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BFI Capital
February 1, 2021

Are Central Banks Really Losing the Battle with Deflation? Or are CPI Numbers Simply “Bogus”?

Central banks, and now governments too, are adding to the money supply using any, and all, tools available. They have been on an excessive expansionary track for quite some time, but especially since the arrival of the pandemic, they have put their monetary and fiscal policies on steroids. Anything is now possible. So far, CPI inflation seems to remain stagnant, at least on paper. However, that is not reflected in the experience of “the man in the street”.

Based on the unprecedented spike in M2 and on the sheer scale of this stimulus tsunami, one would expect inflation to be picking up substantially by now. However, with money velocity at historic lows, that is not happening. The liquidity is not “hitting the streets”, nor is it actually stimulating the real economy. The main beneficiaries appear to be financial markets, or the investors in those markets.

Last year’s surge in US money supply was the largest in 150 years!

Source: Financial Times,

However, as shown in recent numbers and portrayed in the diagram that follows, courtesy of the US Bureau of Labor Statistics, the past two decades have seen the cost of the essentials go up, while the price of many of life's “luxuries” has been going down. This is a clear sign that CPI inflation does not tell the whole - or even the true - story, as those official figures do not reflect the reality on the ground or the experience of a large portion of the population in the US.

Price Changes: January 2020 to December 2020 (Selected US Consumer Goods and Services, Wages)

Source: Bureau of Labor Statistics, Carpe Diem AEI

It would be naive to assume that the current polarization and social unrest in America are merely the results of presidential policies or political rhetoric. They go much deeper than that. The wealth gap has been growing. And it is being further augmented by the very policies that are supposed to be the solutions. State planned economies, centralist money spigots, unlimited cheap money… none of that benefits the poor and it does not build a strong middle class. On the contrary, these policies only serve to further concentrate wealth at the top, at the expense of everyone else. And yet, that is not the story being told by the consensus view.

That view instead posits that all problems can be solved with more cheap money, more debt and higher deficits, and more regulations and restrictions to free enterprise and productive activity. And everybody, bamboozled by the prospect of “more relief and support”, or at least another government check, is screaming for more.

Priced Out – The share of young people owning homes has collapsed in the past 20 years.

Source: Institute of Fiscal Studies

Meanwhile, young people are no longer able to get on the property ladder and take their first steps towards financial security like their parents did. In fact, they can longer accumulate wealth in any meaningful or sustainable way. Hard work, entrepreneurship, diligent saving, and responsible, long-term investing will get them nowhere in the current political, economic, and monetary environment.

And at this point, it looks like it will be exceedingly difficult (if not impossible) to stop this trend. The only thing that might allow a “real reset” is a deep and painful economic crisis and, most regrettably, all the social unrest and destruction that are known to go along with it.

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