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Brace for the COVID-19 Inflation Tsunami

Americans will need to brace for the impact of the coming inflation tidal wave.

The big bazookas have been fired, the printing presses are running overtime, and the addicts on stock exchanges all over the world have received their narcotic injections to stay afloat until their next fix. Global institutions have shown the cards they had meant to play during the next significant financial crisis. They now may be out of bullets. When another bust in the business cycle occurs, the average citizen – or the next generation – will be left facing higher taxes, more debt-servicing payments, and a devalued purchasing power. Should Americans get ready to purchase the newest Apple iPhone, Tesla Roadster, and loaf of bread with wheelbarrows of cash, once COVID-19 eases?

Stimulating the Senses

Swamp creatures are patting themselves on the back for ostensibly working together to bail out Americans, small businesses, and large corporations with an unprecedented amount of money. The Federal Reserve slashed interest rates to 0% and unleashed quantitative easing infinity. Republicans and Democrats in the U.S. government allied temporarily to pass the single largest stimulus bill in the nation’s history. Should you dare speak out and question the price-tag or the political transparency, you had better prepare for the political fallout – just ask Representative Thomas Massie (R-KY) who only wanted a recorded vote on the legislation. As everyone at the center of power declared the necessity for this astronomical level of spending and intervention, nobody thought to ask if the country could afford it.

The short answer is no. The long answer is certainly not. At least there is the printing press!

The Powell Putsch

The U.S. central bank is taking aggressive action never seen before. The Fed’s motto of going big and going bold surpasses everything the Eccles Building did during the 2008 financial crisis. In addition to slashing interest rates to nothing, the Fed is pumping trillions into the financial system by scooping up corporate bonds, bailing out repo markets, acquiring Treasurys, and promising to buy all assets without a ceiling in place. The central bank is willing to go even further, promising that it has not run out of ammunition.

For the week ending March 25, the balance sheet spiked to $5.3 trillion, topping the $4.52 trillion peak in May 2016 before quantitative tightening. Since the Fed is just getting started, the balance sheet could soon top $10 trillion sometime this year – and then to infinity and beyond! This is monetary madness.

But, hey, former Fed Chair Ben Bernanke endorsed the Jerome Powell Putsch, so everything is OK then!

Even those who fell asleep during high school economics class would realize the inflationary pressures generated by such an enormous expansion. Not so, warns the smartest men and women on Wall Street. If there was no inflation following the three QE rounds during and after the Great Recession, then there will not be any increase in prices after the fourth and fifth edition of QE.

Indeed, it is incorrect to argue that there has been little to no inflation over the last decade. Sure, there has been no inflation if you do not live under a roof, attend a university, receive medical care, or own stocks. From housing to health care to education, everything has gotten more expensive since the recession. As eminent economist Ludwig von Mises wrote years ago, freshly created money is not equally distributed throughout society; it first gets allocated to government and the banks, then it reaches the wolves of Wall Street. Indeed, asset price inflation has been real, and – surprisingly – this fact has been conceded over the last six months by the business media. What’s more, everyone admits that it is Fed-induced.

The Fed is purchasing tens of billions of dollars in Treasurys, a move designed to bring down rates and print money. It drives cheap dollars into the economy, making borrowing and lending costs almost non-existent and leveraged trading on the stock market the new norm. Of course, once these securities mature, then what? Everyone saw the flash crashes happen when the central bank incrementally took the training wheels off and tightened monetary policy. By the time the Fed ditches QE, the real bust in the business cycle could happen, leaving the central bank without any options besides subzero rates.

Hyperinflation may have been hyperbolic since the Bernanke blitzkrieg. Still, it is not out of the realm of possibility that the consumer economy could witness prices jump as much as 10% on the other side of the lockdown. Due to the pent-up demand, something to which Treasury Secretary Steven Mnuchin alluded in a press briefing, specific industries will attract customers almost immediately. Certain businesses could impose double-digit price hikes to make up for the lost time and diminished purchasing power.

Pick Your Poison

Instead of drastically inflating the money supply, why can’t the U.S. government just raise taxes or borrow the money? If you are a politician, that’s like asking if you prefer to die by suicide or murder.

For one thing, Americans are taxed to death – nickeled and dimed on everything from the fruits of their labor to the soda pop at the supermarket. Voters do not want to be told they are going to be penalized more. They may want the other guy to pay more in taxes, but they never want their household to fork over more of their hard-earned income to wasteful bureaucrats. Whether it is President Donald Trump or his successor, no White House occupant is going to be candid to the nation that taxes need to go up considerably to pay for this new wave of outlays. That is a bunch of malarkey.

Borrowing might be a bit more realistic since there remains a fierce appetite for Treasurys. The Trump administration has gotten away with its spending because investors are buying T-bills and T-notes. Anytime the federal government auctions a fresh supply of bonds, investors go on a buying spree. If Trump or Joe Biden wanted to cover the short-term cost, the bond market might be the way to go. The bills do need to be paid, eventually, but Washington is famous for kicking the can down the road.

Why Not $4 Trillion?

As usual, elderly lawmakers will pass the bill to the next generation or two of American taxpayers while claiming to be the heroes of today. Whether it is in the form of higher payroll levies or the iniquitous inflation tax, somebody tomorrow needs to pay for the excesses of the present. The $2.2 trillion stimulus package and the Fed’s QE infinity may be championed as solutions, but they will be the razor blades that result in Uncle Sam’s severe hemorrhaging. Politicians might be hungry for even more spending, but there is no such thing as a free lunch. The bill will always come due.

Since politicians are abandoning any semblance of fiscal sanity, Liberty Nation’s Scott Cosenza asked a poignant question on his Uprising podcast: “Why not $4 trillion?” At this point, what is the difference between $2.2 trillion and $4.2 trillion?

~

Read more from Andrew Moran.

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