It is easy to find reasons for discomfort. Tesla’s stock price is up more than 300% in the past year. Copper prices are up 56%. The S&P Case-Shiller Home price index is up 9.5%. Freight prices are up 215%; soybeans, 54%, lumber, 117%.
John Greenwood and Steve H. Hanke write,
Speculative manias are in the air, as evidenced by the recent price surges for bitcoin, a digital asset with a fundamental value of zero, and GameStop, a declining retailer. Along with the other economic trends—a strong recovery, surging commodity prices and an uptick in inflation—those asset bubbles have a clear cause: the massive expansion of money and credit.
My picture of the situation right now is that the paper wealth created by various tranches of “stimulus” is flying around the asset markets, chasing Elon Musk tweets (ht Matt Levine). It is like airplanes stacked up over LaGuardia, flying in circles waiting for permission to land. At some point, people will resume spending their wealth on consumption. That is when the inflation will shift out of asset markets and into the prices of goods and services.
What will be the average annual rate of inflation between now and February 2027? I would give the following probabilities:
less than 2 percent: p = .5
between 2 and 4 percent: p = .2
between 4 and 6 percent: p = .1
over 6 percent: p = .2
Am I willing to bet? If my goal were to get rich, I would be buying an ETF that shorts long-term Treasuries. But my goal is to try to maintain what I have. I am trying as hard as I can to have a portfolio that is defensive against a high-inflation scenario. I probably should be investing in commodities.
The most likely reason that my view differs from the market’s is that I am much less confident that the Fed can stifle inflation when fiscal policy is so loose. The standard Fed response to inflation would be to buy less government debt. That would allow interest rates to rise. That causes government spending to rise by (change in interest rate)x(amount of debt to be rolled over). Because there is so much debt to be rolled over, this is a big deal. Other things equal, it puts more paper wealth into the hands of the public, so that it is less anti-inflationary than would be the case if we were starting with less outstanding debt.
And I predict intense political resistance to allowing interest rates to rise.
I find the idea that Bitcoin and Gamestop are good evidence of economywide speculative mania unpersuasive.
Gamestop appears little different from any other short squeeze in a single small stock, a frequent and unremarkable phenomenon if coordinated by a single person.
Bitcoin may not have a “fundamental value” in some sense. However, it is (1) an instantiation of a genuinely new technology and (2) of use to, e.g., illegal drug wholesalers or indeed folks who fear inflation of fiat money. It again seems little different from, say, the idea that art can be an asset despite having no fundamental value. As for the proximate claim, Bitcoin went from $10 to $5,000 long before the recent rounds of stimulus.
You point out that “my view differs from the market’s.” Have you placed a bet on your view? It would be easy to do, and could make you a lot of money.
Personally, my guide to the future of the economy will always be the market, not any individual–not even one as insightful as Arnold Kling.
Maybe, at long, long last, after 40 years of warnings, inflation will pick up in the US.
It is not picking up in Japan, in fact they are facing deflation even as the government has run up debts equal to 250% of GDP. The Bank of Japan keeps the yield on 10-year treasuries at 0.10%.
When I look back on the last 40 years what has happened to the middle class has been exploding housing costs, and what has happened to the working class has been offshoring of industry and the opening of borders to unlimited immigration.
We have Detroitified the heartland and Hong Kongified the coasts.
And yet macroeconomists politely decline to discuss these aspects of our economy, or even defend such declines in living standards as necessary to be globally competitive, but again and again and again talk about inflation.
“Opening of borders to unlimited immigration…”
Did this actually happen? When?
Yes. This month.
“The Biden administration on Thursday announced new U.S. Immigration and Customs Enforcement guidelines that are expected to reduce border arrests and deportations through the refocusing of resources only on security and public safety threats.”
https://www.upi.com/Top_News/US/2021/02/19/Biden-administration-issues-new-ICE-deportation-guidelines/7161613699288/
Thats not open borders. Nor is it unlimited immigration. You know that.
In 2020 whites became a minority of Americans aged 18 or less. By 2041 they will be a minority of anyone median age or lower. By 2060 they will be a minority of every group except senior citizens.
https://www.brookings.edu/blog/the-avenue/2018/03/14/the-us-will-become-minority-white-in-2045-census-projects/
If that isn’t essentially open borders, I don’t know what is.
BTW, Venezuela is about 43% white, so I’m looking forward to going through that.
Perhaps “de facto open borders for desperate economic immigrants” is a more-accurate description.
Why do elites hate the border wall?
From what I can tell, the US establishment wants to control what happens on every square inch of the planet, except along the US Mexican border.
“From what I can tell, the US establishment wants to control what happens on every square inch of the planet, except along the US Mexican border.”
+1 and we all know why this is.
Biden is bombing Syria. That will help.
“Perhaps ‘de facto open borders for desperate economic immigrants’ is a more-accurate description.”
So, you would concede then, that current immigration restrictions actually prevent many non-desperate would-be economic immigrants, which would include many high-skilled and law-abiding immigrants, from immigrating? True open borders (for everyone, not just “desperate economic immigrants”) would shift the immigrant mix towards many more legal immigrants.
When immigration is outlawed, then only outlaws will immigrate.
What is your point?
A nation has no obligation to accept any immigrants. Why this onus to accept immigrants?
Why not an onus on Central Americans to make their nations prosperous and livable?
My point is the US establishment embraces de facto illegal immigration as they want cheap labor, and to undercut the US employee class. They dress the open borders up as “helping Third Worlders,” and say only racists are against immigration. The ID politics rag.
