How Inflationism Undermines the Division of Labor

Technology guru and Forbes columnist Josh Wolfe writes, (bold and italics original)

Chief Investment Officer of Guggenheim Partners Scott Minerd has just noted the Faustian bargain the Fed has made with quantitative easing (a term itself in its complexity quickly confuses the masses). He notes simple bond math that shows the real risk to the Fed’s actions and the the strength of our dollar [paraphrased here]:

In 2008 pre-crisis

• The Fed had $41B in capital and ~$872B in liabilities = debt/equity ratio of 21:1
• The Fed’s had a portfolio with $480B in Treasuries with duration of ~2.5 years. (a useful rule of thumb is that duration of a bond x the change in interest rate = change in value of the bond)
• Thus a 1% rise in interest rates would cause a 2.5% drop in its holdings ~$12B

In 2011 post-crisis

• The Fed’s had portfolio of $2.6 T in liabilities = debt/equity ratio of 51:1 (up from 21:1)
• Duration = ~8 years.
• Thus a 1% rise in interest rates would cause an 8% drop in its holdings ~$200B
• That decline would exceed its capital by about $150bn

From here: as Minerd’s clear logic lays out: if the economy expands, then interest rates rise, then the Fed’s holdings drop, then it might not have enough sellable assets to reduce the money supply and maintain the value of the US dollar. And then if there are doubts about the dollar, the Fed is the buyer (and printer) of last resort, setting the stage for the risk of runaway inflation. So: “To hedge against [a decline] in the dollar’s purchasing power, investors [are migrating to] gold, commercial property, and artwork.”

While these may prove to preserve capital for the individual, for society it may be far better to have these assets invested in productive profit-seeking business and financing innovation and emerging technologies, than sitting in vaults, piling up on dirt or hanging on walls.

Inflationism drives economic imbalances through the pricing system by disrupting the feedback mechanism (profit and loss to reflect on demand and supply), in conjunction with the coordination process of the allocation of resources (through the production system).

As Professor Gary North explains,

Without reliable, predictable pricing, most people would make errors most of the time in estimating what things should cost. This is as true of our decisions as producers as consumers.

Money allows us to make bids in the market for the ownership or use of scarce resources. These bids are our responses as both consumers of goods and suppliers of goods. If prices no longer convey predictable information over time, planning becomes chaotic. Producers and consumers will erroneously forecast the state of supply and demand. Our errors add up over time. We produce losses. We find that we have consumed our capital. We cannot replace what we have consumed at prices we thought would prevail.

Hedging on assets against inflation keeps capital away from productive undertaking.

More the inflationism means greater volatility, instability and most importantly reduced economic activities. Inflationism also rewards political class and their cronies at the expense of society.