What Few Expect: Inflation Will Surge, Destabilizing The Status Quo

Authored by Charles Hugh Smith via OfTwoMinds blog,

Few seem to ponder what global shortages in key commodities might do to prices.

If there is any economic truism that is accepted by virtually everyone, it's that inflation is low and will stay low into the foreseeable future. The reasons are numerous: technology is deflationary, globalization is deflationary, central banks will keep interest rates near-zero essentially forever, and so on.

Just for laughs, let's look at healthcare, almost 20% of America's entire economy, as an example of low inflation forever. If being up over 200% in the 21st century is low inflation, I'd hate to see high inflation.

Here's the official Consumer Price Index (CPI), which as many have noted, severely distorts real-world inflation by claiming big-ticket items such as college tuition and healthcare are mere slivers in household budgets.

Note the remarkably stable trend line in CPI over the past 40 years. This certainly doesn't shout "inflation is near-zero and will stay low indefinitely."

Here's the PCE, Personal Consumption Expenditures, the Federal Reserve's favored measure of core inflation. Let's put it this way: either the PCE is real and the CPI is false, or vice versa; they can't both be accurate measures of real-world inflation.

Here's a look at the annual rate of inflation. The go-go years prior to the Global Financial Meltdown of 2008-09 and the years of "recovery" 2010 to 2014 look very similar: some modest volatility between 1.7% and 2.5% annually.

But something changed in 2015-2017. The wheels fell off and then inflation turned up. Maybe it was nothing, maybe not. Let's turn to a chart of asset inflation for a different perspective.

Courtesy of Goldman Sachs, here is a chart comparing asset inflation with real-world inflation. Note how assets have soared while real-economy measures have barely edged higher--commodities actually fell in price.

Now let's look at where the gains of the "recovery" were concentrated: in the hands of the few in the top .5%. This chart depicts the unprecedented concentration of income gains in the very apex of the wealth-power pyramid. Needless to say, very little trickled down to the bottom 90%, and even the top 9.5% received mere crumbs.

So what do these charts tell us about future inflation prospects? To the conventional punditry, they suggest more of the same: higher asset valuations, low real-world inflation and near-zero interest rates (courtesy of central bank purchases of bonds and other financial assets).

I beg to differ. To me, these charts suggest real-world inflation is about to take off in the next 5 years, surprising everyone who expected more of the same. My reasoning is simple:

The leadership of the Status Quo has a simple choice: continue with more of the same, enriching the top .5% at the expense of everyone else, and face a political firestorm of upheaval, instability and insurrection, or start funneling the trillions of dollars, yen, yuan and euros that have been channeled into the hands of the few into the hands of the many.

The policy of funneling fresh cash into the hands of households has a number of variations: negative tax rates (lower income households get a hefty tax rebate annually), Universal Basic Income (UBI--every adult gets a monthly cash stipend), QE for the people (the central bank buys special government bonds that eliminate all student loan debt), and so on.

Where virtually all central bank monetary stimulus over the past 8 years went into assets, QE for the people would go right into household bank accounts where most of it will be spent in the real economy.

The incomes of the bottom 90% have gone nowhere for 8 long years. No wonder real world inflation has been capped outside of housing, healthcare and higher education. (Never mind these are the dominant expenses for the majority of households.)

So what happens when fresh trillions start flowing into the real world economy instead of into assets? If history is any guide, inflation picks up. Toss in some global shortages in key commodities and the fuel for inflation will be ready to ignite.

One part of the inflation will stay low indefinitely story is there's an abundance of everything: grain, oil, natural gas, copper, bat guano--you name it, the world is awash in the stuff.

Few seem to ponder the possibility that this surplus of everything might be temporary, a brief run of extraordinary luck rather than a permanent abundance. Few seem to ponder what global shortages in key commodities might do to prices.

Whether you call soaring prices inflation or not, the result is the same: the purchasing power of currency declines. Every unit of currency buys less of whatever is no longer in surplus.

The funny thing about inflation is that it's not a problem that can be solved by creating trillions more dollars, yuan, yen and euros out of thin air. Issuing mountains of new currency actually increases inflation.

Oops. Our only "fix" is to issue trillions more in new currency and credit. If that doesn't fix the problem, the toolbox is empty.

