"Most investors just look at the narrow money aggregates and central bank balance sheets. But if you look at broad money, you notice that it has been growing very slowly by historical standards for the past 30 or so years. There were many factors pushing down the rate of inflation over that time, China being the most important, but I do believe that the low level of broad money growth was one of the factors that led to low inflation."
This has now changed.
"We are currently in the worst recession since World War II, and yet we observe the fastest growth in broad money in at least three decades. In the US, M2, the broadest aggregate available, is growing at more than 23%. You’d have to go back to at least the Civil War to find levels like that. In the Eurozone, M3 is currently growing at 8,9%. It will only be a matter of months before the previous peak of 11.5% which was reached in 2007 will be reached. So I’m not making a forecast, I just observe the data."
"Does the growth of broad money matter? Investors don’t think so, as breakeven inflation rates on inflation-linked bonds are at rock bottom. So clearly the market does not believe that this broad money growth matters. The market probably thinks this is just a short-term aberration due to the Covid-19 shock. But I do believe it matters. The key point is the realization who is responsible for this money creation.
This broad money growth is created by governments intervening in the commercial banking system. Governments tell commercial banks to grant loans to companies, and they guarantee these loans to the banks. This is money creation in a way that is completely circumventing central banks. So I make two key calls: One, with broad money growth that high, we will get inflation. And more importantly, the control of money supply has moved from central bankers to politicians. Politicians have different goals and incentives than central bankers. They need inflation to get rid of high debt levels. They now have the mechanism to create it, so they will create it.
What’s the timeline for your call on rising inflation?
I see 4% inflation in the US and most of the developed world by 2021. This is primarily based on my expectation of a normalization of the velocity of money."
Bruce Baker comments:
We are at a point in history, where some major disinflationary (and deflationary) forces of the last 3 decades in the process of reversing.
Globalisation has resulted in far more intense price competition as service providers and manufacturers in the emerging world, provided goods and services more cheaply to the West. We are now beginning to see deglobalisation (at least for manufactured goods) as a result of the COVID-19 crisis as well as the growing tensions between USA and China. This means that factors other than lower-cost have started to become more important.
Technology has been a major deflationary force by:
enabling much fiercer price competition via the Internet eg via Internet shopping.
Also because of Artificial Intelligence, far greater automation and robotisation.
Some are now arguing that the big tech giants like Google, Amazon and Facebook have become so dominant in their sectors that they are now seeking to monetise that dominance (monopoly power) by raising prices and killing off competition - hence higher prices than we should have to pay.
China has been a major source of disinflation and deflation in the West. The growing tension between USA and China including tariff barriers, seems to be pushing the world into a new Cold War where countries and companies will have to choose sides - USA or China. This is inflationary - and an overlapping issue with deglobalisation China has also been
Massive growth of western M2 Money Supply, as governments supplement the role of central banks in controlling money supply. And now this is the argument presented by Russell Napier above.
I will add more to this discussion later.
That said, while not yet being prepared to accept Russell Napier's forecast on the timing of 4% inflation, coming inflation is DEFINITELY that we must now keep on our radar - because coming inflation will effect ALL other other prices - and hence it is a critical ingredient when considering investment strategy at this time.
Some Other References:
Economist Martin Wolf argues a somewhat similar case for inflation here.
Ray Dalio Says 'Inflation Is Coming' - How To Prepare - 5/7/20
Why Our Economy May Be Headed for a Decade of Depression (and then inflation) - Nouriel Roubini 22/5/20
Bruce Baker summary of 22/5/20 Nouriel Roubini article above: Roubini does not believe that there will be sufficient political will in the USA, to take the extreme monetised fiscal-deficit and redistribution measures required to avoid economic depression....even if Biden becomes president. Roubini also argues that negative supply-side shocks will bring inflation some time over the coming decade - maybe in 5 years time.
Inflation is coming.
"It may seem like a strange time to be thinking about inflation – just as the world is in shut-down and deflationary signals abound. In our opinion it’s clear there are likely to be several quarters of deflation as a result of the supply shock instigated by the drop-off in consumer demand associated with coronavirus-related job losses and furloughing. But it’s precisely because inflationary signals are not yet fully visible that we need to be preparing ourselves now.
Over the coming months, these are the key signs that we believe investors can look out for to indicate the onset of inflation:
Talk of “inflation make-up” by central banks, an early-warning sign of governments allowing inflation to creep back into the system;
A move from ballooning central bank balance sheets to ballooning money supply: remember, financial QE alone didn’t move the money stock – fiscal QE can;
Increase in fiscal deficit and increased government spending plans;
Signs of greater protectionism/less globalisation;
Perhaps the most important signal of all: a change in the relationship between stocks and bonds. An increase in the correlation between the two asset classes – the extent to which they move together – has historically been a sign of a pick-up in inflation.
Attempting to protect portfolios could mean buying not-so-liquid inflation-linked securities and floating-rate bonds; pursuing value and momentum strategies in equities; and purchasing commodities, gold in particular. We are all going to have to learn to live – like Alice in Wonderland – in a world turned on its head, when after decades of a benign inflationary environment, the dominant story of the next decade becomes one of structurally higher inflation."
After trying for a decade, central banks might succeed at generating inflation 12/5/20