make no sense right now.

    I had a small 1-year CD that was paying 1.5%. It renews next month. The highest interest rate available on any of the CDs from the same provider was 0.2%. But I could get 0.3% in their straight savings account.

    So why would anyone tie up their money in a CD when they could keep it in a demand account and “earn” more (not that .3% is earning…)

    I was a bank teller in the late 70s early 80’s.    I remember opening CDs at 19.5%.

    • #5
  6. Kozak Member
    Kozak
    @Kozak

    Ekosj (View Comment):

    Miffed White Male (View Comment):

    Interest rates make no sense right now.

    I had a small 1-year CD that was paying 1.5%. It renews next month. The highest interest rate available on any of the CDs from the same provider was 0.2%. But I could get 0.3% in their straight savings account.

    So why would anyone tie up their money in a CD when they could keep it in a demand account and “earn” more (not that .3% is earning…)

    I was a bank teller in the late 70s early 80’s. I remember opening CDs at 19.5%.

    Funny thing though.

    Lots of credit cards still charging 18% interest.

    • #6
  7. Bob Thompson Member
    Bob Thompson
    @BobThompson

    Ekosj (View Comment):

    Miffed White Male (View Comment):

    Interest rates make no sense right now.

    I had a small 1-year CD that was paying 1.5%. It renews next month. The highest interest rate available on any of the CDs from the same provider was 0.2%. But I could get 0.3% in their straight savings account.

    So why would anyone tie up their money in a CD when they could keep it in a demand account and “earn” more (not that .3% is earning…)

    I was a bank teller in the late 70s early 80’s. I remember opening CDs at 19.5%.

    The last sixty year history of banking, inflation, and interest rates is interesting. I remember when Regulation Q capped interest rates in the low single digits, like 3 or 4 %. Savers were frustrated. I wish I could get those rates now.

    This from Wikipedia:

    History[edit]

    As a result of Section 11 of the Banking Act of 1933, Regulation Q was promulgated by the Federal Reserve Board on August 29, 1933. In addition to prohibiting the payment of interest on demand deposits (a prohibition that the act also wrote into the Federal Reserve Act (12 U.S.C.371a) as Section 19(i)), it was also used to impose interest rate ceilings on various other types of bank deposits, including savings and time deposits.[3]

    As interest rates in general rose during the 1950s, banks felt increasing incentive to work around the interest ceilings by competing on the basis of convenience features such as multiple branch banks and on the basis of pecuniary features such as loan interest rate discounts that were tied directly to deposit account balances.[4] A more direct challenge was the creation of NOW accounts, which were structured to effectively be the equivalent of interest-bearing demand deposits but to technically avoid being demand deposits. Congress legalized these for Massachusetts and New Hampshire in 1974, the rest of New England in 1976,[4]:pp.3–4 and nationwide on December 31, 1980.[2]

    Congress permitted the creation of new types of flexible-interest bank accounts, including money market accounts as of December 14, 1982. Regulation Q ceilings for savings accounts and all other types of accounts except for demand deposits were phased out during the period 1981–1986 by the Depository Institutions Deregulation and Monetary Control Act of 1980; as of March 31, 1986, all interest rate ceilings had been eliminated except for the ban on demand deposit interest, which was then the only remaining substantive component of Regulation Q.[2]

    The Regulation Q prohibition of interest-bearing demand deposit accounts was effectively repealed by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Pub. L. 111-203 §627). Beginning July 21, 2011, financial institutions have been allowed, but not required, to offer interest-bearing demand deposits.

    Regulation Q has been cited as a tool for contributing to financial repression.[citation needed]

    • #7
  8. MarciN Member
    MarciN
    @MarciN

    Competition in the free market will keep inflation in check for goods and services. It’s the government-regulated and government-supported utilities and other economic activities–the things like insurance and drivers’ licenses and college tuition and gas–that will see the biggest inflation. 

    • #8
  9. Ekosj Member
    Ekosj
    @Ekosj

    MarciN (View Comment):

    Competition in the free market will keep inflation in check for goods and services. It’s the government-regulated and government-supported utilities and other economic activities–the things like insurance and drivers’ licenses and college tuition and gas–that will see the biggest inflation.

    Would that this were so.   But inflation is, in my opinion, primarily a monetary phenomenon.   So much money has been pumped into the system that it’s hard to imagine how it’s impact won’t be widespread.   This, coupled with government induced energy supply reductions will, I think, produce inflation across the board.  

