Of particular interest to us here at the Letter is the coming train wreck…when two especially numbskull federal programs. One is making things — especially energy — more expensive by reducing supplies. The other is making them more expensive by increasing demand (in the form of fake money). What happens when they collide?
The Fed created today’s inflation in the old-fashioned way — by ‘printing’ money. No need to go into the mechanics of it; they don’t matter. And we don’t want to take the time to understand them.
Here, economist Richard Duncan explains the first phase:
‘For decades, the US economy has been driven by rapid Credit Growth and Asset Price Inflation. Since the Crisis of 2008, in particular, aggressive fiscal stimulus, ultra-low interest rates, and round after round of Quantitative Easing have kept the US economy expanding and created astonishing amounts of Wealth.’
Of course, it was not real ‘wealth’ that was being created. It was fake wealth — brought to life by fake, ‘printing press’ money.
But between 1999 and 2022, the Fed added US$8 trillion (increases to its balance sheet). And its artificially low interest rates had engendered a US$50 trillion increase in the US’s total — public and private — debt.
(We’re dealing with round numbers here…if we’re off by a few trillion, one way or the other…don’t worry about it.)
Rising prices…
This ‘inflation’ of the money supply first led to an ‘inflation’ in asset prices. The Dow Industrials rose three times. The non-industrial…lighter-than-air…emptier-than-a-congressman’s-mind…assets went to the Moon. No one complained.
But then, the inflation leaked over to consumer prices. And suddenly, with the COVID lockdowns and the war in Ukraine, the leakage became a flood. Consumer prices rose worldwide — led by the most important ones — oil, food, and housing.
But the Fed wasn’t alone in causing consumer prices to go up. While the Fed was increasing the supply of money…the federal government was also restricting output. Lockdowns, for example, did far more damage than is generally recognised. The elites have little connection to or understanding of the real economy. They work in academia, Wall Street, the press, government, or the non-profit sector. It wasn’t surprising that they thought the economy was like a light bulb, something they could just turn off and on with the flick of a switch.
Alas, a real economy is a living thing. Drive a stake through its heart, and it dies forever. It cannot rise from the dead. Instead, a new economy must take its place. And that takes time, investment, training, and learning. New relationships must be built…distribution channels need to be worked out…costs and benefits need to be calculated…and investments to be made.
…falling supply
So, imagine that you are in the oil business. You saw after Donald Trump declared a state of emergency in March 2020 that the oil price could go below zero. Oil companies couldn’t sell their oil; they had to pay someone to store it for them.
And now, all over the world, the federales want to put you out of business. Here’s the LA Times: ‘Game over for the internal combustion engine’ as EU countries approve climate measures’:
‘The EU member nations came to an agreement on draft legislation aimed at slashing the bloc’s greenhouse gasses by at least 55% in 2030 compared with 1990 levels, rather than by a previously agreed 40%.
‘“A long but good day for climate action: The council’s decisions on Fitfor55 are a big step towards delivering the EU Green Deal,” Frans Timmermans, the European Commission vice president in charge of the Green Deal, said after the meeting of environment ministers in Luxembourg.’
The US’s ‘Climate Envoy’ is on your case too. John Kerry delivered an ultimatum:
‘We have to put the industry on notice: You’ve got six years, eight years, no more than 10 years or so, within which you’ve got to come up with a means by which you’re going to capture [emissions], and if you’re not capturing, then we have to deploy alternative sources of energy.’
So…what do you do? The feds want to put you out of business and make it almost impossible for you to plan for the future. Do you invest more money, drill more wells, and build more refineries? Chevron’s CEO Mike Wirth says there will never be another refinery built in the US.
Why?
‘Not Acceptable’
Who will invest millions of dollars…over many years…when the feds are gunning for him? And who’s going to wait years for a return on his investment when he has no idea whether oil will be selling for US$500 a barrel…or nothing?
And then, if you’re lucky enough to make a profit, they threaten to take it away. Joe Biden:
‘At a time of war — historically high refinery profit margins being passed directly onto American families are not acceptable.’
So, what happens when these policies — inflationary money printing and output-stifling regulations — crash together? How will people get to work? How will they power their cars and heat their houses? What will fuel their trucks and tractors? What will we eat?
What happens next? Well…we don’t know exactly. But our guess is that it will be a cold day in Hell when we find out.
Regards,
 |
Bill Bonner,
For The Daily Reckoning Australia
