I see headlines warning of inflation (meaning rising prices), even hyperinflation. These predictions have ebbed and flowed for just under twenty years and many a commentator has a face full of egg. Not that any of them have acknowledged being wrong, or apologised for misleading their readers.
Their basic problem was the belief that the more credit notes (fiat) there are in existence, the less value they will have. In other words, the Quantity Theory of Money. The theory is false but it is easy to understand, so will continue to be believed by its chanting devotees, despite overwhelming evidence that it is a fallacy.
Unfortunately, in the real world inhabited by business operators, we don’t have the option of raising our prices just because there is more credit sloshing around.
The price of those things only available from a government monopoly or quasi-monopoly – such as power and fuel – will continue their inevitable rise. That is the blessing of a monopoly – for governments. Meanwhile, the products of the marketplace continue to plunge in price. Businesses continue to take the razor blade to costs in the effort to maintain their customer base and stay in business.
Those two factors have pretty much balanced themselves out over the last twenty years, though the former slightly overwhelms the latter. To put it in very simple terms, you pay twice as much for power, and half as much for a fridge or laptop. I bought two upright fans last week ($15 each from the private sector). Together, they cost me less than a packet of cigarettes ($33.60 from a quasi-government monopoly).
But what about now? What are the current prospects for price inflation? Has anything changed? Possibly yes.
The great speculative waves are from bonds to commodities, then back again. Is the speculative ‘money’ in the bond market about to withdraw and enter the commodities market? There are some hints to that effect.
If it does, then as the price of bonds begin to fall, so interest rates will inexorably rise. That will exacerbate the movement from bonds. That is a scenario that will definitely produce price inflation. As the bonds fall further, so interest rates will rise higher. Once in motion, no amount of razor slashing by manufacturers will be able to offset the trend. Prices will rise, and keep rising.
Those rising prices will see demand drop and many businesses fold. The rising interest rates will also cause government finances to fall into an even deeper black hole.
Thus, at the very time that the private sector is imploding, governments will begin taxing in earnest. Then the Great Gouge will be upon us.
If this scenario does manifest, it will not be Godot coming; it will be the Grim Reaper, dressed in black and carrying a scythe and portending the slow and agonising death of Western Civilization.
I’m very keen on starting a new business this year, but it may be time to sell the fiat for real money instead.