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Here’s Why Inflation Is About to Return with a Vengeance

How can the Federal Reserve print 200 years’ worth of money in 17 months without sparking hyperinflation? Brandon Smith of Alt-Market.us explains the factors behind the recent dip in CPI, and shows us that this isn’t the end of the inflationary episode, but merely the end of the beginning…

Heres Why Inflation Is About to Return with a Vengeance
Now, imagine trying to fill a swimming pool a quarter of a mile away... Photo by Ozzie Stern
Photo by Ozzie Stern

From Brandon Smith

Perhaps one of the most bizarre recent developments in economic news has been the attempt by establishment media, on behalf of President Joe Biden, to declare U.S. inflation “defeated” despite all the facts to the contrary.

Keep in mind that when these people talk about “inflation,” they are only talking about the most recent consumer price index (CPI), which is allegedly a measure of current inflation growth rather than inflation already accumulated. The official CPI is easily manipulated, though, and to focus on that single measurement is a dishonest way of misleading the public regarding the true economic danger.

The way U.S. inflation is presented might seem like a fiscal miracle. How did America’s CPI fall so quickly, while the rest of the world (especially Europe) is still in distress?

Is “Bidenomics” really an economic powerhouse?

No, it's not. I have addressed this issue in previous articles but let’s dig into inflation specifically. This  is important because I believe a renewed inflationary surge will begin in the near term and I suspect the public is being deliberately misled to keep them unprepared.

The four categories of inflation

First, let’s be clear that there are four types of inflation, distinguished in annual or year-over-year terms:

  • Creeping (2% or less)
  • Walking (above 2%)
  • Galloping (10% or more)
  • Hyperinflation (50% or higher)

We also should distinguish between monetary inflation and price inflation, because they are not always directly related. (Yes, usually they are, but many events other than money-printing can send prices higher).

If we calculate CPI according to the same methods used during the 1980s, actual inflation has been in the double digits for the past couple years.

Modern CPI measurements vs. 1980s-based inflation measurements

According to unadjusted 1980s-based CPI measurements, inflation has been in the double digits since mid-2021 (highlighted portion). Chart via ShadowStats

This constitutes galloping inflation, a very dangerous condition last seen in the U.S. during the stagflationary era between the end of the gold standard and the Reagan administration (1971-1982).

Now, there are multiple triggers for the inflation spike…

The primary cause is years of monetary stimulus created by the Federal Reserve, starting in 2007. Presidents of both political parties supported these measures. You could argue that Republican presidents wanted to juice real economic growth, while Democratic presidents were more interested in benefiting their globalist elite supporters, but ultimately motive doesn’t matter. The results are indistinguishable regardless of intentions.

This unprecedented stimulus created an avalanche effect in which the economic weakness accumulated like sheets of ice on a mountainside. Charles Hugh Smith calls this the Federal Reserve’s “one weird trick” and explains:

The U.S. economy has been saved time and again over the past two decades by this one weird trick:

“Bringing Demand Forward” by lowering interest rates and lending standards so Americans could continue to buy stuff they didn’t really need because the monthly payment dropped as interest rates were pushed toward zero.

Every time the economy faltered, the Federal Reserve would push interest rates down to “Bring Demand Forward” by goosing debt-based consumption…

Smith points out that the decision to “bring demand forward” has an expiration date. Regardless of the Federal Reserve’s ability to print infinity dollars, these efforts don’t create real economic growth. The best the Federal Reserve can hope is that some small quantity of the dollars flooding the economy are eventually diverted into productive economic activity.

It’s really difficult for most people to intuitively understand issues like this. Terms like “money supply” and “demand” and “stimulus” are so abstract, so let’s indulge in a thought experiment…

Imagine a firefighter trying to fill a swimming pool his your back yard with a fire hose – but he’s standing on top of a 10-story building a quarter of a mile away from your home. Could he eventually fill the swimming pool? Certainly! Some small percentage of the 400 gallons-per-minute output would end up in the swimming pool. What about the rest? Most would flow into gutters or storm drains, effectively wasted. He’d inadvertently water some parched lawns and probably break a few windows. It’s certainly not the most efficient way to fill a swimming pool, although it has a very deliberate side effect of visibility. He’s making a very public effort that no one within the blast radius can possibly ignore.

This is how monetary stimulus works. The Federal Reserve is the deranged firefighter, the swimming pool is economic productivity and the water, of course, is cash…

The last straw

The pandemic panic, covid lockdowns and $8 trillion in stimulus spending flooded the economy with newly-printed dollars. Then, it all came crashing down.

