Things are moving on the bond side… and that’s not a good sign for inflation. But things are also moving in other sectors of the market – notably bitcoin: what to think about it?
The US bond market is moving.
It packed its bags last August, which appears to have marked the peak of the bullish bond market that started 41 years ago.
Last week, yields on T-Bonds (which move inversely to bond prices) hit 1.75% after Federal Reserve Chairman Jerome Powell reported that inflation threats did not disturb him.
1.75%, that doesn’t sound like a lot. Barely zero in real terms (with consumer prices climbing at a rate of 0.4%).
It is still three times the rate of last August.
Things are moving on the front of the cash too. Last Thursday, $ 271 billion disappeared from the coffers of the American authorities, mainly to finance the stimulus checks. It is more than the GDP of Vietnam.
Has the Fed ever gone too far, to stay there too long? As rates rise in the bond market and an almost endless demand for new liquidity, can it ever retrace its steps?
If the money supply increases … prices follow
We remind the reader that “inflation” refers to the act of increasing the money supply.
And just to be even clearer, although there are many factors that come into play, as the amount of dollars increases, ultimately… sooner or later… before it freezes in hell… all other things being equal … Prices should do the same.
Money supply – using the Fed’s balance sheet as a practical, although incomplete measure – has gone from less than $ 700 billion in 1999 to $ 7,000 billion today.
In other words, in two decades, the Fed has inflated the money supply ten times as much as all the Treasury secretaries and Fed governors put together over the previous 21 decades.
At the same time, the goods and services that can be bought with this money, of which GDP is a rough measure, have only doubled, from $ 10,000 billion to over $ 20,000 billion.
The idea of the post-1971 “monetarist” plan was for the Fed to control the growth of the currency, allowing it to grow roughly in proportion to the economy as a whole. This was supposed to maintain price stability while eliminating sudden credit shortages.
But as you can see, at this point in the 21st century, the money supply has grown nine times faster than the GDP.
She’ll have to climb more – to replace the cash who has just packed up. And even more … to finance the $ 1,900 billion stimulus plan… And even more… for new infrastructure… and all the other wonders that the US authorities still have in store.
So it wouldn’t be very surprising if the prices went up too.
Money is used to acquire goods and services. If the quantity of money grows faster than the quantity of goods and services available … logically, prices will rise.
Waste of money
Let’s add some flesh to this naked skeleton.
Government spending is included in GDP. But the services offered by the government are not the kind we usually seek.
Very few people wake up in the morning saying to themselves, “I have to buy myself an F-35 fighter jet today”. Rather, they want things that the government doesn’t make not.
Government spending focuses almost entirely on the consumption of wealth, not on its creation. In other words, they add nothing to the “supply” side of the “supply / demand” balance. They take things away from it.
So when government spending increases as a percentage of GDP, this too should be the cause of higher consumer prices.
After World War II, total government spending – federal and local – fell to just over 25% of GDP. Last year, we exceeded 40%.
Flood of liquidity
Economists describe inflation as a growing quantity of money that “runs after” consumer goods. But the currency is not always ready to go hunting.
Sometimes people choose to save rather than spend. However, if the authorities create money and it goes nowhere, it has little effect on prices.
Where that currency decides to go is important too. Most of the additional money generated in the 21st century has been parachuted into financial markets.
The Dow Jones has gone from around 11,000 points in 2000 to over 30,000 today.
Bitcoin was worthless (it wasn’t invented until 2008), and it now sells for close to $ 57,000.
Non-fungible tokens (NFT) first appeared in 2014. Since then, more than half a billion dollars of NFT have been traded.
The flood of cash has lifted most boats… but not all. Some 40% of US stocks are still underwater after the 2008-2009 disaster.
As authorities injected more and more liquidity into the markets, the veterans – with a Graham & Dodd edition lying on their desks… and a (signed) portrait of Warren Buffett hanging on the wall – did not follow suit.
They knew gold provided protection against inflation, but they weren’t sure about Bitcoin. Was it a hedge against inflation … or a simple measure? What about NFTs? What the hell was that? Where were they going?
No one knew for sure… but they were moving.
That said, almost everything is on the move right now – the bond market… the way of working… politics… culture…
… But where?
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