    • #9
  10. OkieSailor Member
    OkieSailor
    @OkieSailor

    MarciN (View Comment):

    Competition in the free market will keep inflation in check for goods and services. It’s the government-regulated and government-supported utilities and other economic activities–the things like insurance and drivers’ licenses and college tuition and gas–that will see the biggest inflation.

    Production and transportation costs will rise significantly as Biden’s war on affordable energy heats up putting pressure on both prices and wages. Consumers, especially wage earners will get squeezed from both ends. This will work to hide whatever productivity gains can do to mitigate, really hide, price inflation. Monetary inflation is inevitable due to the profligate spending used to ‘fight’ Covid19 and will work in tandem to further depress economic activity. The only alternative would be massive tax increases to offset the spending which is politically untenable if not impracticable at best. The only way forward is to allow inflation to burn the cash out of the economy and let corrections sort it out.

    • #10
  11. Headedwest Coolidge
    Headedwest
    @Headedwest

    Ekosj (View Comment):

    I was a bank teller in the late 70s early 80’s. I remember opening CDs at 19.5%.

    I had CDs and savings accounts like that. And in real dollars they were all losers at the end of the term.

    High inflation makes you a little crazy. When I saw something I might want to buy, I would be inclined to just grab it now because next week it could cost more. Easy to start a habit of running up credit card balances.

     

    • #11
  12. DonG (2+2=5. Say it!) Coolidge
    DonG (2+2=5. Say it!)
    @DonG

    Ekosj (View Comment):

    MarciN (View Comment):

    Competition in the free market will keep inflation in check for goods and services. It’s the government-regulated and government-supported utilities and other economic activities–the things like insurance and drivers’ licenses and college tuition and gas–that will see the biggest inflation.

    Would that this were so. But inflation is, in my opinion, primarily a monetary phenomenon. So much money has been pumped into the system that it’s hard to imagine how it’s impact won’t be widespread. This, coupled with government induced energy supply reductions will, I think, produce inflation across the board.

    Inflation or “general inflation” is always a monetary phenomenon.  Inflation in the prices of certain goods is called “specific inflation” and is market driven.   We should expect specific inflation from government actions (reducing supply of fossil fuels, taxing products,…) and also some market conditions (semiconductors are hard to get now).

    Normally we’d expect general inflation from the big expansion of the money supply.  But, this is being offset by the crazy high savings rate (20%) and the Fed paying interest on excess reserves (a gift to big banks).  The high savings rate reflects a slowdown in the velocity of money, which offsets inflation.  The excess reserves exactly offsets the new Fed money.  This is like the Fed creating money, but paying the big banks to take it out of circulation.  When the savings rate returns to normal (near 0%), real interest rates will rise and the increase in the velocity of money will bring out inflation and higher nominal interest rates.  I expect the savings rate to return to normal, when Americans stop being afraid of Wuhan Lab Flu. 

     

    • #12
  13. kedavis Member
    kedavis
    @kedavis

    I’m glad I have a modest “mortgage” locked in a 2.5%, but it’s only for 6 years.  (5.5 years left…)  If there ends up being a lot of inflation it could end up costing me a lot less in adjusted money, to pay it off.

    • #13
  14. Kozak Member
    Kozak
    @Kozak

    Bob Thompson (View Comment):
    The last sixty year history of banking, inflation, and interest rates is interesting. I remember when Regulation Q capped interest rates in the low single digits, like 3 or 4 %. Savers were frustrated. I wish I could get those rates now.

    Yeah. I’m at the point where I should have minimal exposure to the stock market. Once upon a time, retires got 4 or 5% return on their money, and if I could get that I would be set.  Thanks to the damn Fed, I doubt we will see those rates until the hyperinflation begins, and then it won’t exactly be good enough….

    • #14
  15. Fritz Coolidge
    Fritz
    @Fritz

    Ekosj (View Comment):

    Miffed White Male (View Comment):

    Interest rates make no sense right now.

    I had a small 1-year CD that was paying 1.5%. It renews next month. The highest interest rate available on any of the CDs from the same provider was 0.2%. But I could get 0.3% in their straight savings account.

    So why would anyone tie up their money in a CD when they could keep it in a demand account and “earn” more (not that .3% is earning…)

    I was a bank teller in the late 70s early 80’s. I remember opening CDs at 19.5%.

