"trying to figure out whether the current inflation surge is temporary or not"
This is an enormously important question, whether the current inflation surge is temporary or not.
But to me the more curious question is -- why are we waiting to find out?
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It's difficult to find comprehensive economic data like we have today that go back in time for several decades -- and comprehensive data simply don't exist if you go back for centuries. And sometimes historical data can't help you in the present, if your present conditions are unlike other points in history.
We have not experienced a surge in the US circulating money supply like we've seen over the past 18 months except during a major war, like the Civil War, WW1, or WW2. Yet those major wars involved massive disruptions to the overall economy and the labor force, what we used to call "mobilization", as large chunks of industry switched to wartime production, and large chunks of labor were conscripted to fight. In the US, income tax rates rose to confiscatory levels during WW1 (77%) & WW2 (94%) to help pay for the huge expenses of these wars. After these major wars ended, we demobilized, switching production back to consumer goods, switching labor back to factories. Governments tried to pay down their wartime debts.
This time, the massive disruptions occurred due to quarantines and shutdowns, and the additional money supply was not used to purchase wartime materiel, but was distributed widely to families and businesses -- regardless of need -- to assist people in getting through these quarantines and shutdowns. Taxes were not increased to help pay for any of this. And I don't expect us to try to pay down our debts once this is over.
So, the volume of cash in people's hands in the US is up about 1/3 since the pandemic started. If nothing else changed, but the amount of cash in people's hands increased by 1/3, you'd expect prices to go up by 1/3, because people could bid up prices by an amount to match their extra cash.
I think this is the process we're in right now -- these so-called "supply chain" problems we're experiencing are due to people having a bunch more cash than before, and they're all bidding up prices for things like houses, cars, toys, printed books, you name it (also stocks, bonds, Bitcoin). Overall, prices of goods and services on average have only gone up about 6% compared to pre-pandemic, so there's still way more money chasing goods and services than before, and we should expect prices to keep going up another 27% or so over the next few years.
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So, yes, the current inflation surge could be "temporary" depending on how you define the term, but even if it is temporary, it seems we're still in the beginning stages of it, not the end stages. So far we've seen 6% of the 33% price hike that has been "baked in" by the massive increase in the circulating money supply.
But why is this such an important question?
It has to do with the confidence people around the world have in the US Dollar. Over the past 40 years, people around the world have come to believe the US Dollar is a stable place to park their savings. If this perception changes, then people will start to look for alternatives to the US Dollar, which will cause long-term interest rates to rise, which will make our huge personal, corporate, and government debt loads much more expensive. If people start dumping the US Dollar, such that the trading value of the US Dollar falls, then the prices of our imports will rise, which will add even more to the inflation rate, which could lead to a self-reinforcing spiral of inflation. In other words, a collapse of the US Dollar.
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But the more curious question to me, why are we waiting to find out?
During the past 40 years when inflation hit the levels we're currently seeing, the Federal Reserve acted to reduce it, they didn't wait around to see whether it was "temporary" or not.
Because they knew of the danger of a self-reinforcing spiral of inflation. We'd experienced one during the 1970s.
The current Federal Reserve is willing to wait and see whether a self-reinforcing spiral of inflation starts happening, before they'll do anything about it. That's similar to waiting to see whether the fire in the kitchen spreads to the dining room before you'll do anything about it.
The Federal Reserve knows as well as I do that they've increased the money supply by 1/3 to fight the pandemic, and that the logical result of this action would be for the general price level to increase by 1/3 as the pandemic eases. But now that inflation is rising faster than it has in over 30 years by some measures, they're supposedly waiting to see whether this rise is temporary or not.
They ought to be increasing interest rates and telling everybody that they will continue doing so until the inflation fires are stamped out. Why aren't they doing this?
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(1) Maybe they're just waiting for the pandemic to end before they do anything about inflation. They may figure the economic disruptions from the pandemic are a more serious problem than inflation, at least so far. And it seems the pandemic won't really be over for another 6-12 months or so?
