Climate Change & Court-Ordered Inflation

However, the 1970s and 1980s did not have the force of law dictating that the shortages and the price of energy would relentlessly increase each and every year. This would be something that we have never seen before, and it is a problem that our central banking systems in the U.S., Europe and other nations simply do not have the tools to deal with.

Just by itself the further substantial reductions in emissions ordered for each successive year will create a powerful primary inflationary surge that will reinforce itself over time, with each year of price increases multiplying times the previous years of price increases.

What will happen when businesses, consumers and workers don't just anticipate likely price increases next year and the year after, but are reading in the media about the judicial decrees that mandate steadily increasing supply shortages that will stretch out many years into the future? We can't say for sure at this point, new textbooks will be written about it (if it happens), but based on what we do know from the past, the changes in behavior could set off a self-reinforcing inflationary cycle that could make the 1970s and 1980s look like a walk in the park in comparison.

Inflation Source Multiplication

Entirely separately - we do have the problem of a U.S. economy that is dependent on the Federal Reserve buying trillions of dollars of government debt, thereby funding the governmental stimulus spending. It is not yet true money printing at this stage, but involves the use of the reserves-based money creation that was first used in 2008. As explored in the analysis linked here, there are only limited supplies for this type of money creation, and if those are exhausted, then we could indeed face the choice between financial collapse, or straight up pure money creation to fund government spending, something that would likely very quickly lead to high rates of inflation.

The Biden administration has now proposed a $6 trillion federal government budget, that even after the huge tax increases, would still add new federal debt at a rate of a little under $2 trillion per year. That could place enormous strains on a Federal Reserve that is already under acute pressure, as explored in the analysis linked here, with the Fed going through major gyrations earlier in 2021 just to keep the national debt funded while providing the Treasury with its spending money.

Growing a national debt by more in 2020 on an inflation-adjusted basis than it had grown in the first 200 years of existence for the United States is risky business, and the Federal Reserve being the primary source of funds makes it that much riskier. Future high rates of inflation are a very good possibility as a result, and there is just no getting around that basic relationship.

Also entirely separately, as explored in the previous analysis, we currently have the highest rates of inflation that have been seen in the U.S. in many years - in multiple areas. Import prices are up by 10.6% in 12 months, gasoline prices are up by almost 50%, used car prices are up by 21%, and home prices are up by almost 13%. These price increases are not from judicial decrees or money printing, but an entirely different source, that of shortages and supply side inflation shocks. They may prove transitory - or they may not, and if they persist, they could be enough to create a new inflationary cycle by themselves, particularly if a potentially declining U.S. dollar creates persistent import price inflation.

We can't know the exact path ahead for judicial orders, executive actions and legislative changes when it comes to carbon dioxide emissions and climate change. We do know that the Paris Agreement is in place and the U.S. is again a participant, pledging it will do its share when it comes to reducing emissions. We do know that there are enormously powerful political, legal and corporate forces in place, both domestically and internationally, that have pledged to radically reduce emissions over the next decade. And as of last week, we now have direct judicial action, with a court in the Hague ordering Shell to reduce all emissions produced by its products by 45% in nine years, as a matter of international law.

Those are three separate sources of potential future inflation. Any one of them could be enough by themselves to substantially raise inflation rates. Each by itself has the potential for creating a self-reinforcing inflationary cycle, of the type that dominated the 1970s and 1980s.

If we get any two of those inflationary sources at the same time - then we get a multiplication of two primary sources of inflationary power. We also get a multiplication of the secondary sources, with wages and costs of goods and services all rising together, feeding each other, with a substantially greater likelihood of creating a powerful self-reinforcing inflationary cycle that is very difficult to break.

If we get all three sources of inflation together - then our lives change, and this could happen very quickly.

One of the most important aspects of higher rates of inflation that seems to have mainly been forgotten is that inflation teaches people and people adapt. High rates of inflation teach people through inflicting financial pain. Companies get burned when they take losses on fixed contracts because their cost of supplies and labor rises, and they adapt. Wage earners get burned when their standards of living are reduced, and they adapt, doing everything they can to prevent future losses. Underlying everything else, that is where the self-reinforcing inflationary cycles come from, it is from companies and people learning painful lessons, and then changing their behavior to try to protect themselves from any future financial pain from inflation.

The worst of the damage, particularly at the beginning of a new secular cycle of inflation, is reserved for retirees with savings, and unprepared investors. Once the inflation-adjusted value of the investments has been lost, and with no inflation-indexed wages to rise with inflation, it can be almost impossible to recover.

One of the best ways to prepare for a potentially quite different future is financial education. To educate oneself in advance about how to avoid the painful learning from experience lessons, and to instead see the opportunities that can be found in the early stages of a potential secular inflationary cycle. Hopefully this and the preceding analyses have been of help to you in that regard.

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