Inflation – By Member Bob Moore

Milton Friedman, in an epic analysis of inflation, concluded correctly that inflation is basically governments increasing their money supply too rapidly. Similar to Einstein’s brilliant, simple formula, E=MC2, Friedman (and before him Irving Price) reduced his analysis to another simple formula, G=PV (G is basically Gross Domestic Product ; P is Price; and V is Velocity (of the money supply). In a stable growing economy, the money supply needs to increase by the annual real percentage of “real” growth of G. (In the interest of “full disclosure” opposing economists have debated this for over 100 years). The rest of the growth in G is due to price increases.

The US money supply has increased by about 40% in the two years since March, 2020 – about when Covid first dominated the headlines. Deducting 3-5% real growth for two years leaves over 30% of built up inflation. Although the Federal Reserve (the Fed) is technically not allowed to fund Federal deficits, it has through “quantitative easing”. Over the past ten years, the Fed has increased its Balance Sheet from about $1 Trillion to $9 Trillion by buying Treasury Securities and Mortgages. In effect, the Fed has funded $8 Trillion of deficit spending and has “hidden” this 30%+ of inflation. The Fed now plans to stop adding to its Balance Sheet even though deficit spending continues.

To reduce interest costs on the former $20 Trillion National Debt that is now over $30 Trillion, the Fed has kept interest rates close to zero for about ten years. This penalizes savers with checking, savings and money market accounts with interest earned near zero. With modest inflation of under 2% until 2020, borrowers pursued “riskier investments”.

The National Debt was about $23 Trillion when the Biden Administration took office and is now about $30 Trillion.

In addition, the Biden Administration took Executive Actions to stop the Keystone Pipeline with Canada; restricted, or “slow walked” drilling new wells on Federal lands; and encouraged lenders to not fund fossil fuel projects.

Worldwide, fossil fuels account for about 80% of all energy consumed. Renewable wind and solar account for about 10% (up from 5% about ten years ago after trillions of dollars of expenditures). The result has been that US oil production declined from about 13 million barrels per day in 2019 and 2020 (with “energy independence” for the first time since the 1960’s and net exports of energy), to about 11 million barrels per day. Since demand was still high, oil from Russia and others with “dirtier” production of oil than the US, was imported to fill the shortfall, but at higher prices.

Very significantly, the International Energy Agency (IEA) issued a large report in 2021 entitled, “The Role of Critical Minerals in Clean Energy”. The Biden Administration forecast demand for key minerals to grow dramatically by 2040 – Lithium (+4200%); Graphite (+2500%); Nickel (+1900%); and even rarer “Rare Earth Minerals” (+700%). Since 2010, the average amount of minerals, such as these, needed for a new unit of power has grown by 50% to bring wind and solar up to 10% of total energy needs.

It takes about 16 years from discovery to first production to mine these (ETM) minerals. The mining projects require high energy intensive transport of massive amounts of rocks and water and subsequent chemical and refining processes. Buried in the report is a statement that , “depending on the location and nature of required future mines, the additional energy for the new ETM mines could wipe out much or most of the emissions saved by driving electric cars”.

The above combination of actions resulted in unleashing inflation in 2021 with ever higher percentage increases for many months (as measured by the Consumer Price Index – CPI). Inflation is the “cruelest tax” because it affects lower and middle income earners so severely. Bloomburg Economics estimates that the 6.5% CPI increase through December, 2021, represents an annual additional cost of $5200 per household. Putin invading Ukraine in February, 2022, adds fuel to the inflationary fires.

So, what are the various estimates of existing inflation? The CPI was at 7.9% in February and 8.5% in March. Another analysis cites 15.1% if calculated the way CPI was calculated in the 1980’s.

Futurist George Gilder cites a project called Truflation. It runs constantly on line to monitor prices on identical line items (i.e, same brand, weight and/or features). (The antiquated method used by the Commerce Department for decades is to send some employees to stores to obtain a percentage sample of list prices of identical items each month.) The Truflation inflation calculations indicate a low of 11.6%; a high of 15.9%; and an average of 13.5%.

A common reaction to inflation by politicians is to impose “price controls”. Price controls have not worked since Hammerabi introduced them in 400 BC. Price controls are similar to a lidded pot of hot water on a burner. Eventually, the lid blows off with bankruptcies or severe shortages.

I had over eight years of experience with price controls as “Price Czar” for Reliance Electric when President Nixon imposed US price controls in 1971. Canada followed suit a few years later. I kept Reliance in compliance because 30-50% of sales were “one-time customized sales” without list prices. For list price changes, Product Managers had historically had list price increases of say 4%, but only “realized” 2% net. I convinced them to limit list price increases to what they could “realize” to leave price increase room for other Product Managers. As historically true, severe shortages in other areas of the economy as well as Steel Industry bankruptcies eventually resulted in the end of price controls.

To end on a positive note, I Bonds are great hedges against inflation. Unlike TIPS (Treasury Inflation Protected Securities), the US Government guarantees “no loss of principal” on I Bonds. The tax deferred interest rate for I Bonds was 7.1% (i.e., another estimate of the 2021 inflation rate) and is now 9.5% in 2022. In addition, future increases in inflation result in higher monthly accruals of interest earned. Also, the current “base rate” of zero may be increased. In the 1980’s, it was a 2-3% base rate plus CPI. I encouraged my Mother to purchase I Bonds as her non-taxdeferred CD’s matured – which benefited her and her heirs.

Individual taxpayers (including tax paying children as well I think) can purchase up to $10,000 of I Bonds per year on the US Treasury web site. By planning ahead for a big tax refund, one can buy up to an additional $5,000 of I Bonds per person with the tax refund.

Bob Moore


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