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Comments

hedgeless_horseman peddling-fiction Wed, 10/04/2017 - 11:45 Permalink

 And health insurance company stocks vs SP 500 since Obamacare bill... 

These are insurance companies...they are by definition intermediaries...not medical providers.  They don't diagnose or treat anyone.  They make money only by receiving premium payments, investing these payments, and by minimizing the physician reimbursements they make to the providers that actually provide healthcare.  

http://www.zerohedge.com/news/2014-09-04/you-have-health-insurance-you-…

What is your premium, deductible, and coinsurance?  What were they 6 years ago?  Many, if not most, of the Obamacare plans actually in use today are $5,000 in-network deductibles, $10,000 out-of-network deductibles, and 30% coinsurnace.  Few specialists signed up for the Obamacare plans because of the low fees, so people are likely to have to pay both the $5,000 in-network deductibles, and $10,000 out-of-network deductibles every year before the insurance will begin to reimburse services.  In summary, 1) you are paying more before the insurance company begins to reimburse services, and 2) you are paying a higher percentage of the costs after the insurance company begins to reimburse services, and 3) you are required by law to purchase health insurance...therefore United Healthcare stock has increased more than 340%, and Humana stock has increased more than 440%!   

In reply to by peddling-fiction

HillaryOdor ne-tiger Wed, 10/04/2017 - 13:16 Permalink

It would work just fine like it used to if (a) government was not involved whatsoever and (b) health insurance was actually that, insurance, not a third party paying for every little thing under the sun.  Your don't use your car insurance when you stop to get gas, so why do people use health insurance for prescription drugs?  Yes I know a lot of them are ridiculously expensive because of the state run monopoly patent privilege, but that's another story.  They are also ridiculously expensive because no one is actually buying them directly.But of course government mandates what kind of insurance you're allowed to have and heavily regulates all aspects of health services (I refuse to call it healthcare.  It's a joke.) so yes private companies will form cartels and exploit these regulations to maximize their profits.  The problem is that it isn't a free market.  But people don't want to be free.  They want to be taken care of.

In reply to by ne-tiger

Pairadimes ne-tiger Wed, 10/04/2017 - 15:04 Permalink

Health Insurance companies, like many things in this era, are nothing like what their name implies. They work diligently to avoid taking risk, and to pass the risk to the provider community and the employer when they can. They are not set up to benefit the patient's health - in fact, their cost and risk minimization strategies often work against the health of their beneficiaries. On the health care value chain, these companies serve only two meaningful purposes - they aggregate a community of providers into a network in order to make the benefit purchase process of the employers or individuals easier, and they serve to cap the possible losses for the plan year to their clients. They extract an outsized share of the funding stream for these services. The rest of the impact they have had upon the health care delivery system has been decidedly negative, including the financialization of primary care and basic health services, and the bastardization of the insurance industry.As healthcare consumers, we need real options which allow us to pay fair market value out-of-pocket for basic health care that we frequently use and can afford, and much less costly insurance options that protect us from risks we cannot afford to take, like a heart attack or a traumatic injury. 

In reply to by ne-tiger

CRM114 hedgeless_horseman Wed, 10/04/2017 - 12:02 Permalink

Absolutely.The number of unnecessary levels of bureaucracy effectively define how close to collapse an empire is. It is historically a very reliable indicator. Passports for Ducks is a good example, as pointed out by Tom Holland in Persian Fire, his analysis of the end of the Persian Empire.State roads were for state messengers only, on penalty of death. Ducks were sacred. Problem: Ducks crossed the roads.Solution? Issue all ducks (individually!) with a Passport that allowed them access to State roads. Disintermediation is the only hope for the West in general, not just the USA. 

In reply to by hedgeless_horseman

Son of Loki hedgeless_horseman Wed, 10/04/2017 - 12:10 Permalink

HH is correct. My docotrs charge almost the same now as they did 10 years ago while my health insurance premiums have skyrocketed.To make matters worse, my doctors say they are actually being reimbursed much less then 10 years ago for the same service!Forcing people onto Obamacare is as radical Marxist as anti-American (like Obama) can get.Glad he and chewbakka are gone. They are horrible and noxious to Americans.

