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Inflation’s Real Drivers: Redistribution and Boneheadedness

President Joe Biden just can’t help himself.

His administration announced on Wednesday, May 22 that, after a new round of student loan forgiveness, one out of every 10 Americans with student loans will have received some amount of debt relief. 

The new plan will shave $7.7 billion off of the balances of about 160,000 borrowers.

There’s at least one problem with this, of course. 

That $7.7 billion isn’t the president’s to forgive. It actually belongs to you and me, the poor schmucks that pay the taxes to keep the lights on around here. Or, more accurately, the poor schmucks on the hook to pay back the additional national debt this will require.

Remember, Uncle Sam isn’t sitting around with bags of cash to hand out like Halloween candy. We’re running a budget deficit that adds a trillion dollars to the national debt every 100 days. So, this $7.7 billion in debt relief isn’t exactly debt relief… it’s just shifting the debt to you and me. 

But hey, if you’re in for a penny, you’re in for a pound. When you’re already nearly $35 trillion in debt, what’s another $7.7 billion?

“A Billion Dollars Isn’t What It Used to Be” 

The late Nelson Bunker Hunt will forever be remembered for uttering those words after he lost the bulk of his fortune attempting to corner the silver market in 1980.

It sure ain’t, Mr. Hunt. 

In a world of multitrillion-dollar deficits, a billion – or even 7.7 billion – is nothing more than a rounding error. 

But this same fiscal incontinence is a major reason why inflation is so hard to kill. 

While the Federal Reserve sucks demand out of the system by keeping interest rates high, Congress more than compensates by running multitrillion-dollar deficits equivalent to almost 7% of GDP. 

That’s the kind of budget deficit you’d expect to see during a major war or during a really nasty recession. We have neither of those things. 

But there’s more to this story…. 

This will come as news to no one, but government spending isn’t efficient. 

My credit card statements are testament enough to my own frivolity, and anyone who has ever worked for a major corporation knows how shockingly wasteful they can be. But compared to the government, most of us are models of fiscal sobriety. And at least I can say that the dollar I frittered away on my credit card boosted GDP by a dollar.

But a dollar in government spending doesn’t actually boost GDP by a dollar. The data on this is a little messy, and you’ll never get any two economists to agree on the exact number, but studies by the International Monetary Fund and others have shown that every dollar in government spending only boosts GDP by about 60 to 80 cents. The rest is lost to inefficiency. 

This is why massive government deficits are worse than inflationary… they’re stagflationary. They fuel inflation without fueling growth. 

Of course, really boneheaded policies cause stagflation, too. 

As our Freeport Society friend Rodney Johnson at HS Dent recently pointed out in a research note…

We produce a lot of energy, but the mix is changing and demand is rising dramatically. Using more expensive fuels to supply more clients leads to one thing: inflation.

When the [Bureau of Labor Statistics] reported on the Consumer Price Index last week, people let out a sigh of relief. Inflation was creeping down toward the Fed’s 2% level. That was true overall, but electricity costs alone jumped 5.1% over last year. It’s true that it represents just 2.465% of the average consumer’s spending, but we still get the joy of opening the bill every month to see how much more we have to pay.  

To make it worse, we’re transitioning to renewable (but not cheaper) electrical generation at the same time that transformative technologies like EVs and artificial intelligence have ramped up our appetite for electricity. This is part of the reason that power prices jumped from 2020 to 2024, on an index basis. From 2014 to 2018, the price of electricity inched higher by 0.47%, to 2.34%. From 2021 through April 2024, the cost expanded by 5.85%, to 29.26%.


Back to the Future…

Think about the conditions in place the last time we saw stagflation: the 1970s. The government spent recklessly on both “guns and butter” in fighting the Vietnam War while also trying to fund the new social programs set up by Lyndon B. Johnson’s Great Society. 

That, along with the fairly recent death of the gold standard in 1971, was enough to give us endemic inflation. But the massive supply shock from the OPEC oil embargoes were the final straw. 

Higher energy costs from the embargo simultaneously fueled inflation while crimping growth. That helped to turn unpleasant inflation into downright miserable stagflation. 

I may have to grow out some lambchop sideburns and a mustache because it would appear that the 1970s are back. 

But fashion sins aside, we don’t have to suffer. In my latest issue of The Freeport Investor (members can log in here), I lay out the scenario for stagflation… and recommend some ways to protect your portfolio from it. 

These include investing in companies driving exponential progress and those helping rebuild the American industrial empire. Think the likes of Nvidia (NVDA) and Caterpillar (CAT)… although, with the former reporting earnings tonight, tread carefully. NVDA is in expensive territory right now.

Use common sense when investing in companies that have gotten so big that the entire market waits with bated breath for their next move. That’s not to say avoid them. Only, invest responsibly.

For Freeport Investor readers, we recommended a more brick-and-mortar company that isn’t flashy and splashy, but is quietly in control of some of the most powerful businesses’ key resource. This video will explain how to get the details of our latest model portfolio addition, plus all the other Rebuilding America and Exponential Progress stocks in our sites.

To life, liberty, and the pursuit of wealth.