    We bought our first house financed with an FHA mortgage in early 1980, and the interest rate was 13%! Glad too to get it at that rate, as when we’d contracted it had been 11%, but by closing was 13% and climbing; conventional mortgage rates were even higher.

    OTOH, our money market account was paying us 17% or 18%, so economics made it tempting to incur debt because inflation would make repayment cheaper in real terms.

    Those days, I recall being advised by my broker to go on margin and invest in secured bonds like those airlines or airplane lessors used to fund purchases of new planes —  great returns! Enjoying the spread between the margin interest paid and the bond interest received, I was an arbitrageur without even knowing the word.  Good times!

    • #15
  16. Ekosj Member
    Ekosj
    @Ekosj

    Fritz (View Comment):
    We bought our first house financed with an FHA mortgage in early 1980, and the interest rate was 13%! Glad too to get it at that rate, as when we’d contracted it had been 11%, but by closing was 13% and climbing; conventional mortgage rates were even higher.

    Yep.   I worked at an S&L.   The mortgage teams sat around staring at the walls and got let go one by one.    We were paying sky high rates but still hemorrhaging money to the MMFs like Dreyfus.

    My lovely bride and I bought our first house in 1990.    Mortgage was 10 1/8%.    At the closing, the frugal Mrs E whispered to me “I never thought I’d see this much money … and now I owe it.”

    • #16
  17. No Caesar Thatcher
    No Caesar
    @NoCaesar

    We have had inflation for 12 years now.  It’s just been hidden from normal interest rates by the Fed.  The Fed’s actions were good and wise for a while.  However, long ago they became dangerous and harmful.  It’s manifested in the crazy PEs in the stock market.  The performance improvements from the digital world, along with the artificially low prices of Chinese imports, have kept the government’s inflation measurements down (and hence the Prime, etc.).  Compare the price of specific items and services now, versus 10 years ago, versus 20 years ago, versus 30 years ago.  Things like: lumber, a bottle of soda, a gallon of gas, an hour of an electrician’s time, items that have not been kept artificially low by Chinese slave labor.

    That the Treasury has not used the abnormally low interest rates of the 21st century to push the US debt into long-term vehicles will be greatly regretted soon.

    When it strikes it will be worsened because social security will be forced to pay more because of the overwhelming size of the Baby Boomer cohort on fixed incomes…

    Bottom line: we are screwed.  And I think it will generally be a global phenomenon.  I.e. there will not be another large currency to run to.

    • #17
  18. David Foster Member
    David Foster
    @DavidFoster

    There has already been significant inflation, only it has been in *asset prices*…things such as stocks, bonds, and houses…rather than in the commodities that are tracked to establish the CPI.  At some point, it seems inevitable that inflation will manifest itself pretty strongly in those consumer commodities, but guessing the timing isn’t easy.

    One factor that will push up interest rates at the long end is the ‘green energy’ boom…solar and wind are considerably more capital-intensive than conventional power plants.

    There are a lot of 30 year mortgages out with interest rates of 3% or less….

     

    • #18
  19. David Foster Member
    David Foster
    @DavidFoster

    Headedwest (View Comment):
    High inflation makes you a little crazy.

    That was the experience in Weimar Germany, only it wasn’t just a *little* crazy.  Here’s Sebastian Haffner, who was there:

    By the end of 1922, prices had already risen to somewhere between 10 and 100X the pre-war peacetime level, and a dollar could purchase 500 marks. It was inconvenient to work with the large numbers, but life went on much as before.

    But the mark now went on the rampage…the dollar shot to 20,000 marks, rested there for a short time, jumped to 40,000, paused again, and then, with small periodic fluctuations, coursed through the ten thousands and then the hundred thousands…Then suddenly, looking around we discovered that this phenomenon had devastated the fabric of our daily lives.

    Anyone who had savings in a bank, bonds, or gilts, saw their value disappear overnight. Soon it did not matter whether it ws a penny put away for a rainy day or a vast fortune. everything was obliterated…the cost of living had begun to spiral out of control. ..A pound of potatoes which yesterday had cost fifty thousand marks now cost a hundred thousand. The salary of sixty-five thousand marks brought home the previous Friday was no longer sufficient to buy a packet of cigarettes on Tuesday.

    The only people who were able to survive financially were those that bought stocks. (And, of course, were shrewd or lucky enough to buy the right stocks and to sell them at the right times.)

