Climate Change & Court-Ordered Inflation

Now some people might think what is described above sounds pretty awful, others might think it is exactly what the world needs. Again, that's the point of judicial decrees based on international law, since it won't necessarily matter what we think.

The average customer is going to need more money, each year, to maintain what is likely to be even a slowly falling standard of living. The average grocery store clerk is also going to need more money each year, as are the farmers and the drivers.

A wage-based inflationary cycle kicks in to accompany the court-ordered supply side inflation shocks. Rising wages increase costs, even as supply side costs are going up as well, the combination means that wages have to go up again, and that then further increases costs.

The average rate of inflation was 1.58% in 1965, the last year of the relatively low era of inflation that had prevailed since 1952. The rate of inflation almost doubled in 1966, as the growing costs of the Vietnam War helped to set in motion the slow collapse of the Bretton Woods accord, thereby severing the last link between the U.S. dollar and the price of gold. Over the next 31 years the annual rate of inflation would drop below 2% only once. Indeed it took 13 years after the 13.50% inflationary peak of 1980, before annual rates of inflation reached levels that were fairly consistently below 3%.

The lessons of history are very clear - once inflationary cycles get going, and inflationary expectations get built into the decision making processes of workers and businesses, then it is a very difficult, long term process to try to break out of those inflationary cycles.

A Potentially Unsolvable Problem

The Federal Reserve has taken to talking a good game about how easily they can control inflation if they have to. One technicality to keep in mind however, is that for most current economists - this is all theory. The last time the Fed had to confront an official annual rate of inflation above 4% was in 1991. There have been huge changes in the economy since that time, as it has become globalized even while the nature of the U.S. dollar has changed with the introduction of reserves-based monetary creation to fund quantitative easings.

There is one type of inflation that the Fed has never had control over, and that is as covered in the previous analysis, inflation that is caused by shortages and supply side shocks. To fix that kind of inflation requires fixing the physical shortage problem.

We're seeing this right now with the 12 month increase in the prices of imports going up by 10.6%. The Federal Reserve doesn't have any magic monetary wand to wave that will make those inflationary price increases go away - either the shortages and supply bottlenecks that are driving the increase in prices are physically solved, or else we have price inflation, there is little the Fed can do about that.

If we have a temporary surge in inflation caused by shortages that has spilled over into more general rising price levels, and the shortages all end, then in theory the Fed should be able to dampen that inflation within a year or two, bringing the secondary sources of inflation back under control. In theory.

However, if inflation is caused by court-ordered reductions in emissions over the period of a number of years, then there may be an inflation problem that is completely beyond the control of the Federal Reserve or any other central bank.

In year one, shortages and an ever heavier reliance on more expensive energy alternatives means rising prices for energy, that spills over into wages and the costs for goods produced with energy. The Fed can do nothing about the primary increase in the cost of energy, but it can try to reduce the secondary effects, to try to keep an inflationary cycle from being built into wages and goods that require energy to produce or transport.

Just as the Federal Reserve and European Central Bank are struggling with containing the inflation damage from year one, then year two rolls around, the supply of fossil fuels drops by another 6.5%, and this energy is less than fully replaced by more environmentally friendly but more expensive alternatives. The greater shortages and greater price increases create a second major primary energy inflation shock, that the Fed is powerless to prevent.

This second primary inflation shock hits the secondary inflation from the first primary inflation shock, which the Fed has not yet contained - and it reinforces the pressures on wages, and the price pressures on goods that require a substantial amount of energy usage. Prices for goods increase substantially, wages move up substantially, and the increase in wages then makes goods that much more expensive to make. Instead of dampening, the inflationary cycle strengthens, and becomes more resistant to attempts by the Federal Reserve to control it.

Even as the Fed struggles to maintain some level of control, year three and the third primary energy inflation shock hits the nation - right on schedule, per the order of the courts. The use of fossil fuels is down another 6.5% in another single year, the cost of energy surges again for the entire nation, the prices for goods made with energy surge again, and wages surge again, in the attempt to keep up. (For those without wages or the ability to keep up with inflation, such as with retirees, this is where the damage is really mounting up - fast.)

By this stage, a new inflationary cycle may be fully established. Even without further primary energy inflation shocks, companies, workers and consumers are now anticipating inflation and are fully building substantial inflationary expectations into their economic behavior and pricing decisions. The changes in inflation expectations and behavior will have spread throughout the economy, and will not be solely dependent on energy price increases.

This isn't just theory, but it is our collective history. This persistent and difficult to overcome type of inflation was what was happening in real time when I was studying economics in college and graduate school in the late 1970s and early 1980s. However, in some ways it seems almost like lost knowledge for many today, who are focused on the easier to understand concept of inflation that is created by excess money creation. What happened in practice was a different source of rising prices. The last time this happened it took decades to fully break the inflationary cycle.

The fact is that we know what the highest levels of inflation of our lifetimes looked like, we know what produced the largest precious metals profits and housing profits we have seen to date - and it wasn't money printing. Indeed, when we study the actual historical data rather than reinforcing confirmation bias with regard to theories about how gold is supposed to work, then what produced the largest gold profits we have seen was gold reacting to inflation in a quite different way than many precious metals investors seem to understand today, as explored in Chapter 16 (link here), and then further developed in subsequent chapters.

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