Core consumer price inflation in the US rose by 0.4% in August as against the previous month. That was double the estimated 0.2% rise. It comes on top of a 0.6% rise in July, and 0.6% rise in June. In total, over 3 months that is a rise of 1.6%, which if carried forward for the rest of year implies inflation rising by around 6.4%. The federal Reserve says it is happy for inflation to run slightly above its 2% guideline, given that it has spent some time below it, but does that mean it will be able to allow annual inflation to run at 6.4% and rising, as additional costs attributable to anti-COVID measures are absorbed, and financed out of additional money printing? Indeed, even if the Federal Reserve is so prepared, will the Bond Vigilantes be so generous?
The full effects of all the borrowing and spending by governments across the globe have nowhere near begun to feed through into inflation and interest rates yet, but they will, and they will increase, as governments spend to bail-out huge industries, such as airlines, aircraft production, and car production, and as they issue huge amounts of bonds to cover that spending, as well as spending to cover rising current account deficits, and as central banks have to resort to the Magic Money Tree to print increasingly worthless banknotes to finance it all.
This is a completely different situation to that of the past, where money tokens were printed simply to buy up bonds and other paper, so as to inflate the prices of that paper. That could inflate the price of the paper, because it was just a question of buying up existing paper, and none of the money printed was going into general circulation to buy goods and services, so it did not act to increase commodity price inflation. It just caused a hyperinflation of asset prices. But, now, its not a matter of printing money to buy up existing paper, and so inflate its price, its a question of printing money so as to buy up huge amounts of new paper that governments are issuing to finance new additional unproductive consumption on a vast scale. So, not only does the money printing fail to push up the prices of the paper in the same way, because the supply of that paper is increasing as fast as the additional demand from money printing, but all of the printed money now goes more or less immediately into circulation to pay for all of that unproductive consumption.
So, now, the reverse of what has happened for 40 years is occurring. Money printing is failing to push up bond prices as the supply of bonds increases to finance all of the massive amounts of borrowing, but also all of the money printing is feeding into general circulation, and pushing up commodity prices as a result, whereas for the last 40 years, the money printing that inflated asset prices, encouraged money to flow out of general circulation, and itself into the purchase of assets, in order to benefit from state backed, guaranteed asset price inflation, and corresponding capital gains on those assets. What is more, the measures resulting from COVID related measures, as well as from the effects of lockdowns - which add to the additional costs caused by Trump's global trade war, and Brexit - means that productivity is falling, and values are increasing, so that this additional money printing leads to prices rising on greater scale still.
Steadily rising inflation is going to lead to the Bond Vigilantes getting restless, as the capital gains they have been able to rely on for the last 40 years disappear, and as the real returns on their bonds begin to turn viciously negative, meaning that not only do they get negative yields, but also they suffer capital losses in real inflation adjusted terms. Sooner or later, they are going to start wanting to ditch those bonds, and then as a bond crash develops, we will see just how cheap all of this debt really is, and we will see that the presumed power of central banks to determine prices was a mirage after all, and that the Emperor is wearing no clothes.
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