“Hey, whatever happened to inflation?”

Sprout Money's picture

We’ve been saying for months and even years that markets can go higher. An important driver has been, and will be, investors’ negative views on the financial markets. Indeed, the higher they creep, the stronger the pessimism gets. Remarkable. In the past investors would swing from a neutral to a positive outlook and eventually reach the euphoria phase, as the markets climbed higher. Today, however, it’s criticism and complaining galore.

The same goes for the last fiscal quarter. While investors discarded equities, some sectors posted results unseen in years. Traditional indices rose by 2.5 percent (Dow Jones) to 5 percent (S&P 500), but growth sectors - technology booked quarterly profits of no less than 11 percent (!) - put up some amazing numbers on the board. We keep stressing technology as a compelling investment, because the masses are tough to convince it seems. There are many psychological scars from the past, which makes it hard for people to trust the markets. It is another sign, however, that stocks still have a long way to go before we reach the top.

Although we tend to say that we are right about our positive outlook on equities time and time again, investors are waiting for a wave of inflation. We have put this on the radar for a while now and investors are curious, and rightly so. “Whatever happened to the inflation you keep talking about?” A justified question we will try to answer in the following paragraphs, although the answer is not straightforward.

Monetary phenomenon

Inflation is often mixed up with rising prices, but those are only the consequence of inflation. Essentially, inflation is a monetary phenomenon. It reflects the amount of money in circulation: if that increases, inflation goes up. The ultimate effect of increasing prices is logical, as more units of a variable asset (money) are around in comparison to a fixed asset (e.g. commodities). This results in the need for more units of the former, to get the latter. Those who want to know how much money circulates may want to ask the central banks, as their balance sheet is largely representative. And because America is the supplier of the world reserve currency, the balance sheet of the Federal Reserve is the ultimate measure of inflation.

Fed base

Balance sheet of the Fed; Source: St. Louis Fed

Looking at the chart of the Fed’s balance sheet above, one immediately notices an inflation explosion. This is monetary inflation, of course, but the effect of this has not really trickled down to our daily lives and there is a good reason for that: the velocity of money collapsed at the same time (see the chart below). And that is because of the fact that the money created by the Fed is still stuck in bonds and other debt securities. Moreover, a major part of the money reserves is parked in banks. Consequently the ratio – the velocity of money – has plummeted in recent years. Not because there is less money in circulation, but because more of the money is tied up.

Velocity of M2 money

Velocity of the money reserves of the Fed; Source: St. Louis Fed

The spectre of inflation is looming

This cannot go on forever. This monetary experiment will come to an end one day, forced by the market. You can probably guess what the outcome will be: an enormous increase in prices. It is a guessing game, naturally, to figure out when and how this will happen. It could be years before anything happens at all, but anything could happen anytime. This is called hyperinflation. No matter how this will pan out, higher price levels are unavoidable in the long term. It would be smart to not wait until the hurricane hits shore, but look for possible escape routes beforehand.

This wave of inflation will have a big impact on our standard of living, but most importantly on the buying power of your capital. Investors who have parked their wealth in assets such as bonds or savings accounts will have to face the music and deal with this devaluation. Investors with a big chunk of their capital invested in real assets are protected against the destructive effect of inflation on their purchasing power. Take your precautions. Invest in quality companies in sectors that will support our future, invest some in gold and some in commodities. The clock is ticking!

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Ned Zeppelin's picture

This article is pure nonsense. His definition of hyperinflation is laughable.


starfcker's picture

USD will reach critical mass at some point, but governments have many options to curb inflation if that happens.  i think a lot of inflation we are seeing in the states is profiteering, and nothing is done about it because it just another tool in the reset. US (and european) consumerism is still one of the primary transfer mechanisms that helps pay the global bills. ever wonder why we allow the narcotics trade to flourish in certain nations? massive voluntary outflow of cash from america. take away the noise (stop peeking behind the curtain) and it's truly remarkable how stable things seem to the average person. the people calling the shots are no dummies, and i think we are going to start seeing more and more pushback on the overreach. the crisis part may be over.          s

lucyvp's picture

imported goods prices  stable or falling, lower quality.  in non imported items, housing, medical care, education, some food items rapidly increasing prices.  rising asset prices are inflation.  What happens when grandpa, has to sell his stock to eat.   When dollars are made toxic to hold people are going to buy stocks, bonds, gold etc to get rid of their to painful to hold dollars.

The current generation just now buying a house, or funding there 401k is going to get screwed buying over priced items. 

but dollars are never destroyed except by the fed.  So who is taking the other side of the trade? When I buy an over priced asset who is holding the dollars?   Confused.

icanhasbailout's picture

The current generation spent their house money on an impressive-looking piece of paper

devo's picture

So who is taking the other side of the trade? When I buy an over priced asset who is holding the dollars?   Confused.

