June 14, 2021 | Going Hyper

As the pandemic passes, will puppies get cheaper? How about plywood? Or properties?

These are odd days. The virus hit. The economy cratered. Government freaked. Jobs were lost. Lockdowns, quarantines and restrictions hit, which are only now (15 months later) being peeled back. And yet during this time the price of almost everything swelled like a zit before the prom.

You know all about real estate. Up 30% nationally in the past year. Building materials are crazy. Foods’s taking off. Supply chain disruptions have goosed the price of boats to bathtubs, RVs and exercise equipment. Officially inflation in the US has hit 5% (the historic average is more like 2%) the most since 2008. In Canada it’s 3.4%, the highest in a decade, but not reflective of reality

Meanwhile the federal government has spent $400 billion more than it collected, adding the difference to the national debt. It’s over a trillion and rising daily. The Bank of Canada spends $3 billion a week buying bonds in order to suppress interest rates. This has created a ton of new money. Look at this…

More debt. More printing. More money supply in Canada.

When there’s more of something, the price goes down because it’s less scarce or valuable. So it takes a greater amount of that thing to equal what value it had in the past. Yup, that’s inflation. The more money in existence, the less each dollar’s worth and the more of them required to get, say, a golden retriever.

Check out some recent comments by CIBC econoguy Benny Tal :

“Nobody knows where inflation will be six months from now. When I say nobody, I include the Bank of Canada and The Fed in that nobody. At this point, the narrative from the Bank of Canada and The Fed is ‘Yes, we know inflation is rising, but it is going to be short-lived. Maybe that’s correct, but they don’t know…. Money supply is rising like there is no tomorrow.”

Tal also thinks all this inflation, spending, money-printing and political profligacy will bite us big. “To me that is the No. 1 risk facing the economy and the market: a very rapid pace of increase in interest rates.”

What can turn current inflation into something worse? A torrent of spending. The unleashing of built-up pandemic savings. More government gushing. And the expectation by people that prices are romping higher, so they’d better buy now. That’s where FOMO comes from – a fear which ignites and accelerates buying decisions, causing people to jump in even when asset values have exploded, since they fret those prices will go higher.

Of course the rapid pace of vaccinations (75% of the herd will be fully dosed by Labour Day) and the relentless reopening of provincial economies will accelerate this. The service sector will come alive. Unemployment will crash. Wages increase. Commodity prices are rising because of increased global demand. Plus you have carbon taxes, a federal election and higher personal taxes after that to factor in.

This has led people on this blog to conclude: (a) cash is trash. Might was well spend it. (b) Hard assets like real estate are a shelter from the storm. (c) Liquid, financial portfolios can’t keep up. And, (d) we’re on the path to hyperinflation.

This is bunkum. But it will take many months – maybe a year or two – for it to become obvious we have the opposite problem. First, understand what hyperinflation is – excessive, out-of-control price hikes typically of 50% a month or more. This happens in wars, times of economic depression, rampant political corruption or when a population completely loses faith in the currency, leading to hoarding, shortages and chaos. Money becomes worthless. CBs print even more of it. People stop saving or paying debts. Banks crumble.

Ain’t happening here. Nor will it. Ever.

Forget inflation. This is what to expect.

Here’s a more likely scenario.

Inflation continues to rise as the pandemic fades. The central bank later this year (maybe starting next month) trims its bond-buying further and eliminates it by Christmas. Consumer prices and real estate swell more until vaccination rates deliver overall immunity and Covid is gone, gone, gone from the daily newsfeed. Mr. Socks wins the October election. In April the budget delivers a tax jolt which the bond market demands. This happens around the time the CB decides inflation’s a threat requiring higher rates. As interest levels increase money becomes more valuable, not less. Savers are encouraged. Borrowers pay more. Asset values moderate.

Meanwhile the deflationary influence of technology continues. Every month productivity goes up as more industries automate, reduce operating costs and replace dithering humans with flawless AI. Technology eats inflation. It allows production to be scaled-up to meet rising demand without increasing costs. This lets retailers trade bricks and HVAC overhead for a web site and a shipping agent, for example. Banks will close hundreds of branches. Government service counters will be kaput. One legacy of Covid and WFH has been to digitize the entire population, proving the economy can function when 25% of all workers stopped going to work.

We live in the cloud now. So what if the next big thing is deflation?

Get used to the idea. It’s the future. The cloud is a platform of innovation allowing programmers access to computing power that was a dream just a few years ago. As computing costs deflate, so do others. Manufacturing expenses and payrolls fall. Services become targeted and more cost-effective.  Robots never sleep or get sick or hungover or need time off or require pensions. Deflation is all around us now, masked by the bits of life that are high-profile, inflationary (and transient) like housing.

Consider the massive debt created by governments in Canada, the US and around the world, plus all the quantitative easing, the bond-buying, the fiscal and monetary stimulus, the rock-bottom rates which are actually negative. All of this – wholly unprecedented – has barely boosted inflation. More debt, more spending and more stimulus is unlikely to change it. Deflation is as powerful as it is stealthy.

What’s it mean?

First, governments have it wrong. This will be evident before too long. Trust me – you’ll not want to be sitting with a heap of debt. Second, folks with cash, money, liquid wealth and negotiable assets will eventually win. Your funds will gain value. Goods will become less costly. Consumer behavior will be modified as FOMO turns into buyer hesitancy – since the longer you wait to get something, the cheaper it may become.

Borrowers squished. Savers saved. Assets sunk. Cash as king. Imagine the impact of that on a government in hock or your neighbours in debt. And you?

Garth Turner June 14th, 2021

Posted In: The Greater Fool

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