Some months ago in the McAlvany Weekly Commentary, Kevin Orrick responded to some verbal obfuscation by Kamala Harris. The VP kept saying that inflation was down, which for those who don’t understand economics implied that prices were down. Her contention was narrowly and technically true; her implication was patently false.
Kevin incisively noted that it’s prices that matter, not statistics—especially a declining rate of inflation that might be going down but is still high. Had he been channeling Bill Clinton, Kevin would have said, “it’s prices, stupid!” Americans weren’t (and aren’t) seeing high prices drop. They were (and are) seeing them go up more slowly.
This truth, though simple, is profound; though straightforward, it’s poorly understood. That’s because the Fed has accustomed us to inflation as a beneficial and necessary fact of life. The Fed targets a rate of inflation of 2% per year, which means that your dollar this year is worth approximately 98% of what it was worth last year. The next year it’s worth roughly 96% of the original dollar. And so on. Over 20 or 30 years—or over 50 years—you can see the devaluation that occurs.
But that’s what happens when you boil the frog slowly. A consumer might perceive that his groceries and gas get more expensive over time, but major assets he holds for a long time, such as his home, appreciate and make him more wealthy—at least apparently (and never mind that he might pay well over double the selling price of the house over the course of 30 years due to interest costs). So he’s not unduly alarmed, just vaguely unsettled.
Not convinced? True story: Back in the dark ages of 1973, this author joined a pickup game of basketball. I charged the basket from the top of the key, feinting left and driving right, around the girls’ gym teacher, in for an easy layup. That was how it played out in my mind. Back in the real world, when I told my left ankle to feint, it thought I said faint, and buckled accordingly. The girls’ gym teacher survived, shaken but undeterred. My ankle was not so lucky.
This resulted in a trip to the emergency room for me, to make sure the ankle wasn’t broken. It wasn’t. I got a foot brace, crutches, and instructions not to walk on that foot for several weeks.
Fast forward to 2013, my dad went to be with the Lord. Helping settle his estate, I went through his file cabinet and found my medical file. In it was the bill for that day. Total care provided: x-ray of ankle. Total cost: $4. I can prove it; I have the bill.
An expected cost for an emergency room visit today is around $3,000. It can go much higher. Why? Inflation—price inflation. And why has the price inflated? Because the supply of money for the medical profession has inflated—wildly. Monetary inflation eventually equals price inflation (all other things being equal, which they are not always).
Back in the early 1970s, a middle-class family could survive comfortably on $10,000/year. If you earned $20,000, you were doing very well. I remember aspiring to that lofty goal. Still, $4 for an x-ray? That’s affordable. You don’t need insurance for that. Insurance then was only for catastrophes and severe injuries. Even at that, our next-door neighbor, who was an insurance salesman, had several expensive cars and three airplanes—including a twin engine Cessna. That was crazy money in my neck of the woods.
But insurance companies wanted more, and they got it. Legislative, regulatory, and policy changes greatly expanded their realm of operations and their profits. Government upped its input to the medical field through Medicare and Medicaid. Obamacare upped the ante further. The pandemic and the immigrant invasion have been the coup de grâce, opening the floodgates. Money has flooded into the healthcare system. Prices have gone up like rockets.
Now, everyone’s accustomed to the scheme. Prices always go up, people think, so the solution to high prices is more money. Inflation is not only baked into the system, it’s baked into people’s thinking. Of course, even in this vicious cycle many people want prices to go down, but no one in power will back a solution that will result in that end. Doing so would reduce government power and be extremely painful for consumers. Most politicians won’t give up power, and democracy doesn’t reward people who dispense pain to their constituents, even when it is needed and beneficial.
Inflation is so much a part of the system now that the Republican landslide winner of the recent election promised to preserve Social Security and Medicare while creating and spending trillions in new money every year. That’s an inflationary mix of Marxist and Keynesian economics, though he’s throwing in a bit of Friedman and von Mises for good measure—perhaps to cool inflation’s jets even as the afterburner switch is flipped.
Perhaps this is the best that can be done given current constraints, but it’s very risky business, with horrible precedents in other countries. The thought leaders summarized below provide the whys and wherefores of this predicament, its history, and its likely course. Even though there are many historical parallels to our current situation, every case is unique. Still, the warning signs are legion and urgent. The wise reader will take heed.