What do you mean? Whoever sold the asset to you is on the other side of the trade and holding the dollars. If you're asking who profits from an asset collapse, it's (a) whoever shorted it and/or (b) whoever has the liquidity to buy it cheap after collapse.

icanhasbailout's picture

The effect of the money printing is immediate, as it immediately displaces demand for money that would have had to come from elsewhere. The velocity is low because are few worthy borrowers who want to borrow under these conditions.


When it comes to prices, the reason we don't see the full effect in US prices is that as a result of the USD being the world's reserve currency, we can freely export that inflation by sending the money overseas instead. So WE don't see the full inflation (yet), but others who are pegged to the USD - like Egypt - see it in spades.


We'll get the full comeuppance when the movement to get off the USD attains critical mass. Then, like Weimar, all the dollars printed and sent abroad for debt repayment will come back in an avalanche.

Illya Kuryakin's picture

An enormous increase in prices? Yes that is a guess. Who will have all that money to spend to drive up prices?


How about a deflationary collapse where all the cash gets sucked out of the economy like oxygen in a fire?

Fish Gone Bad's picture

I love to shop at the 99 cents only stores and have been going to them for quite a few years now.  It is interesting to watch the size of goods just shrink and shrink and shrink.  At one time, a person could buy three cans of tuna (on sale around Easter) for 99 cents.  Try finding 2 cans for a dollar now.  Has anyone noticed the price of chicken being a bargain, and the price of eggs going out the roof?

There has never been a better time to get in shape and lose weight.

devo's picture

We buy whole chickens. They used to be $4 last year, now they're $6.

Like you, I notice the size of everything is smaller (near half from five years ago). I have been taking photos and documenting how the foods change. Maybe one day I will blog about it. The author claims no inflation, so apparently people need to be shown pictures of price changes with the % change calculation.

akak's picture


Has anyone noticed the price of chicken being a bargain, and the price of eggs going out the roof?

Fellow ZH poster Orly certainly has --- she assures us that she has been paying only $0.99 a pound for chicken breasts for the last 35 years.

There is only one problem: they no longer taste "just like chicken".

devo's picture

There is only one problem: they no longer taste "just like chicken".

Yep, totally. I notice the premium tuna looks like the standard stuff from a few years ago, and standard white now looks like chunk. It's mealy, and clearly fucked up food stuffs. I'd honestly rather they pass on the cost and give us human grade food. But listen to what this has come to? A middle class citizen begging for human-consumption-grade meat. Nice work, Bernanke.

Trampy's picture

A middle class citizen begging for human-consumption-grade meat.

Begging?  You can go to Whole Foods and pay for the "wild-crafted organic."  I used to buy canned tuna for my cats there so I know they used to have some good canned tuna from Thailand there, and it was cheaper than the "Star-Kist" crap.  The rich will always be able to buy quality canned tuna.  More importantly, the rich can afford to buy quality food, not just for themselves but also for for their pets!  And there are plenty of people already eating pet food because it's more affordable and there are probably some more palatable than others.  So the question becomes, what's the best pet food for humans?

Can you imagine what would happen to say a nutritionist who started a "public service" blog with taste tests and lab analyses of various pet foods for potential human consumption?  After all, human beings are not that much different in biology (or psychology and behavior) from canines.  So my first guess would be to try some super-duper premium "all natural" dog food.  I see plenty of healthy dogs around town and with more and more homeless it's becoming more common to see homeless people with (usually) dogs that they care for but there are more and more with cats recently, and sometimes the animal looks better fed than the human.

But, no, that would be helpful we won't hear about it unless the (non-homeless) start dying from eating poisonous pet food ... or if they do, it'd only be reported at places like RT or PressTV, and hopefully picked up here secondarily.  Do ya think the Masters of the Universe want the zombie sheeple to know how common it is for poor people  to be eating pet food in the "greatest nation on earth"?  [rhetorical]

Be creative and have an open mind.  Go to the best pet store in town and you might be surprised at what you can find.  Need antibiotics for that skin abscess from shooting up?  Don't want your doctor to know?  Get some "fish-grade" cephalexin in capsules.  Just check the expiration date and you should be fine because it's the same stuff sold for humans, only not as fresh or clean and without a lot of QA paperwork.

I  went shopping online for injectable vitamin B-12 and decided the prices were too high since I no longer bring down the big bucks, so instead of paying the usual $40/vial (+ intl. shipping) for 30 ml of 1000 mcg/ml of Cytex or Sandoz from Canada I got creative.  It took only an hour to find out that "pure" vet B-12 required a RX in the U.S.S.A., but there's no RX required if it's "adulterated" with niacinamide.  After an hour of browsing it cost me $11.73 delivered to get a huge 250-ml domestic (FDA animal use only) bottle of Agrilabs' B-COMPLEX-PLUS, NDC57561-611-05 with a full year of remaining shelf life. In order to "deter" its use by humans, they add teeny-tiny amounts of four other B vitamins, notably the 12.5 mg/ml of niacinamide which is what scares off most humans because of the warning about it possibly causing a flushing reaction.  Some of these vet B-12 mixes can have up to 50 mg/ml of the niacinamide and best avoid those, but 12.5 mg/ml is nothing really, and it does more good than harm.  What really matters is that the big Agrilabs bottle is manufactured here under the same sterility rules and bottling method as the human grade and it has the exact same 1000 mcg/ml B-12 (cyanocobalamin) for ~4% (i.e., ~1/25) of the price of the expensive stuff from Canada, so why waste money, expecially when poverty for everyone but the rich is coming soon to a theatre near you?  Since agriculture is dominated by corporations and corporations control the FDA, I have great faith that the vitamins used to increase meat production are good enough to help keep me going for a few more years ... with $30 extra in my pocket and a much bigger supply on hand.

