The Most Important Debate in Economics Today

Which Side Will Lose? Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] The Most Important Debate in Economics Today - The most important debate in economics today… - The little-known reason why China will drive inflation higher… - Then Jim Rickards shows you when he believes today’s deflation will shift to inflation, and how to prepare… Recommended Link ["Your chance to see this is coming to a close”]( [Read more here...]( This could be the most important message you see all year if you are serious about securing your financial future. A famed gold expert has said we’re witnessing a rare occurrence in the gold sector that we haven’t seen for years… In this short message he urges you NOT to invest in anything until you hear this. [See This Important Briefing Before It Comes Down At Midnight]( Portsmouth, New Hampshire April 13, 2021 [Jim Rickards] Dear Reader, The discussion about whether we should expect inflation or deflation is the most important debate in economics right now. If you knew we were headed for deflation, it would be easy to construct a portfolio. You’d buy medium-term Treasury notes, increase your cash reserves, and look for instruments with steady cash flows such as annuities, insurance and municipal bonds. If you knew that we were headed for inflation, it would also be easy to construct a portfolio. You’d buy gold, silver, real estate, fine art and companies with a capacity to raise consumer prices faster than input costs. But, which is it? The answer is both, just not at the same time. In the short run, deflation (or at least disinflation) will prevail. As the global economy continues to recover from COVID, we still face significant slack in labor markets and excess capacity in providers of goods and services for everything from restaurant meals to manufactured goods. Companies will be happy to reopen and try to claw back market shares. Employees will be thankful to get their old jobs back. But this is not an environment that will sustain price increases, especially with regard to Chinese manufacturers. Due to supply chain disruptions during the pandemic, many Chinese manufacturers lost market shares to domestic producers in the U.S. and Europe who did not have to rely on seaborne transportation channels. Now that domestic vendors are reconnecting with overseas suppliers, those suppliers will actively undercut their U.S. competitors to regain shares. That gives a deflationary push to the global reopening. Still, that trend may only last a year or two. Beyond that, inflation will emerge and last perhaps twenty years. The reason again is China. The Chinese population has stagnated and is aging rapidly. This will require more working-age Chinese to care for the elderly, many of whom will suffer from dementia, Alzheimer’s disease and Parkinson’s disease. The result will be a labor shortage among productive, working-age Chinese who will then be in a position to demand higher wages, which will increase costs globally. Similar trends are also seen in Russia, Japan, Europe and the United States. The best advice for investors is to be nimble and diversify. Cash and Treasury notes are fine for the time being. But investors will need to pivot to hard assets when inflation arrives. Gold is a good all-weather asset because it will retain value in all states of the world and be among the first assets to rally when inflation washes ashore. I’ll be watching for signals, so my readers will be among the first to know when the shift from deflation to inflation takes place. Below, I show you when you can expect that shift to take place, and how to prepare. Read on. Regards, Jim Rickards for The Daily Reckoning P.S. Unlike quantitative easing that never made it into the real economy, the new deluge of fiscal spending will. We won’t see inflation right away, but it will catch up with a vengeance once it does. The best way to protect your wealth is with physical gold. But please, don’t buy a single ounce of gold until you see [this critical message.]( [The best way to grow your wealth is with select gold stocks, which can explode hundreds or even thousands of percent!]( It’s happened before and I believe it’s ready to happen again. And in my view today’s bargain basement gold prices offer you an incredible bargain, with very little downside and massive upside. [Go here and I’ll explain exactly what’s at stake and how you can take full advantage of it.]( Recommended Link [Coming to America: A New Federal “Digital Dollar”?]( [Read more here...]( It’s finally here… Starbucks, Subway – and 16 other major businesses – are set to test a new state-mandated digital currency. [Here's How To Prepare]( The Daily Reckoning Presents: Inflation and deflation are locked in a tug-of-war. Inflation will ultimately win. But when?… ****************************** Inflation Will Win the Tug-of-War By Jim Rickards [Jim Rickards]The fiscal response to the economic calamity produced by the pandemic was unprecedented. Three deficit spending packages came on top of a $1 trillion baseline budget deficit for both fiscal 2020 and fiscal 2021. The total deficit spending from the three relief bills and the baseline budget amounts to over $6.8 trillion in 2020-21. The U.S. national debt at the end of fiscal year 2019 was $22.7 trillion. The added deficit spending from COVID relief, stimulus and baseline deficits equaled 30% of the entire national debt accumulated over 230-years from 1789 to 2019. The ratio of U.S. debt to GDP surged from 107% before the pandemic to 130% in less than two years. The previous all-time high in the U.S. debt-to-GDP ratio was 118% in 1946, immediately after World War II. The U.S. is in unexplored territory in terms of debt, deficits and spending. And I’m not even getting into the proposed “infrastructure” bill that would cost as much as $4 trillion. The Congress and White House were not alone in breaking new ground. In addition to its interest rate policy, the Fed expanded its balance sheet with money printing and asset purchasing. The Fed’s balance sheet grew from approximately $4 trillion immediately prior to the pandemic to $7.7 trillion by April 5. The U.S. M1 money supply also exploded. Both the Fed’s balance sheet and the money supply were at all-time highs by many trillions of dollars. What was the Fed to make of this explosion of debt and money supply? They do not know if there is too much or too little stimulus in the system. They do not even know if deficit spending is stimulus because debt is already so high that more debt may be a headwind to growth. And they do not know if their money printing has created asset bubbles that are about to burst. The best metaphor is that the Fed is searching for a hidden object while blindfolded in a dark room. Fortunately, there is some hard data to light the way. Inflation measures remain weak. Actual inflation, which is measured by the core personal consumption expenditures rate of increase (the Fed’s preferred index), has lagged considerably behind the Fed’s 2% target. There is no significant (official) inflation in the