He warned people before the 2008 subprime mortgage fiasco and recession. He's trying to warn us now.
Remember Michael Burry from the movie, "The Big Short", about the 2008 financial crisis? In the movie, Burry was the one played by Christian Bale.When almost everyone thought the housing market was doing great, Burry figured out that it was about to collapse and made a huge, multi-million dollar investment bet that he was right about that. His "short" investment ended up making a $700 million profit.
So when Burry has something to say about financial markets and the economy, we should listen. One would think.
Recently, he posted this tweet:
"People say I didn't warn last time. I did, but no one listened. So I warn this time. And still, no one listens. But I will have proof I warned."
The warning: Inflation is coming.
He later deleted his tweets about inflation and posted this explanation of why:
"Tweeting and getting in the news lately apparently has caused the SEC to pay us a visit. Lovely. #nomoretweetshttps://t.co/6t3v8Tc7LF— Cassandra (@michaeljburry) March 18, 2021"
Is there some reason that the U.S. Securities Exchange Commission doesn't like him tweeting warnings about inflation? Well, I'm taking that as even more of an indicator that people should pay attention.
We ordinarily have inflation all the time. That means prices on various goods and services going up. So the prices at the store go up a by about two or three per cent per year. So what?
Well, sometimes, it's a lot more than that. Take what is happening in Venezuela, for example. Their annual inflation rate is about 2,665 per cent. To make that relatable: If we had that much inflation for a year, a 4 liter jug of milk would go from $5 to $133. A $2 can of soup would go up to about $50. Gasoline would cost about $40 per liter. If filling up your car costs $50 now, that much inflation would drive the price of a fill up to over $1,300.
That's not the worst it can get. In 2019, the annual inflation rate in Venezuela hit 350,000 per cent At that rate, the prices double every month. If that happened here, how long could you keep the lights on?
Meanwhile, people who own homes with large mortgages would find that their houses have become worth many millions while the mortgages stayed the same. People who own businesses can increase their prices to try to keep up with inflation. They may lose customers, but they aren't powerless to deal with it.
One of the nastiest things about inflation is that those who have worked hard, saved money, and keep it in things that are considered safe like cash, chequing accounts, savings accounts and government bonds will be financially destroyed. Meanwhile, those who ran up debts and have no savings will be rewarded as their debts evaporate. Those who have the closest connection to the government and its pet banks will be in a position to profit immensely. Some of these people will be recipients of the increased government spending. Others will benefit by getting a pile of newly created money in the form of bank loans that give them money to spend now, but that they only pay back later when a lot of that debt has evaporated due to high inflation.
Canada's money supply increased by over 18 per cent last year. Normally, it's more like 5 per cent. This really looks like Canada is covering its massive budget deficit by issuing more money.
In the U.S., the situation is even more dramatic, with the money supply increasing by 26 per cent. No wonder; their budget deficit of $3.3 trillion is about half their total spending. Already this is happening. About half of all borrowing by the U.S. Treasury is from the Federal Reserve which just issues new money and lends it to the government. A similar program is underway in Canada. According to Bloomberg, Canada’s central bank was purchasing $4 billion worth of government bonds every week — and is acquiring so much government debt that the bank’s Governor, Tiff Macklem, has warned that “market functioning could get distorted” if we don’t pull back.
The U.S. has another big problem that we don’t have. People in the rest of the world are holding huge amounts of US money. The best estimates are that there is more U.S. currency in the rest of the world than inside the U.S. Perhaps as much as a trillion dollars in cash. Foreign central banks are holding about $7 trillion more. There a lot more held by other foreign banks. If the US dollar drops a lot in value, the rest of the world may want to cash in dollars for other currencies. Last year, the value of the US dollar already dropped by 7% compared to other currencies.
If all those dollars abroad come flooding back in, that alone could easily create 20% to 100% price increases in the US. Nobel prize winning economist Paul Samuelson predicted in 2005 that something like this could happen someday.
Much of Canada's economy is focused on exporting to the US. If the US dollar drops in value and Canada's dollar stays the same, then everything made in Canada will cost higher prices to Americans. That means they'll buy less from us. The solution that has been used frequently for decades is to reduce the value of the Canadian dollar whenever the value of the US dollar goes down. Regardless of the reason, if we drop the value of the Canadian dollar, then we will have inflation in Canada. If we drop it a lot, the inflation will be a lot.
It may seem as though the U.S. economy is large enough to absorb huge amounts of new money without a major problem. That's true. A hundred billion dollars of new money would be just a blip to the US economy. Trillions upon trillions of new dollars is something else entirely. The numbers matter.
There is that much coming. There is a $3.3 trillion dollar budget deficit, financed largely by printing more money. $7.7 trillion in existing debt that has to be refinanced, also mostly with newly created money. That adds up to $11 trillion the US needs to raise in addition to all their tax revenue in order to not default on their debts. If they can borrow about half of that, there would still be at least $5 trillion in new money created. There's only $20 trillion in the whole US money supply. So that's a 25% increase in the money supply next year in addition to the 26% increase over the past year. That's without any massive new spending initiatives, but President Biden has announced $2 trillion in new spending initiatives.
There are at least $8 trillion US dollars outside the US just in cash and foreign central bank reserves that could come flooding back to the US at any time. 25% - 50% inflation in the US is now looking very possible. If that happens, a lot of foreigners holding US dollars won't want to get stung by that. About half of the foreign held US dollars coming back could easily add another 25% inflation.
The worst part of this particular situation is something that I haven't heard anyone else saying. All the usual methods of slowing or stopping inflation involve higher interest rates. The US has $28 trillion of debt that it's paying interest on at very, very low rates. Even at those rates, the interest payments are about 5% of the US budget. That's part of what's causing the huge budget deficit that is being financed by creating new money. So if interest rates go up, the interest payments go up. That causes the deficit to go up which will increase how much new money has to be created to avoid default. Creating new money is the main thing causing inflation.
It's like welding the accelerator to the brake pedal on a car. If you push the brakes, you also push the accelerator. How then, do you stop?
There are solutions, but none that the politicians are willing to do. Instead, they are likely to just keep going even though it means high rates of inflation. You see, that causes their enormous debt to evaporate. Only a small amount of the $28 trillion US debt is indexed to inflation. 25% inflation would benefit the US government by about $7 trillion.
The thing is, almost nobody understands economics or inflation. So the politicians will blame someone else. The usual target is businessmen and currency speculators, but they're not causing this, they're reacting to it. A multi-trillion dollar motive and someone else takes the blame? This is a crime that's almost inevitable at this point.
Peter Bernholz conducted a study on hyperinflation. He found that at least 25 out of 29 episodes of hyperinflation that he studied were caused by governments covering budget deficits by issuing more money. Right now, the US has an enormous budget deficit equal to half their spending and half the deficit is being covered by creating new money. That is the recipe for hyperinflation. Not ordinary inflation, but the 50% a month or more hyperinflation.
Most governments, when there is high inflation and the public is upset by it, will pose as the heroes by imposing price controls. That causes shortages, but nobody understands this either so the government can again avoid blame and say they're doing all they can. In other countries, when this sort of thing is going on and the shortages lead to people actually going hungry, you can get food riots, radical political movements and even revolution. Venezuela has all this going on now including an attempted revolution.
Please, somebody tell me I'm wrong...