    Every minor official, every employee, every shift-worker became a shareholder. Day-to-day purchases were paid for by selling shares. On wage days there was a general stampede to the banks, and share prices shot up like rockets…Sometimes some shares collapsed and thousands of people hurtled towards the abyss. In every shop, every factory, every school, share tips were whispered in one’s ear.

    The old and unworldy had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience was punished by starvation and death, but rapid appraisal of new situations and speed of reaction was rewarded with sudden, vast riches. The twenty-one-year-old bank director appeared on the scene, and also the sixth-former who earned his living from the stock-market tips of his slighty older friends. He wore Oscar Wilde ties, organized champagne parties, and supported his embarrassed father.

    Haffner believes that the great inflation–particularly by the way it destroyed the balance between generations and empowered the inexperienced young–helped pave the way for Naziism.

     

     

    • #19
  20. David Foster Member
    David Foster
    @DavidFoster

    Continuing on the theme of Inflation and Craziness…Sebastian Haffner’s great novel Little Man, What Now? is focused on a young couple in late Weimar, in a period when inflation is no longer the problem–unemployment is.  But the psychological damage of the inflation lingers.  The couple’s landlady cannot comprehend what has happened to her savings:

    Young people, before the war, we had a comfortable fifty thousand marks. And now that money’s all gone. How can it all be gone?…I sit here reckoning it up. I’ve written it all down. I sit here, reckoning. Here it says: a pound of butter, three thousand marks…can a pound of butter cost three thousand marks?…I now know that my money’s been stolen. Someone who rented here stole it…he falsified my housekeeping book so I wouldn’t notice. He turned three into three thousand without me realizing…how can fifty thousand have all gone?

    • #20
  21. Flicker Coolidge
    Flicker
    @Flicker

    No Caesar (View Comment):

    We have had inflation for 12 years now. It’s just been hidden from normal interest rates by the Fed. The Fed’s actions were good and wise for a while. However, long ago they became dangerous and harmful. It’s manifested in the crazy PEs in the stock market. The performance improvements from the digital world, along with the artificially low prices of Chinese imports, have kept the government’s inflation measurements down (and hence the Prime, etc.). Compare the price of specific items and services now, versus 10 years ago, versus 20 years ago, versus 30 years ago. Things like: lumber, a bottle of soda, a gallon of gas, an hour of an electrician’s time, items that have not been kept artificially low by Chinese slave labor.

    That the Treasury has not used the abnormally low interest rates of the 21st century to push the US debt into long-term vehicles will be greatly regretted soon.

    When it strikes it will be worsened because social security will be forced to pay more because of the overwhelming size of the Baby Boomer cohort on fixed incomes…

    Bottom line: we are screwed. And I think it will generally be a global phenomenon. I.e. there will not be another large currency to run to.

    Two or three years ago I did a price comparison of everything from cars and houses to washing machines and refrigerators to cans of tuna and condensed soup from 1960 to 2020 and the prices of each came out to nearly exactly 20 times higher today.  (And incidentally the product quality and durability were better then.)

    At the time I did this prime rib had gone up in the past ten years form nearly $8 a pound to $12.  Today at the same store it is selling for $16 and change.  Interestingly, ox tails (normally considered poor folks food) has gone in the past 30 years from 39 cents a pound to $3.90 two years ago, to $7.49 today.  Jumbo shrimp and lobster tails have similarly gone up from $8 or $9 a pound 20 years ago to $12 two or three years ago, to $16 and $18 a pound today.

    I wonder if the money supply has anything to do with it.

    • #21
  22. kedavis Member
    kedavis
    @kedavis

    At least people in a stable home-ownership situation – not those sitting on huge adjustable-rate mortgages and perhaps in not-very-stable employment either – have a decent chance of not becoming homeless.  The great trend for renting over the past few decades is probably going to cause a lot of damage too.

    • #22
  23. David Foster Member
    David Foster
    @DavidFoster

    A truly diabolical monetary policy

    • #23
  24. RufusRJones Member
    RufusRJones
    @RufusRJones

    Kozak (View Comment):

    Bob Thompson (View Comment):
    The last sixty year history of banking, inflation, and interest rates is interesting. I remember when Regulation Q capped interest rates in the low single digits, like 3 or 4 %. Savers were frustrated. I wish I could get those rates now.

    Yeah. I’m at the point where I should have minimal exposure to the stock market. Once upon a time, retires got 4 or 5% return on their money, and if I could get that I would be set. Thanks to the damn Fed, I doubt we will see those rates until the hyperinflation begins, and then it won’t exactly be good enough….

