I don’t think the average investor appreciates how difficult it is to engineer inflation in our current situation. Everyone was screaming about inflation in 2008. They are screaming about it again. What we should have had in both instances was massive deflation. Instead what we got from endless QE was merely asset price inflation benefitting the scant few. They will attempt to hold it off once again as the reality that the old normal is not coming back. It’s gone.
Why is it so difficult to get inflation in America? Well, the answer is pretty simple. We have an enormous debt overhang on Main Street. The average American is carrying approximately $6,000 in cc debt (w/ a 17.99-24.99 interest rate), the college grads are sitting on tens of thousands of student debt & auto debt is at record highs. Oh, & median incomes for the bottom 60% of Americans are barely higher than they were in 2000 when adjusted for inflation. Now toss in the deflationary impact of technological innovation allowing us to be more productive with less workers. Then realize that negative interest rates are already here for the working poor who cannot maintain a bank balance high enough to not get clipped for $12 maintenance fee each month.
So, this begs the question of how do we engineer inflation. Well, I don’t think a handout of $3400 for a family of 4 or PPP is gonna do it. Bailing out Wall Street, buying Investment Grade Bonds, buying High Yield Junk Bonds, buying municipal bonds and ultimately, buying equites, won’t do the trick either. In order to make a real dent here you need to put gigantic sums of money in individuals hands. Enough so that they can effectively wipe out a very large percentage of their current debt load. In essence this would act as a Debt Jubilee. I really think the amount of money would have to be on an order of magnitude that would be hard to believe. Or at least hard to believe before we started throwing around trillions a week in March.
Even then, we’d still have the issue of 22m unemployed on the way to an eventual tally of 30m+. Now, these people aren’t all coming back when this passes. Take away the number of small businesses that are going to disappear. Set that aside. Corporate America will comeback smarter and more efficient (I know. They were all calling for bailouts week 1). When it comes to finding a way to do the work of 10 people with 8 or 9 people, corporate America is still pretty efficient. The psychological damage here is going to last for a long time. For some, it’s going to be a permanent change. If the average American even cuts back 5% on discretionary spending we are fighting off deflation on a massive scale.
Anyway, lots of rambling here. We are going to have to sit and watch how it plays out. Stay safe and good luck to all.
-RP
