The Forces of Evil, human and supernatural, look like doing very well out of the coronavirus epidemic. From the supernatural side, deaths from the disease and the misery from the economic disruption look likely to provide triumphs. From the human side, government budgets are yet more unbalanced, bringing global bankruptcy several years closer and increasing state control of the economy. However, the greatest triumph for the forces of evil, devastating noble rentiers yet again, will be a resurgence in inflation.
Whereas thirty years ago, economic analysis could be argued on the basis of policy differences, the policies being pursued are now so irrational and the damage they will cause so extensive that they can only be explained as an aspect of the Manichean struggle between Good and Evil. There is no longer any attempt to balance the budget, nor any attempt to do anything with monetary policy beyond prop up the stock market. Politicians, in office for only a few years in each term, may be able to ignore the long-term effect of their misdeeds; the rest of us, coronavirus willing, have to live on this planet long enough for the long term to play a major role in our lives.
I have posed the struggle as that between good and evil, with the evil principle being represented by Ahriman, the Zoroastrian spirit of pure destruction, because I don’t want to get conventional religion mixed up in the discussion. Also Satan, at least as portrayed in John Milton’s Paradise Lost, is altogether too noble and nice a fellow to represent pure evil and destruction — much pleasanter to spend an evening with than George Soros or Nancy Pelosi, for example.
The policies and effects of the human Ahrimans are pretty clear. Unlimited monetary expansion, with the Fed buying not only government bonds, but Exchange-Traded-Funds of corporate bonds, will lead to yet more inflation of prices. Since asset prices had risen to levels almost unimaginable and both stock and junk bond prices are due for a very hard period ahead (however much the Fed tries to boost them) this will inevitably result in a surge of inflation.
The sudden 80% drop in the shares of the Chinese competitor to Starbucks Luckin Coffee (Nasdaq:LK) is the canary in the coal mine. We can expect that the revenue fraud apparently found in Luckin’s accounts will appear in many other companies’ accounts also, in the United States and Europe as well as in China, as “financial engineering” undertaken to hit quarterly earnings targets will be exposed in the downturn. A rising tide floats all boats; more sinisterly, a falling tide leaves them stranded on the rocks with their bottoms staved in. The collapse of Softbank’s share injection for the egregiously awful Silicon Valley darling WeWork is another precursor of hard times ahead.
If asset prices are deflating and money is still being pumped into the system by Ahriman at the Fed, then apart from truly spectacular losses for the Fed (which will inevitably be picked up by unfortunate U.S. taxpayers) the only place the money can go is consumer price inflation. This column has been wrong for more than a decade in predicting consumer price inflation, because the concentration of money in the rich, fashionable and intellectually down-market led to it flowing into asset prices, whether stocks, bonds, urban real estate or collectibles. The asset bubbles are dead; look for consumer price inflation to roar back.
However, Ahriman’s inflationary impulse is not confined to monetary policy. Fiscally, he has controlled U.S. policy since the end of the Bill Clinton years, the last time the U.S. budget ran a surplus, albeit at the top of a stock bubble. George W. Bush gave way to his Ahriman tendencies in making no effort to keep the budget balanced. Barack Obama made the problem very much worse by keeping the budget close to a trillion-dollar deficit even as the U.S. economy recovered.
Now an additional $2 trillion has been added to the deficit in fake Keynesian “stimulus.” Countries generally reach bankruptcy when their debt approaches 250% of GDP, the highest level from which it has ever been brought back. That date when that miserable milestone is achieved by the United States has been pulled forward from around 2040 to say 2035, just by the one “stimulus” bill. Keynesian “stimulus,” Ahriman’s favorite tool, has been brought out again.
