EC Current & Future Supply Side Inflation Shocks

When the two quite distinct sources of inflation potentially come together in the future, inflation from money creation and inflation from supply shortages creating rising asset prices - then they would reinforce each other, making curing either much more difficult than it would otherwise be. They are also not additive but multiplicative. One fundamental and powerful source of inflation is multiplied times the other fundamental and powerful source of inflation, and the combination destroys the purchasing power of money at a far faster rate than either would do by themselves. There is not only a direct multiplication at any given point in time, but the doubled reinforcement of the core inflationary cycle from both fundamental sources, each acting together to increase the cost of goods which increases the cost of labor which increases the cost of goods.

How the multiplication of multiplications can come to dominate the original simple source multiplications is a key part of the many years of research that came together in writing the Homeowner Wealth series, and are the particular focus of the second book, The Eight Levels Of Homeowner Wealth Multiplication (link here). In studying the national averages for all 395 of the possible 1-10 year homeownership periods between 1975 and 2019, I found that there was a multiplication of general price inflation times housing specific asset inflation more than half of the time - and it is an extremely powerful relationship for homeowners and investors.

The combination of money driven inflation and supply driven inflation would be a triple toxic combination for most people, most of the time. Money driven inflation drives down the purchasing power of dollars, this is multiplied times the power of supply driven inflation, greatly increasing the damage and the speed with which the damage occurs, and the underlying fundamentals of supply shortages then decrease the average standard of living. This is a particularly toxic triple combination for retirees, as they face a doubling of the usual danger from price inflation, even as they are at an inherent disadvantage in competing for scarce resources with those who are still in the workplace and whose incomes are at least partially rising with the rate of inflation. Furthermore, because these are fundamental and cumulative forces at work, they are likely to be persistent over time rather than transitory, with a building level of damage and loss of standard of living.

Not all wealth is being destroyed, however, much of the time it is being redistributed. My research for the Homeowner Wealth Formula books showed that when one creates an asset/liability inflation arbitrage - i.e. buying a home with a mortgage, whether to live in or to rent out - then the fundamental, persistent and cumulative forces flip from being a wealth destroyer to being a persistent and cumulative wealth creator. The national average homeownership results over the decades quite convincingly show that that the higher that either general price inflation or housing asset inflation go, the more real wealth that is created, and that having both at the same times goes from being a nightmare to being an ideal source of wealth multiplication. And the greater the potential supply shortage - the greater the multiplied wealth building that results.

Indeed, that was the intent behind Chapter 10 of the second book, taking the long term potential inflationary consequences of the massive increases in the national debt, and multiplying them times the real price increases that can be result of a long term relative supply shortage for an asset such as homes in desirable locations. The increase in wealth over the long term is extraordinary, as would be the financial contrast between those who have inflation protection over the long term and those who do not.

Fundamentally, inflation is a redistribution of wealth. However, not all inflation is the same, and how the wealth is redistributed can vary depending on what kind of inflation is in play. Between the growth in the national debt, the rate of monetary creation, and the current plans for simultaneously effectively reducing supplies over time in many key components of our standards of living - the 2020s may not be kind for those who are unprepared for inflation.

To be prepared for inflation requires understanding that there is more than one type of inflation. All it takes is one source of inflation coming into play, either inflation resulting from excessive money creation or supply driven inflation, and the 2020s could bring the highest rates of inflation that we have seen in decades. There appears to be a good chance that we will get not just one but both types of inflation at the same time over the coming years, and if that were to happen then the degree of the destruction of the value of the dollar could greatly exceed what would be caused by either single source of inflation by itself. Hopefully this analysis has been helpful in understanding those issues.

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Disclosure: This analysis contains the ideas and opinions of the author. It is a ...

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