Some Thoughts on Inflation By Les Nemethy, CEO, Euro-Phoenix M&A Advisors, Former World Banker

I have been writing that we are facing a period of high inflation since long before it was fashionable. Now I believe that on the balance of probability we face an entire decade of high inflation. That’s not to say that inflation cannot decrease at times during the decade (e.g. if there is a recession)– just as in the 1970’s, there were ups and downs of inflation — but overall it was one of the most inflationary decades on record.

In the first part of this article, I will briefly summarize my reasons for my “decade of inflation” prognosis. In the second part, I will offer evidence that inflation is not accidental, but a deliberate act of theft by governments, and finally, a conclusion.

a, The 2020’s are likely to be a decade of inflation

This section does not purport to be comprehensive. It summarize just four of the great inflationary structural changes that are happening in the world today:

  • Deglobalization. Factories are no longer built where factor costs are optimized; security of supply chain has become a much more significant consideration. This inevitably results in higher prices, as do interruptions to supply lines and the need to stock more inventory.
  • Demographics. A demographic implosion results in labor becoming more scarce, putting upward pressure on labor costs.
  • Green energy. Green energy is more expensive than fossil energy. The more we substitute fossil fuels by green energy, the more it drives up energy costs. A dearth of green energy minerals will further drive up green energy costs. Policy shifts towards green energy has made fossil fuel providers reluctant to invest in expanding or even replacing fossil fuel capacity, for fear of being left with stranded assets, hence fossil fuel prices are also driven up.
  • War economy. Just as the United States tried to achieve “guns and butter” in the late 1960’s and 70’s (the Viet Nam war and Johnson’s “Great Society”), so too, Governments today are spending lavishly on everything from Covid relief to social security, while the Ukraine war (and other conflicts or threatened conflicts) are increasing military spending. Deficit financing is funded by expanded money supply.
  • Government guarantees of bank loans. These are experiencing surprising growth on both sides of the Atlantic,encouraging banks to lend more, once again, fuelling growth in money supply and inflation.

b, Inflation is not accidental, but a deliberate act of theft

In defense of the above proposition, I offer the thoughts of a number of great thinkers. These are some of my favorite quotes on inflation, collected over a decade: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of its citizens.”
J.M. Keynes

“The most important thing is to understand that inflation is not an act of God, it is not a natural disaster, and it is not a disease. Inflation is a political strategy.”
Ludwig von Mises

“I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.”
Friedrich A. Hayek

“Most of those in political office, quite understandably, are firmly against inflation and firmly in favor of policies producing it.”
Warren Buffet

“The first panacea of a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists. “
Ernest Hemingway

“Inflation is always an evasion of reality – an attempt to maintain an artificial prosperity … [Leaders] have been backed into a corner by events and lack the moral courage or the political support to institute fundamental reforms, which would require them to inflict pain on the mass of commoners and vanquish powerful elites… …rulers bereft of backbone, ingenuity, and capital attempt to postpone the impending crisis by inflating…”
William Ophuls, author of “Immoderate Greatness: Why Civilizations Fail

“Inflation is not caused by the actions of private citizens, but by the government: by an artificial expansion of the money supply required to support deficit spending. No private embezzlers or bank robbers in history have ever plundered people’s savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments.”
Ayn Rand

“Inflation, however, can only continue as long as there is the opinion that it will cease in the foreseeable future. Once the conviction is established that inflation will not stop, panic breaks out.”
Ludwig von Mises

c, Some concluding comments

I migh add that probably the only politically pallatable way that politicians can make our debt levels more manageable again is to inflate them away, by keeping the infllation rate a few percentage points higher than the interest rate. Given that we are facing a record amount of debt ever accumulated by humanity—some 370% of global GDP—there will be very little option but to inflate it away. Perhaps this is even the responsible course of action.

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