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The Gathering Financial Storm of Inflation

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Inflation

All the perplexities, confusions, and distresses in America arise, not from defects in their constitution or confederation, not from a want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation.

John Adams

Have you noticed how everything seems to be getting more expensive? It’s not just happening in your head. It’s true. Everything costs more money these days. In fact, inflation is—according to official numbers—at a 13-year high. This means it is even worse than after the great financial crisis of 2008. And those numbers don’t even include food and energy prices, two of the most significant areas of increase.

It’s no wonder this is happening. As a recent Deutsche Bank report ominously put it: “US macro policy and, indeed, the very role of government in the economy, is undergoing its biggest shift in direction in 40 years. In turn we are concerned that it will bring about uncomfortable levels of inflation.”

John Adams was right –most people are not aware of how money is actually produced and how producing too much of it can lead to inflation. The short version of how money is produced is this: out of nowhere. The Federal Reserve literally creates it out of thin air, as recently explained on 60 minutes by Federal Research Chairman Jerome Powell.

But producing too much money can create very serious problems for the economy. When the money supply increases, that means the value of each individual dollar necessarily decreases, and more dollars are required to purchase the same goods and services.  That’s what is called inflation, and inflation dramatically erodes the financial wellbeing of individuals and companies who find they can buy less and less with the same amount of money. Inflation becomes an even bigger challenge if it is the result of the Federal Reserve hastily creating more and more money, or if it is the result of the economy not growing as fast as the money supply, which is the case now. And that’s putting it mildly.

Inflation concerns first began to appear at the end of 2019 after the Fed intervened to prop up the troubled “repo” market (temporary loans between financial institutions). But then COVID-19 hit, and the Fed massively increased the money supply to fund historic amounts of government spending and debt to combat the virus.

To get a better sense of the scale of the inflation we are currently facing we need to look at the M1, M2, and M3 numbers that the Federal Reserve uses to measure the money supply.  For example, it is extremely revealing to simply look at what is called the M1 Money Stock, which refers to physical currency and checkable bank deposits. The same is true of M2 and M3. While the shocking increase in the money supply is most evident in the M1 graph, M2 and M3 also show that last year, the supply of U.S. dollars went up like a rocket ship compared to the past 50 years. We are in truly unprecedented territory.

Perhaps the biggest increase in inflation has taken place in housing, a major component of many Americans’ net worth. The Case-Schiller Price Index indicates that home prices have gone up more than 13% since last year.

Inflation is making it especially difficult for Millennials to buy homes. According to a recent report, right at the moment that many Millennials were attempting to become homeowners, the price of a new home has increased by more than $35,000 in the past year alone, in part due to COVID-19 restrictions on lumber production. Overall lumber prices have jumped by nearly 200% since April 2020.

Yet the lumber shortage has only exacerbated the housing crisis. Freddie Mac estimates that the U.S. is short 3.8 million homes, pushing the American Dream further out of reach for young families. Just as Millennials were beginning to recover from the first economic crisis of the 21st century, they got hit with another.

Housing inflation is particularly difficult for the average American who rents or is seeking to buy a home, because housing isn’t an optional expense, unlike that optional road trip or Hawaiian vacation.

The same story is happening with gasoline, which has gone from an average of $2 per gallon to $3 per gallon since last year—a 50% increase.

All the while, as our national debt edges closer and closer to $30 trillion, we’re engaging in record government spending, and our birthrate is dropping to historic lows, which will only exacerbate the long-term solvency of our entitlement programs as relatively fewer people pay into them.

The problem of inflation isn’t going away, and it reveals a great deal about the financial challenges we will be facing as a nation into the foreseeable future.

Hard choices will be required. Will our leaders rise to the challenge?

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Chris
3 months ago

This is all by design, Government creates the economic collapse and then steps-in to take absolute control.

Phonies
3 months ago

Obama’s running the show with Biden as his puppet. Everything wicked is Obama/Biden/Harris!!!