economy today despite massive fiscal and monetary expansion. The personal savings rate has also surged. Since the pandemic started, U.S. savings rates have been comparable to what is seen in countries like China and Germany that are more driven by exports than by consumption. This means the government can mail out checks in the trillions of dollars as so-called COVID relief (really a new kind of welfare program), but people aren’t spending the money. They’re largely saving the money, paying off debt (another form of saving) or investing in stocks, which feed asset bubbles. The result is low velocity or turnover of money and weak GDP growth despite massive money printing and deficit spending. Added together, money printing doesn’t work because savings are high and velocity is falling. Deficit spending doesn’t work because the debt is already too high, and Americans will save money in anticipation of higher taxes or higher inflation or both down the road. In short, the hard data paints a picture of low inflation, weak job creation, high savings and only modest GDP growth going forward. This presents a conundrum most economists do not understand and that the Fed and White House definitely do not understand. They’re working with outdated or simply flawed models that say money printing leads to inflation, and deficit spending is stimulative. Both assumptions are wrong. What is happening is that certain inflationary forces (money printing and deficit spending) are in a struggle with certain deflationary forces (demographics, technology, high debt loads and precautionary savings). Recommended Link [The Truth? You can actually choose…to BE RICH]( [Read more here...]( I’m not talking about wishing, hoping, or believing that a miracle is coming your way. I’m talking about making a choice, setting a course of action, and then going out and making it happen. I make that choice every single day. And I believe you can actually achieve it. If you want to make the choice to be rich – here are three things you can do today: - Commit to getting financially educated. - Be ready to let go of the old-school financial advice you’ve been taught. - [Join me for a free training this week. (It’s 100% FREE for you this week)]( [Click Here To Learn More]( I explained this conundrum ten years ago in my first book [Currency Wars]( The Fed is attempting to inflate asset prices, commodity prices and consumer prices to offset the natural deflation that follows a crash. It is basically engaged in a game of tug-of-war against the deflation that normally accompanies a depression. As in a typical tug-of-war, not much happens at first. The teams are evenly matched and there is no motion for a while, just lots of tension on the rope. Eventually one side will collapse, and the other side will drag the losers over the line to claim victory. This is the essence of the Fed’s gamble. It must cause inflation before deflation prevails; it must win the tug-of-war. The point of the tug-of-war analogy is to illustrate a situation in which the rope (inflation/deflation) is not moving, but the stress (in opposite directions) is enormous. Not much has changed in ten years. The description above was written in 2011 but could have been written yesterday. The world wants to deflate, but central banks cannot have deflation, so they print money promiscuously. Neither side wins in the short run. Prices appear stable. Yet, we are moving closer to the point where one side collapses, the other side prevails, and either inflation or deflation dominates. So which is it? Inflation will be subdued in the short-run not only by the fundamental deflationary offsets described, but also by onerous Biden administration policies, including shutting down oil and gas development, higher taxes, more regulation, open borders bringing in low wage workers, a higher minimum wage (which destroys existing jobs and is ignored by illegal immigrants), and the Green New Deal that will result in higher energy costs. None of this means that inflation is dead. It’s only sleeping. After 2021, we may experience the highest rates of inflation since the 1970s, and that inflation may persist for decades. I explain specifically why in [the latest edition of my newsletter, Strategic Intelligence.]( But here’s the Cliff Notes version: Inflation will catch the Fed and the world’s other leading central banks by surprise. They may begin to raise rates to deal with the inflation, but this will have a devastating impact on public finances because of the high debt ratios. No one worried about debt when interest rates were 0% to 1%. If that debt has to be rolled over at substantially higher rates, even more money printing and monetary ease will be needed to cope. This will make inflation even worse. This world-historic inflationary wave will not emerge overnight. These major waves develop slowly, and so do their economic consequences. But, much like a glacier, their force is powerful and the movement inexorable. The coming year will continue to be characterized by the deflationary and disinflationary forces that have emerged from the pandemic. This is the death rattle of thirty years of trending deflation. Beginning in 2022, we will see the first signs of the inflationary wave, which I believe will last for twenty years or longer. Central banks may find they don’t entirely mind inflation because it reduces the real value of public debt. Government can win in that scenario. The losers will be savers, retirees, and those relying on insurance, annuities, pensions and fixed-rate bonds to pay their bills. Contrary to what most believe, stocks do poorly in an inflationary environment. Costs for wages, inventories, fixed assets, interest and rents tend to rise faster than revenues, resulting in squeezed profit margins. The biggest winners will be those who invest in hard assets such as oil, natural resources, gold, silver, and real estate. As always, those who move earliest to position ahead of these waves will gain the most. Inflation will be the global environment for decades to come. Everything else will be policy content at best or, at worst, mere noise. Regards, Jim Rickards for The Daily Reckoning P.S. Unlike quantitative easing that never made it into the real economy, the new deluge of fiscal spending will. We won’t see inflation right away, but it will catch up with a vengeance once it does. The best way to protect your wealth is with physical gold. But please, don’t buy a single ounce of gold until you see [this critical message.]( [The best way to grow your wealth is with select gold stocks, which can explode hundreds or even thousands of percent!]( It’s happened before and I believe it’s ready to happen again. And in my view today’s bargain basement gold prices offer you an incredible bargain, with very little downside and massive upside. [Go here and I’ll explain exactly what’s at stake and how you can take full advantage of it.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [James Rickards][James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. 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