Assessing Potential for Higher Inflation

While I strongly expect that we will see higher than expected inflation during the approaching cycle, we are still in the early stage of recovery. Inflation expectations have, so far, not lifted to a level that we would deem above a short-run target of around 2.5%-3%. Today, I will present signs to watch for that may indicate if a significantly higher level of inflation is, in fact, approaching.

Article by James L. Caton from AIER.

Although the 2020 recession was severe, the economy quickly rebounded. Much of the fall in real income was caused by a precautionary shutdown of productive factors. As Covid-19 is receding, so too is the shutdown of these factors.

At the beginning of the Covid-19 lockdowns, Jerome Powell was concerned about the possibility of deflation and subsequent destabilization of financial markets. He responded by expanding the Federal Reserve’s balance sheet from a value of approximately $4.2 trillion to greater than $7 trillion. At its current pace of growth, the balance sheet will pass $8 trillion in the next 1 to 2 months. Most of this expansion has been supported by purchases of U.S. debt and mortgage-backed securities.

There are good reasons to be concerned about the prospect of inflation. So far, inflation and inflation expectations have only increased modestly. Some prices, though, have been very responsive to support provided by the Federal Reserve.

Over the last year, the Federal Reserve has continued to accumulate mortgage-backed securities. It now holds $2.25 trillion worth of mortgage debt. In the 4th quarter of 2020, there existed $16.78 trillion of mortgages in the United States. We should not be surprised that the price of many commodities have been rising over the last year, especially the price of inputs for construction of new homes. The price of lumber and wood products have more than doubled since April 2020. Many other commodities are following this upward trend. Reflecting this, the producer price index for all commodities has increased by more than 10% over the last year. As we should expect, rising prices of goods used in the early stages of production processes are picking up the inflationary effects of expansion first.

Two questions concerning inflation are yet to be resolved: 1) will the price of these primary inputs continue to rise and 2) will rises in these input prices translate to a rise in the general level of prices? So far, input prices have not pushed to a level that, on their own, justify expectation of rates of inflation, say, in the double digits. Rising prices seem to be drawing resources into production, precisely the goal of the Powell-led Federal Reserve. If prices continue to rise at similar rates over the summer, greater concern will be merited.

Industrial production is not far from its pre-recessionary highs. As the Industrial Production Index returns to its old highs, increases in total expenditures are more likely to translate into increases in prices rather than increases in the real level of production. If this turns out to be the case, the rise in commodity prices will not be a blip, as they were leading into the 2008 crisis, and the prices of final goods and services will rise in response to the rise in the cost of inputs driven by an increase in total expenditures.

So far, price increases of inputs are not outside the bounds of recent precedent. Even the price of lumber experienced similar increases during the early 2000s. A jump in the producer price index in 2008 was followed by a collapse as the nature of the recession became clear in October of that year. One factor is concerning as the current recovery gains steam: the quantity of money in circulation as measured by M2 has been surging for the last year, a factor not present in past crises in the last several decades. Since expectations were depressed, the increase in M2 was an indication of higher savings rates, owing largely to expansionary fiscal policy in the form of stimulus payments and expanded unemployment benefits. We should expect that as expectations improve, at least a portion of these saved funds will be dedicated to consumption or to investment as returns to investment rise, thus increasing velocity of M2.

This might not seem to be an obvious problem since, over the last decade, the velocity of M2 has been collapsing. The main reason for this has been stricter lending regulations imposed by Basel III. Specifically, the liquidity coverage ratio acts as a quasi-reserve requirement that limits the level of riskier investments that banks may take in proportion to less risky, more liquid assets. These regulations were mostly implemented across the last decade and are likely responsible for confounding the relationship between consumer confidence and M2 velocity. As consumer confidence returns to pre-Covid-19 levels, however, it is not unreasonable to suggest that velocity of M2 will also move closer to its previous levels. Even a recovery of velocity by 10% – less than half of the fall since the start of the crisis – would significantly lift inflation and, consequently, nominal interest rates. Higher rates may create feedback driving further inflation.