In reply to by hedgeless_horseman

Raynja Son of Loki Wed, 10/04/2017 - 13:15 Permalink

Obamacare was a backdoor bailout of the banks disguised as healthcare reform.They wanted to make sure debt could not be discharged through bankruptcy, so they took away the number one reason people file for bankruptcy, huge medical debts. Yes, you can still end up with large debts, but most people won't file for $10k in medical debt.

In reply to by Son of Loki

CRM114 Wed, 10/04/2017 - 11:38 Permalink

You can't make any meaningful conclusions from false data, and the official data on everything from inflation to unemployment is a crock of shit.Go find some meaningful data, like shadowstats, and I may be interested in your conclusions. "If there is any economic truism that is accepted by virtually everyone"Total Bollocks

hedgeless_horseman DontWorry Wed, 10/04/2017 - 11:49 Permalink

 

The price increases are due to...

Obamacare which clearly says if we don't buy their health insurance products then we either pay a fine or go to jail for tax evasion.Legislative demand is a bitch...http://www.zerohedge.com/contributed/2014-01-21/how-does-fascism-work-2… 

Holy shit, Doctor Buttscope!  You must upgrade all of your Microsoft XP computers you purchased for the last HIPAA mandate with new Microsoft operating systems (and upgrade or purchase new Electronic Health Record systems, Practice Management systems, and Accounting systems), or else you are going to be in violation of HIPAA (MSFT will miss earnings estimates) and the Feds will be up YOUR ass with an endoscope, and they can no longer afford the lube thanks to the sequester!  No, Dr. Buttscope, your Federal government doesn't give a stool sample that all those computers running XP you purchased still work just fine for you, Doc.  This is about HIPAA compliance!  You don't want to be out of compliance with HIPAA!!!

In reply to by DontWorry

Don Sunset Wed, 10/04/2017 - 11:43 Permalink

With ramping rents or house payments (with loads of debt), health care costs and other insurance costs, utility bills and education costs, coupled with relatively stagnant wages, I don't see how the consumer even has a heartbeat.  This unprecedented debt run has got to be close to blowing up.

Farmer Joe in … GlassHouse101 Wed, 10/04/2017 - 12:01 Permalink

Done and done.Amazingly, my current income falls just below the threshold to make me a taker (food stamps and medicaid) and not a giver (tax donkey).Before you trash me, I lived in NYC for 10+ years making mid-six figures and paying ~50% in total annual taxes (fed, state, local) AND 17% of gross income in child support (per NY state law...until age of emancipation at age 21).I've paid well into 7-figures of taxes and am REALLY sick of getting fucked by the system.I'm sitting back, starving the beast, and waiting for the reset...at which point I will get out my scuba gear and see if I can find those pm's at the bottom of the lake...

In reply to by GlassHouse101

dynomutt Wed, 10/04/2017 - 11:52 Permalink

Of course this is going to happen!What the fuck do you think "repatriation of corporate funds at a lower tax rate" means?! Where the fuck do you think the m2 rope has gone all these fucking years?

wisehiney Wed, 10/04/2017 - 11:57 Permalink

Inflation sure took an extreme and quick dive in 2000 and 2008.Life moves pretty fast. If you don't stop and look around once in awhile, you could miss it.  Ferris

Grandad Grumps Wed, 10/04/2017 - 11:57 Permalink

And yet, inflation should not be necessary or desirable unless money is lent at interest by banks. If money is government created and supply is controlled by the government, they don't need inflation to pay for interest.

Clowns on Acid Wed, 10/04/2017 - 11:59 Permalink

Its obvious as to "what has changed". Obama became President as the corrupt Media propagandized the US public on an unprecedented basis. Obama doubled the deficit to $ 20T, broke the law with unprecedented illegal immigration form low skilled, non white countries, then passed ObamaCare to have the illegals paid for health by workers, handed the illegals special status previously alloted to US born black people, increased regulations on the productive elements of US socio-economic fabric, and supported all these "unprecedented" and illegal moves by promoting "racism" ans "white privelege, whilst monetarily supporting ANTIFA and BLM.This is what the article should use as a basis. Now go relate thge obvious to the graphs and narrative and you have a non fiction story.   

shizzledizzle Wed, 10/04/2017 - 12:01 Permalink

I'll believe it when I see it... I think they'll burn the whole fucking thing to the ground before they let debt slaves pay off debt with a worthless currency. 

mo mule Wed, 10/04/2017 - 12:10 Permalink

Nationalise all health insurance. Set up single payer US Goverment Medicare for everyone> Eliminate the Fed, or nationlize it as well. Cancel all  debts owed to anyone thru the BIS, Rothschilds phonzi banking system.  Lets be senseable  stop the stealing by the Fed's Rothchilds thiefiery Stop the interest being paid. Till then nothing changes?

