Bond markets and post-pandemic inflation fears

February 26, 2021 at 6:36 pm

Here is an excerpt from my book which explains some of the dangers of inflation and why the markets are reacting so violently against the prospect of its return:

"Governments require a positive inflation. Governments jumpstart their economies by stimulating economic activity through boosting government spending with the belief that overall spending and loan demand by the public should rise too. Inflation can to be very good for those who have debts and own assets, but it can prove disastrous for savers and average salary earners because their savings depreciate and their wages stay the same. Whilst the cost of living goes up resulting in worse standards of living, and to top it off they will suddenly find that the finish line has just been moved further away from their grasp. With inflation, a person works their entire life to amass some capital and he is destined to lose it, invisibly, through currency depreciation over the years therefore he feels a pressing haste to spend or use his capital quickly, which then forces him to keep working to amass more, and this pressing sentiment leads people to keep working harder and faster to try and keep up. Many call this kind of inflation oppression through social coercion, a hidden tax which rewards debtors and punishes savers, thus incentivizing people to keep spending and consuming now and bringing forward future consumption, basically by putting the economy on steroids through relying on increasing debt to keep the system going. That is why governments need constant inflation, otherwise it would be forced to deal with the structural economic budgetary deficit instead of taking the easier way out of devaluing its massive debts and currency and not paying full value on their obligations. While deflation does exactly the reverse, it slows down the economy and rewards those disciplined enough to spend within their means.

The governments argue that inflation has not even reached its target of 2% per year in the past years, thus enabling them to keep pushing on down this path. But the truth is that the way central banks measure inflation is not even adequate. The most widely used measure is the Consumer Price Index (CPI), which offers a convenient way to include or exclude certain products that give a favorably low result. Therefore, the CPI is a busted barometer that does not reflect real inflation because it does not include full housing, education, health or investment assets price increases. Moreover, the weight of each expense does not reflect the average household’s reality.

On one hand governments want a high inflation to devalue their debt but on the other hand there’s a vested interest in not acknowledging the real inflation rate because then there would be no excuse to stimulate the economy further or to continue the never ending debt cycle. Moreover, payment of social welfare programs depend on inflation, so the higher the reported inflation, the more money the government needs to spend on these payments. So in fact, prices are rising but the government does not want to admit it, or else it would have to raise wages and social benefits such as pensions. This is why, for the general population, it is important to have an accurate measure of inflation because only then will people know the true extent of the negative impact on their savings and standards of living from the continuous money printing by central banks.

Another risk could be a return of hyperinflation. The current combination of monetary debasement, populism and social unrest is neither a new phenomenon nor a coincidence. The late Roman Empire clipped or shaved silver coins as it disintegrated; Henry VIII replaced silver coins with copper to pay for wars against France and Scotland; the British Empire allowed double-digit inflation to erode bondholders’ wealth following the War of Independence; the Weimar Republic precipitated an inflation spiral to pay for war reparations.

Monetary policy has in the present, like in the past, increased inequalities between the rich and poor, the old and the young and between large cities and suburban peripheries left out of the recovery. Brexit, Trump’s plan to exit trade agreements and the calls for independence across European regions all envision a return to past glory with the use of national borders, identifying an external enemy to polarize people’s angst and pursue disruptive policies in the process, while diverting people’s attention to the real core of the problem. History shows that absent redistributive policies to rebalance inequality and promote social mobility, excess spending and protectionism from populist regimes are likely to result in higher public debt, higher inflation and losses for society as a whole."

If you want to know more in depth what I think about these topics, you can find my book here:

https://www.tradingpros.club/servicesproducts/ebook/

And this full chapter is available for free here:

https://www.tradingpros.club/news/params/post/2642764/tales-of-the-pirate-investor---chapter-11

Let me know your thoughts. I enjoy discussing these topics.