Inflation Is Shortages And Thankfully Transitory

However, I’m not convinced these trends will hold. To me, the deck looks stacked against inflation. Its misinterpretation may present trading opportunities.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world (emphasis added). Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement (emphasis added). Inflation has risen, largely reflecting transitory factors.

Federal Reserve’s FOMC statement, April 28, 2021

It’s rare that I agree with Federal Reserve (Fed) officials. However, I fall firmly in the “transitory” camp when it comes to today’s inflation. It’s not that I think the Fed has been a good steward of the U.S. dollar’s value. Rather, it’s that inflation has little to do with monetary policy anymore. It’s the way in which we define inflation that makes me a secular deflationist. You see, I’m an optimist. I simply expect human ingenuity to prevail.

The U.S. 10-year treasury rate (blue) has nearly tripled from its all-time lows and commodities (purple) are rocketing higher as CPI (red) has increased.
The U.S. 10-year treasury rate (blue) has nearly tripled from its all-time lows and commodities (purple) are rocketing higher as CPI (red) has increased.

Inflation’s meaning has stealthily changed

We take inflation’s meaning for granted today. It’s a foundational concept for valuing bonds that rolls off the tongues of laymen as easily as experts. There are volumes of books chronicling it, reams of academic literature analyzing it, and scores of metrics to measure it. Inflation is one of the most studied and commonplace financial concepts in the culture.

Yet, inflation is completely misunderstood today. Its definition has evolved over the years; however, many hold on to its old one which no longer applies. Inflation once meant the debasement of a monetary standard of value. Today, it simply means “price increases.” These are very different definitions with equally distant implications.

A historical look at the origin and uses of the word inflation, arguing that although the term has become nearly synonymous with “price increase,” its original meaning—a rise in the general price level caused by an imbalance between the quantity of money and trade needs—is the definition driving many of those who advocate an anti-inflation policy for the Federal Reserve.

Michael F. Bryan, completely misunderstood

All is not “on average”

Monetary debasement is a ubiquitous condition that applies to all goods, services, and actions. Nothing is spared since the standard unit of value itself is altered. It is also an instantaneous event occurring on the date of (political) decree. Imagine doubling the definition of an inch one day. Everything would instantly measure smaller in these new inch terms no matter what you measured; all that was four inches would now measure two. This is inflation’s historical use.

“Price increases”, on the other hand, are completely different. Prices routinely fluctuate with commercial conditions—as supply and demand dynamically shift. They are an economic phenomenon unique to each good and service that garners a price. Some go up and some go down, but all do not move together, even if they appear to do so on average.

In other words, all is not the same as “on average.”

Money defines value and requires a standard

Recognize that inflation today means growth in the consumer price index (CPI). It bears no resemblance to its former definition of monetary (standard) debasement. Yet, we still treat inflation the same. While inappropriate, I nonetheless sympathize with the usage. Economies require an independently observable measure for money, just as they do for length and time.

Grasping money’s meaning is simple when its units are defined. Under a gold standard, for example, a dollar was equivalent to a fixed weight of gold. While it may seem arbitrary, it’s anything but. A fixed weight of gold requires a certain amount of effort to produce. It’s a value that anyone can wrap his/her head around, irrespective of one’s familiarity with gold mining. Thus, a dollar’s meaning was relatable to all and objective.

Remember, money is an abstraction. It’s a placeholder for real-world value in fungible form. Money represents goods and services that we already produced and those that we will come to purchase in the future. It’s not arbitrary nor a subjective social contract. It’s a literal measurement of the fruits of our labor.

However, there is no monetary standard for value in a fiat currency regime, by definition (i.e. fiat)! A dollar, to continue with our example, is simply worth whatever it will fetch in trade. Thus, it has different values to different people. It is subjective. While innocent sounding in theory, it’s a disaster in practice.

Imagine remodeling your kitchen using vendors that each had its own measurement standard. Coordination becomes impossible. How could you know which oven to order, or how many tiles you need, or if the cabinets fit together? Each item would come in sizes that bear no resemblance to each other. Ultimately, you’d need to guess with your orders and then modify and/or rebuild each item yourself once they arrived to fit the spaces; assuming you even could. The remodel would be highly inefficient and a complete disaster by today’s standards.

