THE GREAT RECKONING: Inflation

For the past two years we were anticipating a debt-induced recession. For just as over a decade ago, too much debt (albeit in many other categories such as home mortgages) finally heralded a reckoning, rather than allow a cleansing process of deleveraging, the Fed acted to settle for an abysmal post-recession GDP growth of only 2%/year while even more debt was the fuel for that moribund growth.

Few people imagined this latest collapse, and today everyone blames COVID19, expecting an economic snapback when the pandemic passes.

But the virus was the spark, the trigger, the catalyst. The debt is the underlying 'causal.' And later this year it will become apparent that massive waves of trillions in 'helicopter money' are no longer doing the trick. There will be no "V."

Now I am refocused on inflation. A burgeoning money supply is present but lacks velocity, therefore no inflation. The trillions of helicopter money will get quickly spent, largely on necessities, finally goosing velocity and creating inflation.

I don't know of anyone else seriously considering a return of inflation. If we go back to the Weimar depression Germany experienced in the early 1920's, the government created a lot more currency and credit instead of allowing a collapse of credit that would wipe out banks, securities, and real estate values.

Likewise the U.S. government is pumping massive amounts of new purchasing power into the economy to create “demand” (even, or rather, especially among corporate and individual welfare recipients, who produce nothing in return).

The government is extending past misallocations of capital, when the economy instead needs to readjust to sustainable patterns of production and consumption. We are unwilling to go through the pain of recession to reduce the debt and return to a strong, healthy capital-driven economy that doesn't need government intrusion to work efficiently and effectively.

Inflation could result from overstimulation when the authorities try to boost the economy out of this trough. If government expands the money supply too quickly, it might encourage the trillions of US dollars owned by foreigners to return here, in a bid for real wealth in competition with domestically held dollars. That would reverse, overnight, the muted inflation figures of the last 40 years, and prices could jump at a 20 percent to 30 percent clip.

If the US dollar becomes sufficiently debased, the inflation could result in even faster velocity and a need for price controls, foreign exchange controls, and bank withdrawal restrictions. We are at the nadir of the past cycle of expansion that brought us to an unmanageable mountain of debt. Interest rates are just about as low as they can possibly go.

All the means for reducing debt will as a matter of necessity be taken to one degree or another, and inflation resulting from wave after wave of helicopter money would reduce the value of debt and the relative difficulty of servicing that debt.

The debt pile is too great to be paid down in an orderly fashion. In a deep recession servicing that debt will usher in personal and corporate bankruptcies. The government has indicated it will go to any lengths to provide liquidity and credit to prop up businesses, avoid loan defaults and foreclosures, and witness depressed asset values getting sold through liquidation, and endure a deflationary spiral much as what we had in the 1930's.

Today our debt-induced depression portends deflation. But as trillions upon trillions are poured into the laps of the needy, and zombie companies get to survive, we will reach an inflection where the return of inflation will catch everyone off guard. And the combination of bond defaults and inflation will virtually wipe out the bond market and seriously diminish the wealth of seniors who thought those investments would be safe.