What Inflation?

As any reputable economist knows (yes, there are a few) Price Indexes whether Consumer or Producer and regardless of any particular basket of items included are unreliable indicators of actual inflation.

Fluctuation of price over time, normally in an upward direction, is only to be expected and the measure of individual prosperity is more correctly expressed as the ratio between income and expenditure. Who cares if the price of eggs is $2 or $20? The point is does it take more to buy in relationship to your total wealth?

This is why the anti-Inflationistas and believers in invisible bond vigilantes are so very wrong. If people are willing to give you as much money as you want at practically no cost to you, you are by definition not carrying too much debt especially if, like the U.S. Government, you’ve only entered into an obligation to repay it with scraps of paper you can print in your basement.

Saudi Arabia wants to sell back a Trillion Dollars in T-Bills? Here you go. Don’t strain your back loading them in your fleet of Dump Trucks. Have a blast, I understand it makes a poor substitute for toilet paper but you can light all the cigars you like.

In fact without U.S. debt the wheels of international commerce would fall right off. Think it can’t happen? When Andrew Jackson broke The Second Bank of the United States and mandated specie (gold or silver) for land transactions he created an immense currency shortage that was the direct cause of many depressions and contributed to the global Great Depression of the 30s. One of FDR’s most effective economic actions was dropping the gold standard and making it possible for Government spending to provide market liquidity.

This is modeled in the ‘Housing Shortage’ strategy of Monopoly. There are only 32 Houses and 12 Hotels in a standard set. Hotels can not be bought directly even if you have the money to do so, you must be able to physically trade 4 House tokens AND the money to buy a Hotel (while observing the build evenly rule). This means that in order to fully develop a typical 3 Property Color Group there must be 12 Houses and 3 Hotels available for purchase in the Bank. If another player is hoarding Houses to prevent your development, well, that’s just the way the game is played according to strict rules (most people use House Rules and you should be sure to clarify them before you start playing, did I mention my whole family hates me and won’t play games with me anymore?).

In the real world you can use any kind of currency substitute that is mutally agreed on from Yap Island Stones to Bananas, so it’s never absolutely impossible to complete a transaction but part of the utility of money is convenience and you don’t have to worry about moving your stones or your bananas rotting away on you.

But back to that ‘lend money at practically no cost’. The best way to measure that kind of inflation is through the market. If people are willing to buy all the bonds you want to sell at discounts that indicate less than 10% appreciation in value over a 10 year redemption period (remember that although you can sell them in the spot secondary market, the U.S. Government isn’t obligated to give you even a stack of inferior bathroom tissue until they mature) you are talking about an inflation rate of less than 1% per year.

And that is the position we find ourselves in. In fact demand for our debt is so great that Ambrose Evans-Pritchard (no heterodox he) is calling in the pages of The Telegraph (hardly a Liberal rag) for us to help the rest of the world out and create some more.

Bond shortage deepens as US Treasury stops issuing debt
by Ambrose Evans-Pritchard, The Telegraph
16 May 2016

The US government paid off more debt than it issued last month in a stunning turn-around for America’s public finances, causing an acute shortage of bonds and a further downward slide in borrowing costs.

Net issuance of notes and bonds by the US Treasury plunged below zero in April as tax revenues surged, a feat last achieved for fleeting moments at the end of the global economic boom in 2008.

The dramatic improvement comes as US federal spending settles at 20.5pc of GDP, down from 24.5pc after the Lehman crisis, and roughly comparable to where it was at the end of the Reagan era in the 1980s.

America’s $19 trillion of existing debt is no longer enough to satisfy voracious demand from investors, forcing them to accept ever lower returns.

“The US government simply doesn’t have the same financing needs any more. Pension funds are having to buy whatever they can get,” said Torsten Slok from Deutsche Bank.

The lack of the new bonds has pushed down yields on 10-year US Treasuries to 1.74pc, close to the historic lows reached during the eurozone debt crisis four years ago.
…
Interest rates in the US are now deeply negative in real terms by any measure, and are falling further each month. This has its roots outside the US: global deflationary forces are playing havoc with yields in all the major economies.

The Institute of International Finance estimates that almost $10 trillion of debt is currently trading at negative rates, with a crush of buyers bidding recently for a Spanish 50-year bond issue at 3.5pc. Ireland and Belgium have both placed 100-year bonds in recent weeks.

Blah, blah, blah, inflation some time in the future measured by something (can’t say exactly when or what), invisible bond vigilantes, debt to GDP so high, must cut Social Security and Medicare.

I told you he was a conservative asshole.

What the market tells us is that there is not enough debt. That 50 Year (50 Year!) Spanish (Spanish! Not the most rock solid economy in the Eurozone) bonds are selling at a discount which returns .07% per year (3.5% / 50) tells you everything you need to know about what the collective wisdom of Mr. Market thinks about inflation.

It doesn’t exist now and won’t for the forseeable future.

But, but, but Grasshoppers and Ants!

Let me tell you about buts. Try pulling your head out of yours.

The warnings are falling on deaf years in a world where everybody else looks just as a bad, or worse. Investors have to put their savings glut somewhere and for now they want as much US debt as they can lay their hands on.

Morons.