The same standard requirements apply to value, and thus to money. Money is abstract so it’s harder see, but it’s nonetheless real. To be sure, we get this. The inherent need to relate money’s denominations to our actual lives has led people to CPI (as fiat regimes lack any). While we don’t actually define a dollar’s economic value, we do try to track its relative fluctuations. When CPI grows, we call that inflation; when it falls, we say there’s deflation. It’s valiant attempt, really. Nonetheless it’s problematic. The result is doom: either for inflation or prosperity.

Inflation is shortages

Today, inflation can only result in doom. Either CPI continues to decline—wiping inflation from the face of the planet—or the arc of human prosperity reverses course. They cannot coexist.

Just think for a moment: How can deflation—falling prices and improving quality of goods and services —be bad? They are literally the calling cards of prosperity. Consider that, according to one study, “an unskilled laborer saw his or her purchasing power double every 34 years” over the last hundred years when scaling food prices to wages. That’s some serious deflation! Yet, is there any doubt that life is better now?

Humans being humans—and companies being collections of us—are driven to improve our circumstances. We are profit maximizers in a deeply profound and inspiring way. Businesses do this by lowering prices while increasing operational efficiencies that result in higher volumes, margins, and profits—the ultimate goal. So long as economies stay free, companies will work to debottleneck supply chains, increase production, and grow profits. This means lower prices to come. Inflation should go extinct.

Yet, today we find ourselves with rising prices and growing CPI. Why? Did the central bankers finally get monetary policy “right” and achieve their inflation goals? Did legislatures perfect their fiscal spending budgets? No, not lowering interest rates to zero (and below), nor endlessly buying bonds, nor spending trillions on stimulus had any impact on CPI growth.

Rather, today’s intensifying inflation was caused by the global lockdowns. Inflation only came from severe economic disruptions, mass unemployment, and bankruptcy. Inflation resulted from shortages.

Just let that sink in for a moment.

There’s opportunity in transitory

Thus, I believe today’s inflation is transitory. Forced lockdowns and abrupt economic restarts created widespread shortages that should prove to be temporary. Companies and people will get back to work and solve these supply chain bottlenecks in order to meet the unyielding demand. It’s what we do: seek to improve our lives.

However, these actions will take time to implement. Price changes filter slowly throughout the economy, both increases and decreases. How long a lag—weeks, months, years—will be specific to each good and service as companies react with varying abilities and speeds. Remember, inflation today is the average price change. By definition, it will transition, not leap like a debasement.

Thus, CPI growth could continue to trend up before it ultimately falls. This may have important implications for various assets like bonds and commodities that correlate to these moves. Trading opportunities may be created—in both directions—if people mistake “on average” for all.

No better cure for high prices than high prices

The recent rise in inflation has understandably captured the market’s attention. It’s an important valuation component for many asset classes and thus has significant investment implications. Furthermore, runaway inflation is a popular doomsday scenario. People are naturally concerned that Fed will be late to act.

However, inflation’s link to monetary policy is a relic. Inflation’s definition changed over the years. It no longer means the debasement of a monetary standard. There simply is no monetary standard to debase in a fiat currency regime. The Fed plays no role.

Today, inflation simply means “price increases”—on average—of some defined basket of goods and service. Prices are determined by supply and demand dynamics throughout the entire economy, not monetary policy. People and corporations seek to lower prices in order to maximize profits and prosperity. Inflation is caused by shortages. Hence, it’s rising in the post-COVID-lockdown economy as demand returns to a shrunken supply base.

Today’s rise in prices is nothing to fret. It bears no resemblance to the hyperinflation experienced by the Weimar Republic, Zimbabwe, or Venezuela. While certainly unpleasant, the CPI growth is simply the market doing what it’s supposed to do. Soon enough, enterprising people will debottleneck supply chains to meet demand and lower prices. Deflation will surely return so long as people are free, though it will take some time.

To be sure, trading opportunities may be created if people conflate inflation’s historical and contemporary definitions. Remember though, there’s no better cure for inflation than inflation.

