Socialism rejects human action and economic calculation and sells a false image of a government that can create wealth at will by issuing more units of fiat currency. Obviously, when inflation arrives, the socialist government will use its two favorite tools: propaganda and repression. Propaganda, which accuses stores and businesses of driving up prices, and repression, which occurs when social unrest intensifies and citizens legitimately hold governments accountable for scarcity and high prices, are the two main strategies.

If you want lower prices, you need to give less economic power to the government, not more. Only free markets, competition, and open economies help decrease consumer prices. Many readers might think that we currently have a free market with competitive and open economies, but the reality is that we live in increasingly intervened and overregulated nations where central banks and governments work to perpetuate unsustainable public deficits and debt. Therefore, they continue to print more money, leading many to question why it is getting harder for families to make ends meet, buy a home, or for small businesses to prosper. The government is slowly eating away the currency it issues. They call it “social use of money.”

What is “social use of money”? In essence, it means abandoning one of the main characteristics of money, the reserve of value, to give the government preferential access to credit to finance its commitments. Therefore, the state can announce larger entitlement programs and increase the size of the public sector relative to the economy, creating a self-fulfilling prophecy. The state issues more currency, which makes people’s money less valuable. Citizens become more dependent on the state, and they will demand more subsidies paid in the currency the state issues. It is, in essence, a process of control through debt and currency depreciation.

When governments and central banks talk about price stability, it means a two percent annual depreciation of the currency. Aggregate prices rising an average of two percent is hardly price stability because it is measured by the consumer price index, which is a carefully crafted basket of goods and services weighted by the same people who print the money. That is why governments love CPI as a measure of inflation. It fails to fully reflect the erosion of the currency’s purchasing power. This is why the CPI’s basket calculation fluctuates so frequently. Even if it accurately measures, it will underestimate the rise in prices of non-replaceable goods and services by adding them to a basket of things we consume maybe once or twice a year at best. When you put together shelter, food, health, and energy with technology and entertainment, there will always be distortions.

Thus, governments and central banks are never going to defend price stability. If aggregate prices fell, competition soared, and citizens saw their real wages rise and their deposit savings increase in real value, their jobs would disappear.

When a central bank like the Fed cuts rates and increases the money supply after an accumulated 20.4% inflation in four years, it is not defending price stability; it is defending price increases. This strategy serves to conceal the government’s financial insolvency. A currency with a declining value.

Governments are the ones that create inflation by spending a currency that is constantly losing purchasing power because the state issues more than what the private sector demands. No corporation or allegedly evil oil producer can make aggregate prices rise and continue increasing annually at a lower pace. Only the one that prints the money, and central banks don’t print money because they want to; they increase the money supply to absorb rising public deficit spending.

Inflation is a hidden tax, a slow process of nationalization of the economy, and the perfect way to increase taxes without angering voters and blaming private businesses in the meantime. The consumer will likely blame the store or business for higher prices, not the issuer of a currency that loses purchasing power.

Why would governments want higher prices? Because it gives them more power. Destroying the currency they issue is a perfect form of control. That is why they need more debt and higher taxes. High taxes are not a tool to reduce debt, but rather to justify rising public indebtedness.

You may have read numerous times that the government has unlimited borrowing power and can manage inflation to allow you to live comfortably. It is false. The government cannot issue all the debt it wants. It has an inflationary, economic, and fiscal limit.

Inflation is a warning sign of declining currency confidence and a loss of purchasing power. The economic limit is evidenced by lower growth, lower employment, weaker real wages, secular stagnation, and declining foreign demand for public debt.

The fiscal limit is evidenced by soaring interest expenses even with low rates, weaker receipts every time they hike taxes, and citizens and businesses leaving the country to more friendly tax systems, all of which add to the poor or negative multiplier effect of government spending.

If you want lower prices, you should give less economic power to governments, not more.

