Cometh Inflation the ‘Exterminating Angel’

Amid all the sound and fury of the Trump news cycle, hardly anyone noticed.

There is a spectre haunting this economy.

It is the spectre of inflation…

Exterminating angel

Bloomberg has the report:

The U.S. cost of living increased in January by the most since February 2013, led by higher costs for gasoline and other goods and services that indicate inflation is gathering momentum.

The consumer-price index rose a larger-than-forecast 0.6% after a 0.3% gain in December, Labor Department figures showed Wednesday. Compared with the same month last year, costs paid by Americans for goods and services rose 2.5%, the most since March 2012.

French investment bank Natixis makes a related observation:

The return of inflation in the euro zone with the rise in the oil price will drive the European Central Bank to give up QE […] Our estimate is that an end to QE would raise interest rates by 110 basis points. [A basis point is 1/100th of a percentage point.]’

Wait… Inflation is what the Fed has been looking for. And the latest numbers reveal it may have already reached the Fed’s target of 2%.

If you’ll recall, the Fed set itself two targets: unemployment would have to fall below 5%.

And inflation would have to rise above 2%. Reaching those two targets would prove that the economy was healthy enough to allow the Fed to raise rates.

Higher rates of inflation — higher prices — signal more consumer demand. And more labour demand, too. It suggests there are more people with more money ready to spend it. How could that ever be a bad thing?

And now, with the Fed’s key targets hit, we’re ready to return to the good ol’ days, right?

Oh, dear, dear reader… If it were only that simple!

The typical US household’s income is below the level of 1999. Higher consumer prices will make it harder to keep up living standards.

But the bigger problem is debt.

Real money — backed by gold — is limited. This limits the amount of debt…because there’s only a limited amount of money to lend.

The post-1971 fake-money system, on the other hand, allowed debt to creep up…and then gallop away. Now, there’s more than $200 trillion of it worldwide — about three times the global economic output.

And here’s the thing: As debt rises, inflation becomes an exterminating angel. Welcome at first…then deadly.

Rising prices signal to lenders that the amounts they are owed are losing buying power. They will demand higher rates of interest to protect themselves.

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Great extinction

But this is a world whose major institutions — banks, pension funds, governments, large corporations…all the major players in the Deep State system — have flourished on extremely low interest rates.

Now, like dinosaurs that have adapted to the tropics, they’ll shiver, die, and go extinct when the chilly winds blow.

And they could blow hard…

Even an increase of just 1% in the cost of servicing debt — if applied to the world’s debt load — would cost more than $2 trillion a year in interest.

Everyone who had to borrow — those aforementioned major players — would suddenly find themselves unable to continue living in the style in which they’d become accustomed.

Ordinary households would be in trouble, too. Mortgage rates would go up. House prices would fall. Credit markets would ‘seize up’, making it difficult to refinance old loans.

They would have to cut back…laying off workers and cancelling expansion projects…or go broke.

Your stocks could easily drop to half of today’s prices…and stay there. Your pension might have to be trimmed. Even the government, if forced to pay more to service its debt, would have to reduce spending.

But don’t worry. The central banks have the matter in hand, right?

Now that inflation and unemployment are in line, they can let rates rise, right? This will tamp down inflation, right?

Recession warning

It won’t happen…

As we’ve been warning, the Fed can never voluntarily return to a normal interest rate policy because it has created a world that depends on an abnormal one.

Here’s what will happen: The Fed will talk about raising rates. It may even raise them another quarter point or more.

But a recession and a bear market are coming, probably before the end of this year. If President Trump were smart, he’d be trying to get them to start soon so he could blame them on Obama. The longer they take to arrive, the more they have his brand on them.

Markets and economies are part of the natural world. They have to breathe in and breathe out. Their lungs fill with ambition and optimism. Then, they must exhale, blowing out the mistakes and disappointments.

But when the ‘correction’ comes, the giant raptors in Northern Virginia and the megafauna of Manhattan will howl for succour.

The Fed will immediately abandon its pretence of returning to normal. Instead, it will buy stocks and bonds.

And it may ban cash…impose negative interest rates…rain down money from helicopters…and come up with novel new ways of distorting, delaying, and defrauding the economy.

Regards,

Bill Bonner,
For The Daily Reckoning, Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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