“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”—Ronald Reagan
“Inflation is taxation without legislation.”—Milton Friedman
It may not surprise you that my favorite quote about inflation is: “Inflation takes from the ignorant and gives to the well informed.”—Venita VanCaspel
Inflation, like other situations—including the stock market and a sinking ship at sea—requires understanding of what is going on. At the beginning, you want to be doing what everybody else is doing. As stock prices are going up, watch the crowd and buy when they do but keep an eye out for trouble just like on a cruise ship. Drink, dance, and party the night away, making an occasional trip to check for icebergs.
At some point, the stock traders will be “drunk” with their genius ability to make money, just like the ship passengers will become too drunk to watch for trouble let alone to get into a lifeboat. A similar condition happens with increasing prices.
At the beginning of an inflationary trend, life is good. That house and lot you bought is going up in price. As a business owner you are able to raise prices a little or even a lot, well above your cost of sales and no one complains. You take advantage of commodity price increases to “store” some lumber or diamonds even if it is just on paper, and let the profits come in—t least on paper.
Remember this name: Paul Adolph Volcker Jr. He served two terms as the 12th Chair of the Federal Reserve under US presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987.
Volcker’s wisdom—a huge break from the past—was that if prices of goods increased, to lower goods demand, decrease the money supply. Volcker raised interest rates to reduce the demand for money. The interest paid on a loan is effectively the “price” of cash. That weapon against inflation works as people figure inflation is temporary and who wants to borrow at these high rates.
But current (last 15 years) Federal Reserve policies—quantitative easing and near-zero interest rates—were designed to pump trillions into the US economy to stimulate growth. QE gave the government a way to dump money into the economy by “secretly” going into massive debt, and the zero-rates were to make the banks borrow from the government and then loan to the public.
Volcker died in 2019 and wrote his memoir a year earlier titled Keeping At It: The Quest for Sound Money and Good Government. He wrote that ethical governance required the “three verities [principles]” of stable prices, sound finance, and good government.
Currently the US is facing consumer prices increasing at an annual rate of 5 percent, the highest since August 2008. Hardly stable. The US “M2” money supply—coins, notes, and short-term time deposits in bank—is up 33 percent since January 2020 and up 100 percent since 2012. Private Debt to GDP in the US is 235 percent and public debt stands at 107 percent. Neither factor shows “sound finance.”
There are those that want you to believe that soon Filipinos will be living in mud caves and covering their private parts with banana leaves as the Philippine economy collapses. You may want to exploit the coming US inflation (and collapse?) by planning to export banana leaves to the West.
And if you buy the media/Federal Reserve argument that inflation is all because of Covid, you probably also believe that the virus started in a bowl of bat soup at a wet market in Wuhan.
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.