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I used to live the life of a millionaire
I didn't mind spending money.
Bring your friends and have a good time
Buy moonshine, champagne, and wine
Lord, I was arrested and I've fallen so low
I had no money and nowhere to go
This is true, Lord, there is no doubt about it
Nobody needs you when you're down
Lord, if I could have a dollar again
I'll hold it till the eagle laughs
I want to try just one tiny house.
No one knows me when I'm down
– Excerpt from “Nobody Knows When You're Down” by Scrapper Blackwell
The inflation we are seeing today is not just the result of recent exogenous shocks like China’s COVID lockdown, the war in Ukraine, or other one-off events, but the result of over 15 years of reckless monetary policy and over 30 years of bad investments driven by moral hazard.
Like the flawed thinking in forest management prior to the 1970s of suppressing all fires in order to “protect” the forests, a process Mother Nature has executed flawlessly for millions of years without the “benefit” of human intervention, the “managers” of our financial ecosystem have consistently thwarted the natural cleansing effects of major market downturns and financial crises.
To make matters worse, the Fed and the world’s central banks, through their insane “easy money” policies (i.e. ZIRP/NIRP, QE), in their foolish attempt to manage a macroeconomic “controlled combustion”, literally scattered combustible debris throughout the global financial system, distorting our values while encouraging massive amounts of reckless speculative activity.
While the “cause” of inflation today is the excessive expansion of the monetary base and all associated monetary aggregates, and the “effect” of inflation is rising prices, there is perhaps the most important motivating factor between these fundamental relationships: human psychology.
Why will we pay 9% more for consumer goods this year than we did last? Why are potential home buyers willing to enter into bidding wars where the final purchase price is 30% higher than the original asking price and clearly outside the historical valuation of the property? Why do young people with few real assets dump what little “money” they have into stock trading apps in the hopes of making a quick profit on the stock of any company, much less an aging company clearly in its twilight years? Why are financially astute investors deluded into believing they can buy a tweet and that it’s worth nearly $5 million? How could an apparently eccentric, soft-spoken 19-year-old named Elizabeth Holmes scam $700 million from the venture capital community for a future innovation that could easily be proven to defy the limits of physical reality with minimal due diligence?
It's really full of delusions!
We live in an age where fantasy has replaced cold, hard facts, where market participants prefer to simply larp their way through life's trajectory while entertaining outlandish concepts rather than actually producing the fruits of their labor and time.
This outcome is also no coincidence, but the result of the choices of the Fed (and other central banks around the world) and the federal government. When money is fundamentally devalued, especially as it has been in the past few decades, it distorts the human mind, unleashing irrational desires, aspirations and perceptions that lead to actions that would never be possible with real, hard-earned wealth in the more pragmatic real world.
In such an energetic and deeply absurd environment, the inevitable spark of COVID-19 pandemic panic was all that was needed to bring things to light, ignite an epic inflationary conflagration, and ultimately provide the final impetus for the greatest and most fundamental challenge of our time.
We need to rise to this challenge and return to a world of sound currencies and prudent behavior.
The economic cleanup from this holds out hope for a post-crisis reality that is in many ways “back to basics,” even if it comes at the cost of massive asset price declines, federal fiscal and budgetary disaster, soaring long-term unemployment, and a never-ending list of economic (and real) suffering as the frenzied, multi-decade bubble dream of the “Great Moderation” becomes a distant memory.
The challenge facing the Fed at this critical moment is to fully embrace a new era, the Great Upset, and move the macroeconomy back in the direction of a healthy currency if it truly wants to tackle inflation and right the mistakes of past policies.
This is no easy task and cannot be achieved by raising interest rates here and there, but rather by a determination to reduce the monetary base, no matter how painful the process, in order to quell speculative fever and at the same time completely dispel the belief among all market participants that they will never see “easy money” again in their lifetimes.
This process may be painful, but it is the only true path toward a world that preserves the integrity of our traditional political and economic systems.
If the Federal Reserve again panics in the face of economic turmoil and reverts to frantic money creation and inflation in an attempt to gain some semblance of “stability,” this latest empire will simply degenerate into the modern Dark Ages of meaningless chaos and we will indeed be repeating history.