YOUGHAL, IRELAND – The Germans have marvelous words for things. Katastrophenhausse, for example. Even without knowing the language, you know you’re not going to like it.
Yesterday, colleague Tom Dyson reported seeing a glimpse of it coming:
The bond market expects the Consumer Price Index (CPI) to increase by 2.5% per year for the next five years, judging by the difference in yields between the 5-year Treasury and the 5-year inflation-protected Treasury (TIPS). That’s a 12-year high.
Tom quotes The Wall Street Journal for further detail:
Prices are surging for the raw materials used to build American homes.
Lumber, one of the biggest costs in home-building after land and labor, has never been more expensive and is more than twice the typical price for this time of year. Crude oil, a starting point for paint, drain pipe, roof shingles and flooring, has shot up more than 80% since October. Copper, which carries water and electricity throughout houses, costs about a third more than it did in the autumn.
Prices for granite, insulation, concrete blocks and common brick have all pushed to records in 2021… Drywall and ceramic tiles are short of records but have also climbed.
You can inflate a tire. You can inflate a balloon. Or you can inflate the money supply… and an economy.
It’s this last form of inflation that leads to Katastrophenhausse.
It loosens the moorings of a society… so that it is soon floating high above the ground… in a kind of miracle fog, where everything seems possible – even replacing real jobs and real earnings with fake money…
And then it crashes.
It was Austrian economist Ludwig von Mises who called it a “Katastrophenhausse,” usually translated as a “crack-up boom.” As you can see, there are two parts to it – the boom… and then the crack-up.
Lottery winners often go through a similar phenomenon. First, they get a lot of money. Then, they lose their wives, their jobs, their friends… and finally, their money, too.
So did the Japanese enjoy a catastrophic triumph when they bombed Pearl Harbor. They celebrated for six months. Then, the Battle of Midway marked the beginning of the “Katastrophen” phase.
Four years later, Yokohama, Tokyo, Hiroshima, Nagasaki, and dozens of other cities were smoking ruins… with 3 million dead, including about 600,000 civilians.
And now, with the printing presses running night and day, Americans feel like young boys whose school has just burned down. They are enjoying a truant’s delight, a vacation from real life… a brief interlude leavened by counterfeiting.
Last year, the American government – federal and state – made one of the most catastrophic decisions in history, causing mass panic and destroying millions of jobs and small businesses.
Then, by printing trillions of new money, it gave the impression that no real harm had been done by the lockdowns… and that the economy can be rescued by printing even more money.
According to a recent Bloomberg report – mentioned yesterday – the Biden Bunch is planning to go “Full Katastrophenhausse,” spending another $3 trillion it doesn’t have, in addition to the $1.9 trillion it didn’t have.
Investors are watching… either warily or greedily.
On the one hand, older investors are fearful that rising bond yields (up more than 200% since last August) and “inflation” sightings (currently at their highest level in 12 years) will force the Federal Reserve to react with more normal, tighter money policies.
On the other hand, younger players think there is nothing to worry about. Most of them weren’t even born when the last serious bout of inflation occurred in the 1970s.
They believe either that inflation is never a problem… or that it is a good thing; it drives up stock prices. (More about that tomorrow…)
Here at the Diary, however, we think they are both wrong.
In our view, inflation is a problem, and the Fed will not be able to control it. We’ve already gone too far, stayed too long… And now, we can’t get back. Like the Japanese fleet, we wait to be sunk.
And here is our prediction. Please cut this out… and put it on your refrigerator. Refer back to it… if it proves prescient. If not, kindly toss it in the waste can…
The first stage of the coming Katastrophenhausse is most likely the “inflation scare.”
Scottish economist Russell Napier says that inflation has become not just cyclical but structural. It no longer rises with a growing economy (more demand), but as a matter of government policy.
He sees a U.S. inflation rate of 4% by some time next year. That will be enough to set off alarms.
The Fed will make a limp gesture toward “normalizing” interest rates and slowing its asset purchases.
Then, stocks and bonds will crash, as investors’ fear puts an end to the Bubble Epoch.
This will all happen very quickly. Investors will anticipate Fed action… the Fed will react timidly, hesitantly… Market prices will fall…
There will be weeping and wailing, and gnashing of teeth. People will fear deflation/depression/defunding and deleveraging…
And then, all Hell will break loose.
Whatever It Takes
It will then become obvious that either the nation endures the Katastrophe it has coming… or the feds make it worse by once again printing up more fake money to try to stall it.
We know how that will turn out…
The politicians will be out in force, promising to “protect hardworking families.”
Treasury secretary Janet Yellen will tell Congress it needs to act immediately, “or we may not have an economy on Monday.”
Federal Reserve chair Jerome Powell will pledge to do “whatever it takes” to keep the jig up.
But none of it – neither the BS words nor the BS money – will stop the crack-up.
More to come…
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