A government that tells you it will borrow $2 trillion per annum in a growth and record receipt economy and will continue to increase debt and borrow well into 2033 with the most optimistic assumptions of GDP and receipt is telling you it will make you poorer.

When a politician promises that he or she will cut prices, they are always lying. A weaker currency is a tool to increase government power in the economy. By the time you find out, it may be too late.

Money is credit, and government debt is fiat currency. Currency depreciation is inflation, and inflation is equivalent to an implicit default. No interventionist government or central bank wants lower prices because inflation allows the government to increase its power while slowly breaching its monetary commitments.

However, the Bureau of Labor Statistics published the latest CPI at 2.9%, despite annual inflation being 1.4% when she took office. Inflation is a disguised tax and accumulated inflation since January 2021, when the Biden-Harris administration started, has increased more than 20%.

Of course, Democrats blame inflation on the war, the pandemic, and the science-fantasy concept of “supply chain disruptions.” No one believed it, because most commodities have declined and supply tensions disappeared back to normality, but prices continued to rise.

As a result, Harris invented the concept of greedy grocery stores and evil corporations to blame for inflation and justify price controls. Is it not ironic? She blames grocery stores and corporations for inflation, but when price inflation drops, she proudly takes credit.

The reality is that the Kamala Harris plan, like all interventionist governments, creates and strives for inflation. Inflation is a hidden tax. Governments love it and perpetuate it by printing money through deficit spending and imposing regulations that harm trade, competition, and technological creative destruction. Big government is big inflation.

Inflation is the way in which the government tricks citizens into believing that administrations can provide for anything. It disguises the accumulated debt, quietly transfers wealth from the private sector to the government and condemns citizens to being dependent hostages of government subsidies. It is the only way in which they can continue to spend a constantly depreciated currency and present themselves as the solution. Furthermore, it is the perfect excuse to blame businesses and anyone else who sells in the currency that the government creates.

Kamala Harris will do nothing to cut inflation because she wants inflation to disguise the monster deficit and debt accumulation. In the latest figures, the deficit has soared to $1.5 trillion in the first ten months of the fiscal year. Public debt has soared to $35 trillion, and in the administration’s own forecasts, they will add a $16.3 trillion deficit from 2025 to 2034. It is worse. The previously mentioned figure does not include the $2 trillion in additional debt coming from Kamala’s economic plan.

Harris is aware that her proposals to impose an unrealized capital gains tax, an economic aberration, and other tax hikes will not generate the $2 trillion in additional taxes she seeks. So, she needs the Fed to monetize as much as possible, eroding the US dollar’s purchasing power and making all Americans poorer in the process, only to blame corporations and grocery stores later. Furthermore, it is a way to present the government as the solution to the problem they create, promising the lunacy of price controls and enormous subsidies in a constantly depreciated currency.

It is a perfect plan to nationalize the economy in the style of Peronist socialism in Argentina.

Increase spending, deficits, and debt, making the size of government larger on the way in. Monetize as much debt as possible and cut rates to make it easier for the bankrupt government to borrow. When deficits balloon and inflation soars, increase taxes to the private sector and hike rates, which increases further the size of government in the economy. And you blame corporations?

Governments do not reduce prices. Governments create and perpetuate inflation by printing currency that loses value every year.

Corporations, landlords, and grocery stores do not create or increase inflation; they reduce it through competition and efficiency. Even if all corporations, grocery stores, and landlords were evil and stupid at the same time, they would not make aggregate prices rise and consolidate a constant trend of increases. For the same quantity of money, even a monopoly would not be able to increase aggregate prices. The only one that can make aggregate prices rise, consolidate, and continue increasing, although at a slower pace, is the government issuing and printing more currency than the private sector demands.

By admitting that the deficit will soar by $16.3 trillion in ten years in a budget that expects record revenues, no recession, and continued employment growth, the Harris team is conceding that they will strive for inflation to dilute the currency in which that debt is issued… and make you poorer.

