“In 1899, my grandfather, Henry ‘by God’ Ford, was walking home from Edison Illumination after working a double shift. He was ruminating. That morning, he had himself an idea that changed the world. Sixty-five years, and 47 million automobiles later, what shall be his legacy? Getting it in the tail pipe from a Chevy Impala?” – Ford vs. Ferrari
If Stephen King were at the Fed: “All the interest rates float down here, Georgie.”
The government is getting ready to blast enough paper money into the economy that even Zoomers get the joke. The Boy has said, on multiple occasions, “Money printer go brrrr.” By that he means that it’s visible to anyone who is looking that government is willing to just add a zero to every piece of currency coming off the press just to toss money everywhere like Charlie Sheen on a night out with Johnny Depp when one of them is dressed like a Muppet® and the other one gets to be the hand.
But the point is, even teenagers anticipate immediate inflation.
But I can be better than Shoeless Joe: I can say it ain’t so.
See, even the kids get it. Not my meme, probably the work of a 12 year old Anon on 4chan.
In fact, I’ve said before and will say again, I expect that many items will not go up in price, but down. Here’s an example: Pugsley is a young man, at that tender age after puberty begins its hormonal onslaught, but before he has a driver’s license. Generally, that means that the thing he thinks the second-most about is: cars. You can probably figure out what first is. He says it’s the Bible, but I’m not sure he owns one, and that surely wouldn’t explain the Internet data rates I’m seeing.
He’s had me price some beautiful cars, some that do amazing things like go from zero to sixty in a short enough time that I’d worry that I’d look like Shrek® got caught under a steam roller if I put the hammer down. One of them is the Ford Shelby GT350®. This particular car can be purchased used, a year or two old, with less than 10,000 miles on it for about $50,000. Just for grins, I thought I’d check out what they were going for last week. $45,000. That’s a 10% drop, in two weeks.
Why?
Because absolutely no one older than 18 is looking to buy one right now, and everybody under 18 has, ahem, the Internet. Potential buyers are also anticipating further price drops. Why buy that Shelby™ at $45,000 when you can have it for $40,000 next month?
Anticipation of cheaper cars is one factor that leads to deflation.
But who will be able to a-Ford® it? I’ll admit it, I’ve even priced insurance.
There’s another powerful force pushing towards deflation: people just don’t have money. I’ve mentioned before that something like 80% of Americans can’t afford an emergency spend of $1,000. Now, people are losing jobs faster than Hillary Clinton’s witness list is shrinking, and it doesn’t take long for rent, phone, and food to add up to $1000. There won’t be inflation if nobody is buying, and you can’t buy if you don’t have money.
I was slightly concerned during the first few weeks of the COVID-19 lockdown because of empty shelves. Not a lot, because the way the food system works ensures that there is some slack in the system: grain isn’t grown and then immediately shipped to the pizza factory as flour. There are silos. There are cows in the field. There are vats of wine fermenting, and barrels of whiskey aging, and the porthole to the alternate dimension where marshmallows come from is holding up fine. A lot of our food is in the process of being made at any given time.
But this week the shelves were full. In Modern Mayberry, we had full shelves of everything except toilet paper. There was sugar, meat, eggs, milk. Okay, there wasn’t any chicken, but isn’t chicken really just poultry Jell-O®? But there was plenty of nearly everything else. How much of those full shelves wasn’t because of the distribution system, but because people were out of money?
That scares me. People need food.
Finally, there’s a third force. People who do have money are hanging on to it. In a very rational fashion, they’ve decided that they have no idea what’s coming next, so best to keep all the spare change in the candy dish available, so to speak. And spare change in the candy dish doesn’t move in the economy. It just sits there.
In part, our financial system is built around a concept called money velocity. In simple terms, after I spend a dollar, how fast does that dollar get spent on something else? When it moves around quickly, it can account for a lot of transactions in a short period, it seems like there is more money than there really is because it keeps being spent, again and again. It sounds like a hot check, but it’s not.
I actually liked economics classes in college. It was like a nap, but with a grade at the end.