(2) Maybe they think stopping a self-reinforcing spiral of inflation is an easy thing for them to do, if it becomes necessary. They may feel confident that if the US Dollar starts slipping, they can quickly fix it with some serious interest rate hikes.
(3) Maybe they're waiting until after President Biden renominates the current Chair of the Federal Reserve Board -- hey, Biden, we're your friend, see, we aren't increasing interest rates, so renominate us! After the Chair is safely reappointed, then they can increase rates to fight inflation and Biden can't do anything about it.
(4) Maybe they aren't any smarter than I am LOL, and they don't know what they're doing, don't know what risks they're taking.
(5) Maybe they're more worried about tanking the stock & bond market bubbles with higher interest rates than about inflation. But eventually the stock & bond markets will begin to worry about inflation. This may already be starting now.
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It would be different if the US Dollar were still backed by gold, like it was prior to 1933. Before then, inflation was always eventually balanced by an equivalent deflation, regardless of what the central bankers did, because increases in the money supply had to be taken back. But once the US Dollar wasn't backed by anything, then it was possible for an inflationary spiral to take hold, like we saw during the 1970s.
Although FDR closed the "gold window" for individuals in 1933, after WW2 foreign countries still had the ability to turn in their excess US Dollars for gold. They rarely did this, which allowed the US to pretend the US Dollar was still fully backed by gold even as the money supply kept increasing. But then as inflation began to warm up during the 1960s, foreign countries started turning in their excess US Dollars for gold, and Nixon had to close the gold window for good to conserve our gold supply.
So there is nothing backing US Dollars except the confidence of those who hold US Dollars. Inflation at the level we're seeing could set off a run on the US Dollar. Normally, the Federal Reserve would be doing something about this. Instead, they're waiting to see whether this inflation is temporary or not.
A prudent investor would not sit around and wait. They'd start looking for alternatives to the US Dollar, and they'd rightly expect that interest rates must rise, perhaps by a lot, to stamp out these inflationary fires.
But to me the more curious question is -- why are we waiting to find out?
-----
It's difficult to find comprehensive economic data like we have today that go back in time for several decades -- and comprehensive data simply don't exist if you go back for centuries. And sometimes historical data can't help you in the present, if your present conditions are unlike other points in history.
We have not experienced a surge in the US circulating money supply like we've seen over the past 18 months except during a major war, like the Civil War, WW1, or WW2. Yet those major wars involved massive disruptions to the overall economy and the labor force, what we used to call "mobilization", as large chunks of industry switched to wartime production, and large chunks of labor were conscripted to fight. In the US, income tax rates rose to confiscatory levels during WW1 (77%) & WW2 (94%) to help pay for the huge expenses of these wars. After these major wars ended, we demobilized, switching production back to consumer goods, switching labor back to factories. Governments tried to pay down their wartime debts.
This time, the massive disruptions occurred due to quarantines and shutdowns, and the additional money supply was not used to purchase wartime materiel, but was distributed widely to families and businesses -- regardless of need -- to assist people in getting through these quarantines and shutdowns. Taxes were not increased to help pay for any of this. And I don't expect us to try to pay down our debts once this is over.
So, the volume of cash in people's hands in the US is up about 1/3 since the pandemic started. If nothing else changed, but the amount of cash in people's hands increased by 1/3, you'd expect prices to go up by 1/3, because people could bid up prices by an amount to match their extra cash.
I think this is the process we're in right now -- these so-called "supply chain" problems we're experiencing are due to people having a bunch more cash than before, and they're all bidding up prices for things like houses, cars, toys, printed books, you name it (also stocks, bonds, Bitcoin). Overall, prices of goods and services on average have only gone up about 6% compared to pre-pandemic, so there's still way more money chasing goods and services than before, and we should expect prices to keep going up another 27% or so over the next few years.
