“Hyperinflation is going to change everything. It’s happening.” So said Jack Dorsey, the CEO of Twitter and Square.
Cathie Wood of Ark Invests thinks there’s actually deflationary pressures, with that being a fairly interesting proposition.
We think no one quite knows until summer or maybe next autumn because the current inflation data is over last year when we were in a great depression.
That we’re seeing inflation now is a great sign the extraordinary measures of 2020 have been cancelled economically, so we’re back out there spending, increasing the velocity of money, but the big question is whether that’s a sustained increase above general trends, or just an increase over last year.
We speculate that it is more the latter with inflation probably returning to 2% or lower because currently we think we probably are in a two lanes economy financially speaking.
A lot of money is being printed, or in more understandable language, a lot of genesis blocks are being created. These block rewards however are not going to ordinary people. They usually do so through banks lending, but banks are not lending, they parking it in repos.
Banks are not lending because there’s no profit. Their profits come from the interest rate you pay back on the money you borrowed, but interest rates are currently at 0%, so why should they take any risk.
If interest rates increase then common money supply will increase and so you’ll get actual ‘common’ inflation where the value of your money goes down for ordinary things.
Currently it is going down for assets – or for commodities that steeply fell in price last year – because that’s where the block reward is going, either to government bonds or corporate bonds or to banks when they put down stocks as collateral in repos.
If interest rates are increased to gradually about 2%, then there might actually be profit in lending, so retail credit should start flowing more freely and that can increase the velocity of money.
As banks are not quite lending, then there’s an argument we’re in a monetary contraction for common people, at least to where we would have been otherwise.
For businesses that can tap into the stock market however and for asset owners, we’re in a monetary expansion.
Wood thinks there are other deflationary pressures, like prices for electronics getting cheaper, but the reason we have not seen much inflation for the past decade may be because of this retail monetary contraction.
Governments may add to it now through regressive taxation with the United Kingdom for example raising National Insurance, a tax paid even by the poorest that earn £5,000 a year.
They’re also increasing corporate tax and much else, with the big question being why. They’re not increasing total spending in a continuous manner, so the only reason is to pay down the debt but, what debt?
The central bank is giving money to the government, and that money is printed out of nothing. If the government is taking money from the people to give it to the central bank, they’re literally burning this money, causing deflation and risking an economic contraction.
There’s a good argument to be made for the government to cut taxes since they have indirectly raised them aplenty through increasing the monetary supply.
If inflation has to slow down such increase, then you can raise interest rates and so have the credit flowing to the people, causing economic growth which should increase the total tax intake without increasing taxes.
That’s because nowadays there’s no such thing as a government bond market, so the government doesn’t really have to pay back the debt, and thus it doesn’t have to raise taxes to pay the debt.
Which might suggest that the only reason they’d want to increase taxes is so that they can expand the public sector at the expense of the private sector, something that is very much a receipt for stagnation and worse, outright communism.