Voters next week will drop ballots on inflation, not realizing what causes it.
Before I get to that, this news: ModernIR is launching a new product Nov 12 at IR Impact in New York. In sales, we learn to match product to consumer. Most market intelligence says nothing about your stock as a product. Ours does. Our newest edition will take it to a new level.
Back to what causes inflation, Congresspersons with straight faces lament the need to “bring costs down.”
Anybody study the Weimar Republic?
As with monetary policy and market structure, people can take about two minutes of history on inflation. Then they begin to claw at their faces and shriek.
I’ll stop before that.
In 1914, Germany decoupled the deutschemark from gold and printed money. The Treaty of Versailles ending WWI saddled Germany with massive debts for reparations.
By 1923, Germans carted wheelbarrows of cash because a bread loaf cost 200 billion marks. Do you think people pushing wheelbarrows felt wealthy?
We laugh about “hyperinflation” like that, worthless money. But laughter might not be the best medicine. Weimar and the current global situation share tenets.
Everybody has cut their currencies loose from gold. Everybody is saddled with reparations called “social spending.” The planet creaks under mountains of debt.
Governments did that. Between 2020 and now, the four big central banks of the US, Europe, Japan, and China increased the money supply by $36 trillion, one entire US economy.
It’s why I laugh when somebody in government says, “We gotta get these costs down!”
In the bible, the prophet Nathan came to King David and told him a story. There’s a rich guy with large herds, and a poor fella whose sole possession is a lamb.
Somebody comes to visit the rich fellow. Instead of one from his own herds, he takes the poor guy’s lamb and serves it for dinner.
David is outraged and announces, “The man shall die!”
Nathan says, “You are the man!”
There’s more to the story you’ll find in the book of II Samuel. But when I hear politicians talking about bringing costs down, I yell at the TV, “You are the man!” Or woman.
Because governments cause inflation. When demand outstrips supply and prices rise that’s a signal from the market to make more stuff. It’s not inflation.
When governments fuel debt, they devalue currencies, taking the little that hourly wage earners have. They are slaughtering lambs.
And when they then pronounce their intention to bring costs down, they are as hypocritical as David in the story. Except David said, “I have sinned against the Lord.”
David changed and suffered the consequences. But he righted his course.
I like David Malpass. Read his editorial (subscription required) on wrong Fed models. I’ve had opportunity over the years to trade notes with him. The model that’s wrong is the one saying growth solves a debt problem.
If the dollar was worth the same today as it was in 1933, we would have no debt. Our money would buy more rather than less, ending worry over retirement and getting raises at our jobs. We’ve had plenty of growth. But debts have expanded faster.
France’s government consumes 50% of its GDP and it’s on the brink of collapse. How can France bring costs down? Prices fall when the value of money rises.
Falling prices, great news for customers, cause governments to panic and print money. And inflation worsens, debt grows. So. Are lower prices really worse than higher ones?
Ponder that.
You know what I think the wheelbarrows are now, hauling cash? AI companies. We don’t even blink anymore at a trillion here, a trillion there. The Weimar mark bottomed in 1923 at more than four trillion to the dollar. They had to restructure, and we had WWII.
I’m not questioning the utility of AI. It’s part of our technology stack at ModernIR.
But we don’t set wheelbarrows on fire for it.
When money is so ubiquitous that a trillion dollars has no meaning, it’s not because everybody’s rich. We’re metaphorically hauling money in wheelbarrows. Yes, inflation makes those nearest the geyser rich as John Maynard Keynes explained in 1919.
We shouldn’t copy the Weimar Republic. It doesn’t feel the same because we’re digital and they were analog. But it’s perilously similar.
How to fix it? The lamb’s been slain. There will be consequences. But give the Federal Reserve ONE job: Assure that our money loses no value. Leave employment, prices and interest rates to us.
On the fiscal side, government should adopt the policies of Switzerland. Balance the budget. Avoid debt. Spend less than we make.
It would be magnificent to end this monetary regime built on debt (prices cannot come down so long as debt backs our money. Ask me if you want to know why).
What keeps that good stuff from happening? The consequences of changing our ways. We can’t handle the truth.
See you in New York next month. We can measure what creates great stocks as products Blackrock buys and give you the tools and data to manage toward that outcome.
