Inflation -Models
Models: “We face the same problem today that presented itself in the past two elections,” said the CIO, his long career straddling East and West. “The prospectus on offer – let’s call it neoliberalism – does not work for the ordinary person.” Neoliberalism is a political and economic model that rose to prominence under Reagan and Thatcher. It advocates free-market capitalism, while limiting government spending, regulation, and public ownership. “The ordinary person now realizes they have no voice in suggesting an alternative to this structure.”
Models II: “And the powers that be have no interest in upending neoliberalism, because in today’s perverted form, it serves their needs,” continued the same CIO. “In the darker moments, we can observe that in the 1930s, our predecessors were stuck in the same basic rut – and the answers given to that dilemma were rather extreme.” The educated Left and Right failed to acknowledge that the Great Depression essentially invalidated the top-down rule in modern society. “What we now see is our political systems searching for better answers than back then.”
Models III: “To understand Japan’s model realize the system is structured to protect the top 20% of male workers,” explained the CIO. “There are two avenues for rambunctious change - the system loses its ability to protect the interests of that 20%, or society’s majority decides it has had enough,” he said. “Mr. Abe, like Mr. Trump and Mr. Sanders, were organic attempts by the system to produce an alternative to a failing model,” he said. “Neither Abe nor Trump did much of what was promised, but both represented an attempt to do something different.”
Models IV: “To understand the US model you must realize the system is constructed to cater to the interests of the top 10% of asset owners,” said the CIO. “The American dream is indistinguishable from the nation’s ideology, and this is true for some.” But it is false for most. “The fact the American dream exists is the necessary basis of an otherwise extremely brutal division into a very-rich and everyone-else society,” he observed. “While the majority are concluding the system doesn’t serve its needs, the top asset owners have no interest in change.”
Models V: “What breaks the US system is inflation, which is not a foregone conclusion, but it is the greatest risk to America’s top asset owners,” explained the CIO. “Even a whiff of inflation will put upward pressure on bond yields, removing the support for all of their elevated assets values.” You would quickly have a deeply unequal system that no longer protects the interests of its masters and has long since abandoned the welfare of its masses. “It is in times when both groups lose confidence in the system that the whole psychological structure unravels.”
Models VI: “The 1970s and Weimar are useful in understanding inflation,” said the CIO. “They are not models but contain lessons.” It is not solely money printing or excessive debt that creates inflation, but rather a restraint to a society’s ability to meet higher prices with greater supply. “The Allies severely limited Weimar’s productive potential. The 1970s industrial unrest and oil supply shock restrained a US supply side response. “There are so many supply-side unknowns now. Will labor return to work in 2021? How quickly will we dismantle global supply chains?”
Anecdote: Who is John Galt? Ayn Rand wrote Atlas Shrugged atop that question. At twenty-five-years-old, it infected me. Powerful ideas do. Her philosophical model, Objectivism, helped explain the world’s workings. At least for a time. I was predisposed to fall for her model. Rugged individualism, laissez-faire capitalism, and an abhorrence for state power left me longing to live in Galt’s Gulch, her mythical libertarian town, hidden high in the Rockies. But I chose a profession that forces one to maintain an open mind, question everything, even those things we cling to desperately. Especially those things. In time it struck me that while Ayn’s paperback utopia may be the way to organize humanity in theory, it would create a living hell in practice. When pushed hard, I still claim to be a libertarian, but the truth is far more complicated. Because after decades of studying humanity, I’ve come to see that each of the great philosophies, the political theories, religions, and economic models have something important to offer. Our reality is an endless battle amongst them all, with the jagged front lines advancing and retreating. At the moment a system appears triumphant, victorious, eternal, inevitable, the decay has already set in. And that’s because the only immutable truth is that whatever we touch, we change in ways that reflect our likeness. And humans are as magnificently complex as we are sublimely flawed - were we not, the world would be awfully boring. So as the decades passed, I lost interest in identifying with any one philosophy, and embraced a study of the models that move the world. Their rise and fall. The signs that mark inflections – these are the times of immense risk, opportunity. And we appear to be entering one now. Which should make this the most interesting decade of my first five.
Good luck out there,
Eric Peters
Chief Investment Officer
One River Asset Management