Gold Price During Hyperinflation

Let’s start by defining hyperinflation…

“Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.” (source)

In addition, hyperinflation is described as “an extreme case of monetary devaluation that is so rapid and out of control that the normal concepts of value and prices are meaningless.”

The latter description is much more characteristic of the potential threat that most people envision when they invoke the term hyperinflation.

Before answering that, let’s look at what happened to the prices of bread and fuel.

The lady pictured above is stuffing German marks into her wood burning stove. Such action was cheaper since the paper currency would burn longer than the amount of firewood they could afford to buy with the worthless ‘money’.


During a period of stabilization for approximately six months during 1920, 1400 German marks was equal to 1 oz. gold. Three years earlier the ratio was 100 marks to 1 oz. gold.

However, a fourteen-fold increase in the ratio of marks to gold was nothing compared to what was about to happen.

“By July 1922, the German Mark fell to 300 marks for $1; in November it was at 9,000 to $1; by January 1923 it was at 49,000 to $1; by July 1923, it was at 1,100,000 to $1. It reached 2.5 trillion marks to $1 in mid-November 1923, varying from city to city.” (source)

Using the ratio of 1 trillion marks to the US dollar in July 1923, the equivalent price for one ounce of gold was 20 TRILLION German marks!


Germany (Weimar Republic) had rejected gold convertibility and abandoned the gold standard prior to the end of World War I. Since their obligations to pay reparations resulting from their activities during the war required them to remit funds in hard currencies, they continued to ramp up the presses.

Any plans to borrow money had been abandoned earlier. They printed whatever marks were needed in order to buy other currencies which they could use to pay their obligations, and hopefully chase away the inflationary effects of their efforts.

Here is another example of how those effects translated in real life…

“A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. “If you want to save money,” he was told, “and you want two cups of coffee, you should order them both at the same time.”

If we use a price of 5 cents per cup of coffee in US dollars, then the ratio at that time was 140,000 marks to $1. Even though the worst was yet to come, this still represents a 27,900 percent increase in the price of a cup of coffee from five years earlier.

At one point in 1923, the price for one loaf of bread was more than 200 billion marks.


Some (not just a few) people today think that the higher the gold price goes, the richer they will be. That is not the case.

One ounce of gold in 1920 was the equivalent 1400 German marks. Three years later, that same ounce of gold was priced at the equivalent of 20,000,000,000,000 German marks.

If you were prescient enough to secure to yourself one ounce of gold before the fun started, you could have become a multi-trillionaire almost overnight. Great!

Now, how will you spend your money? Better get something to eat first before tackling a plan for your finances. You could buy a loaf of bread for two hundred billion marks and a cup of coffee for fifty billion marks.

If you buy the loaf directly from the baker, you might score a free cup of coffee. Nobody even knows what price to charge for a cup of coffee anyway, and the baker desperately needs to sell that bread. He is only inclined to make that offer if he is paid in gold, though.

You decide to buy five loaves since you don’t know how much bread will cost next week. You give the baker 1/20th oz of gold which is the equivalent of one trillion marks ( 5 loaves x 200 billion marks = 1 trillion marks). You and your friends enjoy drinking the five free cups of coffee and you break bread with them.

You are not as jovial as you were before your purchase, though. You know that you are not as rich, either. Doing some quick math, you realize that if you spend 1/20th oz gold every day, you will be a pauper again in three weeks.

What you could buy with your gold after its price went up did not make you rich. The value of your gold is the same as it was three years earlier. The price for the bread and coffee is the same as it was just a few years earlier: 1/20th oz of gold.


If you own gold and are betting on a much higher gold price because you expect hyperinflation anytime soon, don’t expect to be any richer than you are now. The higher price for gold will only compensate you for the loss in purchasing power of the US dollar

(also see Gold’s Singular Role)

Kelsey Williams is the author of two books: Gold’s Singular Role  and  Gold’s Singular Role

NZ Business Confidence Takes a Hit; China’s factory Deflation Eased in July,

The Asia-Pacific news was relatively light early Monday. Japan is on a bank holiday which dampened some of the volatility in the Forex market. The Australia and New Zealand Banking Group released its latest data on New Zealand Business Confidence and China revealed consumer and producer inflation data.