Pat
3 months ago

“long-term insolvency of entitlement programs”…??? What are those??? Welfare nor social security are entitlement programs…no one is “entitled” to welfare and social security is TAXPAYERS’ money taken by the government which should ALL be paid back. Congress should be forced to refund all the money they have stolen from our fund over the years and prevented from taking any more…EVER. Where would they get the money to pay taxpayers back you ask? With all the taxpayers money they continue to give to other countries which hate Americans.

Bill on the Hill
3 months ago

John Adams, our 2nd President is mentioned at least a couple times in this somewhat lackluster report on inflation… To quote John Adams: ” There are ( 2 ) ways to enslave a country – one is by the sword, the other is by DEBT. ”
On the subject of housing & the cost of lumber: Lumber has indeed risen 400%, not the 200% stated in this article & secondly lumber is set to drop by 40%. That leaves 360% still unaccounted for, as in it remains overpriced & the expensive inventory sits idly on the racks collecting dust. It is just a matter of time, the law of supply & demand should drive down the prices, however it is said we will never see the previous low lumber prices ever again…
As mentioned in the article housing lumber costs have risen dramatically putting home ownership out of reach of millennials? Considering whom the vast majority of them voted for, I can give a rat’s ass in either case…
The parameters are a bit different this time around, however, I can sense another housing bubble on the horizon, i.e. remember 2005 – 2008. Oh, how we forget so easily…
The Feds are printing money faster than they can spend it, therefore the dollar is losing value, hence the inflation all of us are now experiencing & thanks in no small part to IRRESPONCIBLE gov’t spending, i.e. lining the pockets of the insurgents, both parties currently occupying Washington, DC…
Bill on the Hill… :~)

Peter K
3 months ago

The final sentence in the article says it all. “Will our leaders rise to the challenge?” I have the answer for you. NO, (emphasis intentional) they will not!

PaulE
3 months ago
Reply to  Peter K

I agree for the following reason: Our leaders fully understand the economic ramifications of the policies being pursued and they are pursuing them specifically to accomplish their goals. Those goals primarily are the following:

1) Monetize the national debt by devaluing the dollar. As Bill on the Hill correctly stated of John Adams, debt can be used as an effective weapon to render a country weaker or even powerless by encumbering the financial power and stability of the country. As more and more of the nation’s resources are devoted to servicing the debt instead of growing the economy, the buying power of the remaining dollars will be inadequate to fund are existing obligations in both defense and other areas. The standard of living of the average person declines as their dollars buy less.

2) Weaken the influence of the United States on the world stage. Specifically, as inflation balloons debt servicing, we have less dollars for what can charitably called “foreign aid” or buying the allegiance of other countries on matters of concern to the United States. China specifically has stepped in to fill this role around much of the world. That is what their Belt and Road Initiative is designed to do.

3) Our leaders are insulated from the effects of their policies and thus much of the impact of inflation, because most of their lifestyles are funded via the government. What isn’t covered is taken care of by money they collect for nebulous items like speeches, book deals by politically friendly companies and other legal means of transferring large sums of money to them. One example is how Obama went from an average Joe, income wise, to now almost a billionaire thanks to overly generous book deals while in office and after, a ridiculously generous deal from Netflix and other obvious huge transfer payments since leaving office.

For most politicians, government salary raises are generally automatic and they control, in one way or another, the percentage of the annual raises. Most of their total living expenses are partially or completely covered by the government, in one form or another, by justifying a meeting, dinner, trip, etc. as business related to discuss feedback to pending legislation or gathering input to such matters. Almost anything can be construed to be legitimate business expense and our politicians are adept at how to work the system.

