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Is an Inflation Crisis Looming?

Janet Yellen

photo of Janet Yellen

By Charles Stampul

Americans are about to get a long overdue lesson about inflation.  It may come as a shock to many CNBC viewers and those working in finance or holding advanced degrees in economics might attempt to refute it, but the word actually means what any child who has used a pump to put air in a ball or tire, might guess. Take out an old dictionary and you will see it’s true. Inflation is not an increase in Consumer Price Index (CPI) or Producer Price Index (PPI), or the Personal Consumption Expenditure (PCE), even if those indexes accurately measured rising prices, which they doubtfully do.  Inflation, instead, is the act of increasing the supply of currency.  Rising prices is the effect of inflation, not inflation itself.  The distinction matters.

When the government inflates, prices of goods and services rise.  When the country is producing an ample supply of material goods, the increases are not so perceptible.  But what happens when the government is inflating at ever increasing rates and production of material goods is falling off a cliff?  Then we have the inflation crises which fill history books, including the fiat money inflation that led to the French Revolution, the collapse of the Weimar republic, which preceded World War II, the Zimbabwe hyperinflation, and most recently, the runaway inflation in Venezuela.

In all these cases, the governments were monetizing their own debt.  The United States has been doing for the past ten years. The US Treasury creates dollars out of thin air, to finance deficit spending through the creation of Treasury bonds.  After the financial collapse of 2008, to cover the cost of bailouts, the Treasury issued more bonds than they would be able to find buyers for.  So, through a program they called “Quantitative Easing,” and with promises that it would be temporary, the Federal Reserve began purchasing them. There was some show of reducing the amount of US Treasuries the Fed held on the balance, which ended abruptly in 2019 before reversing incredibly in 2020.

Every  effort is made by the Treasury and Fed to keep foreign governments, banks and individuals holding US Treasuries.  But it isn’t working.  The percentage of bonds held by the Fed continues to rise.  What might happen if Congress grants President Joe Biden’s wish for a 1.9 Trillion spending bill?  We can guess the answer and only the reality that we haven’t seen anything like it in our lifetimes keeps us from believing it.  More creditors will dump US government bonds.  As they money comes out of US Treasuries it will go into gold, silver, oil, and other commodities.

There may be a day this year when gold opens up more than $500, as more futures market traders than anticipated take delivery on their contracts and the exchange, to make good, is forced to buy at any price.  With the passage of the first Trillion plus spending bill, prices for food and other essential goods are likely to accelerate.  People will then start advocating for price controls, which, if enacted, will result in shortages.

Yes, an inflation crisis is looming. So keep an eye out for a trillion plus stimulus bill and If the package includes a direct payment to individuals, be sure to spend or invest it quickly.

3 thoughts on “Is an Inflation Crisis Looming?

  1. It’s a big-business solution for our economic malaise. The economy is not working because there’s not enough decent work. The reason why there’s not enough work is because half the stuff Americans are consuming is a result of work done overseas.

    Instead of bringing jobs back, however, our corporo-socialist (fascist is a technical term) government decided they need to put $ in the hands of consumers to stimulate the economy. That’s a dumb solution – ppl already have $. Look at US savings rate skyrocketed during pandemic!

    And the way they will execute on that is by printing monopoly $ and forcing savers (I.e. readers of this blog) to buy stuff in anticipation of hyper inflation. Think real estate in FL, boats, lux cars, and of course a ton of Chinese crap.

    You don’t have to be a genius to see where it will end.

  2. Hey… Buying Votes Costs Money!

  3. “I Don’t See a Financial Crisis Occurring In Our Lifetimes.” – Janet Yellen, June 2017

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