Inflation could mean trouble for world finances

By John Grace

Contributing Columnist

Everybody wants to know the date things go sideways. As I am fond of saying, if we are jaywalking across the street, it’s not the bus you do see that can disrupt our day, it’s the bus we didn’t see, couldn’t name and was impossible to time.

Global bubbles from the U.S. to Europe to Asia have been artificially pushed by stimulus for so long that we are literally at the point where they could burst for no big reason. As Dent Research illuminates, was there a trigger for Japan’s 62% crash from late 1989 to 1992?

Japan’s economy looked like a well-tuned piano in late 1989. How about in early 2000, when the first tech bubble crashed 78%. There had been no signs of recession. In fact, the recession didn’t really set in until late 2000 into 2001, several months after stocks started to crash.

Something’s happening here in color and in real time. If you’re worried that the Federal Reserve might do too little too late to buttress inflation concerns, you can take comfort from the Fed’s rate-setting committee that there is an easy shift away from easy-money policies.

“The problem is that the instruments in the Fed’s toolbox for lifting rates are potentially more harmful than they once were and using them is likely to induce pangs of regret,” the Wall Street Journal reported May 27.

Central banks around the world make the case that they have all of the tools they need to keep economies from getting too hot or too cold. To do so means there must be a magical thermostat connected to the machines that simply whirl away, shifting from cold to hot air so that everyone is as comfortable as can be to keep on spending mindlessly.

But despite what a large number of Federal Reserve members who are determined to encourage you to wear rose-colored glasses that discolor everything, retail giant Costco may see things clearly that the current inflationary spike the U.S. is experiencing will be anything but transitory.

“Chip shortages are impacting many items from an inflation standpoint, some items more than others,” Costco Chief Financial Officer Richard Galanti said June 1, according to Yahoo Finance. “And with regard to containers and shipping, transportation costs have increased as well. This will continue. The feeling is that this will continue for the most part of this calendar year.”

Galanti went on to say, “We’ve had a lot of questions about inflation over the past few months. There have been and are a variety of inflationary pressures that we and others are seeing. Inflationary factors abound.” They include increased freight expenses, higher labor costs, more transportation demand on top of the container shortage, port delays, shortages from everything from chips to oils and chemical supplies by facilities struck by the Gulf freeze, storms and commodity prices.

In fact, the U.S. Commerce Department found that core personal consumption expenditure price index increased 3.1% in April, father than was expected. At the same time, the consumer price index rose in April at the fastest pace since September 2008, clocking in with a 4.2% increase versus a year ago, according to Yahoo Finance.

Where did inflation come from you ask? Let me share Chapter 10 with you “A Tarifically Bad Idea” from my book, “Making Finance Make Sense; Striving to Win.”

“On March 9, 2018, in an effort to restore American industry to its previous luster, former President Trump garishly imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports. Beijing responded quickly escalating the dispute.

“China intends to impose tariffs with ‘equal scale, equal intensity’ on imports from the U.S., and all of the country’s earlier trade commitments are now off the table,” the Commerce Ministry said according to Yahoo Finance.

A tariff is a duty or tax placed on particular goods by the government. The design is to make foreign goods more costly, giving an advantage to domestic manufacturers of the same products who don’t have to pay the tax. Let’s say you need a new car and you have two at the top of your list.

If Product A is 25% more expensive than Product B and there is no distinguishable difference in quality, it’s reasonable to believe most consumers will vote with their wallet and buy the cheaper car — no matter its origin.

High inflation is often unstable and unpredictable, which can keep the economy from performing at its best. Unevenly rising prices reduce the purchasing power of consumers and this erosion of real income may be the largest cost of inflation. And remember, markets abhor uncertainty.

The instruments in the Fed’s toolbox for lifting rates are potentially more harmful than they once were and using them is likely to induce pangs of regret.

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.

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