Borrow, Print... Inflation
By Alex Saitta
April 21, 2021
Introduction:
If you read my old website, some of my letters to the editor and now this page, where I talked about the evils of debt.
I wrote about the coming debt crisis in June 2005 (see picture 1). We had a debt crisis in September 2008. Today the debt numbers are much worse, lying there like a pile of kindling wood waiting for a match. Like 2008, we were within hours of some sort of collapse in March 2020. What saved us in 2008 and 2020 is the government has gotten better at managing the debt and these shocks to the system. I misjudged a lot on this, but I underestimated the ability of the government to keep all the balls in the air this long, especially when the system comes under stress.
How They Do It:
Mainly, the Federal Reserve buys up public and private debt with printed money like any Banana Republic. I thought by now investors would have seen through this shell game, but I was wrong about that too. While this monetization of debt has kept interest rates from rising and collapsing the economy, all the printing of money is causing inflation to rise faster than incomes, making things unaffordable for many.
For example... in 1969 the median household income was $9,400. The median price of a home was $24,800 or 2.6 times income.
Gold Standard Bye Bye:
In the past, the US Federal Reserve could print only as much money as their gold stock on hand. That was called the gold standard. In 1973 the Fed totally abandoned the gold standard, and the printing presses could roll with no limit. You remember the inflation bout of the late 1970's. In part, it was caused by excessive printing of money
Inflation:
By 1986 household income was $22,415 and a home cost $88,000 or 3.93 times income. That ratio was quite stable until 2001 where it was only 4.17 times (see picture 2). During that time, the printing of money was mild.
The recession of 2001 ushered in a period of increased printing of money. The 2008 was worse. The Fed created 5 times the bank reserves in the 2009 to 2013 period as it had it first 95 years of existence. Inflation took off.
Today the Fed is printing wide open on a grand scale. And you can see it in these numbers. Today household income is $68,703. A price of a home is $346,800 or 5 times as much (picture 3). Homes are getting to the point where they are unaffordable for many.
Conclusion:
This will get worse over time. If you are not invested in things that are keeping pace with inflation like real estate gold/ commodities or stocks, you will be left behind. Your income from your job will buy less and less over time. I abandoned stocks for the most part in August of 2019 when the Dow was at 26,000. I just didn't have the stomach for it. I have stayed in real estate, gold and have been adding to my commodities holdings.
