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December 13, 2021 | Inflation Is Always Bad News for a Democratic Government

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

YOUGHAL, IRELAND – On Friday morning, investors were tense. The inflation numbers were coming out… Was the fun coming to an end?

For the last two weeks, the Biden team had been trying to downplay rising prices. Here’s a Reuters’ report from Thursday:

President Joe Biden, bracing for another jump in inflation, sought to reassure Americans on Thursday that rises in energy costs and other key goods were starting to ease, but said the change might not be reflected in November data due on Friday.

But rising prices are a hard thing to keep under your hat. You can lie about a war in Afghanistan, for example, for 20 years. Who’s to know?

But rising prices? Consumers see them every day.

And economists were warning that the inflation numbers on Friday could be worse than those of last month. They could show prices rising at a rate not seen for 40 years.

Then, as expected, Friday’s report showed inflation at a 6.8% rate – the highest since 1982. The Financial Times reported:

US inflation hits fastest annual pace since 1982

Consumer price index rises 6.8% in November, intensifying pressure on White House as it seeks support for spending plan.

Mainstream Media Awakens

Inflation is always bad news for a democratic government. They don’t necessarily understand the process, but voters feel ripped off… and they don’t like it. Typically, they show their displeasure at the ballot box.

That is why it’s hard to square inflation with democratic, consensual capitalism. Often, you get a coup d’état by the military… or an “emergency” that brings democracy to an end.

(Some argue that inflation is a policy tool of the elite, not only to enrich itself… but also, intended to undermine democracy. More on this tomorrow…)

Many times in these Diaries, we have given you our opinion. Push comes to shove, we said… the elite is going to push down hard on the inflation pump… and shove democracy down the stairs.

Maybe that’s what investors believe too – they bid up stocks to new record highs on Friday.

And a headline from Bloomberg over the weekend gives us a look at where this is going. In it, we see that the mainstream media has finally taken note of the “Inflate or Die” trap:

Massive U.S. Debts Could ‘Trap’ Powell as Fed Fights Inflation

The U.S. went on a borrowing binge last year and the hangover could make it harder for the Federal Reserve to fight inflation without crashing the economy.

Corporate debt has surged $1.3 trillion since the start of 2020 as borrowers took advantage of emergency Fed action as the pandemic spread, slashing interest rates and backstopping financial markets to keep credit flowing. […]

Powell’s challenge is to try to curb price pressures without large costs to employment or growth, a move that would likely anger both political parties and blotch his record with the first Fed-assisted hard landing since the 1990-1991 downturn.

Hard Landing Ahead

To be clearer about it, the financial markets – and the economy itself – are the grotesque creatures of more than 12 years of absurd monetary policy by the Federal Reserve.

It has lent money below the rate of consumer price increases for almost all of that time. Of course, corporate debt increased – by almost 80%. And so did U.S. government debt – up more than $18 trillion (more than 180%) since 2008.

Now, the Fed can’t “normalize” policy without a “hard landing”… in which asset prices return to normal… over-leveraged businesses go bankrupt… millions of people lose their jobs… millions lose their homes… the elite gets about $30 trillion poorer (from lower asset prices)… and the economy goes through a very mean wringer.

Excuses Abound

Do Powell, Biden, et al have the backbone for it? Do they even understand what they are doing?

In any case, here’s our prediction: There will always be something more important than restraining inflation. Here’s a story from England this morning, again from Bloomberg, that gives us a hint:

Omicron Seen Trumping Inflation for Bank of England This Week

Economists expect BOE to hold off rate hike until February

The flu… the weather…

…and most importantly, a collapsing economy…

There will always be reasons not to change course. And when push comes to shove, they’ll find one of them.

Regards,

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Bill

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December 13th, 2021

Posted In: Bill Bonner's Diary

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