-----
So, yes, the current inflation surge could be "temporary" depending on how you define the term, but even if it is temporary, it seems we're still in the beginning stages of it, not the end stages. So far we've seen 6% of the 33% price hike that has been "baked in" by the massive increase in the circulating money supply.
But why is this such an important question?
It has to do with the confidence people around the world have in the US Dollar. Over the past 40 years, people around the world have come to believe the US Dollar is a stable place to park their savings. If this perception changes, then people will start to look for alternatives to the US Dollar, which will cause long-term interest rates to rise, which will make our huge personal, corporate, and government debt loads much more expensive. If people start dumping the US Dollar, such that the trading value of the US Dollar falls, then the prices of our imports will rise, which will add even more to the inflation rate, which could lead to a self-reinforcing spiral of inflation. In other words, a collapse of the US Dollar.
-----
But the more curious question to me, why are we waiting to find out?
During the past 40 years when inflation hit the levels we're currently seeing, the Federal Reserve acted to reduce it, they didn't wait around to see whether it was "temporary" or not.
Because they knew of the danger of a self-reinforcing spiral of inflation. We'd experienced one during the 1970s.
The current Federal Reserve is willing to wait and see whether a self-reinforcing spiral of inflation starts happening, before they'll do anything about it. That's similar to waiting to see whether the fire in the kitchen spreads to the dining room before you'll do anything about it.
The Federal Reserve knows as well as I do that they've increased the money supply by 1/3 to fight the pandemic, and that the logical result of this action would be for the general price level to increase by 1/3 as the pandemic eases. But now that inflation is rising faster than it has in over 30 years by some measures, they're supposedly waiting to see whether this rise is temporary or not.
They ought to be increasing interest rates and telling everybody that they will continue doing so until the inflation fires are stamped out. Why aren't they doing this?
-----
(1) Maybe they're just waiting for the pandemic to end before they do anything about inflation. They may figure the economic disruptions from the pandemic are a more serious problem than inflation, at least so far. And it seems the pandemic won't really be over for another 6-12 months or so?
(2) Maybe they think stopping a self-reinforcing spiral of inflation is an easy thing for them to do, if it becomes necessary. They may feel confident that if the US Dollar starts slipping, they can quickly fix it with some serious interest rate hikes.
(3) Maybe they're waiting until after President Biden renominates the current Chair of the Federal Reserve Board -- hey, Biden, we're your friend, see, we aren't increasing interest rates, so renominate us! After the Chair is safely reappointed, then they can increase rates to fight inflation and Biden can't do anything about it.
(4) Maybe they aren't any smarter than I am LOL, and they don't know what they're doing, don't know what risks they're taking.
(5) Maybe they're more worried about tanking the stock & bond market bubbles with higher interest rates than about inflation. But eventually the stock & bond markets will begin to worry about inflation. This may already be starting now.
-----
It would be different if the US Dollar were still backed by gold, like it was prior to 1933. Before then, inflation was always eventually balanced by an equivalent deflation, regardless of what the central bankers did, because increases in the money supply had to be taken back. But once the US Dollar wasn't backed by anything, then it was possible for an inflationary spiral to take hold, like we saw during the 1970s.
Although FDR closed the "gold window" for individuals in 1933, after WW2 foreign countries still had the ability to turn in their excess US Dollars for gold. They rarely did this, which allowed the US to pretend the US Dollar was still fully backed by gold even as the money supply kept increasing. But then as inflation began to warm up during the 1960s, foreign countries started turning in their excess US Dollars for gold, and Nixon had to close the gold window for good to conserve our gold supply.
So there is nothing backing US Dollars except the confidence of those who hold US Dollars. Inflation at the level we're seeing could set off a run on the US Dollar. Normally, the Federal Reserve would be doing something about this. Instead, they're waiting to see whether this inflation is temporary or not.
A prudent investor would not sit around and wait. They'd start looking for alternatives to the US Dollar, and they'd rightly expect that interest rates must rise, perhaps by a lot, to stamp out these inflationary fires.