4) The transition from being dependent on voter approval to remain in power to a completely unaccountable form of governance. This is a powerful incentive to throw everyone else under the bus. Where the political class is essentially becoming the new royalty class. Crushing the middle class and the poor with high inflation and then forcing them to be completely dependent upon the government for periodic handouts (think stimulus checks just barely enough to scrap by as the economy stalls out). A country where every single business, no matter how big or how small, is directly controlled or influenced by the government every single day. Every decision being made by any business has to be approved and in-line with the policies of the government or that business or a even an entire industry sector is crushed out of existence. Think what the government did to the medical health industry with Obamacare as one example and the left is just warming up. To us, this would be economic and social hell, but to most of those in the political class this is a dream come true.

Dennis
2 months ago
Reply to  Peter K

Also remember … Jerome Powell was nominated and supported by Trump…
Now I understand the deep state told him to do this however he could’ve done something. Anything …But he chose to do nothing …. and now Barry and Biden and the rest of the idiots will finish it….

Mark L
3 months ago

I’m happy some have finally realized how many THINGS we buy daily or anything often that gasoline rose up 50% since Biden stole the Presidency! If you haven’t noticed you’re likely on subsidies from the Government. EVERYTHING we buy has increased by the same percentage which tells us that it all was part of the DemocRATS Plan!
If you voted for Biden/Harris then you can’t complain you are part of the problem! President Trump had everything under control and OUR Country was doing great!
We had inexpensive gasoline and oil the Natural Gas business was booming all areas of the Economy were growing not closing!
Democratic States still lag behind on reopening their States. The businesses are having problems hiring people to work because they are collecting more from their respective States and Federal Assistance programs!The creation of Dictatorship has to stop now!
WAKE UP PEOPLE!

Wanda
3 months ago

Yes…I look for the Stock Market to go down….I can remember the inflation we had under Peanut Brain President Carter….If you had some money, you did good….we have our own manufactured housing sales lot and the interest rate was 10% or above on loans. Everything was inflated and we were depending on the middle east for our oil and gas….I can remember sitting in line to get gas and you were limited to just so much when you got to the pump. Does anyone else remember this? Trump made America self-sufficient in oil and gas and China Faux President Biden just made it to where we again will depend on our enemies for our power….oh, I forgot….we have wind and solar….well, let me tell you about that….I live in Texas and we had an ice storm and lost electricity for eight days in 5degree weather….it was awful and the reason we had such a hard time was due to the wind and solar power not working. Just a week ago, our electrical supply asked us to turn up the a/c to at least 78 degrees….the reason? Seems that the wind mills didn’t have enough wind to run them. So is the the new Green Deal future for America? I certainly pray that it is not.

Mark L
3 months ago
Reply to  Wanda

And here we have it folks, clean energy works where as going Green is a total failure and will continue to be. It just doesn’t work!

Matt Gabor
3 months ago

Yes it is “The Perfect Storm” for Inflation which was mainly preventable! I am sorry that many Millennials will not be able to purchase a home for a while but think about what Political Party they favor! I am sure down the road they will blame Republicans for everything!

I cannot blame the politicians for everything though. Many Americans are ” Financially Illiterate” due to their parents being the same way and few schools that teach “Real Economics”!

40 years ago all I knew was Mutual Funds. I took it upon myself to learn as much as i could. Many of the issues we have seen over the years are repeating financial cycles. During The Great Recession I bought my home while prices were depressed and foreclosures were high.

As you may recall the financial institutions approved mortgages to just about anyone whether they qualified or not! Lately The Left has been complaining about people who cannot afford to buy a home. I believe we will go right back to giving out mortgages like candy! This time around the Dems will print more money and forgive the loans!

I have seen homes in my area sell for way more than they will ever be worth and it would not surprise me to see a “Housing Bubble” like we have in the past. Many couples only look at the monthly payment and when the next recession comes one could be out of a job!

Last year when Oil and Gasoline prices were very low I noticed a lot more people driving “Gas Hog” SUVs and Trucks. Now that the Gas prices have nearly doubled I wonder how they feel? If you recall the same scenario occurred right after Hurricane Katrina. Natural Gas prices were over $16.00 per unit, Oil well over $100.00 per barrel and Gasoline over $4.00. I saw people who could not even give away their vehicles! We seem to have forgotten the lessons learned back then!Since we are not Energy Independent any longer be prepared to pay a lot more! Buying an Electric Car will only prolong the inevitable of some senseless tax being added on!

