What exactly is inflation?? We’ve all been told it’s bad, and we all get annoyed with things increasing in price. Economists intuitively understand that it’s the lagged effect of money printing, but is it that simple??
When stocks go up in value, is that inflation?? What about when homes appreciate?? No, those are financial assets, even if homes are technically durable consumer goods. For some reason, this is a good thing, even when it prices many people out of homes. What about when wages go up?? Is that inflation?? No, that’s also a good thing, except when wages go up too fast, then it’s a bad thing because it squeezes corporate profit margins, even though real wages have lagged corporate profits for decades. What about when an airline raises ticket prices?? Is that inflation?? No, that’s a sign of economic strength where demand is pushing prices higher, so it’s also a good thing, unless you’re shopping for a flight at that moment—in which case it’s inflationary. What about when the price of beef goes up?? That has to be inflation?? Except, we understand that many ranchers, and most abattoirs are currently losing money, even at currently elevated beef prices. As a result, we grudgingly accept it, without asking why these businesses cannot earn a profit at all-time high beef prices. What about when the price of gasoline goes up?? For some reason, gasoline is where we draw the line. As a rule, we all universally agree that higher gas prices are a terrible thing. Except, how is this any different from airlines seeing increased demand, and getting pricing power?? Besides, it’s not like oilmen are having it much better than ranchers over the past decade.
Inflation is a funny thing culturally. There’s good inflation, inflation we sort of accept, and then bad inflation. It’s odd, because these are all different forms of inflation, but our collective reaction function is quite different.
Let’s take a step back and think abstractly about inflation. Over a year ago, I wrote a hopeful piece predicting that Trump would choose to “run it hot.” I was horribly wrong. Instead, Trump chose Economic Feudalism, in all its economic drudgery for most Americans. However, humor me—imagine a world where Trump had been willing to accept a drawdown in equity prices, in order to genuinely reset the American economy. What would we be seeing??
To start with, in a strong economy, the demand for labor would be white hot. Wages would be going vertical, as employers fought for employees. Is that not inflationary?? The demand for every commodity would be going up, against a limited supply of commodities. The whole periodic table would be roofing. Is that not inflationary?? As companies paid more for goods and labor, they’d be forced to push prices through the supply chain in order to retain margins. Is that not inflationary?? My favorite restaurants would all be booked solid, as rising wages would allow more people to dine out more often. Restaurants would be raising prices because they could, as would airlines and every other business. Even the hotdog stand down the street, would raise prices if they thought the market could bear it. Is this not inflationary?? Higher prices would lead to higher margins, more retained capital, more reinvestment. Suddenly, inflation looks synonymous with economic growth. Sure, stuff costs more, but we all feel better economically. Is this inflation??
I don’t mean this as a defense of inflation. I’ve spent a career mocking Fed officials and complaining about inflation. At the same time, I recognize Economic Feudalism, and I see that much of the recent fight against inflation, is really a fight against nominal GDP growth. Our current leaders need to suppress growth in order for asset bubbles to keep expanding. It’s an odd set of economic priorities—in fact, it’s so counter-productive to economic prosperity, that it hasn’t been tried since the Middle Ages.
As Treasury Secretary Scott Bessent meddles with the yield curve, I’m reminded that banks lend money into existence. A steep yield curve incentivizes them to do this. Loan growth drives economic growth. When you lean on the curve to flatten it, you paradoxically suppress economic growth. Bessent isn’t worried about Main Street, he’s worried about his over-levered finance friends, who are having an existential experience as long-rates blow out. While everyone rushes to say that this is inflationary, I instead see Bessent doubling down on Economic Feudalism. As noted above, if most components of accelerating nominal GDP growth seem to create inflation, wouldn’t clamping down on loan growth serve to reduce inflation??
Sure, with a flattened yield curve, you get increased asset inflation, which seems to be the goal, but what if asset inflation is symptomatic of the problem?? What if elevated asset prices are indicative of a dangerously imbalanced economy?? What if a healthy economy has subdued asset prices, as capital chases productive employment with much higher returns on capital?? What if increased asset prices are instead indicative of a dying economy; where entrepreneurs cannot think of anything better to do with their capital, except to purchase an existing asset hoping for price appreciation, instead of building something new??