    It is an outrage in multiple ways. You have to get a return on savings accounts and terms under two years or you can’t have a civilization. It completely screws up personal risk management and pension risk management. 

    It also makes the financial system distort the economy.

    • #24
  25. Patriciajay Coolidge
    Patriciajay
    @Patriciajay

    Ekosj (View Comment):

    Miffed White Male (View Comment):

    Interest rates make no sense right now.

    I had a small 1-year CD that was paying 1.5%. It renews next month. The highest interest rate available on any of the CDs from the same provider was 0.2%. But I could get 0.3% in their straight savings account.

    So why would anyone tie up their money in a CD when they could keep it in a demand account and “earn” more (not that .3% is earning…)

    I was a bank teller in the late 70s early 80’s. I remember opening CDs at 19.5%.

    I remember my dad putting money into a money market account that was earning 18%!

    • #25
  26. Patriciajay Coolidge
    Patriciajay
    @Patriciajay

    OkieSailor (View Comment):

    MarciN (View Comment):

    Competition in the free market will keep inflation in check for goods and services. It’s the government-regulated and government-supported utilities and other economic activities–the things like insurance and drivers’ licenses and college tuition and gas–that will see the biggest inflation.

    Production and transportation costs will rise significantly as Biden’s war on affordable energy heats up putting pressure on both prices and wages. Consumers, especially wage earners will get squeezed from both ends. This will work to hide whatever productivity gains can do to mitigate, really hide, price inflation. Monetary inflation is inevitable due to the profligate spending used to ‘fight’ Covid19 and will work in tandem to further depress economic activity. The only alternative would be massive tax increases to offset the spending which is politically untenable if not impracticable at best. The only way forward is to allow inflation to burn the cash out of the economy and let corrections sort it out.

    I have read that the new theory includes that massive taxation. Sounds like this is all a method of growing government.

    • #26
  27. Patriciajay Coolidge
    Patriciajay
    @Patriciajay

    Fritz (View Comment):

    Ekosj (View Comment):

    Miffed White Male (View Comment):

    Interest rates make no sense right now.

    I had a small 1-year CD that was paying 1.5%. It renews next month. The highest interest rate available on any of the CDs from the same provider was 0.2%. But I could get 0.3% in their straight savings account.

    So why would anyone tie up their money in a CD when they could keep it in a demand account and “earn” more (not that .3% is earning…)

    I was a bank teller in the late 70s early 80’s. I remember opening CDs at 19.5%.

    We bought our first house financed with an FHA mortgage in early 1980, and the interest rate was 13%! Glad too to get it at that rate, as when we’d contracted it had been 11%, but by closing was 13% and climbing; conventional mortgage rates were even higher.

    OTOH, our money market account was paying us 17% or 18%, so economics made it tempting to incur debt because inflation would make repayment cheaper in real terms.

    Those days, I recall being advised by my broker to go on margin and invest in secured bonds like those airlines or airplane lessors used to fund purchases of new planes — great returns! Enjoying the spread between the margin interest paid and the bond interest received, I was an arbitrageur without even knowing the word. Good times!

    Me too, with my mortgage. So how did it all end? I can’t remember exactly how we did it.

    • #27
  28. The Reticulator Member
    The Reticulator
    @TheReticulator

    Patriciajay (View Comment):
    Me too, with my mortgage. So how did it all end? I can’t remember exactly how we did it.

    We did it by creating future Trump supporters.

    • #28
  29. RufusRJones Member
    RufusRJones
    @RufusRJones

    This is the most succinct, easy to understand thing you’ll ever see you about what is going on right now. Before you watch it, look up the definitions of real and nominal interest rates. 

     

     

    This is how we got into this mess. The second the Soviet Union fell they should have gotten every single unfunded liability under control. They did everything wrong in the face of the deflation from automation and globalize labor. This is screwing up the economy and it’s causing huge social problems. Promoting home ownership was evil. They should have let everything collapse in 2008.

    You cannot have a civilization without real positive interest rates. This whole mess is from politicians central planning so they can lie to everybody.

    If you want to take a stab at things that are much more technical, go over to the Grant Williams podcast and listen to the Lacey Hunt, Chris Cole, and Russell Napier interviews.

     

     

     

    • #29
  30. RufusRJones Member
    RufusRJones
    @RufusRJones

    The other thing is, when you don’t have real interest rates where do you think insurance companies get their cash flow from? 

    Speculate or die. Great system.

    • #30