The most ardent immigrationists in US history were the slavers. They loved immigration! Keep in mind that history lesson.
Sadly, the world has a lot of hellhole nations that I would leave if I could. I do not blame the individual immigrants for immigrating. Most are hard-working, and desperate for work.
For some, the purpose of the US is to serve the globalist-multinationals, for others, to serve the upper-classes (often the same people).
What would a hardcare policy to sustainably improve the lot of the US employee-class look like?
“ From what I can tell, the US establishment wants to control what happens on every square inch of the planet, except along the US Mexican border.”
Lol
The Biden Administration’s policies are strongly anti-growth and that alone should be enough to keep inflation in check. All the rosy retail sales forecasts will “unexpectedly” get thrown out the window. Look for stagnant wage growth, flat family income, and inflation in energy prices offset in other sectors by decreased demand due to stagnant employment. The great immigration boom will be stifled by the $15 minimum wage. Inflation at this point is really just wishful thinking.
Arnold – I agree with the substance of your comments, but it raises the question about why the probabilities you assign to inflation five years hence. Your modal selection is inflation at or below 2% with a 50% probability, i.e. about where we are now. Do you anticipate the Fed clamping down in, say, 2024, 2025 and 2026 to get us back to moderate inflation after a peak (well) above 2% in the next few years? Given the rapid growth of the money supply, some 9% per year for the last five years on average, and multiples of that rate in the last year, inflation will need to be quite a bit more rapid to absorb all this excess liquidity. Or the Fed will have to reverse course. I don’t think they’re that fleet afoot.
Won’t the rate at which savings gets turned into consumption have a big impact on inflation? If the savings is turned into consumption on a steady basis, I would think that would allow for firms to plan increases in production, and that would mitigate the extent to which the extra money becomes inflation instead of increased production. Not that production of every commodity, good, or service is perfectly scalable, but certainly a lot of them are, especially if you have time to plan and prepare for making and selling more.
I dunno–there’s a lot of deflation in the air as well.
Technology reduces the cost of everything. AI is coming of age and will dramatically make everything cheaper.
Wages are going down–certainly in real terms. That is because workers are competing against robots, and at the end of the day robots work for peanuts.
The future of labor is in personal services–stuff robots can’t do–e.g., home health care aids, eyebrow pluckers, baristas, etc. These are poorly paying jobs to begin with, and as the baby boomers pass on the market for them shrinks dramatically.
Populations are declining–and so is demand.
So, more manufactured items produced at lower cost, going into a smaller market because of demographics, requiring less labor hired at lower wages–I don’t see inflation in that picture.
Also, I buy the savings glut theory. AI doesn’t require a huge capital investment.
So my bets are long commodities (more manufacturing), long on long-term treasurys (interest rates go to zero), and long on labor-intensive service industries (e.g., hotels, though maybe not the ones currently in existence).
Also, don’t forget (as I just did) the huge debt overhang, which will force the Fed to keep interest rates low, and which will be a drag on gdp.
Not sure i follow your thinking. You say go short T bonds which means bet on bond prices down and interest rates up, yet if reading your probabilities forecast right you seem to think there is only a 50% chance that rates will exceed 2%. Not sure those probabilities suggest getting rich, but do suggest a hedge against a rate rise depending upon your portfolio asset mix.
There are ETF’s if futures and options not to one’s liking: TBF, TMV are inverse bets on long dated T bonds, and would do the trick for hedge against inflation.
Commodity oriented stocks: FCX for ex and others as well
Have gotten lucky placing some bets on Materials EFT and FCX and a few others, but if inflation does pick up with some growth, growth stock prices will be more in line with underlying fundamentals and if forecasts of those metrics remain unchanged then those stocks will do well.
Taxes going up all over will impact inflation, and perhaps an out of the box probability for now might be stagflation at some point if unemployment remains quite sadly high
“But my goal is to try to maintain what I have.”
Wouldn’t that suggest short-term T-Bills? If inflation hits and rates rise, then one will get the benefit of higher rates when rolling over the bills. Of course, the average short-term *real* rate over the next several years may be negative, implying a loss of purchasing power, but the real interest rate would seem to reflect the supply and demand for trading current and future consumption. Apparently, a lot of people desire future consumption and are willing to part with quite a bit of current consumption to get it.
The return on commodities is the price return *less* storage costs, whether one buys physical commodities or implicitly bears storage costs through commodities futures. So, even if commodities prices keep pace with inflation, storage costs can make the total real return negative. Also, there is the risk that services prices, e.g., health care, rise faster than commodities prices.
I predict intense political resistance to allowing interest rates to rise.
So i < 2 p=70%
2 < i < 4 p = 15%
4 < i < 6 p = 5%
6 < i p = 10%
Not sure there's enough difference to make a good bet.
Huge dependence on "i", since the real inflation now is based on asset hyper-inflation. I don't see why the rich (AND powerful) will want to change that.
Don't see it changing until some currency other than USD really competes as a wealth maintaining alternative. Don't think any non-gov't crypto will quite cut it in 5 years. Maybe 10. Maybe 20. Maybe 50.
Massive robot production of normal folk food & clothes & computer Digital Reality, where so much life is lived today, like my own, as I type, before sleep 2.30 am.
The easiest way to hedge against inflation is to get a 30 year mortgage.
FYI,
They were 2.65% the day before the Capitol Storming to 3.27% today.
I feel really damn good about getting a rate lock that week. People correctly understood that a Dem Senate and the political capitol from the riot is going to result in a printing binge. They are about to pass a stimulus we don’t really need.