Interventionists argue that the government does not have a budget constraint, only an inflation constraint, and can always tax the excess money in the system. Beautiful. This implies an increase in the size of the government during periods of economic expansion and further government expansion during periods of perceived normalcy. The government receives an enormous transfer of wealth from the productive sector, resulting in the creation of a dependent citizen class.

High taxes are not a tool to reduce debt. High debt and high taxes are tools to confiscate the productive sector’s wealth and create a subclass of dependent citizens.

Socialism redistributes middle-class wealth to bureaucrats, not rich to poor.

Massive government spending, constantly increasing taxes, and printing money. A plan to reduce the economy to serfdom.

Harris’ economic plan is not aiming to reduce inflation but to perpetuate it. Indeed, this economic policy mirrors Argentina’s 21st-century socialism, and it threatens the US dollar’s status as the world’s reserve currency. The government does not determine the level of confidence in a currency. When confidence in a currency declines, it does so quickly. Saying it will not happen in the US because it has not occurred yet is the equivalent of driving at 200mph and saying, “We have not killed ourselves yet; accelerate.”.

About the Author

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers “Life In The Financial Markets” and “The Energy World Is Flat” as well as “Escape From the Central Bank Trap”. Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

Investors are turning to utilities and real estate stocks, but these sectors need more than low rates; they need a buoyant economy and strong consumer demand, so interest rate decisions may be insufficient.

If we look at the long-term trend, the market remains in a cyclical bullish mode, but we need to understand why and be aware of the rise in volatility.

Markets have been rising, discounting an ever-increasing money supply and future currency debasement. However, the next wave of central bank easing may not come until 2025.

Fundamentals may have been weak and earnings not as robust as required by demanding valuations, but investors understand that the fiscal challenges posed by rising government expenditure and public debt will ultimately mean ultra-loose monetary policies, which make sovereign bonds more expensive, erode currency purchasing power and, by comparison, make equities and risky assets more attractive.

Investors may continue to accept higher valuations for equities and risky assets because they fear monetary and fiscal insanity more than they are concerned about a recession.

It is not that markets like fiscal imprudence. Extreme monetary policies erode the currency’s purchasing power, and equities and risky assets become protection for real inflation. Murray Rothbard calculated the true money supply (TMS), which is the most realistic indicator of inflation. As Professor Joseph Salerno explains, “three items which are not included in any Fed measure of the money supply (Ml, M2, M3) or even of overall “liquidity” (L) find a place in the TMS.”. These are the demand and other deposits held by the U.S. government, foreign official institutions, and foreign commercial banks at “U.S. commercial and Fed banks.”.

When we look at True Money Supply, we can understand what market participants really look at for a bullish market trend, even if they may not be calculating it in the Rothbard way. The available money for market transactions. The quantity of money that is put to work to generate a return that offsets inflation. “Liquidity,” as most market participants call it.

Mike Shedlock, a great macroeconomic analyst and investor, discusses these important differences when analyzing money growth because they basically give us an idea of the buying or selling pressure in a market. The True Money Supply (TMS) includes the currency component of M1, total checkable and savings deposits, as well as U.S. government deposits, note balances, and demand deposits from foreign banks and public institutions. Any market trader understands this when they are talking of “cash on the sides,” “high liquidity,” and “bullish sentiment.”. All these money measures, when rising, indicate stronger demand for risky assets looking for a return. Alternatively, Professor Frank Shostak’s definition of total money supply includes cash plus demand deposits with commercial banks and institutions plus government deposits with banks and the central bank.

Why are these measures more important than the traditional M2 and M3 money aggregates? Because they show us the level of buying pressure in the market.

Many Keynesian economists see deposits and savings accounts as idle money and invented the ludicrous “excessive savings” concept. There is no such thing as excessive savings or idle money. The reason they see those savings as negative is because their political view of economics perceives that any money not spent by the government is not productive. Far from it. Those savings and deposits are invested in the capital markets and are the key to originating lending, investment, and growth in the real economy. Keynesians tend to think of the “social use of money,” which means more printing of currency through deficit spending, because they mostly perceive that the government is the only one making a real social use of currency issued. However, inflationism is not a social policy but a tool for serfdom that creates hostage clients of citizens by destroying the purchasing power of their wages and deposit savings. It is a transfer of wealth from the middle class to the government.

