Weekly Briefing 10/25/20 - The Forecast

Weekly Briefing 10/25/20

Weekly Briefing 10/25/20

During Donald Trump’s first term as president, the national debt increased by over seven trillion dollars. It seems the federal government’s approach to spending continues to go big or go home.  Just a few decades ago, the national debt was a hot button issue, but now it has been brushed to the sidelines. In the era of fiat money, a common misconception is that inflation occurs when there is an increase in a nation’s money supply. While there is some measure of truth to that, it is not the whole story.

There is a saying amongst statisticians, ‘correlation does not imply causation.’ The quantity theory of money is no exception. While the mainstream belief is that inflation soars when the money supply exceeds its equilibrium, this is a corollary of inflation rather than a root cause.  When looking back to tumultuous financial events such as The Great Recession, the.COM Bubble, or the Coronavirus pandemic, significant inflation did not arise. Even after the Federal Reserve printed trillions of dollars to help buoy corporate balance sheets. So then what triggers inflation?   

When looking at the graph above, note how inflation rose dramatically in 2011 – due to a loss of confidence within the government, rather than an increase in the money supply. Specifically, during 2011, for the first time in its history, the U.S credit rating was downgraded from AAA to AA+, showing the world the first chinks in Uncle Sam’s armor. Meanwhile, in 2008 even after Obama issued an $800 billion stimulus package, inflation was a non-issue. So long as the United States remains the de facto financial capital of the world, do not expect increases in government spending to be the cause of inflation.

This truth has remained constant throughout the history of human civilization.  In Ancient Rome, the infamous emperor Nero began debasing the content of the aureus by 10% to help a nearly bankrupt Roman treasury. While his intentions were to provide infrastructure jobs to its Roman citizens, the debasing of the aureus caused people to no longer trust their government. Several years later, the senate and the people of Rome would turn against their emperor, leading to him committing suicide.

Our future forecast for inflation is bullish throughout the next decade. Throughout the 2020’s, we expect civil unrest to be prevalent and for confidence in the government to reach new lows.

The Forecast





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