What is inflation? Most people define inflation as an increase in general prices, and this is almost true.
What is the first thing that pops in most people mind when we are talking about inflation or hyperinflation?
Some pictures from the Weimar hyperinflation,
or maybe the Zimbabwe inflation.
However I know one country that trumps this all when it comes to inflation.
I’m actually from Hungary and Hungary still holds most records when it comes to hyperinflation.
Sure this Zimbabwe bill is exciting:
But I have something even more extreme:
This is One trillion trillion Pengo, or 1 with 24 zeros after it. Compared to this the Zimbabwe dollar, with “only” 14 zeroes, is super valuable.
This will be a record hard to beat but you never know.
But wat is inflation and how is comes about?
I will include one single equation here, don’t be afraid is simple, and I will explain it.
P is the average price of goods;
T is the quantity of the goods produced by that society;
M the quantity of money in the system
V the speed of money, how frequently changes hands an average dollar.
Starting from this basic formula, if a country doubles the quantity of the money and the speed of the money does not change, nor the quantity of good produced than the prices double.
Now how does hyperinflation happen? If people lose faith in a currency, the speed can go up even tenfold or hundredfold, and the currency loses most of its value quickly.
Now let us take a look at the US money supply:
We can see that after the 2008 financial crises it went up more the 4 fold, so where is the inflation.
Part of the answer is that this is just base money, and for a more accurate picture M3 is more important, I will not discuss M3 in this video.
The rest of the answer is that there is inflation, the speed of the money went down, and also the quantity of goods went up.
So where is the inflation?
The inflation is in asset prices.
If a company’s price, with a given earnings dividend, doubles than the company or the price of passive income just doubled.
If the yield on treasuries goes down from 2% to 1% than the price of income from treasuries just doubled.
Based on this there is huge inflation. Inflation in almost all asset classes: stocks, bonds, real estate, art. There is no inflation, in commodities, in wages it only starts to happen now, and because of this consumer price inflation is low for now.
As Marc Faber sad:
„When you print money, the money does not flow evenly into the economic system.
Now from time to time it will lift the NASDAQ like between 1997 and March 2000. Then it lifted home prices in the U.S. until 2007. Then it lifted the commodity prices in 2008 until July 2008 when the global economy was already in recession.
So we are creating bubbles and bubbles and bubbles.”
I like Milton Friedman’s definition of inflation: "Inflation is always and everywhere a monetary phenomenon." So the printing of money is the inflation, the increase in consumer prices is just the effect.
Inflation is printing of money.
Consumer price inflation is only the effect and usually is delayed with 18 to 36 months.
The monetary base in the US went up fourfold.
We do have high inflation is asset prices.
When will sentiment change and money start to flow into consumer goods, we do not know that, but when the money will flow back from stocks and bonds to commodities and consumer goods, prices will go up 2-3-4 fold, you pick a number.
The last picture is the value of us dollar in gold.
Will consumer price inflation appear once again? My guess is that it will, but nobody has a crystal ball.