That was Fed chairman Jerome (Jay) Powell speaking about the chances of returning to 1970s-style inflation in the U.S.
He was speaking in front of lawmakers on Capitol Hill on Tuesday.
Regular readers will know the background of Powell’s testimony. But if you’re just joining us, here’s what’s been going on…
Earlier this month, we got news that consumer prices were up 5% in May versus a year ago.
That’s the country’s highest jump in inflation in 13 years.
And judging by the feedback we’ve been getting, it’s front and center on your fellow readers’ minds.
Take this note from Legacy reader Curtis B., who has a construction business…
Current inflationary trend, long-term or short? Aye, that is the question.
We build, own, and operate industrial buildings on a speculative basis. […] We bid our latest project in November. With complete plans it came in at $11.4 million, excluding land. We rebid the same project last week at $15.2 million. Lumber, labor, steel, concrete, glass, and everything else has risen like a skyrocket in seven months.
It matters for anyone who’s earning, spending, and saving in U.S. dollars.
Inflation is what my mentor and Legacy Research cofounder Bill Bonner calls a “wealth stealer.”
When it’s running hot, it’s like being stuck in quicksand. You may be earning a good salary… Your investments may be doing well… But you’re still sinking.
Because every dollar you earn buys you less stuff.
That’s why I (Chris Lowe) have made the inflation threat a focus here at the Cut. I want to make sure you have the best insight into what’s going on and know the steps you can take to protect your wealth.
So is inflation a temporary phenomenon that should be of little concern to you, as Jay Powell wants you to believe?
Or will it get worse and leave you in the financial equivalent of quicksand?
And if that’s what we’re facing, what can you do about it?
These are the questions we’ll explore in today’s dispatch.
If you’re just joining us, welcome aboard.
The Daily Cut is the premium e-letter we created for all paid-up Legacy Research subscribers.
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It’s my mission as editor to make sure you never miss a big idea about making money… or protecting your wealth… from the team.
I’m not talking about the kinds of ideas you find on CNBC or Bloomberg.
As Bill says, “If you invest like everyone else, you’re going to get the same results as everyone else.”
The ideas we’re interested in go against the crowd. They’re ideas mainstream investors haven’t heard about… laugh about… or consider too “out there” for their portfolios.
This fierce commitment to contrarian thinking is what’s allowed our readers to get in early on megatrends such as crypto… 5G… legal cannabis… “tech metals”… gene editing… and psychedelic medicine – when the biggest profits are still on the table.
And it’s why we’re so interested in what Jay Powell had to say at his House panel testimony yesterday. The mainstream view is that inflation is going away. But we suspect something else is going on…
His testimony reminds me of the misdirection an illusionist uses to distract their audience as they make a secret move.
On Capitol Hill this week, Powell admitted that the drivers of inflation “have been larger than we expected, and they may turn out to be more persistent than we expected.”
But he said these inflation drivers would soon vanish nonetheless…
What we’re seeing now, we believe, is inflation in particular categories of goods and services that are being directly affected by this unique historical event [the COVID-19 pandemic] that none of us have ever lived through before.
But just like with a magic trick… that isn’t the full story.
Last week, I had an eye-opening conversation with inflation expert Steve Hanke about what’s really going on.
He’s a professor of applied economics at Johns Hopkins University. He sat on President Reagan’s Council of Economic Advisers.
He’s also a senior fellow at the Cato Institute’s Troubled Currencies Project, which documents the world’s most vicious inflation and hyperinflation.
And he’s a well-known currency reformer.
Steve helped set up new currency regimes in Argentina, Ecuador, Estonia, Bulgaria, Lithuania, and Montenegro.
He’s forgotten more about how currencies get into trouble than I’ll ever learn.
That’s why I reached out to him last week for our Legacy Inner Circle advisory.
He told me what’s really going on with the current bout of inflation in the U.S. dollar…
We know, for instance, that supply bottlenecks have been part of the reason lumber prices have skyrocketed.
And the economy’s reopening is causing a surge in travel-related prices.
Plane ticket prices are up 24% from this time a year ago. Car rental prices are up 110%.
Those are all temporary factors pushing up inflation.
But that doesn’t mean ALL drivers of inflation are transitory. There are longer-term drivers at work, too. Steve…
There’s some truth in the idea that the inflation we’re seeing contains transitory elements. The economy is restarting. Supply chains have been disrupted. And they’re a bit slow getting off the mark. So there are isolated shortages of certain items, and with shortages come price jumps.
But the next punch we’ll get is a monetary one. That’s because the money supply has been growing so rapidly.
Steve told me that the “golden growth rate” for the U.S.-dollar money supply right now is 7%-8% a year.
That’s the rate that would allow the Fed to hit its inflation target of 2% a year.
But since the start of the pandemic in the spring of 2020, Steve says the money supply has being growing closer to 20% annually.
That’s more than double what it should be.
Steve’s research shows that what happens next comes in three phases.
As he explained it to me…
First, with a lag of about one to nine months, asset prices go up. And of course, asset prices have gone up.
We had the money injection starting in early 2020. And asset prices have been strong, including speculative assets such as bitcoin and other cryptocurrencies.
Second, the economy takes off. The lag between the monetary injection and this stage is about 6 to 18 months. We’re into that second phase now. The economy is opening and cranking up.
Third, consumer price inflation sets in. This phase happens somewhere between 12 to 24 months after the monetary injection.
And he had no doubt about what that means…
The duration of these lags is hard to predict precisely. But we know inflation is coming. We’ve had this huge growth in the money supply over the last 17 months. So inflation is already baked in the cake.
Next year, Steve predicts inflation will continue to run at 5% a year. Then in 2023 and 2024, it will be closer to 6% a year.
I’ll have more for you on how to protect your wealth in an inflation-themed mailbag edition tomorrow.
And we’ll return to this subject next week.
For now, I’ll repeat what I said in last week’s Weekly Pulse video update…
If you’re concerned about inflation happening in the U.S. dollar… you want to move from something that is in abundance to something that is scarce.
I think we’re going to see a rally in anything that is scarce. That’s artwork. It’s cryptocurrencies such as bitcoin. It’s non-fungible tokens (NFTs) – these digital “receipts” for ownership of art. It’s commodities. It’s gold.
Anything that can’t be printed by a government, you want to own in an inflation.
Finally, I’ve “unlocked” the transcript of my Q&A with Steve Hanke for you.
I usually don’t do this because it’s subscriber-only content. But it’s so urgent you get a handle on the inflation threat… and how to protect yourself… I’m making an exception.
You can access it here.
(Steve also expressed some bearish views about bitcoin on our call. So if you’re bullish on bitcoin, and you don’t like to have your views challenged, this may not be for you.)
June 24, 2021