ANZ Survey Shows Business Confidence Settling Lower as ‘Lockdown Relief’ Fades

New Zealand business confidence took another hit, according to the latest survey data collected by ANZ.

The bank said preliminary data for August showed a 10-point decrease in the firms’ assessment of economic conditions, with a net 42 percent of business owners forecasting tougher times in the year ahead.

Business’ assessment of their own future activity also deteriorated with a net 17 percent expecting to fare worse, compared to a net 9 percent in its July survey.

ANZ warned at the end of July that a bounce in business confidence earlier in the month appeared to have run out of steam.

Chief economist Sharon Zollner said its latest numbers added to the evidence that the “post-lockdown rebound’ might have run its course.

China’s Factory Deflation Slows in July as Recovery Gains Strength

China’s factory deflation eased in July, driven by a rise in global oil prices and as industrial activity climbed back towards pre-coronavirus levels, adding to signs of recovery in the world’s second-largest economy, Reuters reported.

The producer price index (PPI) fell 2.4% from a year earlier in July, the National Bureau of Statistics (NBS) said in a statement on Monday, compared with a 2.5% decline tipped in a Reuters poll of analysts and a 3.0% drop in June.

Analysts say China’s industrial output is steadily returning to levels seen before the pandemic paralyzed huge swathes of the economy, as pent-up demand, government stimulus and surprisingly resilient exports propel a recovery, according to Reuters.

Despite ramped-up fiscal stimulus there are still issues. PPI rose 0.4% on a monthly basis, unchanged from the increase in June, pointing to strains on construction and production work caused by recent floods in southern China. Some economists have warned the recovery could stall amid cautious consumer spending and a resurgence in global infections.

Consumer inflation also picked up in July as the bad weather pushed food prices higher. The consumer price index (CPI) rose 2.7% from a year earlier, its fastest pace in three months and compared with an expected 2.6% increase and a 2.5% rise in June.

Core inflation, which excludes food and energy costs, rose a mere 0.5% in July from a year earlier.

For a look at all of today’s economic events, check out our economic calendar.

The Phantom Threat of Inflation and Fears of Covid-19’s Second Wave

This is associated with the emergence of a new sickness case in Wuhan, which brings back fears of a second wave of spread after the restrictions were lifted.

At the same time, the global picture clearly shows a decrease in the number of new infections and deaths in the past 24 hours. In our opinion, we should look for other reasons behind the difficulties of market growth. The US Treasury is draining market liquidity by placing unprecedented amounts of government bonds to finance support packages.

While the US Treasury is “vacuuming” the market, the demand for dollars remains high. Besides, the Fed has sharply reduced the scope of asset purchases on its balance sheet, which has lessened support for markets.

At the same time, investors take profit in those securities, which offset the decline of February-March. Sales on growth seem to be the prevailing strategy in recent days. The focus is on those shares that can benefit from the global economic slowdown.

First of all, these are producers of essential goods and grocery store chains. At the same time, there is a rupture in the supply chains of products, which makes us think about the risks of food inflation in the coming months.

Food does not play a significant role in today’s spending structure, with just 14% of expenditures. So, we are likely to see food prices increase along with a decline in the overall volume in the food industry in the coming months.

The inflation data published in China this morning showed a slowdown in consumer price growth in April to 3.3% YoY from 5.4% in January. The decline in producer prices accelerated to 3.1%, indicating a deflationary trend for almost a year.

Later this afternoon, the US data will be published, which is expected to show a slow down of CPI to 0.4% YoY, the lowest level in almost five years. Excluding energy and food prices, it is expected to slow to 1.7% YoY from 2.4% at the peak in February. Surprisingly, this indicator risks coming under pressure in the nearest months, justifying a softening of monetary policy.

But if we look further, the impending reboot of the logistics chain risks is becoming a severe factor in favour of rising inflation. Globalization was previously a crucial deflationary factor. Deglobalization promises to drive prices up, which is bad for the poorest countries as well as the rich.

By Alex Kuptsikevich, the FxPro senior market analyst.