Inflation And The Confiscation Of Wealth
Summary of Absolute Return Partners' October 2021 Letter
Niels Clemen Jensen writes a great letter each month for his firm, Absolute Return Partners.
This letter covers inflation, the consequences of inflation and the Fed’s plan to destroy debt through inflation.
Niels starts off this month’s letter with a very interesting graph showing U.S. Wealth-to-GDP which is now at a mind-boggling new high of 623%.
Niels says that the long-term average for U.S. Wealth-to-GDP is 380%, therefore this ratio is going to have to revert toward the average at some point based on economic growth theory.
The biggest drivers of household wealth are property; pension savings; holdings in private, family-owned businesses, and listed equities which are much more common in the U.S. It is the huge rise in the U.S. equity markets that Niels attributes to most of the increase in the U.S. Wealth-to-GDP ratio.
Niels doesn’t know what will bring the U.S. Wealth-to-GDP ratio back down but he says it will definitely come down at some point. He also says that debt has grown to levels that can’t be sustained.
Excessive wealth growth and excessive inflation are two sides of the same coin.
Niels believes that Jerome Powell and the Fed are ok being “behind the inflation curve” because the U.S. is under a mountain of debt and inflation is the least painful way to get rid of some of that debt.
A consequence of much higher inflation to be aware of is that inflation confiscates wealth. (In order to better understand this, think of how many more goods $1 bought 100 years ago compared to today)
Here are 5 reasons, according to Niels, why it is time to take inflations seriously:
1. Rapidly Rising Inflation Expectations
Expectations of inflation lead to more inflation and right now, the expectations curve is rising. If it continues to rise sharply then Niels believes that you can then forget about inflation being transitory.
2. Rising US Wages
3. Rising Industrial Commodity Prices
In 4 of the 6 commodity supercycles since 1795, the top in commodity prices happened together with a top in inflation. The only time there wasn’t a new peak in inflation was during the post-World War II supercycle peak and the 2008 supercycle peak. With a recent rise in oil, agricultural and industrial prices, it isn’t unreasonable to worry about whether this will lead to more inflation.
4. Bottlenecks and Other Supply Chain Distortions
The bottlenecks and supply chain distortions are happening all around the world.
5. Inflation is Akin to Confiscation of Wealth.
Inflation destroys purchasing power. Inflation of 2-4%, which is what we are currently having, isn’t much to worry about. What we should worry about is inflation similar to what happened in the late 1970’s.
The purchasing power of a dollar in 1913 was only a few cents of what it was in 2013. The chart below is a little old but the situation isn’t any better 8 years later.
In summary, Niels says that the Fed allowing inflation to go on for a while is part of their objective to get rid of debt, not to confiscate wealth. Confiscating wealth is unfortunately the consequence of getting rid of debt through inflation though.
It’s possible that other central banks around the world are trying to get rid of their debt through inflation as well.