Aug 12, 2021

Coming Apart

Last week, the Centers for Disease Control and Prevention announced that it’s extending the eviction moratorium. No more rent! How many branches of government are we up to now?

Then, the Department of Education announced that it is extending student loan forbearance for the fourth time. The new extension will last until January 31, 2022. But this will be the last one, they’ve assured us. No more student loan payments!

No more work!

No more school!

Society is coming apart before our eyes. What does this all mean?

We have had heard echoes of this before: in the 1960s, during the counterculture movement, and in the 1920s, with the reaction to alcohol prohibition.

The late 1960s saw rising inflation and the peak of a long bull market that lasted the entire decade. Though the 1920s wasn’t characterized by inflation, it was also a peak of a long bull market.

Are there any parallels to today? I don’t know. I am just making things up.

But when other countries experience episodes of rising inflation, stuff gets weird. This was well-documented with Weimar Germany, where great social upheaval coincided with a period of hyperinflation.

Inflation rips society apart; deflation bands people together. Japan, despite decades of deflation, is a peaceful and prosperous society with its values intact. Inflation creates political instability, which can lead to democracy… disappearing.

Which would you prefer?

This is not an anti-Fed newsletter, but this is what the Fed gets wrong. The dangers of high inflation are not strictly economic—they’re cultural and political.

This country won’t survive 30% inflation. We’ll end up with an autocracy. And we’re already trending in that direction, as attitudes have shifted ever-so-slightly away from democracy and toward “strong leaders.” The shift is even more noticeable among young people. A large number of them say that democracy might not necessarily be the best political system.

So, if you’re a Fed governor, you are either ignorant of all this political and monetary history, or you just like to poke the bear, shoot for a little inflation, and try not to get too much. A little bit of inflation is fun, after all.

Tombstone

I am reminded of a quote from Doc Holliday in the 1993 movie Tombstone, “I have yet begun to defile myself.”

We’re in the process of passing a joke infrastructure bill in a bipartisan fashion, with a spending bill coming down the pike that is five times larger than that. It is possible that we could end up with a $7 trillion deficit this year, or about 30% of GDP.

I haven’t looked it up, but I think this is the biggest deficit in the developed world—in history. In peacetime, of course. Early indications are that most, but not all Republicans want to restrain Biden’s spending—or simply redirect it to their own pet causes.

We’re losing our minds. But we’re not done yet—not even close.

I am a trader, and as a trader, I am fond of saying that it doesn’t matter until it matters. For the time being, the bond market (along with the Fed) seems to be absorbing all of this supply. If it doesn’t, the Fed will simply be used as a political utility to keep rates low.

There is that old line from Greenspan’s essay: “The law of supply and demand is not to be conned.” The next sentence in that essay reads: “As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise.”

This behavior will continue until there are serious economic consequences. What would constitute a serious economic consequence? Double-digit inflation, for starters. Four percent interest rates. Persistently high unemployment. Skyrocketing food and energy prices.

Until one or more of these things comes to pass, we’ll continue spending and printing. And who is arguing against that? Nobody in government. Nobody, except for a few Austrians on Twitter.

All of this happened in the span of 20 years. If you want to go back a little further, you could point to 1971.

Our experiment with a flexible monetary standard is relatively short in economic terms. Fifty years is a small sample size. What if we’ve just experienced the first half of one long, economic super-cycle, and we haven’t gotten to the down half yet? What if this results in 50 years of recession?

Isn’t That Special

I get that it’s August, and everyone is probably enjoying a White Russian poolside. I don’t mean to put you in a bad mood.

ZeroHedge is fond of saying (in a quote they lifted from Fight Club): “On a long enough timeline, the survival rate for everyone drops to zero.” Let me add Dillian’s corollary to that: On a long enough timeline, everyone gets to be right.

Who has consistently been wrong? The Austrian gold bugs always predict doom. They will be right eventually. If you wait long enough, eventually, gold will come back into favor. When they are right, it’s not going to be pretty, and it’s not going to be fun. More is at stake than just the price of gold.

Jared Dillian

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