Summary

• The Soft Landing is possible but that isn’t a good thing

• Inflation is calming fast due to underlying deflationary elements in our larger economies

• Deflation is very likely to be experienced in the year 2023, but it will likely be a stopped by the Federal Reserve in early 2024.

What is Disinflation?

I think it is important to discuss what deflation is at this point in this disinflationary spiral that I am quite sure we are falling into. First off, I will define inflation. Inflation is simply the rising of the average price of goods in a given marketplace. There are many things that can contribute to price inflation such as:

• Greed

  • Oligopoly, monopolies and other marketplaces with limited suppliers can raise prices at their will, especially if the good is inelastic.

• Supply shock

  • If the good is harder to acquire or whatever might contribute to scarcity in respect to demand, the price will go up.

• Demand shock

  • If the amount of people that want something is growing faster than the supply can expand, the price will go up.

• Labor Shock

  • If the cost of living rises or necessary labor is in shortage, employees will demand more for labor and the cost of this labor can be pushed onto the consumer

The Pandemic has been a mixture of all of these with a significant rise in CEO vs Employee pay, supply chain disruption, stimulus checks increased demand for goods, & many people retired from the workplace resulting a labor shortage.

So what is deflation?

I do not want you to confuse deflation with disinflation, which is a period of time in which the things that caused inflation begin to either be normalized in the market or weakening. Deflation is when prices begin to drop as a result of the following:

• Declining Demand

  • The amount of goods being produced are great than the goods the consumer wants, as a result prices fall to convince consumers to buy

Deflation is far simpler than Inflation. It is rooted in declining demand. How might we see demand decline? When humans do not produce more humans, demand will decline. A nation with a shrinking and aging population will require less food, shelter, clothes, and much more. It is well known that 1970s inflation was fueled by the baby boomers coming of age and buying the same goods such as homes, food & shelter, let alone the reckless spending of the federal government. The amount of goods the economy demanded was much higher than being produced.

As prices rise, life gets uncomfortable for young people looking to stake a claim in the old American Dream. Millennials, accompanied by much better contraceptives, are not having enough children as the US birth rate has fallen below the necessary number to reproduce the population to 1.64 births per woman (2.1 births per woman needed).

The labor shortage is here to stay & absent ample wage growth, demand will have to subside. During the 1970s, wage growth fueled inflation.

In wages, the major jump had already occurred by 1968: rates of increase in nominal hourly wages were already 6.5% per year, and rose to a peak of little more than 8% per year at the end of the 1970s - America’s Peacetime Inflation: The 1970s Page 13 of PDF

While the birthrate naturally fell due to the economic downturns and chaos of the time period, it was able to recover due to the underlying growth in employee wages, not CEOs. We are currently seeing wage growth stagnant well behind inflation. This will likely push the birthrate further down, and discourage large purchases like homes, cars, and more.

Other Consequences of Deflation

The real value of debt increases under deflation, resulting in more burdened companies, organizations and people. Real Rates increase, which discourages large spending events like homes and cars. Real wages increases raises the cost of employment. Discouraging Consumer Spending reduces profitability of companies and subsequently lowers prices and cuts jobs. All of these factors will have negative effects on the stock market, the backbone of the American Tax system & American wealth overall.

What does this mean?

Well. It isn’t good for the global economy. While Jerome Powell is raising rates, he likely knows that the underlying inflationary influences are weak & weakening due to a lack of demand from young humans. This only helps the disinflationary process, and might offer a way to address the issue without killing the labor market. The problem is, if you kill demand how do you get it back?

One way is to turn on the money printers, make people feel rich again and watch them spend uncontrollably for a few weeks, but this stands to increase inflation further and has no long lasting effect.

Another way is negative nominal interest rates, which essentially stands to force people to spend their money. The issue is that young people already like cryptocurrency and can escape that system.

Lastly, there is deflation. Allowing prices to spiral downwards while wages remain stagnant is a way to increase the buying power of the youth, and spur economic growth. The issue is that falling prices discourage investment because the margins of profit for major investment companies will shrink. Who would invest in something where the nominal profit has been reduced from 8% to 2%? Who would invest when the buying power of their dollar increases? Who would innovate when they are able to survive on a regular wage.

I know this may be a bit morbid, but hunger is something fuels innovation. Human suffering is what inspires the greatest amount of innovation from humanity. Deflation removes this hunger by increasing the affordability of life.

Do I think Jerome Powell will allow deflation?

No, I don’t think it is in the interest of the world elite that life were suddenly more affordable, but I do think he may allow some form of deflation. It is all in the Federal Reserve policy. If rates are 5% by June 2023 & Consumer Price Inflation is found to be less than 5% by this time, we will be move toward deflationary environments. If the Federal Reserve sticks to the Higher for Longer policy, allowing rates to sit well above CPI will likely inspire deflation behaviors in the marketplace.