If you consider that this money came from a checking account, in general according to the statistics a dollar in a checking account bounced around over five times in 90 days at the end of 2019. That means:
- I got paid and,
- I bought some toilet paper from Wal-Mart™ and,
- Wal-Mart® paid their cashier with my dollar and,
- The cashier bought my old bicycle and,
- And I bought some more toilet paper from Wal-Mart©.
It’s simple. But what if there’s no toilet paper? Well, then the second half of the transaction never happens. I just sit on my dollar. It’s not moving around in the economy. That means, even if the Fed prints trillions of these dollars, it’s not enough to offset the fact that there’s no toilet paper to buy and that no one is going out to eat for the last month.
Those transactions just never happened.
And people like me that sit on a chunk of their pay? That drops the velocity on that stack of money to zero until I use it. Right now, people are in general sitting on every dollar they can, unless they have a good source for bargain toilet paper, and I guess they’re sitting on that, too.
Because of those conditions, a lot of things will cost less instead of more, at least in the near-term future. Does that apply to everything?
No.
Things that are in demand, and are in genuinely short supply, will increase in price. Take gold and silver, for instance. The price of silver today is $15 an ounce, according to Kitco™. To buy a silver coin? That’s $24 a coin. The $9 difference? That’s the price to get a coin by the United States Mint or from the Canadian Mint. Silver bars, which have a generally smaller premium? Forget it. Kitco© doesn’t have a single one in stock.
So not everything will deflate like my ego after losing that fistfight to William Shatner at Fight Club. Oops. Wasn’t supposed to mention that. Shhh.
Pugsley tried to Photoshop® something for me, but I told him that teenagers can only do minor editing, at least until they turn 18.
But houses will deflate like a bouncy castle after being jumped on by a dozen toddlers covered with hypodermic needles – but enough about New York City. How many people are buying and selling houses now? No one is. How many people are moving for a new job?
No one is.
Let’s take another example, the New Zealand dollar. The New Zealand dollar is a currency I’ve followed for several years, just for grins. I like to imagine buying a New Zealand winery and retiring there to be a funeral director. I just found out where New Zealanders bury lopsided people – asymmetry. Trust, me it’s funnier if you read the last word in a New Zealand accent.
In the last 15 years, the very best the New Zealand dollar has ever done against the United States dollar was a little shy of $0.90. Right now, you can get a New Zealand dollar for about $0.60. If you look at history, as long as people think of the United States dollar as “safe,” you get people jumping out of currencies like the New Zealand dollar into the United States dollar whenever they get skittish.
Here’s hoping the sheep don’t figure out they outnumber humans in New Zealand.
The United States having a zillion nuclear warheads probably makes people think it’s safe, so they take their money from all over the world. Instead of buying New Zealand dollars, they buy United States dollars, which makes United States dollars increase in value.
The New Zealand dollar has deflated.
I would have bet that would happen, and it has. Imagine all the sheep and, um . . . more sheep you could buy with your new expensive United States dollars?
Can I predict what assets are going to drop in price, by how much, and for how long?
No, I can’t.
But be aware that the rules that you are used to aren’t going to apply.
Will there be inflation?
I think so, after a while, and depending upon where and when the Federal Reserve tosses all those scads of money from the printer that goes brrrr. But if you had just lost your job, and got a check for $10,000 would you spend it on PEZ®, pantyhose, and elephant rides right now? Of course not. But it may be farther off into the future than you anticipate. Houses won’t inflate until people have enough money to buy one. Unless the Fed fills people’s pockets with money and forces them to buy a house, they won’t. Would I buy one in San Francisco for $2 million right now? Would you?
No.
Hmmm, makes those Oklahoma double-wide jokes seem a little, umm, self-serving?
Those assets are frozen, harder than a two-year-old’s grubby grip on a Gummy Worm©. And good luck borrowing money on a house for what it was “worth” yesterday. In the last bust, I went from bankers offering me more money than I could pay back on my signature before the housing bust to having to having to find a receipt to prove I hadn’t stolen that Spice Girls™ CD I listed as one of my assets. Banks always seem to close the barn door in a timely fashion, at least one month after the horse ran away.