To give you a sense of how bad the situation is, we can take a look at the Fed's M2 money supply (they stopped reporting the more complete M3 money supply right before the crash of 2008). According to the M2, the amount of dollars in circulation jumped around 40% in the span of only two years – from $15.45  trillion  in February of 2020 to a peak of $21.7 trillion in July 2022.

That is an epic amount of money creation!

To put this into perspective, you have to understand some numbers…

During the first 228 years of our nation’s history, the money supply rose $6.25 trillion.

The money supply rose by the same amount in just 17 months.

That’s over two centuries worth of new money printed in less than two years.

The economy simply hasn't processed all of this new money yet.

Prices rise when an increased number of dollars chase an unchanged supply of goods and services. (That’s monetary inflation, and rising prices are the symptom.)

Obviously, in such a scenario, necessities like food, fuel and housing rise in price the most. Plans to purchase another Rolex or a vacation home on a lake can always be postponed – plans to buy bread, milk and eggs cannot.

Thanks to the absolute tsunami of money-printing, two centuries worth of cash in less than two years, necessities now cost some 25%-50% more than before the pandemic panic.

Think about that for a moment...it now costs us 25%-50% more per year just to survive it did before 2020, and it's not over by a long shot. Houshold costs are still climbing.

It’s important to remember that, since inflation is cumulative, we’ll never be rid of the increases that are already in place.

Inflation may be transitory, but its damage is permanent.

With all this in mind, why is the official CPI going down – excuse me, going up but more slowly?

The main reason has not been the central bank pumping up interest rates. The more expensive debt becomes, the more the economy slows down. That said, the Fed has remained hawkish for a reason; they know that inflation is not going away.

They need help if they're going to convince the public that inflation is no longer a problem.

Enter Biden's scheme of dumping America's strategic oil reserves on the market as a means to artificially bring down CPI. Energy prices affect almost all other aspects of the CPI index, and when energy costs fall this make it seem like inflation has been tamed. The problem is that it's a short term fraud. Biden has run out of reserves to dilute the market and the cost of refilling them is going to be significantly higher.

This is why you now see gas prices rising again and they will probably keep rising through the rest of the year.

On top of this, there are also geopolitical dangers to consider. For example, Russia is now aggressively preventing Ukraine's wheat and grain exports, which is going to cause another price spike in many different types of foods (flour, remember, is made from wheat – not just bread, but pasta, breakfast cereals, snack foods…)

India just shut down rice exports to protect their domestic supply, meaning rice is going to skyrocket.

And, there's an overall trend of foriegn creditors quietly dumping the U.S. dollar as the world reserve currency. All those dollars will eventually make their way back to the U.S., meaning an even larger money supply circulating domestically with higher inflation as a result.

The Fed doesn't need to keep printing money for inflation to persist. They just had to set the chain reaction in motion. The recent Fitch downgrade of U.S. credit rating is not going to help matters as it encourages foreign investors to dump the dollar.

To be sure, there is still the matter of the battle between deflationary factors vs inflationary factors. In October, the last vestiges of the covid stimlus measures will finally die, including the moratorium on student loan debt payments – that's trillions of dollars of debt, requiring billions in payments each year.

Not only that, but when those loans were put on hold, millions of people magically had their credit ratings rise, which means they had access to higher credit card limits and a vast pool of debt. Now, that's all going away, too. No more living off credit cards means consumer spending is about to take a considerable hit along with the jobs market.

Then there's the Fed's interest rate hikes which are now about as high as they were right before the crash of 2008. The same hikes that helped cause the spring banking crisis (which is also not over).

So yes, there will be competing forces pulling the economy in two different directions: Inflation and deflation. However, I would argue that inflation is not done with us yet and that the Fed will have to hike interest rates even more to attempt to control inflation in the year ahead.

I believe it’s a crucial time for all of us to do the best we can to preserve what’s left of our purchasing power. Owning physical gold and silver may, in the not-too-distant future, be the best means of maintaining your standard of living. There’s a reason the Founding Fathers used gold and silver as intrinsically-valuable money. The same logic applies today: precious metals are uninflatable and have no counterparty risk. Gold and silver aren’t a promise to pay. There’s no faith or credit involved.

That’s extremely important when both faith and credit are in short supply.

Brandon Smith has been an alternative economic and geopolitical analyst since 2006 and is the founder of Alt-Market.com.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Birch Gold Group.

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