I Got Yer Hyperinflation Right Here!

On more than one occasion (example), I've come down on the side that predicts our economic collapse will be inflation or hyperinflation rather than deflation.  I've also been more circumspect and less sure that I know what's coming.  The Federal Reserve, though, has always seen and still now sees deflation everywhere and that's among the reasons it continues to buy bonds.

Keith Weiner, CEO of Monetary Metals, blogs on Kitco this week that we have, in fact, had terrible inflationary impacts.  The reason the Fed doesn't react to this inflation is baked into their market distortions.  He begins:

In hyperinflation, the purchasing power of the currency collapses. Before the onset, suppose one collapsar buys ten loaves of bread. Soon, it buys only one loaf. Shortly thereafter, it buys only one slice. Next, it can only purchase a saltine cracker. Pretty soon the collapsar won’t buy any bread at all. Stick a fork in it, it’s done.

Many critics of the Federal Reserve, the European Central bank, and others have predicted that this end is coming soon. They have been frustrated as prices are clearly not skyrocketing. For example, the price of crude oil was cut almost in half (so far). There’s little to see if one looks at the purchasing power of the dollar, euro, Swiss franc, etc. Purchasing power, as conventionally understood, is doing just fine.

There are real indicators of inflation, such as the smaller package for the same (or higher) price phenomenon, for example, but there are few signs of excessive inflation (although in my mind, the 2% target the Fed uses is too high).  Nobel prize-winning asshole Paul Krugman, while writing about how wonderful the economy is, compares people who predict runaway inflation to “true believers whose faith in a predicted apocalypse persists even after it fails to materialize.”  Think of the Heaven's Gate cult who killed themselves over the coming of comet Hale-Bopp.  If you think we run the risk of inflation, Krugman thinks you're one of them. 

Weiner, though, finds the missing inflation that nobody else finds.

Yield Purchasing Power (YPP) shows how much you can buy, not with a dollar of cash, but with the earnings on a dollar of productive capital. No one wants to spend their life savings or inheritance. People are happy to spend their income, but not their savings.

To come back to the analogy of the family farm, people should think in terms of how much food it can grow, not how much food they can buy by selling the farm. The tractor is good for producing food, not to be exchanged for it. Why, then, do people think of the purchasing power of their life savings, in terms of its liquidation value?

An illustration is useful.

I compared two archetypal retirees. Clarence retired with $100,000 in 1979, and Larry retired with $1,000,000 in 2014. Clarence was able to earn 2/3 of the median income in interest on his savings. Larry was nowhere near that. He would need over $100 million to do the same. In 35 years, the YPP of a 3-month CD fell more than 1,000-fold.

The collapse in YPP suggests an analogy to hyperinflation. Look at how much capital you need to support a middle class lifestyle. Measured in dollars, the dollar price of this capital is skyrocketing.

This skyrocketing price of capital has the same effect as hyperinflation: it undermines savings and causes people to eat themselves out of house and home.

This, of course, is due to the Zero Interest Rate Policies of the Fed, exactly what Krugman is praising.   A generation ago, 1979, one could earn a decent retirement income with the interest on savings of $100,000.  Today, it takes 1000 times that, $100 Million to earn that income.  How many of us have $100,000,000 in savings to retire on? 

What does this mean for anyone with less than what they need to support themselves—$100M and rising? They must liquidate their capital, and live by consuming their savings. It’s terrifying to anyone in that position—which means anyone in the middle class.

I've said before that the Fed has crosshairs on the back of every saver, and this is a perfect example of the effects of the ZIRP.  The market distortions of the zero interest rates are ripping apart savers, small businesses, and many other groups.  What would help savers, retirees and those planning to retire is for interest rates to go back up to their historical levels.  That would hammer the rest of the economy as the percentage of the Federal Budget needed to pay interest on the debt would increase, and have to come from somewhere.