by Gary Alexander

April 13, 2021

“Money is more than an artifact: It is an idea, a central feature of civilization, the health of which depends, in a liberal society, on the predictability of its value, its stability, not only today but in the distant future. Money is, as Keynes said, a link between the past, present and future, in order that long-term commitments and contracts can be made and kept at interest rates that express the real scarcity of capital, the urgency of time, with as little chance of forecasting error as humanly possible.”

– Robert A. Mundell, “The Debt Crisis: Causes and Solutions,” Wall Street Journal, January 31, 1983

Last Sunday, April 4, we lost a great champion of economic sanity, Robert A. Mundell, the 1999 Nobel Prize winner in economics, the inventor of the Euro currency and, most importantly, a long-time champion of honest money. He died on the cusp of the passage of the second $2-trillion package of fiat money programs in three months under the Biden administration. He has clearly gone to a better place.

Nobel Prize Photo

Mundell was Canadian. He grew up close to my home turf in Seattle, first matriculating at the University of Washington before moving on to MIT and the London School of Economics. He lived through the great “stagflation” of the 1970s which drove many of us into the arms of gold 50 years ago, when Nixon closed the “gold window” on August 15, 1971, and then 40 years ago when the Prime Rate hit 21%, 10-year notes reached 15.84% and the 30-year fixed rate hit a high of 18.63% in 1981. Those were the fruits of going off the gold standard and setting the dollar afloat, only to capsize in a value-relativistic world.

Those lessons now apparently must be learned all over again by a generation which never felt the pain of the 1970s. A new mystical theology called Modern Monetary Theory (MMT) promises a free lunch of prosperity for all by printing unlimited funds for all with no significant “morning after,” either through inflation or debt hangover. We are now in that magic period between the dream state and waking up.

Writing 40 years ago in The Wall Street Journal (September 30, 1981), Mundell spoke of the after-effects:

“Since the breakdown of the U.S. gold standard, the U.S. monetary system has produced more dollars than in the entire previous history of Republic. The prices of gold, oil, silver and other commodities have risen more than tenfold and, barring a drastic change in the monetary system, prospects are for more of the same in the future. Never before in U.S. history has the Treasury had to pay 15% for 30-year bonds.”

Enjoy Economic Nirvana While It Lasts, Before Inflation Returns

But the dollar is currently strong, you say? Compared to what, and when?  From March 15, 2020 to year end, the U.S. Dollar Index was down over 12%. It rose in the first quarter of 2021, but the Dollar Index is down 1.2% so far in April after the Fed reiterated that it won’t raise rates despite forecasts that the U.S. economy will likely recover faster than its peers. Longer term, the dollar is down 99% to gold since the Federal Reserve was created in 1913, and the dollar is down 98% to gold since it was set afloat in 1971.

FRED Graph

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The paper money universe is often a “race to the bottom” to see which currency can lose value to its rivals to gain a trading edge. For instance, the dollar has been up and down vs. the euro and other major currencies since Bob Mundell helped create the unified continental currency at an IPO of $1.18 in 1999.

Euro to US Dollar Exchange

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The latest inflation figures show a rapid escalation to a 1% (monthly) rise in the Producer Price Index, which is a 12% annual rate. The major commodity price indexes are soaring at double-digit annual rates. It’s only a matter of time until producer prices translate into consumer prices. The massive amount of cash in the bank accounts of consumers and corporations is just itching to be spent, and when we finally escape our artificial COVID prisons, after the vaccines push us into “herd immunity,” Katy bar the door.

The International Monetary Fund (IMF) has just lifted its 2021 growth forecast for the U.S. by a giant leap forward, from 5.1%, to 6.4%, the fastest U.S. GDP growth rate since 1984, “Morning in America” under Reagan. These are the fruits of the multi-trillion-dollar stimulus packages under Trump and Biden.

Amazingly, official Fed policy is to try to push their favorite inflation metric higher, to 2%. In a Barron’s interview (“A Central Banker on a Mission,” April 12, 2021), San Francisco Fed President Mary Daly, a voting member of the FOMC this year, said “We have struggled for a whole decade…to get inflation up to our 2% goal.” Then she promises, “We always have the tools to pull inflation down if it gets too high.”

File that promise away for future review – or review Paul Volcker’s experiences in 1979-82 to see how he struggled to rein-in double-digit inflation: We had to suffer two recessions that felt like a Depression.

FRED Graph2

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Since we haven’t been able to spend on over-priced restaurants and entertainment, travel or cruises, we’ve saved up a lot of money. We’ve spent a lot on home improvement and new homes (new single-family home sales are the highest since 2006). We’ve also bought more new vehicles (U.S. motor vehicle sales rose at an 18 million annual rate in March, the highest since 2005), but we can’t drive them very far, so we’re itching to spend and travel. The CDC says it’s safe to travel – but others are screaming, “WAIT!”

Put it all together, and we have lots of cash and we’re itching to spend it – a classic formula for inflation.

While you’re waiting, read some history books about inflation, with perhaps a special focus on the 1970s.

P.S. Part of Modern Monetary Theory is that they don’t even need our tax dollars. Isn’t it ironic that we have all this money in the bank and the IRS doesn’t want our taxes on April 15 – for two years in a row?!

FRED Graph3

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
We Are Now Essentially in Economic Nirvana

Income Mail by Bryan Perry
Taxing Foreign Profits – GILTI As Charged

Growth Mail by Gary Alexander
Inflation Will Roar Again – And Probably Soon

Global Mail by Ivan Martchev
Tuesday’s CPI Numbers Will Be Interesting

Sector Spotlight by Jason Bodner
Is the Stock Market a “Yellow Light Turning Red”?

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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