The last piece of the inflation puzzle is taking shape now which is to raise and cement higher wages into the economy. I wanted to share a real boots on the ground story with everyone. I was talking with a gentleman that owns a furniture refurbishment operation in Oklahoma City, and he shared with me that it was extremely difficult to hire people to work at his firm. He is paying a minimum of $15/hour.
I asked him what kind of competition he was seeing in terms of wages being paid and what it would take for him to attract employees. He replied that it was hard for him to recruit people when a fast food establishment a mile down the road is paying $19/hour with a $500 bonus to go to work. That was an eye opening moment for me. We have this situation where the government is competing with the private sector for labor, and the government is winning right now. Essentially, they are forcing private businesses to raise wages through this mechanism.
Wealth Transfer
Here is a statistic for everyone. Bitcoin has had a 200% CAGR for 10 straight years. The US Dollar has lost 90% of its value since 1950. Those invested in hard tangible assets will preserve their wealth and purchasing power as we navigate these rough waters. Those that sit on the sidelines in fixed income instruments, i.e., CD’s, Bonds, Pensions, etc., will see more of their discretionary income go to spending on the everyday necessities of life.
Essentially, this is squeezing the middle class and people are either going to fall into poverty or, preserve their wealth and grow even wealthier if on the right side of this massive wealth transfer. Sadly, the vast majority will fall into poverty because of inaction. I see the set up for a stagflationary environment on the horizon. For those that lived through the last one, you know it is a most unpleasant environment to live through. This time around, the debt is much greater and the trade deficit is much larger than what we have ever seen.
Inflate or Die
It is now inflate or die time for the Federal Reserve. A hard default is not an option and it is obvious which path the government has chosen; a soft default. This means that they will inflate the US debt away. In my opinion, before the Federal Reserve ever attempts to raise interest rates, they will begin to reduce asset purchases.
Watch very closely what the Federal Reserve is doing that affects liquidity because I believe they will attempt to reduce liquidity in order to see how the stock market reacts. For example, the Federal Reserve is now purchasing $120 billion in assets per month which shows up as “Assets” on the Federal Reserve’s balance sheet. On the other hand, the Federal Reserve has also been selling in the reverse repo market, which shows up as “Liabilities.” In effect, that reduces liquidity, if the liabilities start outrunning the asset purchases.
The Bottom Line
As I have been saying for some time, hard tangible assets are necessary and paramount to people being able to maintain their purchasing power in the environment we are currently in. Will inflation be transitory? I think that in some areas it will be, but in the overall macroeconomic perspective, inflation is going to be a condition we live with for longer than people may think. In my view, a stagflationary environment is taking shape that includes higher inflation, higher unemployment and stagnant GDP growth. Stay tuned.
Until next time,
Don
The Energy Transition – GDC Consulting LLC Podcast
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