Inflation? Sure. But before then that Shelby GT 350™ will be down another 20%, I bet.
Money printer go brrrrr.
Shelby GT 350® go Rawarrrrr? But on a budget, right?
I will keep working to keep the interdimensional marshmallow portal open.
Some people will hold on to their dollars, but as you pointed out, the majority are already living paycheck to paycheck with minimal cushion for emergencies. You probably need some discretionary income to be able to hold onto dollars. If you can’t, or won’t, save money before the pandemic, you won’t be able to save during it….especially if you have an interruption in your income. The “discretionary” dollars to be hoarded will come from not paying rent, mortgages, car payments, etc.
I’m glad that StaPuftCorp is keeping you busy!
Yup, nobody will be able to save during the pandemic, except for the Keymaster and the Gatekeeper.
Oh, Zuul.
A better visual for The Boy’s meme about the Fed
https://www.facebook.com/photo.php?fbid=3399212316772183&set=a.101561333203981&type=3&theater
Nice. A-10 go BRRRRRRRRRR!! Love it!
For the last decade or so, debt has been cheap, so we’ve had price increases in the things that people could borrow money for (houses, college educations, cars, stocks), but deflation or at least much less inflation on the things that required cash: labor (mostly), food, utilities. (I don’t know where the money for medical care comes from; that whole business is a labyrinth of smoke and mirrors.) You might be asking “Wait a minute. Who borrows money to buy stocks?” There are two answers to that. The obvious one is that an investor can buy stocks “on margin” (about $500 billion, according to finra.org). The (possibly) less obvious one is corporations selling bonds (debt) and using the cash to buy their own stock from corporate officers who receive stock as part of their compensation. What better way to reward investors than to increase demand for their stock? vs. What better way to destroy a company than to accumulate debt which the corporation will hold long after the officers have sold out and left the scene?
The problem with pumping new money into the economy to compensate for slowing velocity is similar to the problem with going on an all-prunes diet to compensate for slowing velocity in your digestive tract. When velocity returns, it may be uncontrollable, and it’s too late to change your mind.
In the financial context, those who managed to maintain a stock of “frozen” money can use it to buy up deflated assets (e.g., residential real-estate), to be rented back to those who are still living day-to-day. The rich get richer; the poor get poorer.
Yeah, that’s a great point – I have “frozen” cash, so I can buy out the local cinema when they go under for pennies on the dollar. (The Mrs. and I have talked about just this transaction.)
But will anyone have money to go to the theater?
Being in the market for a home for a while, I’ve been watching the market in the area I want to move to. Homes aren’t flying off the shelves but they’re selling. I just bought my home last week and I’m pretty happy. I have the feeling I might have left some money on the table but the place was perfect so eff it. No sense murdering the 94 year old woman who was selling.
MM, good deal. I hope that works out for you, really I do. Houses aren’t investments, they’re home. Enjoy.
A two minute sound track for the apocalypse….
Okay, that rocks. And makes me want to cover my body with cooking oil so all of that money sticks to it.
I am concerned about inflation, not in the next six months, but over the next year or so. The stimulus TrumpBux are going to start hitting accounts this week. When those hundreds of billions of dollars do next to nothing to calm people down, the only solution is to send more checks. There is already talk of a second round of “stimulus” and the first one is barely off the ground. When we stumble through summer with 30% unemployment and then fall rolls around and the Chinese virus flares back up again, back into lockdown we go and here come more checks to keep people from rioting. There is a real possibility of Andrew Yang’s Universal Basic Income becoming a reality and then we really have an issue because once people get used to free money, they are going to demand they get it every month.
None of that takes into account the national debt. One way to make it go away is to simply inflate it away.
We are in the early stages of this whole thing. What happens in May and June? I don’t think anything is off the table and none of that has much to do with the actual coronavirus.
As David Stockman said in his latest post:
“With the establishment media keeping the US economy on lockdown – and we mean that literally, as even Dr. Fauci is now saying there should be no relaxation of the economic freeze until there are zero new cases and zero deaths – and the Trumpified GOP keeping the spending machine and Fed printing press at full throttle until at least the November election, it is truly impossible to imagine the level of madness ahead.”
