Preface: “Part of courage is simple consistency.” – Peggy Noonan
A Primer on Inflationary Business Conditions (Segment VII)
Rewind in time for a moment to the summer of 2020, when the inflation vs. deflation debate was beginning to gain initial tractions regarding business planning for a post-Covid economy. Many experts were of the firm opinion that while unemployment levels would stay elevated for a time, and hence economic demand weaker, it would give the logistical supply chains a smoother curve back towards normalization. In addition, the deflationary logic included a theory that money printing would provide businesses with the opportunity to survive with lower operating margins and an impetus to quickly get back online with inventory and supply to rebuild the economy, hence driving prices lower = deflation.
The contrary resulting inflationary conditions is likely contingent on the trillions of dollars injected into the marketplace since 2019, and of note more than $3.0T in 2020 alone, as the Federal Reserve has continued to build its balance sheet. Therefore, any macro plan for a business is hinged directly on the Federal Reserve policy of quantitative easing. Why? Because the Federal Reserve’s policy of balance sheet growth via asset purchasing as the buyer of last resort drives the engine of current economic activity and the ebullience of the financial markets.
Correspondingly Wall Street where both the stock market and bond market trends occur, including interest rates measurement, control the majority of real-time consumer sentiment and confidence. In fact, Federal Reserve spokesperson Robert Steven Kaplan has recently remarked that excesses and imbalances in the financial markets, including surging home prices, are imminent dangers to the border economy. What could that lead towards for managing a business during inflationary conditions?
The bottom line is that any perceived or permitted deflating of the growing asset price bubble from a change in Federal Reserve policy could result in financial risks that could emulate the Japanese financial malaise the began in the early 1990s. In that instance, the countries historical asset price bubble deflated quickly along with economic vibrancy. Complicated with among other deflationary factors, including tax hikes, Japan’s economy has yet to recover from the deflationary financial crater even after more than two decades of near-zero interest rates and concerted central bank measures. Further Japanese consumer’s mindsets have now shifted to the viewpoint that prices should stay relatively consistent.
Therefore, any slowing in the current stimulus spending for the Covid-19 Pandemic, along with an approaching expiration of the mortgage foreclosure forbearance, and unemployment compensation, before December of this year, may lead to the clear visibility of the actual economic realities from a Pandemic shutdown.
Continued acceleration in the current inflation rate and the potential implications could elevate worldwide financial concerns or fears since the US dollar is the world’s reserve currency. Although not impossible, perhaps probable is a containment of the current inflation rate, as outlined by the Federal Reserve’s description of inflation price increases as “transitory.” This could result in either a dysfunctional deflating from open ceilings levels to certain degrees with the growing asset bubble (perhaps real estate, stocks, or more problematic bonds) or maybe a financial rodeo of surprises from asset price volatility or perhaps a plan like this Forbes article describes An Egyptian Bailout.
Combine these economic risks with the most giant financial bubble in US history, and the solution seemingly is an economic governance plan capable of navigating Cadillac Mountain driving in reverse at ## MPH. Hold onto your hat. May they be that good?