May 8, 2021
Inflation… I keep sounding the alarm because its threat to the economy keeps insidiously growing every day. And despite what the Consumer Price Index (CPI) report, Warren Buffett, or even reality seems to suggest, it appears the Biden administration won’t admit the existence of rising prices.
But you don’t need to be the Oracle from Omaha to see it coming — you only have to look at the cold numbers.
Once the Fed finally realizes (or admits) there’s too much inflation, its single option is raising interest rates, which will pose a massive pullback effect on the economy.
On the American Consequences podcast this week, I spoke with Daniel Lacalle, Chief Economist at Tressis, who details that the European Union offers a case study in how big government and massive spending are toxic for economic growth – and how the U.S. can avoid their missteps.
The Inflation Fallacy
Daniel claims it’s foolish to believe that economists wouldn’t worry about inflation — even pre-COVID, education, health care, and housing costs were going up past predicted CPI levels.
And concerningly, this rise in prices comes at the exact moment when central banks have a severe surplus of money that far exceeds the demand… inflation 101.
Gas prices are up 9%, and Goldman Sachs is calling for $75 a barrel of oil this summer… Energy and food sectors are rising. You may have already noticed this at the pump or self-check-out… But your wages? They’re staying flat.
According to Daniel, this is the fallacy of inflation. In the Keynesian world, inflation jacks up prices, companies pay workers more, people spend more, and it’s all rainbows and unicorns… Unfortunately, that doesn’t happen. We know that inflation doesn’t translate to real wages for workers or better margins for companies. Hear how Daniel would solve America’s inflation problem.
The man who made twenty-three 1,000% recommendations just unveiled his #1 stock live on camera right here.
Politicians and central banks have their go-to playbook in this circumstance — and it’s a PR move, not a bit of monetary policy. They’ll first deny the inflation, then dub it “transitory,” and ultimately scapegoat corporations for the price hikes.
And D.C. will then present itself as the shining hero by introducing price controls. There’s a precedent (and president) for this: FDR’s Emergency Price Control Act of 1942.
As I’ve mentioned before, Roosevelt’s grossly overrated in the collective memory of American history, as his extensive regulation and protectionist measures ended up prolonging the Great Depression.
It wasn’t until the war effort and a government curb in spending that the American economy was unchained. And don’t forget, the New Deal applied to an America that’s far smaller than it is now.
So if Biden fancies himself some FDR 2.0, he should rethink that bit of branding… But Uncle Joe has more in store, as we can’t forget about inflation’s equally evil twin — high taxes.
Transatlantic Tax Tutorial
Janet Yellen’s proposed 28% corporate tax rate will push American companies to set up shop overseas and give the U.S. the highest corporate rate in the Organization for Economic Cooperation and Development.
Yellen claims this hike won’t have negative consequences while in the same breath calling for a matching global minimum rate… indicating full-well that she’s privy to the disastrous repercussions.
This measure will bleed small and medium enterprises the most. These businesses are less-equipped than the Apples and Amazons of the world to circumvent the costs with fleets of attorneys and tax-haven loopholes.
And they bandy about corporate tax rate talk as if it’s the only tax that businesses pay.
But that’s what they pay after turning a profit, coming on the heels of property, labor, and investment taxes. And to penalize all companies at nearly 30% will, in turn, dampen investments and job creation.
Then there’s the proposed capital gains hike from Biden and Co., nearly doubling it from 24% to 43%… and in the process cooling the engines of capitalism, financing, and private equity, leaving entrepreneurs to look abroad for investing.
What seems like a measure that “only targets a small percentage of the population” (millionaires) is always the messaging interventionists leverage for further taxation.
And across the pond, it’s what Europeans have been hearing for years.
Daniel claims that the taxation machine perpetually lowers the bar on who’s “rich” in the European Union — and the same pattern could emerge stateside. Sure, the new proposed cap-gains tax only targets millionaires right now. But what if they reduce the minimum to people making $500,000 a year? $100,000?
And if you copy the EU, you’re going to get the growth of the EU, which is to say, barely any.
By 2019’s end, America’s economy grew at more than 2%, while Germany was nearly Recession-level and Italy sported zero growth — and this was all before anyone had even heard of COVID.
France hasn’t had a balanced budget since the late 70s and suffered stagnation for three decades, with unemployment levels twice that of the U.S.
The average per capita American income of someone “poor” in this country still matches or exceeds what’s considered middle class in many European countries.
We forget how well we have it here and how easily it could all slip away…
Because with a doubled cap-gains rate, the government’s going to take about half if you’re a small-business owner.
This measure kills the ingenuity and industriousness we hold so dear. Take our markets, for example. The S&P 500 looks wildly different than it did 20 years ago, unlike the stagnant STOXX Europe 600 across the Atlantic, a testament to America allowing new businesses to thrive.
Citizens take for granted the capital-allocation machine that allows for improved productivity and job creation. People think these things just happen or that Washington will come in and fix everything — it won’t.
Americans need to understand that a big government with high taxes ala Europe is not the answer.
Pandemic-wise, the continent’s suffering from a slower vaccine rollout and more draconian lockdowns. And Europe has their version of Biden’s misallocated trillions in stimulus (naturally). Next Generation EU is a public-private package that’s supposed to strengthen the digitization of their economy, green energy, and gender equality.
Are you ready to join the EU? I didn’t think so.
Dying Currencies: A Living Omen
If America thinks the dollar will always be the world’s reserve currency and keeps pushing the limits of monetary policies, Daniel reminds us again to look at the U.K.
The British pound lost its top spot as the world’s reserve currency nearly a century ago… If we keep spending and borrowing recklessly, the dollar may suffer the same fate.
The Fed and Washington should warn against the siren calls of Modern Monetary Theory, thinking they can print and borrow endlessly. There is, in fact, an end. If you look at the history of money, nearly all empires crumbled because of a monetary disaster… We’re looking at you, Rome.
And you needn’t be a top player to destroy the purchasing power of your currency: Venezuela, Argentina, Iran, Turkey, Spain, Greece, Portugal, Italy (before the Euro), all of them did and do what the U.S. is doing now. Prices change by the hour in parts of Latin America…
And if we suffer death-by-printing at our own hands, China’s there waiting to pounce (as always). The Red Dragon’s cementing relationships with African, Euro, Latin economies right now, waiting for the American financial system to stumble and hoping for a reality where it’s their money that makes the world go round.
The elections of 2022 and 2024 will be critical in the U.S. deciding on America Going European or the States sticking to its capitalistic roots.
We need to keep addressing our irresponsible financial policies, folks. We’re getting caught up in petty culture wars as our economy is on the verge of imploding. Empires and societies longer-lasting than our own have fallen in similarly dire fiscal circumstances… Just look at a map of Europe to remember the fallen giants.
As a country, we want to avoid this end. As an investor, you want to pick stocks that rise with inflation. In short, fiats are in trouble, and assets like gold and bitcoin have rarely looked better.
If we’re not careful, you might have to pay for that next Starbucks Venti with digital yuan.
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Publisher, American Consequences
With Editorial Staff
May 8, 2021