The Hyperinflation Fairy
How do you scare a Boomer? You whisper softly, “Inflation.”
I don’t mean to poke fun at someone’s formative experiences in life. It’s topical and should be taken seriously because we have embarked on a new monetary experiment started by the CARES Act. The Treasury and Federal Reserve are supporting the economy in a way we have never seen before. Just look at the Federal Reserve balance sheet and a proxy for cash in the system:
That’s a lot of economic support and cash!
Naturally, one would say that would be inflationary. Lots of money invariably means prices increase, right?
Inflation was a big deal in the 70’s and early 80’s measured by CPI[1] was 12.5% and close to 15% respectively. Look at mortgage rates for reference:
This messed up the economy and it was difficult for economic participants to function with rates so high and uncertainty, so no beuno.
Why did this happen back then? There are a lot of theories and honestly no one knows why. One theory I favor is the velocity of money — how much money is flowing through the system. Quick thought experiment on why — If I give you and me a billion dollars and we don’t spend it, then would that create inflation? I’d say no. We need to get that money participating through the economy (i.e. velocity) for inflation to come around. Looking historically that can be seen:
How does velocity look now?
Hmmm…looks like people are sitting on their cash. My theory is we need people spending and creating velocity before we will see inflation.[2]
Will that happen?! Now that’s a good question for you to answer…What do you think?
[1] Yes, Consumer Price Index has issues measuring inflation. I’m not here to fight about that.
[2] My other theory is that inflation is more tied to demographics (70’s/80’s had a different growing generation), technology (we have more computer power in our pockets than went to the mood; where does that show up in inflation numbers?), and losing control of one’s currency (everyone’s favorite examples are countries that lose sovereignty of their currency: Wiemar Germany, Argentina, etc.).