INDICATIONS: For use as a supplemental source of B complex vitamins in cattle, swine and sheep.

DOSAGE: Calves, Swine, and Sheep- 1 to 2 mL.  May be repeated once or twice weekly.

Thass good enough for me!  But if it gets so bad that eating dog food of my own free will is the only alternative to eating dog food in a FEMA camp, i'd choose neither.

And while it'd be an FDA felony--and they do have Special Agents with guns and badges--for me to sell or even mail the Agrilabs for human use or possibly even to share it with friends, we still have freedom of speech to tell others about it.

But a blogger with nutritionist credentials offering pet food reviews and quality tests as a public service?  How long do you think that could last?  Since there's no law against it, they'd have to be killed.

devo's picture

I don't know what you're talking about, because I compared my year over year list of goods I buy, and they're all up 20%+.

Magnum's picture

Governments around the world are sucking up as much money as they can, from the private sector, for THEMSELVES.  For this reason there will not be inflation until confidence collapses.  

Bro of the Sorrowful Figure's picture

deflation, loosely defined, will come first. when confidence collapses  a huge amount of artificial wealth will be destroyed. the stock, bond, student loan, housing 2.0, credit card etc etc bubbles bursting will make prices plummet.  it is what the fed, other central banks, and foreign owners of USD will do in response to the crash that will lead to hyperinflation.

strannick's picture

The Fed actually does manage to get its new money leveraged and into circulation by the banking system, and that is through the REVERSE REPOS it instituted just after it announced it wasnt going to taper after the last FOMC. 

moneybots's picture

"Investors with a big chunk of their capital invested in real assets are protected against the destructive effect of inflation on their purchasing power."


Until the government confiscates your profits.  17 trillion in debt and counting.

moneybots's picture

"In the past investors would swing from a neutral to a positive outlook and eventually reach the euphoria phase, as the markets climbed higher. Today, however, it’s criticism and complaining galore"


Because it is all based on FINANCIAL FRAUD.  The market does not belong up where it is.  I find no reason to cheer about financial fraud.  Whether the market is knocked back down or the dollar value crashes, the outcome will be bad.

I don't know what the reason why is supposed to be, but the KTLA news warned the other day that milk prices could run up to 8 dollars a gallon.  I can't afford that.  Imagine the price of everything started jumping up, to catch up with the stock market.

ronaldawg's picture

Milk is subsidized to the tune of $5 a gallon. Removing the subsidy is a good thing and Milk won't be $8 for long. government distorts markets.

Solarman's picture

Good article, but any inflation before it gets hyper will cause a debt collapse first.  I for one will walk away from anything variable to pay my bills to survive, declare bankruptcy and hold on to my home, as I will stay current there. The balance sheets of the Fed will collapse faster than velocity will increase.

CheapBastard's picture

Good article. I agree. Private sector wages are stuck for many reasons, massive low wage immigration for one. Walk into any grocery store or retail store near the cash register and you can watch consumers arguing over 26 cents mistake one way or the other while they fumble with 4 or more coupons on stuff that is already reduced 60-80%.

Also, the 50 million [or more] on welfare programs don't give too much extra discretionary money to them so they do not add much to 'velocity.'

akak's picture

Damn, I hate to threadjack, much less as the very first poster, but I find it more than curious that ZH has been utterly silent on the whole Andrew Maguire/Jeffrey Christian bruhaha.  With the hysterical accusations by (un)Christian leveled at Maguire, much less very publicly at the recent Silver Summit, I would think that this would be perfect fodder for some lively ZH discussion, not to mention being pertinent news in its own right --- yet the Tylers have not picked up the ball.  Why?

olto's picture

akak: good question; why not, indeed?

I think the answer is commercial interests.

mjcOH1's picture

“Whatever happened to the inflation you keep talking about?” A justified question we will try to answer in the following paragraphs, although the answer is not straightforward."

Well....thanks to the sacrifice our fathers, we get to distribute the consequences of the profligacy of 300 million people among the remaining 6 billion others on the planet, or at least that percentage of the 6 billion who need to directly or indirectly consume food or energy which is traded in dollars.

So work harder, y'all. You want to eat and we need more Obamaphones.