Jamie Dimon is the CEO of JP Morgan Chase, one of the world’s largest banks. And last week he issued a stern warning on the bank’s quarterly earnings call that “multiple inflationary forces” are still lurking.
File that one away under “duh”. It should be completely obvious to just about anyone paying attention to the world that many of the key drivers that rocketed inflation higher are still with us.
The Federal Reserve, of course, desperately wants to pretend that inflation is in the rear-view mirror, never to return. And they keep insisting that the downward trend of inflation justifies their interest rate cuts.
But as Mr. Dimon points out, “large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world” all create high risk of substantial inflation.
We agree with him.
“Remilitarization of the world”, i.e. conflict, is very expensive. The very nature of war means consuming vast quantities of resources to produce munitions that will destroy your adversaries’ resources.
Most governments don’t have the money to do this. The last time the United States was able to fund a war without going into debt was the Spanish-American War in 1898. Every other war, or even preparation for war, required significant additional debt… which ultimately resulted in printing more money.
So, in the end, warfare means more money in the system, but fewer resources. This is the very definition of inflation.
Dimon mentions trade disputes as well, which are also very expensive.
Free trade creates wealth. It allows countries and producers to specialize in what they do best, and trade for what other countries do best.
Germany is great at high tech manufacturing, pharmaceuticals, and various other industries. But they can’t produce bananas to save their life.
Fortunately, Guatemala exists. Guatemala has no high-tech industry. But they’re great at bananas. It’s a sensible trade.
When nations are in dispute with one another, trade breaks down and they start having to produce goods and services where they have no expertise.
Sometimes it works out; in one of their endless wars with France, Britain boycotted French wine… and in the process, accidentally invented port. But usually, such inefficiencies create a lot of inflation.
Dimon also mentions infrastructure needs. And that’s a massive understatement.
The US highway system is deteriorating. Amtrak is blowing money without any serious improvements. California is tens of billions of dollars over budget, and several years late, for a high-speed rail it promised from San Francisco to Los Angeles.
It doesn’t help that they put $1 trillion in the hands of an incompetent diversity hire like Transportation Secretary Pete Buttigieg.
All of this money will need to be conjured out of thin air by the central bank, which, again, is inflationary.
Lastly, Dimon also references “large fiscal deficits”, which is putting it politely.
We’ve said it many times— the government’s own internal projections expect an extra $22 TRILLION in deficit spending (i.e. new debt) on top of the $35 trillion national debt, over the next decade. Most of that will come within the next five years.
Deficits are inflationary, as we have seen over the past few years.
To be fair, there are some potential deflationary forces as well.
Increases in productivity are very deflationary. Technology, driven by artificial intelligence, could be monumental in improving productivity and keeping prices down.
Yet there are also a lot of people in government (and even within the AI industry), trying to slow down development and hold back AI.
Capitalism— which encourages competition to offer the best quality goods and services at the lowest prices— is also deflationary.
Unfortunately, many people in power despise capitalism and rail against it as racist, misogynist, or bad for the planet.
Even the President of the United States constantly moans about America’s most successful companies, claiming that their “greed” is an evil force keeping inflation high and prosperity low.
It’s quite ironic that a man who refuses to step down and clings to the Oval Office is complaining that other people are greedy. Joe Biden is the embodiment of greed.
So, I’m not holding my breath that these deflationary forces, i.e. capitalism and AI, will be kicking in anytime soon to counteract the negative effects of deficits, conflict, etc.
This is why we continue to anticipate higher inflation down the road.
Where I disagree with Jamie Dimon, however, is that I don’t think the Fed is going to do anything about it.
In theory the Fed should be holding interest rates at higher levels… or even increasing interest rates. This is the normal tool they use to reduce inflation.
But the Fed has 35 trillion reasons to not raise interest rates.
At $35 trillion, the US national debt is simply too high for interest rates to remain where they are right now.
This year alone, the US government has to refinance $6 trillion worth of debt that is about to mature. Refinancing the debt means having to pay a much higher rate of interest… easily 3% higher than in the past.
That’s a whopping $180 billion per year in additional interest costs that the Treasury Department is going to have to pay. And they’ll pile on even more interest expense next year and the year after that.
Uncle Sam simply cannot afford that bill. The Treasury Department needs rates as close to zero as possible in order to not go bankrupt. And that’s going to mean LOTS of inflation.
The Fed knows the risk. But they’re going to have to choose between inflation… versus a full-blown meltdown of US government finances, and, by extension, the US financial system.
Inflation is the obvious choice.
My guess is that they’ll just come up with some new way to calculate the CPI to pretend that inflation is lower than it actually is.
The Inspired Idiots will start claiming that the CPI is rooted in racism and demand a new inflation metric that takes into account some DEI nonsense. And poof, the inflation rate will magically plummet.
Regardless of what tricks they come up with, in such an environment, it makes sense to own critical resources that the Federal Reserve cannot conjure out of thin air. And these are real assets.
Real assets retain or even grow their value when faced with inflation. And the added benefit is that many of them are dirt cheap right now.
