Inflationary Deleveraging & the Illusion of Wealth II
This week I would like to offer a self-correction on a particular thought conveyed in the last blog, or perhaps better articulate the point, and offer some final thoughts on this important and emerging subject.
First, certain points regarding inflationary deleveraging must be reiterated:
Excessively indebted societies must periodically deleverage bad debt to avoid an otherwise certain social and economic downfall.
The two deleveraging options available to central planners are inflation and deflation.
Inflationary deleveraging involves controlling a high inflation rate while keeping real interest rates negative over a long period, such that nominal economic growth outpaces government debt, thereby lowering the debt/GDP ratio.
Inflationary deleveraging is the Fed’s clear choice.
The Fed has limited real control over the U.S. economy and financial markets but gets participants to do its bidding by controlling the narrative.
The Fed’s narrative involves talking up the economy, talking down inflation, talking up stocks and other “risk assets”, talking down gold and other dollar alternatives, talking up taxes, talking down interest rates (that’s a lot of talking!).
The Fed’s attempt to deleverage America’s bad debt through inflation has a small probability of success, requires the market to swallow the narrative long-term, and will have many unintended consequences, most notably the impoverishment of the middle class.
Last blog I inferred “the Fed’s inflation policy results in persistently high asset prices, commonly referred to as “The Wealth Effect”, but in reality it is “The Illusion of Wealth Effect”, which recently played out in Venezuela, as the cost of living outpaces asset appreciation”. A more accurate assessment is ‘in reality it may at any moment become’, “The Illusion of Wealth Effect”. This is a better statement and an important clarification in the argument because in America the rate of consumer price increases has not yet surpassed the growth rate of “risk assets”. My sincere apology for the misstatement, and this, of course, leaves one unanswered question.
Is inflationary deleveraging worth the risks of increasing America’s distribution of wealth, impoverishing her middle class, having to endure repeated systemic crises due to the weight of trying to carry a mountain of bad corporate debt, risking the global reserve currency status of the dollar, and risking the credibility of the dollar itself? You be the judge.
Think about it. Shaun
Did you know the ridges on quarters and dimes, originally 90% silver, were put there to prevent our government from cutting and melting the edges of coins to arbitrarily create additional currency units? Do you know what other nation’s government very famously did this?
“You have sown much, and harvested little. You eat, but you never have enough; you drink, but you never have your fill. You clothe yourselves, but no one is warm. And he who earns wages does so to put them into a bag with holes. “Thus says the Lord of hosts: Consider your ways.”
~Haggai 1:6-7
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.