As I related in the last blog post in this series, its seems likely we’re going to have inflation rates greater than the Fed’s goal in the near term (say the next couple of years)–if we don’t have some sort of economic collapse. I say the latter because when you have systematic debasement of the currency like the Fed has done, the biggest inflationary problem is not higher consumer prices–which are painful–but rather the imbalances they’ve created in our financial system. Easy money begets leverage and speculation, and we have asset prices everywhere that are priced for nirvana. Value is always subjective, and asset prices are a reflection of one’s vision of the future. When asset prices are high, one is more confident of the future. Yet confidence, like market liquidity, is a coward, often fleeing when it is needed the most. Thus our financial system is inherently more vulnerable to shocks than it would be, and any collapse has the possibility of turning into a debt deflation, as the debt that is amassed when good times are expected to never end can be difficult to service if there is an external shock. And yes the imbalances in our world could cause such a shock. For example, the current real estate bubble in China is imploding. Will the Chinese totalitarians be able to let the bubble slowly without larger systemic contagion? Emerging markets are seeing stress on their currencies, and hot money is leaving those markets, where does that go? The point is not to cry that the sky is falling, but we must realize that the sky could fall at any time, and how much the more with the financial imbalances caused by a decade + of heterodox money policy goosing asset prices globally?

So aside from the deflationary result of some exogenous shock, we’re likely to see higher prices. And as the Fed has shown us both in the aftermath of the financial crisis and taken to a whole new level with with Covid-19, there is no limit on their willingness to print more money. This suggests that even in the debt deflation possibility we’re likely to have only a short-lived period of deflation before money printing takes over. Yet money printing is never neutral in its distribution–money printing always gives some command over resources that others would have had. Money printing takes from some to give to others, and is broadly legalized theft. When the largesse is to the benefit of the government, e.g., a stimulus bill that is funded by Treasury debt that is monetized by the Federal Reserve, it can be thought of as just another tax, with the beneficiaries being those favored by the government. But those that do not have the government’s favor will be the payers of that inflationary tax. And the tax payments will not be uniform, even for those not receiving the benefits of the new money creation. You don’t need me to tell you this inflationary income redistribution is immoral–everyone going into the grocery store is seeing that their wealth is now less in real terms. That former level of purchasing power was taken from them. Most don’t know who took it, but they know it’s now gone and they know someone, somewhere is getting a benefit that cost them. Inflation is less than a zero-sum game, i.e., someone must lose for someone to win, since it engenders inefficient actions on the part of everyone in the system to try to protect themselves from the institutionalized theft.

The tone of the previous paragraph may seem harsh to readers only because we have not been accustomed to the higher levels of inflation we’re now seeing. Previous generations that suffered from their governments monetary policy know and hate this theft more than we do. As do those in Argentina, Venezuela and Turkey, or the many other countries that have looked to the printing press as the path to prosperity. The only source of prosperity is more production, always and everywhere. Along with a former student, I’ve previously examined the morality of fractional reserve banking (FRB), with the primary question of morality being the inflationary result. Our conclusion was that FRB isn’t necessarily immoral, if disconnected from legal tender laws and central banking. Yet the real world we live in features all of those institutions, making the process of money creation necessarily granting someone the right to consume without producing. And what is ongoing now is systematic theft from some to others. Which is why it is shocking to see our Federal Reserve committing to higher levels of theft than previous. And it is disappointing to see the focus of the Biden administration regarding Federal Reserve governors being who will promote a climate policy agenda? Or who will regulate our financial system to transform the economy the way we want it to look? And seemingly no consideration as to who will stabilize the purchasing power of our dollar?

So what can we do about it? As always make your voice known in the myriad of ways you can–you have elected officials, contact them and let them know you are upset at the rising prices they are creating. Make sure that they know you will be holding them accountable. My financial advice is limited; my worldly wisdom would say sign up for as much debt as possible and pay back with cheaper dollars. That is, after all, the government’s plan. But I will trust in the biblical wisdom to not be in debt to anyone, except the continuing debt to love one another. Should you be in stocks, gold, bonds, bitcoin? BATG is not the place for specific financial advice (as I’m an economist and not a financial planner), but you wouldn’t catch me anywhere near bonds. If we do get the deflationary collapse in the near term, we could see yet another sharp bond rally–that indeed will be likely. But if you think that inflation is going to be higher in the long run, someday those holding bonds will be crushed. For example, bonds rallied to unprecedented lows with Covid, but then rates have risen dramatically–those investing in bonds last year have likely suffered pain. Claims on real assets (e.g.,real estate, stocks, gold) tend to perform relatively better in an inflationary environment, but no one wins. In my mind the best scenario going forward would be for the stock market to go sideways for several years to allow the inflation to drive earnings growth higher such that existing prices were not in bubble territory. The best financial advice I have is to be debt free, invest in yourself and your skills, and invest in God’s kingdom purposes. For your personal wealth, the advice of Ecclesiastes 11:2 still holds: Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.*

* But when I’m thinking about diversification, I’m not thinking of seven or eight publicly traded stocks. Think across all asset classes.