Is hyper-inflation a real worry?

Starting with the administration of George W. Bush successive administrations of both parties (Bush, Obama, Trump) have incurred increasingly large federal deficits. Bush added $3.3 trillion to the federal deficit, Obama added another $6.8 trillion over his eight years, Trump added almost as much, $6.6 trillion, in just 4 years, and now the Biden administration has proposed adding another $6 trillion or so just in his first year. Meanwhile the Federal Reserve has been printing (or its electronic equivalent) new money at a great rate.  Should we be worried? Will this bring on hyperinflation?

Well, the Fed chairman says no. Yes, he says, there might be a slight “temporary” uptick in prices reflecting pent-up demand after the COVID lockdown, but not to worry. The Fed, he says, is sure that things will settle down shortly and inflation will surely stay around 2% or just a bit more. Should we believe him?

Warren Buffet, speaking at this year’s shareholder’s meeting, says inflation is already here. He sees it every day in the prices of his companies’ raw materials, and says we ought to worry about it.

Dr. Michael Burry, who so accurately predicted the 2008 meltdown (and made a fortune for his investors by betting against the “common wisdom”), is similarly pessimistic and has been saying so in his Twitter account, citing a great deal of historical data to support his contention. The feds were so worried that his twitter messages might affect the market that they asked him to get off of twitter, which he did.

Dr. Nouriel Roubin, who also famously predicted the 2008 crash (and was ridiculed at the time as “Dr. Doom’ for his pessimism), also says we are headed for a world of hurt.

A number of others, most with somewhat less impressive credentials, have also been warning about impending fiscal catastrophe from the massive and growing debt, and the Feds money-printing spree, but then there are always doomsayer around, so it is hard to know how to evaluate this.

So how about looking at hard data instead of just opinions (hard data? What a concept!). First, what about the claim that the Fed has been “printing’ enormous amounts of new money. Here is a current chart of the M1 money supply from the Federal Reserve itself, from Jan 2016 to the present. As you can see, about 35% of the money now in circulation has been created just since February of 2020. That’s a lot of new money to have “printed”.

Inflationary pressures typically move through the economy like a pig through a python, starting with basic commodities and moving through the supply chain to eventually raise the price of finished goods.

So how about commodity prices? Here is a chart of the price of lumber (per 1000 board feet). Framing (with wood) makes up about 20% of a new-house cost. Builders estimate that the recent rise in wood prices just to date will add about $35,000 to the price of an average new house.

Here is a chart of steel prices over the past year:

Here is the price of Lithium Carbonate over the past year, critical in making the electric car batteries of which Biden is so enamored:

Here is the price of cement, critical to most construction, over the past year:

Looks to me like the data support Buffet, Roubini, and Burry’s worries.

Thinking about money

The Biden administration is on track to generate the largest federal deficit, as a percentage of GDP, of any American president in history. Besides the $1.9 trillion in COVID relief just passed, the administration proposes about another $4 trillion in new infrastructure and social spending, on top of the government’s normal operating expenses (about $4.8 trillion in 2020), all essentially without raising taxes. Yes, I know there is a proposal to tax the rich and corporations more, supposedly enough to pay for all of this, but by the time the lobbyists and the corporate accountants and the tax lawyers are through this is not likely to happen. As it is, 90 of the largest U.S. corporations don’t pay any taxes today, despite the supposed 21% corporate tax rate, and most of the really wealthy also have lots of legal ways to shelter their income.

And in any case, if we confiscated ALL the income of the wealthiest 1% it would hardly make a dent in the deficit (do the math; it is revealing). And corporate taxes in any case currently make up only about 7% of federal income, so even doubling it doesn’t make that much difference. So in the end most of this additional spending will almost certainly just add to the federal debt, currently at about $28 trillion, already more than the nation’s annual GDP (about $21 trillion in 2020).

And this fiscal deficit is actually minuscule compared to the unfunded (and off-books) obligations the U.S., government already carries for Medicare and Social Security and federal and military pensions, a total estimated to run somewhere between $100-250 trillion, depending on what assumptions one makes about future growth rates, demographics, and trends. By comparison, the federal government’s total annual income is only about $3.5 trillion, clearly nowhere near enough to ever pay for these unfunded obligations.

All of which makes me think about the nature of money.

Bitcoin and its other digital cousins (Dogecoin, Ethereum, etc) are an interesting phenomena. They are currencies backed by ….  absolutely nothing! In essence they are like the emperor’s new clothes. They have value as long as, and only as long as, everyone agrees to pretend that they have value. Yet speculators are bidding up the price of these currencies to astronomical heights.  That certainly sounds like a crazy scheme to me.

But wait a second. The American dollars is also backed by ….  absolutely nothing! Oh, not quite nothing. It is backed by “the full faith and credit of the American government”.  But what exactly does that phrase mean? If I loan the US government some money (which is what I do when I buy a treasury bond), what exactly does the government’s “full faith and credit” actually mean? It means they promise to redeem my bond when it comes due with US dollars, which they can always do because they can always print (or its electronic equivalent) more dollars. But the dollar is actually not backed by anything either. So like bitcoins, this system works as long as, and only as long as, everyone agrees to pretend that the emperor actually has clothes on – so long as we all agree to pretend that dollars have value.

In fact, the government “prints” new money all the time. About 35% of the dollars currently in circulation have been “created” by the Federal Reserve over the past 12 months (the fancy euphemism for this is “quantitative easing”, which sounds ever so much more sophisticated than just “printing more money”). In theory I guess the government can always pay off its debts, however large, by just “creating” new dollars – electronically adding a few zeros to the balance. Does this worry you? It worries me.

The danger then isn’t that the government won’t have the dollars to pay off its debt – they can always print more dollars. The danger is that people will decide the dollar isn’t worth that much any more in purchasing power (that’s called inflation). And in fact, if one studies history there are a whole string of nations and empires that overspent, accumulated great debt, and then failed when their currency as a consequence became essentially worthless. Apparently, US politicians don’t study history, and neither do voters.

 

Stating what I would have thought was the obvious

I would have thought the following three points were obvious by now to everyone:

1.      Anything connected to the public internet or transported over the public internet is potentially available to anyone in the world. This is true no matter how many supposed security features are involved, as is demonstrated almost every day.

2.      Any data stored on devices connected to the public internet might as well be published in the New York Times. Again, this is true no matter how many supposed security features are involved, as is demonstrated almost every day.

3.      Any device controlled over the public internet is potentially controllable by anyone else in the world. And again, this is true no matter how many supposed security features are involved, as is demonstrated almost every day.

Why corporations and government continue to store their most sensitive data on internet-connected devices, and why governments and corporation continue to control critical devices over the public internet is beyond me. Yes, it is more convenient and less expensive than building a separate non-public communication network, but I would have thought by now it would be obvious that the public internet is simply not secure, no matter what “experts” claim. Indeed, in several recent cases the very software/devices that are supposed to provide internet security were themselves hacked. And as people like Edward Snowden have demonstrated, every USB port is a potential doorway to the most sensitive data.

I was once taught to assume that anything I wrote down might someday appear in the New York Times, and so to be careful what I wrote down. It is clear that the same thinking applies to the public internet – anything put on the internet may well appear eventually in the New York Times and perhaps in Russian or Chinese factories as well. This is true whether it is just a private email or the detailed plans for our latest fighter plane (both of which have been stolen over the internet in recent times).

This point is so obvious. Why then do we still get almost daily stories of corporation and government systems and devices being hacked?