Many, many millions of people across the globe are reacting to the high-risk scenario before them by trusting the time-tested safe haven asset. The price in gold of products and assets has not changed much, if at all, in the 111 years since the Fed’s founding. In dollars, prices today are roughly 100 times as high as in 1913, depending on the item. Gold is not called stable money for nothing.
The yellow metal has helped people in times of stress and disaster for millennia, and it still fulfills the same function today. Just look at central bank purchases across the globe. Such banks are buying gold in quantities never before seen. Perhaps that’s a hint worth taking.
Key Takeaways:
- Be careful what you claim credit for
- A good man gone wrong
- A new era, or a new version of all the old eras?
- Gold’s down, but far from out
The McAlvany Weekly Commentary: Will Trump Trump Inflation?
While acknowledging the overwhelming election outcome as a mandate for extensive change, David also points out the danger of Trump tying his victory to the stock markets’ soaring response. Such markets are not single-factor entities, and will likely have significant variation from an upward trajectory over Trump’s time in office. “It’s dangerous to associate with so wily a thing as the market,” notes David, “the market peak is what I have as a primary concern.” On the concern that past might be prologue, the hosts take a look at market euphoria over Herbert Hoover’s election in 1928. A highly successful businessman and free-market conservative had taken the reins, and good times were all but assured. Markets responded accordingly, but history records the sad ending of Hoover’s time in office. Now, “the risk is that history will be as unkind to Trump as it remains unkind to the memory of Hoover,” with highly meaningful implications for future Republican presidential hopefuls such as JD Vance. In the light of such analysis, the hosts then consider the possible paths Fed Chair Powell might take—putting in place either lower or higher interest rates.
Doug focuses on comments by Fed Chair Powell in Dallas last week as significantly more substantive than usual—substantive, but revelatory of sub-optimal operation. Powell describes the Fed’s actions to support the Treasury market, both during the pandemic and by extension in the future. And while Doug initially thought highly of and supported Powell, and believes him to be an honorable actor, Powell’s record is rife with what Doug carefully analyzes as missteps. Doug quotes Powell at length and then critiques his comments. The critique is clearly on a level equal to or even higher than the Chair’s rationale for action. Doug then segues to Trump’s cabinet picks, finding them similarly short of the mark. “President Trump, of course, has every right to choose his nominations. Gaetz, Hegseth, Gabbard, RFK Jr. Is this how it’s going to go? ‘Trolling enemies’ takes precedence over the issue of a deeply fractured nation?” Doug also cites sources covering the decline in defense stocks impacted by Trump’s new Department of Government Efficiency, other election-influenced developments, and market news in general.
Hard Asset Insights: Trump Trades and Trends
As investors continue to pile into equities in the wake of the recent election, Morgan warns that doing so depends on implicit and strong faith in the arrival of a “new era.” By this, he means that historical precedents for what is currently happening in markets offer dire warnings and advise extreme caution. Those who ignore these warnings are swimming upstream against a strong historical current and betting their investments on the concept that ‘this time is different.’ As Morgan states it, “the current disconnect between market prices and reality is indeed historic.” He provides both expert commentary and data to prove the point. Elation in the markets since the election has fueled what has been termed “Trump trades.” Morgan looks ahead to determine the Trump trend—the long-term effects of the Trump presidency on markets. Though much remains speculative, Morgan takes what is known and gives the situation much more comprehensive treatment than the economic caricatures fueling investors’ current euphoria.
Golden Rule Radio: Period of Consolidation
Tory introduces the program this week, noting that many fundamental factors remain in place despite the election results. He informs us that the hosts will first cover technical analysis, then fundamental analysis. Miles takes the baton for the technical portion, noting first that gold is down $85 for the week, and down $211 from its peak. Silver for the same periods is down $0.83 and $4.50. Platinum’s negative numbers are $52 and $115, and palladium’s are $105 and $322. The S&P, Dow Transports, and dollar are up a little on the week and a lot since the election. Rob takes over from there and shows that the gold chart is both good news and bad news. The bad news is immediate and short; the good news is delayed and long. Rob describes the likely shape and extent of the correction, noting that it will provide a good buying opportunity, and emphasizing that the bull market remains very much in effect. Miles gives some more in-depth analysis to that summary, noting that, though there are no guarantees, the pressure remains strong and upward for gold.
