“A prerequisite for any sustained inflation, however, is monopoly control of the money supply. In the absence of a monopoly, individuals simply will switch to a competing currency when one becomes inflated.” Jay Habegger writing on the Chinese hyperinflation of the 1930sLast week we discussed depression and how a contraction of the money supply was one of the key errors made by the Federal Reserve and how it helped cause the Great Depression. We also discussed how the crazy spending of the previous decade helped bring it about. Huge credit was extended to consumers, and they enjoyed themselves immensely. If given the opportunity people will, and that is what must be broken, the people. The absence of liquidity caused banks to fail, businesses to close, and the government to rush to the aid of a society that had gotten drunk on money.
“The question on the table is how drunk is drunk enough and the answer is that it’s all a matter of brain cells… Every drink of liquor you take kills a thousand brain cells but that don’t matter much because we got billions more. First, the sadness cells die so you smile real big. Then the quiet cells go so you just say everything real loud for no reason at all, but that’s ok that’s ok because the stupid cells go next so everything you say is real smart. And finally, come the memory cells, these are tough sons of bitches to kill.” Captain Randolph Junah from Savannah, Georgia
Not having money isn’t so bad when you have never had money, but once you are poor after being rich, the feeling will never leave you. The stench of shame, regret, and wasted opportunity permeates your bones. A person carries that weight with them. The great depression left men in rags, tattered clothes that they wore for months if not years. Frugality was instilled not as a virtue but as a matter of life and death. There was no disposable income for fun and frivolity or very little. Work was scarce and a nation of independent entrepreneurs that had immigrated to this country for opportunity and individual freedom had become dependent on the government for capital expenditures and the government dole to survive. Their gold was confiscated, and then revalued by their government essentially stealing their money and they were powerless, hungry, and poor. Politicians rejoiced as their power expanded and FDR was elected 4 times, but after his death Congress passed term limits for that branch of government because the power of the executive branch was superseding their own.
The Great Depression was a huge expansion of government that has never receded. People began to rely on the government as captured in the country and western song by Alabama, “Well, somebody told us Wall Street fell but we were so poor that we couldn’t tell…the cotton was short and the weeds were tall, but Mr. Roosevelt was gonna save us all.” Independent citizens are not controllable en masse but reliant citizens can be so when the great industrialists were building steel towers, oil and banking empires, the trusts had to be broken up. J.P. Morgan infuriated the government that a private citizen could have that much power, the government wanted that power. When JD Rockefeller controlled the railways moving his products, the government wanted that power, and when Andrew Carnegie supplied the most jobs in America through his steel work and the building resulting from his innovation, the government wanted the power of those jobs. It’s always about power with governments.
As Lawrence so eloquently writes:
“Money originated in the marketplace as a medium of exchange. Governments, sooner or later, love to take it over, monopolize it, and then debase it to accommodate their thirst to spend. Prices soar, savings erode and economies fall apart in the chaos.”
One of the reasons that Argentina, which is suffering from over 100% inflation right now isn’t in another state of hyperinflation (2600%) like they were in the early 90s is because the government doesn’t have monopoly control of the money supply. People simply buy dollars as soon as they can. This offers support for Brent Johnson and his milkshake theory that we have talked about. As bad as the US Dollar is, other countries are worse, and they will buy dollars. We will provide a link for those of you unfamiliar with Brent’s theory. Argentina’s situation would be much more dire if their government were to outlaw dollars. I am not a proponent of Bitcoin but the foundation of its existence is in distrust of the government’s money after the Great Financial Crisis. I might question the vehicle but not the necessity of an alternative.
Last week we discussed the current Federal Reserve moves to depress the economy by contracting the money supply and raising interest rates. If left on this track a recession or depression would likely follow. This is the worst case scenario for a Federal reserve, but an effective weapon against inflation. Here’s the problem we face. We can’t stop spending.
The debt ceiling is about to get raised so now Janet Yellen is going to sell a bunch of bonds and I mean billions if not a trillion to fill up the Treasury’s piggie bank or checking account if you will. Remember all the dumb things that we discussed that the government was paying for in the Cares Act and Inflation Reduction Act? That’s right, someone has to pay for all that. So we are back to my old question, who is going to buy the bonds, and at what price? Remember it was the Fed that was buying up to half the bonds not 2 years ago. If the market is going to increase the supply of something, what does that do to price? It usually causes prices to drop and in this case rates move inversely to bond prices so interest rates will rise. So why are 2 year Treasuries 75 basis points below the Fed Funds rates? The market thinks Powell will have to pivot. He will have to inflate because he is scared of contraction, recession, and depression. It’s a pretty good thesis, right?
Here is the problem with that:
If he pivots and inflation isn’t killed dead, and judging from Friday’s PCE numbers they are anything but, inflation can take off again like in 1974 and it gets worse, a lot worse. Interest rates will have to go up and that wrecks the bond market, again. The US stagflation of the 70s is the best scenario which means low or no economic growth and inflation. That means the US standard of living goes down and goes down a lot. That is one of Powell’s goals, it has to be. He told us last summer to expect pain and the US consumer just increased their spending last month by double the amount experts expected. I think he has to take away the kool-aid first. He has to stop this spending foolishness first, but then? Which pain is next is the question? One of recession or of inflation? Can I offer you a third option? A shortage of real stuff: minerals, oil, natural gas, food, and knowledge, yes real stuff, not apps, not things to make us buy things easier, not artificial intelligence but real stuff.
The reason we have discussed sacrifice, empathy, and delayed gratification is that these traits aren’t going to be optional very soon. When the market starts absorbing these bond sales, the liquidity we have discussed will dry up even more. When companies can’t borrow more money to increase their liquidity, they will set the example for what the federal government should do… cut spending by laying people off. This has started in the tech sector and is trickling its way into the general economy. Initial jobless claims are rising, and jobs cuts will follow and follow and follow. People do not spend when they don’t have jobs and this will happen. People do not spend when the bank won’t give them any more credit and this will happen. When people do not spend in a consumer driven culture such as ours that country goes into recession, and this will happen. If we are prepared to sacrifice, empathy, and delay gratification then the adjustment period for us will be a) easier which will be nice as we are prepared and well saved and b) present us with opportunities if we are prepared. Having capital to deploy is vital when those come along. Frugality must become as important as oxygen for that to happen.
Yet, people are digging into their savings and spending records on credit cards, but why? The sadness cells are gone and we are smiling real big and we aren’t quiet about our spending either instead we are loud. Posting and posing is what we are doing on TikTok and Facebook and the Twitterverse, but it’s ok because every stupid thing we say on these devices we are told is real smart. It’s our truth, and we can be whatever we want to be and that’s ok. We have generations that have been told this their entire lives and have no memory of being denied anything. Those memory cells are going to be tough sons of bitches to kill.
Sincerely Yours,
C Thomas Printer
On this date in history
134 years ago to be exact, the South Fork Dam gave way under the heavy rainfall. The resulting flood is known as the Johnstown Flood. The wall of water with 60 feet of height moved at 40 miles per hour and killed more than 2,200 people.
Also born on this date
Don Ameche, Mortimer Duke from the first family of commodity trading Duke & Duke.
This week’s financial tip
Check up time…Is your emergency fund ready to go? 3 months of bills ready and set aside? No, get on it. If so, congratulations. So, today I want you to make a list of things that you would miss if there was another lockdown. Remember, the toilet paper shortage? So it could be lighters, deodorant, canned food, baby formula, prescriptions etc. It’s time to fill the pantry with some necessities.
Resources
What can we learn from China’s hyperinflation in the 1940s?
Podcast