What Inflation?

Inflation is an increase in money and credit. There is almost always inflation, except during periodic delfationary events. Even during the gold standard, the mining of gold and issuance of credit paper during various booms was inflationary. The difference between then and now was there were constant systemic resets when deflation hit, whereas since the Great Depression, the government and central bank no longer allow a reset.

Most people use the word inflation to mean a combination of things including higher consumer prices and sustained high inflation. The deflation or disinflation camp argues that the increase in money and credit isn't sustainable (disinflation) or isn't enough to prevent a deflationary episode.

Over the past 15 months there was a great increase in federal debt, but not in the rest of the economy. A similar thing happened in 2009, and the result was a decade-long slow growth trap that led to populist revolutions around the world.

The chart below is Total Credit Market Debt Outstanding TCMDO and Federal Debt: Total Public Debt GFDEBTN. The chart is TCMDO minus GFDEBTN (divided by 1000 because it is in millions and TCMDO billions). Taking federal debt out of the equation, there's no discernable change in trend. There's a kink in the line around the pandemic, followed by a return to the former trend.

Sustained inflation into 2022 assumes USG will borrow more, private business and consumer and homebuyers will borrow more, an economic shock will trigger this (higher oil prices or Green New Deal), a currency market event will trigger this (dollar tumbles) and so on. The disinflation side only needs things to continue on their present course. There isn't enough money in the system to force prices ever higher. The deflation argument at the highest level says the credit bubble is maxed out and no amount of borrowing, outside of currency-crippling amounts that cause an immediate collapse in the dollar's exchange value, will be enough over the long-term. Short bursts like the one we had this past year are possible, as were bursts after 2011, 2016 and 2018. My deflation argument cuts at the inflation argument's core assumption: the Baizuo admin is so incompetent that it will fail to pass an infrastructure bill or the bill will be smaller than anticipated. Polling will shift in the direction of Republicans, this will scare moderate Dems away from being seen as close to the administration. There won't be anywhere near the spending expected. Stock investors have assumed a great deal of spending that will never materialize, while the bond market is already aware and running hard in the opposite direction.

None of the above should be construed as denying price increases that have occurred or that they will be largely permanent. Nor does it refute the more robust inflation argument that includes factors such as demographics with respect to wage pressures, government interference in the energy market and rising geopolitical tensions. I'm focused on financial markets and what information they have priced in. Pointing to higher prices today confirms that you should have bought commodities 9 to 15 months ago. The question I ask today is: what is the CPI going to look like in 9 to 15 months? Right now, I think it will be much lower than the stock market expects.

I remain heavily invested in gold mining shares, with various other commodity exposure such as uranium, copper, rare earths and silver, and take opprtunistic shots on the short side with put option when appropriate.