Been a Long Time

I have not been posting anything here because I have a professional conflict. I cannot ethically or responsibly talk about banks, given my position. So, I won't.

So, I'll just posit a ramble.

Hyperinflation will not come. To step back a second and define terms, let's call hyperinflation something greater than 15% headline inflation (core inflation is basically meaningless to anyone who spends money, and only useful for Federal Reserve monetary policy). We're currently at about 3.6% headline inflation.

We are seeing headline inflation due to currency devaluation (back to Fed monetary policy), but the fundamentals of the American economy still support a deflationary trend. Economic activity is stalled, or still shrinking (if you take GDP minus headline inflation, you get a negative number, meaning we never left the recession except for maybe one or two quarters).

Forward, then, zero interest rate policy (ZIRP) will not trigger core inflation to spike. The reason is as follows. ZIRP encourages capital allocation to commodities or risk assets, but not to business investment. The only thing that encourages business investment (by that I am not referring buying NASDAQ stocks, but rather buying tractors, buildings, new ventures, etc.) is optimism. Optimism will only come after either a true bottom is hit, or after a period of stagnation so boring that business leaders and entrepreneurs start trying new things just to shake off their own doldrums.

Stagnation also will build its own form of inefficiencies to exploit, especially as the rest of the world continues to change.

Deflation would be more just, as it would cause some of the zombie entities to finally die. Deflation would be very painful, though. Wages would decrease. Unemployment would shoot upwards to 15% or so. Getting a loan would be nigh impossible on the downward trajectory, thus causing even greater economic malaise. Much of what we know in our world today would change due to cultural upheaval in the face of such a terrible condition for the average American. Doom and gloom would reign, even more so than in a period of prolonged stagnation.

On the flipside, deflation would benefit the dollar, meaning oil would be cheaper because a single dollar would buy more oil than it does now. At some point, energy would be so cheap that optimism would surge as investors realize the opportunity. Likewise, other assets would plunge to fire sale prices. Those with a cash stockpile (even a small one, say $10k) and those with nerve aplenty would become the leaders of change.

Creative destruction. With the dynamism and worldly interconnectedness of the modern economy (assuming the modern economy could survive American deflation), the greatest bull market ever would erupt.

Our fearful leaders will choose stagnation. That's their only hope for keeping their jobs. So, enjoy the wait. Eventually Baby Boomers will retire, which will give some relief to the labor market (opening up new positions) and to corporate earnings and government budgets (cost of labor will be reduced as younger, cheaper people fill the positions). Eventually the country will grow large enough that the excess labor pool will bring down wages sufficiently to make American exports competitive. Eventually Americans will deleverage and default on their debts to the point where banks might consider lending rather than hording their cash. Eventually weak core inflation and lack of demand will make housing prices look attractive again.

A lot of eventuallys. Welcome to the new normal.