Summary

In terms of inflation expectations Brenden rejects comparisons between 2008 and 2020. In 2008-10 there was a decisive break in the monetary inflation cycle caused by the contraction in credit. By contrast, in this cycle there has been no serious tightening as goods and services inflation has not picked up. 2020 might be classified as a recession according to the National Bureau of Economic Research, but it is not a recession in terms of any monetary concept. The Fed is hegemon in the world economy in a way it never was in the 70s 80s and even 90s. Prior to the ECB, the Bundesbank was willing to defy US monetary policy and take the consequences in terms of exchange rate fluctuations. Today the ECB is 100% aligned with the Fed meaning powerful inflationary forces are being stirred in unison. Brendon expects high inflation in the 5-7% range as non-monetary disinflationary forces, such as globalisation, recede. In addition the pandemic has forced a huge expansion of monetised debt which tends to lead to malinvestment. However, the resulting pickup in inflation will be welcomed by political forces as governments gain from monetary inflation due to a reduction of the real value of debts outstanding. Less understood is the monetary repression tax which Brendon defines as the difference between the super low interest rates which have come about by central bank manipulation and where rates would be in real terms if we had anything like a sound money regime. It is Brenden’s view that asset inflation reduces long term prosperity through the corruption of signalling, providing oxygen for false narratives, misallocation of investment and growth of monopolisation. Since 2000 we have had poor productivity growth and investment spending compared to previous long cycles. He see’s asset inflation as an illusion as a monetary repression tax cannot be avoided by switching out of bonds into riskier assets as those risk assets trade at a premium. These repression tax premiums and monopoly profits are not here for ever. They have their limits and will go into reverse at some point. Brenden then tackled the illusion that fiscal deficits are costless. In other words, interest rates are so low that you may as well run deficits. The saving surpluses are a result of investment being depressed. Large government deficits will be paid back either by explicit taxes or by monetary repression tax, or inflation tax. And the illusion that the business cycle can go on for ever is also a false narrative. Central banks cannot manipulate interest rates indefinitely. Either a rise in goods and service inflation will lead to a tightening of policy or there will be a shock through the extent of malinvestment leading to a bubble bursting and credit contraction. Brenden expects the post pandemic economic rebound will see goods and services inflation rise with a fading of asset inflation. Europe is at the epicentre of this risk. The European recovery plan will not help Italy and the banking system is essentially bankrupt. It will come to light in any asset deflation process. Brendon does not share the widespread pessimism on the US dollar as he sees the high inflation scenario as a direct result of a general race to the bottom amongst major currencies. The US may be ahead in terms of where the high inflation is going to be first in the next 2 years but Europe will eventually end up with much higher inflation than the US as there is no way the ECB can realistically pull back its balance sheet or raise rates without massive losses emerging in the whole credit structure. Inflation hedges such as equities and real estate may have already peaked. Brenden’s colleague Stephen highlighted technical analysis that indicates a correction starting now in the US equity market then a final capitulation higher, but May this year should mark the end of the bull market started 2009.

Topics