Anon2017 Wed, 10/04/2017 - 12:44 Permalink

If inflation surges, more and more seniors will become subject to Medicare premium surcharges and the premium rates for new enrollees will also jump. Increases in Medicare premiums will effectively become a back door way for net Social Security benefits to be cut. In 2018, the Medicare premium surcharge formula is already set to go up (based on a prior change in the law) for singles with income between $133,000 and $214,000 and for married couples with incomes of $266,000 to $428,000. Within a few years of surging inflation, these incomes won't look as high as they appear today.  

Dill-Temko Wed, 10/04/2017 - 12:16 Permalink

What few expect? Except for the trolls 100% of ZH posters have been stating this and citing historical examples since before ZH. ZH represents a significant sample of literate people. Extrapolate them apples.

buzzsaw99 Wed, 10/04/2017 - 12:25 Permalink

The leadership of the Status Quo has a simple choice: continue with more of the same, enriching the top .5% at the expense of everyone else, and face a political firestorm of upheaval, instability and insurrection, or start funneling the trillions of dollars, yen, yuan and euros that have been channeled into the hands of the few into the hands of the many...GET HELP NOW.  PROFESSIONAL PSYCHIATRIC HELP.  URGENTLY.

adr Wed, 10/04/2017 - 12:32 Permalink

In 1986 my dad was making $65k a year. Actually pretty easy to do in 1986, easier to make that 30 years ago than it is today.He bought a 2500 sq ft house for $152k in a top rate suburb with schools in the top 100 nationally. We were a family of five, had three cars, one a classic car for fun, went on two vacations a year, had a country club membership, and didn't have as much stuff as other people but as kids we got most of what we wanted.The kicker is that my mom didn't work. The whole middle to upper middle class lifestyle on one salary.I make a lot more than my dad did at the same point in my life. But I don't have even close to what we had, and I only have one kid. My wife works a $15 an hour job to pay for her massive student loan bills and a few minor things.Things really didn't start getting expensive until after 2007. Prices were still relatively steady up until the Magic Negro got elected, everything at least doubled. How could inflation be 2% if a fucking Big Mac meal went from $2.80 to $7.65 during his term? A can of piss Campbell's soup went from $.60 to $2.45 and lost half its noodles.The Status Quo didn't just destabilize, it warped to another point in spacetime. The current world is nothing like the world when I was a kid. I kind of understand what my grandparents saw when the culture went ghetto. Going back 30 years from 1985 people wore suits to go to a baseball game.I don't see any way the future doesn't turn out to look like Elysium in 2050.I read a stat from 2010 that said that 47% of the residents of Aurora, IL are Hispanic or latin origin. 34% are black and 57% are White. Since Hispanics are counted as white, your common definition caucasian person only makes up 10% of the population of Aurora, IL which is just a bit higher than the Asian population of 6.4%.That is the future of America. I don't see a country where white people make up 10% of the urban/suburban population moving up economically.

Ol' Painless adr Wed, 10/04/2017 - 14:20 Permalink

Your example exposes many truths as well as identifying the target. Of course, one has to be honest to see it.Historically, through hundreds of years of "modern" history, there has one group that has been consistently a threat to the elites...a strong and well educated middle class. Also, the most successful of these middle class rebellions which in turn brought about decades, in some cases centuries, of prosperity for all have historically been primarily of one ethnic type. It's trivially easy to look around the world today and see how prosperity and in turn civilization declines quite rapidly when that class and ethnic group is eliminated from a position of standing.The evidence of the ongoing attack is literally in everyones face. But, due to the PC movement which has become ingrained, any honest dialogue on this is ironically considered "racism". Reminds me of that Braveheart movie when Longshanks says something to the effect, "if we can't weed them out, we will breed them out."

In reply to by adr