When discussing the economic recession in early 1826, Lord Liverpool distinguished between recessions with genuine causes, such as the war in 1793 or the Orders in Council trade embargo in 1811 and those caused merely by frivolous speculation in the private sector, like the banking crash of 1825. Of our recent recessions, 2000 and 2008 were clearly caused by frivolous private sector speculation and should have led to no government “stimulus” at all. This one, on the other hand, has a genuine cause; it should therefore receive genuine government aid – in an amount of about 5 million 1826 pounds, the amount being discussed then, or about $20 billion in today’s money, adjusting for the current U.S. population of 327 million versus the 22 million of 1826 Britain. That’s billion, not trillion, to ease the most badly affected businesses. The extra $1,980 billion in the recent stimulus bill is pure Ahriman.
Ahriman’s fiscal stimulus is not however being deployed in a normal recession. In such a recession, output is less than that which would be possible with full employment, so fiscal stimulus, by increasing employment, will increase output, giving people something to buy with all the money. Here employment was about as full as it can be before the coronavirus, at least in the United States. The massive world-wide economic lockdown that has been the response to the coronavirus has reduced output as well as employment, and no amount of stimulus will restore output we have lost. Meals that are not cooked in April cannot necessarily be cooked in August, automobiles not produced from the shut-down factory cannot be produced later, or only to a very limited extent. Hence the excess money from the fiscal stimulus will chase too few goods, as in the economy of World War II when purchasing power found nothing to buy. The result will be fiscal-driven inflation.
Sensible commentators for the last decade, not just this column, have expected Ahriman’s monetary and fiscal policies to result in a surge of inflation, destroying all that is good. However, the third factor that has come into play results from the activities of the celestial Ahriman rather than terrestrial ones – the coronavirus and the lockdown that has resulted. This will greatly increase the inefficiency of the global economy – it must. Just-in-time production systems cannot function when suppliers in their immensely long and complex supply chains are closed for several months. This will inevitably produce a horrible grinding noise in the world economy as it restarts – output per worker will be far below established norms.
There will be additional inefficiencies from any bankruptcies that occur while the global economy is closed – the U.S. and European governments may prop up all their over-leveraged rubbishy behemoth companies, but emerging markets, currently subjected to a vicious credit squeeze, will not have the money to do so, even if they wanted to. There will also be additional costs from shortening and hardening supply chains. On the political side, we are not going to want to source vital pharmaceuticals from a doubtfully reliable China. On the logistical side, companies will want to “onshore” production because doing business with an over-extended global supply system, with backups to take account of national and corporate failures, has proved to be uneconomic and damaging. Globalization went a great deal too far; de-globalization is now the way ahead.
This third factor, the increased costs of doing business and sheer inefficiencies in the global economy, is likely to persist for at least 12-18 months, especially if we get a global recession or the coronavirus returns for a second season next winter. Even those deluded Keynesians who believe neither the monetary nor the fiscal triggers for inflation cannot deny this one. Hence inflation we shall get, probably at a brisk trot approaching the double-digit level.
Of course, the Ahrimans who control monetary and fiscal policy will initially be immensely pleased at the appearance of substantial inflation; it is a result they have been trying to achieve for decades. Monetary Ahrimans will now be able to run a regime of sharply negative real interest rates without all the intellectual difficulty and populist squawking and disappearance into cash that occurs when nominal interest rates are pushed too far below zero. Fiscal Ahrimans will rejoice doubly, because they have stuffed investors with government debt at low interest rates, the real value of which will now erode at a spectacular rate. Maybe bankruptcy can be avoided after all, as it was by Britain in 1945-75, by destroying the country’s middle class.
So, what of the good? The opponents to Ahriman, representatives of goodness, truth and light, are of course the world’s rentiers, the middle-class savers attempting to build a retirement and maybe leave something for their children. Doomed to extermination by Ahriman-Keynes, their savings are the principal engine of wealth and civilization, that prevents us relapsing into the Stone Age. Ahriman has deluded them by over-inflated asset values and excessive debt into believing that their retirements are secure; they will now find otherwise. Only a Revolution of the Rentiers can save civilization from Ahriman’s universal destruction.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)