The Many Faces of Inflation
As we cross into the second half of 2021, inflation continues to be one of the hottest topics in the financial media. After originally being dismissed by many of the mainstream pundits and government officials, we are now being told that inflation is “transitory”.
They say the first step in fixing a problem is admitting the problem exists. However, we all know that the folks at the Federal Reserve have no intention of dealing with it because this problem is actually their solution to paying off the federal government’s massive pile of debt.
Add the federal deficit to a record $13.5 trillion in corporate debt that has accumulated during this period of artificially low-interest rates and there is a disaster waiting to happen.
The Federal Reserve has no choice but to let inflation run hot which is exactly what many experts believe will be the case.
So far this year, this is exactly what we have seen as both producer and consumer prices have experienced steady increases. This has in part been due to lower baseline numbers from the previous year.
It is yet to be seen what will happen to prices in the coming months and years but there seems to be agreement that we will see dramatic price swings in one direction or the other.
Inflation comes in many shapes and sizes. Helping to give economists and pundits more issues to argue over and ensuring nothing gets done to fix any of them should they arise. Here are a few common examples to look out for.
Stagflation is described as a period of economic stagnation paired with rising prices and high unemployment rates.
The United States last experienced stagflation in the 1970s when a sharp rise in oil prices spurred an economic recession.
The higher cost of production from increased energy prices caused higher prices for goods and services and slow economic growth. This resulted in high unemployment numbers to round out the criteria for stagflation.
There is concern that we may find ourselves in a similar situation as the world moves to “green” energy that is far less energy-dense than fossil fuels. Some experts believe this will lead to an energy crisis where rising energy prices will lead to a similar situation as was experienced in the 1970s.
In a recent video, George argued that a Central Bank Digital Currency could also lead the economy to a period of stagflation due to the economic distortions it would bring.
This argument stated that the Fed would not operate under lending constraints that commercial banks traditionally would follow. Instead, money would be created out of thin air and not lent out for productive economic activity.
These lending practices would lead to inflation from dollar printing, slow economic output from the inefficient capital deployment, and a loss of jobs in the real economy.
Another form of inflation making the media rounds lately is hyperinflation. Hyperinflation is defined as out-of-control and rapidly accelerating inflation.
It occurs when governments print significantly more currency units without a corresponding increase in goods and services produced, leading to a massive imbalance in the supply and demand for goods and services and the rapid deterioration in the real value of the currency.
One of the most cited instances of hyperinflation occurred in the Weimar Republic during the early 1920s. More recently, we saw hyperinflation ravage the currencies and economies of Zimbabwe and Venezuela.
The annual inflation rate for the Weimar Republic peaked in 1923 when some prices tripled in a single day due to the government printing massive amounts of money to try and pay for World War I. The only way the government could afford to pay off its large amount of debt was to inflate it away.
In what has now been dubbed the “Wheelbarrow Effect”, a combination of the loss of faith in the monetary system, a decline in government revenues, increased money printing, and shortages began a cycle of hyperinflation that decimated the currency.
Some argue that the United States is set up for a similar fate unless the debt levels are somehow reduced and the money supply stabilizes.
Negative Inflation (Deflation)
Deflation, or the reduction in prices of goods and services, can be both good and bad for an economy.
In a deflationary environment, the purchasing power of a currency increases which is generally good for consumers. Advancement in technology and more efficient production of goods and services can lead to prices falling naturally in the market.
Deflation is bad for the economy when consumers begin to spend less and save more, thus weakening economic growth. It also reduces the incentive to use or repay debt because it raises the value of debt and makes it harder to pay off.
There are some who have argued that the next economic collapse will not be caused by inflation, but by deflation instead.
It seems the number of deflationists has decreased over the past year but in a recent video, George brought up an interesting argument involving the massive increase in reverse repo transactions with the Fed being a catalyst for upcoming deflation.
Shrinkflation is not spoken about as frequently as these other forms of inflation, but it is a unique form of inflation that may be affecting your purchasing without you even knowing it.
It is a term that was coined by British Economist Pippa Malmgren that refers to businesses reducing the size of a product offering without reducing the price you pay. Businesses will try to inconspicuously reduce the size of their product or packaging in hopes the consumer will not notice. And usually, they don’t!
You will most commonly find this practice in the food and beverage industry. Recently an article was published about cereal manufactures participating in this secret tax.
Although shrinkflation helps out businesses by increasing margins and offsetting rising production costs, they must be careful to hand over customers to their competition.