Once we understand that what matters for market participants is the elusive “liquidity” and “sentiment” perception and that bullish sentiment and liquidity come from a rising true money supply, while bearish signals arise from a decline in this measure of liquidity, then we can understand that the allegedly hawkish messages of central banks disguise a much looser policy than headlines suggest. Furthermore, using any of the different measures of true money supply previously mentioned, we can understand why market participants try to defend their clients from the current and future loss of purchasing power of the currency by taking more risk and accepting higher valuations for growth assets.

Most market participants are aware that higher liquidity injections will mask the current fiscal imbalances. Unsustainable deficit spending is money printing, which creates strong long-term pressure on the purchasing power of fiat currencies. Thus, market corrections are always an opportunity to buy stocks and risky assets that will always rise in value in fiat currency terms because the unit of measure, money, loses purchasing power.

Once it is established that fiscal insanity will make currencies fall in value and, consequently, markets denominated in that currency rise, investors need to understand the timing and where to invest.

The difficulty this time is that now we have persistent inflation and central bank losses in their bond portfolio. Thus, timing is essential. The lag effect of a market correction and its subsequent bounce may be longer. It will happen, but we need to guess when.

After the Fed decided to hold rates steady at its two-day meeting, equities slumped, even though Powell seemed to signal that rate cuts could be coming as soon as September. Markets discounted a slump in liquidity, therefore lowering buying pressure. Hence, multiple compressions. Rate cuts do not signal a healthy economy but a slowing one, so equities slump despite the promise of a rate cut because investors continue to see lower buying pressure.

Even with the bounce after Black Monday, most indices remain significantly below the level when markets started to weaken on July 22. The lag effect of the true money supply started to show its effect on March 13. The Nasdaq and the S&P 500 were leading markets that had begun to slow down and pointed to lower highs and deeper lows.

What can we learn ahead of the next bullish wave of money growth? First, pay attention to the components mentioned above and their trends. Second, analyze when the Fed may start a true easing path, being realistic. The trend now signals liquidity drying up. There may not be a recession, but monetary buying pressure is slowing down markedly. The tap is not closed, but the flow is slow.

The Fed may cut rates in September, but that is only realizing that the economy is weaker than headlines suggest. A rate cut of 25 or 50 basis points is unlikely to generate an immediate burst in credit demand or rising deposits. Hence, the truly bullish signal would come when the Fed returns to purchasing mortgage-backed securities and treasuries. However, that may not happen until elections have passed and there is clarity about the next chairman of the Fed. We may be talking about March 2025.

Before that money growth bounces abruptly and leads to the next multiple expansion phase, we must remember the lessons of this correction. So-called defensive indices do not protect investors. Japan and Europe remain bad options in a liquidity drought. Cryptocurrencies do not show defensive qualities and their correlation to US tech stocks remains elevated. Gold is a better defense against a market correction than most risky assets, and commodities do not perform well in a slowing economy with diminishing liquidity.

Most investors will look at the recent slump with prudence, knowing they need to leave some dry powder (less liquidity, less buying pressure) to take advantage of opportunities.

In this era of monetary insanity, ignoring the macroeconomic, geopolitical, and earnings’ realities may lead to excessive risk-taking and significant losses in a correction. We must consider the fundamentals when looking at buying opportunities and pay attention to when liquidity will flow back to capture the currency debasement trend that leads to the next bull market. It’s not easy. Risks accumulate slowly but manifest quickly, and we tend to blame one catalyst instead of the complacency built after years of fiscal and monetary excess.

The next wave of monetary excess will be more aggressive than the past one, that is guaranteed. That means markets will soar again. However, timing is key… and it may take a few painful months to arrive.