Whether the government and banks are involved or not all markets have naturally occurring defined cycles. 100 years ago Ralph Nelson Elliot discovered The Elliot Wave Trading System used by Investors and Traders all over the world. In 1983 Jim Sloman discovered The Delta Phenomenon which also is used by many. The Foundation For The Study of Cycles has repeating cycles for just about everything you can think of going back hundreds of years! The Moore Research Co has Seasonal Cycles that repeat year after year. If people would take the time to learn ahead of time and not have a “Herd Mentality” Regardless of what anyone may think of Warren Buffett he does advocate being a Contrarian.

There is a saying “The best cure for high prices is high prices” I remember The Inflationary 70s. When prices are too high and people stop buying they begin to come down. When prices are too low a company will not find it profitable to search for more Oil or Gold. In the Bible there is a scripture “There is nothing new under the sun” One look at our leaders shows they have not learned anything positive from history!

Jorge L Rios
3 months ago
Reply to  Matt Gabor

You forget the whole idea is to NOT look at history. We just need to erase history and rewright it to match the current agenda; all white people (except the elete democratic leadership) are racist , and only they can decide what money needs to spent on what, so they can print as much as they want. Do as I say not as I do. And so on, and so on.

Ed J
3 months ago

Inflation is the mechanism governments use to “pay off” their debts from their earlier and persistent profligate spending. How does it work? Simple! Borrow a dollar today that has some standard of value in terms of purchasing power and pay it back much, much later with cheapened dollars that have lost purchasing power. Essentially, the value of the dollar paid back later is not worth the same as the dollar borrowed earlier. Only the dollar “numbers” are the same.
 
Just look at history, in particular Germany post-World War 1. They experienced hyperinflation. Wage earners were often paid twice a day – once at noon and once at the end of the day, with wage rates changing by the hour each day. If you “saved” your noontime pay until evening, it would not buy anywhere near as much as if you spent it during your noon hour lunch break.
 
In America, in the early 1960s, you could mail a first-class letter for a 4¢ postage stamp. Today it cost 55¢ to mail a letter. That’s inflation in its most obvious form and is easy for everyone to understand.

Mark L
3 months ago
Reply to  Ed J

The newer generations just don’t get it because they don’t care or the parents didn’t teach their children responsibility. Americans have a job go to work every day and for that they are paid by their employer. The newer generations expect people like you and me to pay more on taxes to support their sorry a$$, I agree with this comment 100%!

Kevin S
3 months ago

Utterly no precedent of a change in direction. Both parties at fault, but not equally.

Bill on the Hill
3 months ago
Reply to  Kevin S

Kevin S… There be truth in what you have stated…The Republican’s, but never the RINO’s backed Trump to a point. The backroom deals with lobbyists goes both ways, Dems/Rep. The Covid-19 stimulus packages sending money to other nations, i.e. millions upon millions to Pakistan for ” Gender Studies “, other places to study the mating habits of carp, millions upon millions of dollars again. It was Trump that made America AWARE of what Congress has been pulling off for decades now. Those monies go to off shore accts & transferred back to the politicians so they can go on their never ending spending sprees, compliments of the American taxpayer,( out of sight. )
Politicians DO NOT go to Washington, DC to help the American people because of their Patriotic Duty to do so, they go to DC to ENRICHEN themselves… Trump brought this out, front & center for all to see & they absolutely DESPISE the man because of this, BOTH parties…
This is the ” dirty little secret ” that none of them openly talk about, BOTH parties, therefore the whole bunch of them are nothing less than the SWAMP creatures they have become…
This is NOT what our Founding Fathers ever wanted to see, a Federal government completely out of control, hence the storyline, INFLATION…
Bill on the Hill… :~)

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