Many investors have let their guard down with regard to inflation. Popular belief is that the Fed has inflation under control. The Bernanke framework that persists to this day has succeeded in preventing expansion of the Federal Reserve’s balance sheet from generating inflation. For the first time since the framework’s implementation, however, Federal Reserve policy is not erring on the side of caution. Monetary policy is intentionally supporting fiscal policy and supporting levels of indebtedness from the Federal government that are unprecedented. The result has been an explosion of M2 that increases the risk of inflation. This fiscal expansion may also aggravate confidence in the soundness of U.S. fiscal policy and, consequently, in the U.S. dollar. It is testing investor willingness to shrug off persistently elevated levels of indebtedness. There is a fair chance that policymakers will succeed. But, for the possibility of success, they risk a monetary-fiscal crisis.

‘The Purge’ by Big Tech targets conservatives, including us

Just when we thought the Covid-19 lockdowns were ending and our ability to stay afloat was improving, censorship reared its ugly head.

For the last few months, NOQ Report, Conservative Playbook, and the American Conservative Movement have appealed to our readers for assistance in staying afloat through Covid-19 lockdowns. The downturn in the economy has limited our ability to generate proper ad revenue just as our traffic was skyrocketing. We had our first sustained stretch of three months with over a million visitors in November, December, and January, but February saw a dip.

It wasn’t just the shortened month. We expected that. We also expected the continuation of dropping traffic from “woke” Big Tech companies like Google, Facebook, and Twitter, but it has actually been much worse than anticipated. Our Twitter account was banned. Both of our YouTube accounts were banned. Facebook “fact-checks” everything we post. Spotify canceled us. Medium canceled us. Apple canceled us. Why? Because we believe in the truth prevailing, and that means we will continue to discuss “taboo” topics.

The 2020 presidential election was stolen. You can’t say that on Big Tech platforms without risking cancellation, but we’d rather get cancelled for telling the truth rather than staying around to repeat mainstream media’s lies. They have been covering it up since before the election and they’ve convinced the vast majority of conservative news outlets that they will be harmed if they continue to discuss voter fraud. We refuse to back down. The truth is the truth.

The lies associated with Covid-19 are only slightly more prevalent than the suppression of valid scientific information that runs counter to the prescribed narrative. We should be allowed to ask questions about the vaccines, for example, as there is ample evidence for concern. One does not have to be an “anti-vaxxer” in order to want answers about vaccines that are still considered experimental and that have a track record in a short period of time of having side-effects, including death. One of our stories about the Johnson & Johnson “vaccine” causing blood clots was “fact-checked” and removed one day before the government hit the brakes on it. These questions and news items are not allowed on Big Tech which is just another reason we are getting canceled.

There are more topics that they refuse to allow. In turn, we refuse to stop discussing them. This is why we desperately need your help. The best way NOQ, CP, and ACM readers can help is to donate. Our Giving Fuel page makes it easy to donate one-time or monthly. Alternatively, you can donate through PayPal as well. We are on track to be short by about $4100 per month in order to maintain operations.

The second way to help is to become a partner. We’ve strongly considered seeking angel investors in the past but because we were paying the bills, it didn’t seem necessary. Now, we’re struggling to pay the bills. We had 5,657,724 sessions on our website from November, 2020, through February, 2021. Our intention is to elevate that to higher levels this year by focusing on a strategy that relies on free speech rather than being beholden to progressive Big Tech companies.

During that four-month stretch, Twitter and Facebook accounted for about 20% of our traffic. We are actively working on operating as if that traffic is zero, replacing it with platforms that operate more freely such as Gab, Parler, and others. While we were never as dependent on Big Tech as most conservative sites, we’d like to be completely free from them. That doesn’t mean we will block them, but we refuse to be beholden to companies that absolutely despise us simply because of our political ideology.

We’re heading in the right direction and we believe we’re ready talk to patriotic investors who want to not only “get in on the action” but more importantly who want to help America hear the truth. Interested investors should contact me directly with the contact button above.

As the world spirals towards radical progressivism, the need for truthful journalism has never been greater. But in these times, we need as many conservative media voices as possible. Please help keep NOQ Report going.

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