On Interest Rates, Inflation, Money Creation, Savings & Investment, and GDP Growth.
Inflation is in the best interest of the government because it erodes the real value of the government’s debt; and also it is in the best interest of the people (and of the government) because it stimulates spending (supporting wages, productivity, and growth, and earnings), because people are more likely to spend during inflationary times versus deflationary times, when they hoard money, waiting for later and waiting for cheaper goods & services. Stimulating spending is good for everyone. Additionally, higher inflation, controlled around 2 to 4, or even 5 percent, is also conducive to savings & investment, because normally interest rates are greater than inflation, which is great for lenders and creditors. Real returns on capital and on investment is what investors should be striving to achieve. Therefore, the central banks of the world, and the U.S. Treasury and Federal Reserve should in my mind, “print money,” (or electronically create it, and then spend it) by increasing the amount of M1, M2, and of the M3. The governments should spend the created money to stimulate GDP growth. In my mind, the government should stop borrowing constantly as much as it does, and instead, it should create more money (that otherwise would have been borrowed), in an effort to create e.g. approximately +3.88% inflation. I also believe a little inflation is in the best interest of investors, shareholders, corporations, and incorporated businesses. This is because large capitalization stocks, and mid-caps (likely small caps as well), they can over time capture the newly created dollars, which may help to support EPS growth rates. In other words if there’s 3.88% inflation, the EPS growth of approximately +3.88 should be fairly easy, and thus e.g. EPS growth of say 7.88 percent would really be a real increase of EPS 4%. In other words, slight inflation is a giveaway to EPS growth, great for investors, it stimulates spending, GDP growth, higher interest rates, and is conducive to savings & investment, it also decreases the liabilities owed by the government by diminishing the real value of the debt and interest due (it does the same for the private sector and their debts).
I probably sound “pro-inflation” here which is in my mind sometimes irresponsible, I obviously don’t like high rates of inflation, I like about 3.88% annual inflation. I’m not promoting the government policy of creating hyper-inflation. I am simply totally against deflation, and I’m against very low inflation rates as well, as inflation can create easy EPS growth for companies in which people are shareholders. As a nation, I believe we should strive for less inflation than our competitor nations, to help strengthen our currency (as high inflation can lead to a depreciating currency), but it shouldn’t be paralyzing low either. Super high inflation rates of e.g. education and health care in the USA are completely and utterly irresponsible to me, and I’m not sure what the solution is, but people should boycott industries that charge obscenely higher and higher prices, while continuously increasing prices like there’s no tomorrow (e.g. sustained annual tuition hikes that are literally sometimes three times higher than the CPI’s annual percentage increase, aka that are three times higher than the inflation rate, are utterly absurd to me). “Crazy” price hikes (of e.g. increasing prices significantly higher than the inflation rates annually) constantly in any industry should be investigated in my mind for price fixing, price manipulation, price discrimination, and for violations of the Robinson-Patman Act, The Clayton Act, and the Sherman Anti-Trust Act; and also for price gauging. It simply should not be tolerated. Coffee also at “guess where” probably should not cost $8 to $12 dollars anywhere on this earth, that would be price gauging, aka ripping people off. Industries that inflate their prices at extremely high rates, e.g. three times the inflation rate, are nearly in my mind committing fraud, and their EPS growth would be equal to at least their obscene price hikes, this fuels excessively high returns for shareholders, while “squeezing” the consumers (I’d call it price gauging and price manipulation, etc.).
Deflation to me is mismanagement of money creation, and when and if it happens, the printing press (of a nation’s central bank) needs to be utilized to bring about +0.2% inflation per month, on average. Deflation can also be a symptom or direct result of poor legislation of e.g. commodity margin leverage regulations, e.g. if rules are made more stringent and investors can’t borrow as much as before to invest in CFTC regulated commodities and currencies, then deflation will or certainly could show its face. Deflation is obviously paralyzing to the economy worldwide, it should be prevented with vigilance by our nation’s U.S. Treasury and Federal Reserve (by our monetary policy and by our legislature). Governmental stimulus programmes of purchasing its own government bonds, helps to lessen the blow from crowding out investment and borrowing, and injects money directly into the economy, but it leads to lower and lower interest rates (perhaps leading to less savings and investment). We need to raise inflation rates and raise interest rates, which might actually increase consumer spending, consumer sentiment, and spur savings and investment, and increase GDP growth. Zero interest rate policies worldwide are not conducive to savings and investment, and is not fair to lenders and creditors. If you’ve borrowed any money, it’s now time to refinance, with rates nearly at all time lows.
There are my current thoughts in a nutshell.
By Andrew G. Bernhardt
Bernhardt Capital Management LLC 