Yup. We need standards. That’s tomorrow’s post.
What’s going on now is, as far as I know, completely unprecedented. The economy is comatose, but it’s a medically-induced coma. These “stimulus” actions by the government are not really “stimulus” at all, but business reporters have small vocabularies. These are really “ventilator” actions, intended to keep the economy from dying until it’s able to breathe on its own again and the coma-inducing drugs wear off. But nobody pretends that being on a ventilator is actually good for the patient; it’s just the least-bad option (at least, that’s what TPTB believe, anyway). Maybe they think that, because this economy didn’t slip into coma naturally, that it will bounce back promptly, but I’m looking for ways to blunt the worst-case scenarios. (Sowed squash, beans, and beets yesterday; the carrots are already coming up.)
Wisdom.
I bought silver last week.
More silver to buy tomorrow. The Romans knew silver, so did everyone after.
Especially the werewolves.
I still haven’t figured out how to convert PMs into something that I can eat, or pay taxes with, without exposing the hypothetical fact of having PMs without adequate physical security to protect them. Maybe it’s just my region (near Washington DC), but anybody with enough PMs at home to make a difference is just asking for a home invasion robbery when times get tough. And if you don’t hold it at home, you don’t really own it. The last time Americans seriously tried to hedge financial uncertainty with gold, silver, and contracts “payable in gold/silver”, the President just issued an EO making those arrangements void. The banks wouldn’t even let people access their safe deposit boxes without a police escort, to make sure that there wasn’t anything Really Valuable in them. Poof! How do you hedge that?
I like I-series Savings Bonds (inflation indexed, not TIPS), deep-dug garden plots, how-to books, garden tools, mechanic tools, wood-working tools, and home-cooking “tools”. And, I’m psychologically prepared to accept massive losses in the nominal and actual value of my savings. As long as my rooftop solar panels keep cranking out the kWh, we’re insulated (so to speak) from rises in the cost of electricity, and the SRECs bring in a little cash every year.
The bonds are nice – I need to buy a few. But the nice thing about the PM is it diversifies you entirely out of the dollar, which is fairly hard to do.
I do like your overall plan.
I think your timing is about right, but it could be pushed off for several years – the market can stay stupid longer than I can stay solvent.
I’m investing in the three precious metals – silver, gold, and lead.
“…which makes United States dollars increase in value…”
I am pretty sure fiat currency has zero value.
Anytime somebody says ‘the Hungarian currency decreased in value while the Bulgarian currency held its value’, I am pretty sure they are blowing smoke.
Well, I can still buy beer, Marge, so there’s that. And I can still buy silver, so my grandkids can say . . . what’s this shiny stuff?
The Ford doesn’t interest me. Any idea about the price of this going down, John? Of course, I will be living in it, as the wife will throw me out, but . . . .
https://static.cargurus.com/images/site/2010/02/28/04/13/1964_ferrari_275_gtb-pic-1468765451471946134-1600×1200.jpeg
For being thrown out? This is worth it. Corair, do it. Enzo would be proud!!!!
(Damn that is a piece of artwork.)
I want the model without the fireplug on the driver’s side rear fender.
But that’s standard on the ’66 models, right?
It wasn’t the Kung Flu that killed my business. It was the governor of Washington when he shut my business down. Now, in order to revive it I’m gonna have to cut my rate in half and work twice as hard, or start doing everything half-assed. Either way, I’m quite angry, having learned the infection rate in my county is a mere .00046% which doesn’t seem to justify this economic suicide.
Read tomorrow.
It gets worse.
The Mrs.’ book? This emergency tromped all over it. Dangit.
She’ll have to redo it all.
Seriously, though, your story is worse.
Dangit all.
I look forward to it. The book, that is.
Steve, I’ll toss you a copy of where she’s at, if you like. Depressingly like . . . today.
Which is scary.
Sorry about the $1200 a high qualified hire at the USPS lost that envelope and a dastardly computer worm ate the binary folder with the money in it.
Oh well wait here comrade…by the firing line and guillotine.
Har!
Yeah. The quickest way to create a dependent who you control? Give them things.