The All Unclear
Mixed signals and wayward prices throw investors for a loop
(Source: Getty Images)
Bill Bonner, reckoning today from Poitou, France...
The problem in a nutshell is that between the post-dotcom crash and subsequent moneyprinting spree and flood of central bank credit in 2020, global central bank balance sheets soared from $4.7T to nearly $42 trillion. That 9X increase in money supply brought only a 2X growth in GDP. The rest went into the pockets of the elites and created asset bubbles now at risk of popping.
~ John Dienner
Mr. Dienner is describing classic “inflation.” More money leads to higher prices. But wait… where’s the inflation?
CNN announced last week:
“Housing market has entered a recession.”
House sales are down 20%, July 2021 to July 2022, it tells us.
MoneyWise this morning:
Homebuyers are backing out of deals at the fastest rate since the pandemic
US Mortgage Lenders Are Starting to Go Broke
The US mortgage industry is seeing its first lenders go out of business after a sudden spike in lending rates, and the wave of failures that’s coming could be the worst since the housing bubble burst about 15 years ago.
…market watchers nonetheless expect a string of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers, and potentially an increase in some lending rates. More of the business is now controlled by independent lenders, and with mortgage volumes plunging this year, many are struggling to stay afloat.
It sounds more like deflation than inflation. And many people are confused by this. Those who aren’t confused aren’t thinking hard enough.
As John Dienner highlights above, central banks ‘printed’ plenty of money. It is no coincidence, he insinuates, that prices are generally rising. European ‘inflation’ is at 8.9%. German consumer prices are going up at the fastest rate in 70 years. Argentina is struggling with a 90% inflation rate.
But if ‘money printing’ by central banks causes price increases, why would anything – housing, stocks, instant pudding – go down?
Oh dear… oh dear… if it were only simpler! In the first half of this year, stocks and bonds had one of their worst 6 months ever. Brent crude was still $122 a barrel in June; now it’s $88. And now houses are going down too. What happened to all that printing press money?
Many economists and market analysts think the threat is over. They see the ‘inflation peak’ behind us… and give the ‘all clear.’ Now, the Fed can ease up, they say… the band can tune up… and assets can go back up.
According to the official tally, prices since 2009 are up about 40%. But if the supply of money went up 4 times faster than GDP, shouldn’t prices have gone up 4 times too? Instead of 40%, shouldn’t they be up 400%?
And isn’t the Fed still lending money at a rate that is far below consumer price inflation? The CPI is 8.5%. But the Fed lends at 2.5%. A borrower scores a 6% gain simply by taking the Fed’s money. Since this encourages borrowing, it also encourages banks to create money they can lend. More money should bring forth even higher prices.
And yet, there are many economists and politicians (such as Elizabeth Warren) who argue that the whole hypothesis is wrong – that ‘printing press money’ has little to do with rising consumer prices and that by raising interest rates the Fed is doing more harm than good. In their analysis, if you can call it that, the Fed should never have bothered to try to head off inflation. Price increases would take care of themselves, they thought, as bottlenecks and supply chain disruptions were resolved.
What gives? Are prices going up or down? Are we out of danger?
Hmmm… let’s see.
Mo’ Money, Mo’ Problems
First, the generally accepted view of inflation is probably mostly correct: Add more ‘money’ and prices will rise. There’s a lot more to the story, of course, but if you get too deep into the details you’re likely to miss the main point.
Most of the Fed’s money printing goes to Wall Street (because the Fed uses its new money to buy bonds); there, it boosts asset prices. Assets are different from consumer items. If you have a stock worth $100, you have a claim on $100 worth of goods and services. If the stock goes to $200, you can buy twice as many goods and services. The trouble is, as Mr. Dienner informs us, the output of goods and services didn’t come close to matching the increase in dollars. So, as asset prices rose a lot of people had claims on goods and services that didn’t exist.
The resolution of this imbalance is deflation… and/or inflation. One way or another, asset prices have to get back in line with available goods and services. Falling asset prices (deflation) reduce investors’ claims on real output (GDP).
Meanwhile, the rise in consumer items also helps to correct the imbalance. A 100% inflation rate, for example, cuts the value of asset prices in half every year.
Rising consumer prices on one side. Falling asset prices on the other. And American households, investors, and businesses crushed between them.
But for how long? And how bad?
To be continued...
Joel’s Note: Just a quick one today, dear readers, to let you know the transcript of our latest Fatal Conceits podcast - in which we caught up with Bonner Private Research’s macro analyst, Dan Denning - is up on the Substack page. Feel free to listen in… or read along… below. And don’t forget to share with friend and foe alike. Cheers!