Let’s go back to what a rapidly growing economy looks like. Wages up, margins at businesses up, commodities up—all on increased demand for scarce resources. All of this is classically called inflation. Sure, it’s supposedly the “good inflation” but it’s inflation. Nominal growth means that interest rates increase as the demand for capital increases. Cap rates increase and equity multiples decline. Isn’t this a healthier economy?? Shouldn’t we all want this?? In the long-run, equity owners would also do better in this demand-driven economy. Shouldn’t we strive for this??
Think of rapidly growing Emerging Markets. They always seem to have elevated inflation as they grow. No one has ever asked why this is. Is this just a fact of life?? A Banana Republic that’s once again acting foolish?? Or is increased economic growth pushing prices higher due to increased demand?? What if this is part of the virtuous cycle where consumers have more spending power, so they can consume more, driving increased demand for everything?? We always seem to accept that rapid real GDP growth in Emerging Markets is going to be inflationary. Why can’t we accept that if we want to grow faster here in America, maybe that’s also inflationary?? Everyone knows that when demand rises faster than supply, you get pricing power. However, if entrepreneurs expect that the Fed will stomp on them in the name of inflation, it then discourages anyone from investing in anything. The virtuous cycle cannot even get going.
Once again, I’m not here to defend inflation. I’m here to think about it abstractly. We’ve been warned about inflation our whole lives. What if inflation is simply a fact of life in an economy where currencies are untethered to gold. What if we were to accept inflation as a nation?? Madness!! Heresy!! What if we want GDP growth?? Everyone would cheer. What if the two cannot be separated??
A few years back, I wrote a piece that questioned if Volcker actually cured inflation. Instead, I posited that deregulation cured inflation, and Volcker was simply along for the ride. What if Central Bankers have learned the wrong lessons of that era?? They’ve spent almost two decades complaining about anemic growth, only to slam every green shoot as it appears inflationary. Why is the ECB currently raising rates while Europe is mired in recession?? Why did Powell panic after COVID and kill the first real economic recovery since the GFC?? I get that no one wants to be Arthur Burns, but did he completely bungle things?? Or was he run over by terrible economic policy decisions?? Would things have been different had interest rates been higher?? I get that no one wants things to spin out of control. No one wants to be Turkey, but on many metrics, Turkey is growing faster than us, even if the Lira is something of a joke economically. The core difference is that in Turkey, equities trade at single-digit earnings multiples and in the US, equities are in a bubble. Are we here to build bubbles?? Or to have economic growth?? Is there a hybrid path that incorporates the best of both worlds?? Not under Economic Feudalism. Instead, every decision is guided by what best supports asset values.
In summary, I wonder if Central Bankers focus too much on headline inflation data, which mostly involves chasing the price of diesel across the screen, rather than asking what inflation even means. How do you even grow an economy without demand growth and pricing power?? Then again, do they even care?? What if suppressing growth, is the actual end-goal??
We’re now almost two decades into Economic Feudalism, and we’re increasingly terrified of economic growth. As a rule, asset bubbles hate nominal GDP growth. To run an economy, with a fixation on asset values instead of economic prosperity, is simply insane. Yet here we are, and those who are blowing the bubbles are also quashing growth.
This all seems like a horrible policy failure that only helps those at the top with all the assets—hence why I call it Economic Feudalism. Honestly, I don’t expect things to change in the near-term. In 2022, they told you all you needed to know when they panicked as asset values swooned and nominal GDP accelerated. They went out of their way to destroy economic growth, particularly wage growth, which seems to scare them the most. Inflation had indeed picked up, but so had nominal growth. As noted repeatedly in this piece, they do seem tied together.
Until there’s political change, we’re going to keep doing Economic Feudalism. That said, with the 2028 elections coming, and the chance for dramatic change at the top, I think it’s time for everyone to ask themselves a simple question; what is inflation??
Kuppy and Mike Alkin “Uranium” Interview at the 2023 World Nuclear Association Symposium