Inflation: How Bad Could it Get? – Part 1, by Banker Bob

Much of my career has been in banking or related financial services including day-to-day, hands-on management of large-scale transaction processing centers for one of the world’s largest banks.

Question 1: What’s your personal measure of inflation?

Weekly grocery bill? Filling up your tank at the gas pump? 9mm or 5.56 ammo when you find some? Medical bills? Your individual perceptions are influenced by personal purchasing preferences, geographic differences, urban vs. rural spending habits, size of family, and income level.

For starters, take a very skeptical look at the 7.5% CPI reported as the 12-month increase for January 2022. The figures published by the Bureau of Labor Statistics are the ones most often cited in the news. It’s hard to ignore them especially the comparison to the CPI as reported in 1979, 1980, and 1981 which reached a high in March 1980 of 14.8%. That number in isolation provides little economic context. The Fed Funds overnight rate hit 19% in December 1980 and again in June 1981. Mortgage interest rates peaked at 18.5% in 1981 while the prime rate reached 21%. In early February 2022, 30-year fixed rate mortgages ranged from 3.75% to 4.125%. The prime rate for large corporate borrowers was 3.25%, and Fed Funds had a weighted average of 0.08% (less than 1/10 of 1% or very close to zero!)

According to the US Energy Information Agency at the national average fuel price was $2.00 at the time of the election in 2020. The comparable price today is $3.37 or a 68% increase in 15 months. Even that high price will look cheap in another 9 months. Energy prices ripple through the economy making them an important leading indicator.

There are two major problems using CPI as your yardstick. First, these published numbers are a trailing indicator and not a measure of what you will pay next month for groceries, gas, heating oil, or ammo. Second, by its own published record, the BLS has made three major changes since 1980 in its methodology (1987, 1998, and 2018) morphing from what was previously a comparison of a fixed basket of goods (COGI or cost of goods index) to a lifestyle choice of substitutable items (COLI or cost of living index). Suffice to say that comparing CPI for 1980 to 2022 is a rigged way of reporting a lower rate of real inflation. (For readers interested in the details, check out the BLS reported changes. As you can imagine, it’s like comparing the cost of one pound of fresh ground hamburger at the local butcher shop in 1980 to four Quarter Pounders at a McDonald’s drive through in 2022. What can a good bureaucrat do to keep a lid on anxiety? Change the rules…

In the simplest terms, prices rise when demand outstrips supply and when massive deficit spending is paid for by increasing the money supply and keeping interest rates artificially low.

Question 2: What’s your personal leading indicator of an imminent societal collapse?

Leaving billions of dollars of military hardware in the hands of the Taliban who might be itching to use it? Two million illegal immigrants streaming across the borders of Texas and Arizona who might want to vote for more free handouts? The IRS requiring PayPal and Venmo to report to them all electronic transfers greater than $600? The ATF illegally having over one billion scanned and electronically stored records of gun purchases? Foreign nation-sponsored cyber-attacks against the electrical grid, fuel pipelines, DOD computers, and US financial institutions? Build Back Better? The Freedom to Vote Act? Joe Biden’s latest word salad speech before being led off the podium by Jill Biden for his ice cream cone?

All the threats to normalcy that get any kind of press coverage – Ukraine, Taiwan, Afghanistan, pandemic, earthquakes and hurricanes, stock market collapse, and arming the Taliban – are just the warm-up acts for a real SHTF crisis. All of those potential disruptions and a number more may make our daily lives less secure and a lot more inconvenient, but on their own, they will not cause a broad scale societal collapse. After all, we can just lower our expectations as we have already been told to do.

There is one reliable predictor of real problems about to happen – and it will be obvious.

The Schumer will hit the fan when financial transaction processing stops for more than two or three days. Within hours of the moment that “money” stops working, unprecedented civil violence will occur in major cities and many other urban areas with a broad scale collapse following whether or not Biden’s handlers unilaterally order the US military to intervene.

“NOTHING TO SEE HERE … MOVE ALONG… MOVE ALONG”

These large volume transaction processing networks are very secure with many layers of safety protocols, audit trails, and multiple data backups plus redundant hardware in hardened facilities. Banks, the automated clearinghouses, and the regional Federal Reserve Banks have successfully dealt with countless cyber-attacks for many years. These systems also have backup power supplies and independent power generators at multiple locations. All of those wonderful security features will be of no value if/when some of the greatest hackers in the world succeed in taking down the system.

An abrupt halt in processing, such as one caused by a complete grid failure that cannot be bridged would result in financial chaos way beyond any collapse of the stock market and total loss of confidence in the financial system.

INFLATION IS JUST AS BAD, JUST SLOWER

Less obvious is that runaway inflation would take longer but result in a similar outcome. Along the path to collapse, bureaucrats in panic mode might mandate bank holidays, limits on cash withdrawals, and even daily maximums for credit cards. Of course, these measures would be for the greater good and only last for a couple of weeks. Guaranteed. Naturally, you keep all of your money in a bank, right?

Between now and a disaster scenario, we are likely to experience the grinding impact of increasing inflation in our daily lives and a political situation that makes it unlikely this administration will make a strong effort to curb a steep climb in CPI or real interest rates. One of the worst elements underlying the ongoing price increases is the energy policy implemented on Day 1 of Biden’s presidency. Was the Executive Order killing the Keystone XL Pipeline just the first step in a grand scheme to create a broad need for more government services? Biden’s Build Back Bankrupt proposed legislation and other green initiatives have eliminated any lingering doubt.

Based on various inflationary periods from the early 20th century and up to the 1970s as well as modern European history, the following sequence is plausible but not certain: 2022 could see inflation steadily increasing over the 7.5% annual rate this January since only relatively limited actions will be taken to curb an inflationary spiral. Unchecked, inflation could double by November 8 and continue to climb in the first half of 2023 regardless of the outcome of the midterm elections.

There are three key players responsible for economic and monetary policy. Jerome Powell is Chairman of the Federal Reserve. Janet Yellen, who was previously Fed Chair under Obama and Chair of the Council of Economic Advisors (CEA) under Clinton, is Treasury Secretary. Biden’s CEA is composed of three social justice economists noted for diversity, unusual diversity credentials, and openly advocating against economic inequality. The Fed, Treasury, and CEA are charged with setting monetary policies including interest rates such as the Fed Funds rate to keep the economy rolling smoothly, maintain unemployment at acceptable political levels, and pay for the massive spending of the federal government.

From this troika, it is reasonable to expect a policy of “Too little, and too late.” with major concerns about keeping unemployment low and providing a bigger safety net for those workers who do get laid off. A sudden tightening of interest rates may be off the table since that would almost certainly trigger a collapse of the stock market and a severe credit crunch for businesses followed by a recession with even higher unemployment. Note: Raising interest rates high enough to curb inflation will also increase the total amount of interest paid on government debt.

In the next nine months, no Democratic politician wants to deal with any of the tough economic or monetary policy issues going into the 2022 midterm elections. That being the case, the CPI could go up by another 6% or 7% reaching an aggregate inflation rate of 13% to 14% by mid-2023 or the same level as the March 1980 high of 14.8% with huge social and political consequences. Democrats and the mainstream media (MSM) will play the blame game directed against the incoming Republican members of the House and Senate and label them as racist insurrectionists. If inflationary forces continue to be driven by the Administration’s energy policies, supply chain problems, only modest changes in monetary policy, and an ongoing stalemate in Washington politics, which direction do you think inflation is likely to go?

(To be concluded tomorrow, in Part 2.)