Big Inflation Coming 2

At the height of the stock panic in late November, the flagship S&P 500 stock index had plunged 49% year-to-date. Fully 2/3rds of this decline happened in the 9 weeks leading into the panic lows! Naturally the psychological impact of such an epic selloff was utterly massive. Fear exploded to unprecedented extremes.

A stock panic is a bubble in fear, and succumbing to this overwhelming fear leads to irrational selling near lows. But interestingly at the time, investors failed to recognize this truth. They sold aggressively, and they wrongly assumed their selling was rational. Of course the only thing that would warrant a 38% loss in the stock markets in just over 2 months was a new depression. So depression fears mushroomed.

With a depression comes deflation, so deflationary theories became widely accepted in December and January. Yet there was one big problem. Deflation is purely a monetary phenomenon. If prices of anything are falling simply for their own intrinsic supply-and-demand reasons, and not as a consequence of monetary contraction, then it is not deflation. In reality, the money supply was skyrocketing in the panic.

With the Fed ramping the US dollar supply far faster than the pool of goods and services on which to spend it, inflation was inevitable. Relatively more dollars bidding on relatively fewer things means higher general prices, the formula is simple. I wrote an essay on the big inflation coming in January, when deflation fears reigned supreme, using the Fed’s own data to highlight the staggering monetary growth.

Saying it was inflation that was coming, not deflation, was extraordinarily controversial just 5 months ago. You would not believe the firestorm of flak I weathered for pointing out the threat of inflation. Being contrarian never wins friends. But not surprisingly, today the consensus view on money is shifting to an inflationary bias. With a more receptive audience not blinded by fear, I thought I’d update this analysis.
Sadly inflation is woefully misunderstood in popular culture. People tend to think it is simply “rising prices”, but this is incorrect. The formal dictionary definition of this word is “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency”. The key is the rising prices have to be driven by an increasing money supply.

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