My wet nostril dream about Russell Napier

There’s nothing like a baby’s wet finger up your nose to wake you up. At 4 am.

Like most people, I assume, I get dreams when I’m not comfortable in bed. Too cold or too hot – that sort of thing.

Well, at some point during the night, my five-month-old daughter had transferred from her cot to the middle of our bed. And my uncomfortable fretting over squashing her or suffocating her with the blanket while I slept led to a very strange dream indeed. About inflation, financial repression and your stockmarket portfolio, believe it or not.

To be fair, that was the topic of our latest issue of The Fleet Street Letter Monthly Alert. So it’s not completely surprising that I’d have a dream about it.

What’s surprising is that this dream gave me some genuine new insights. Which probably should’ve made it into the monthly issue…

And I even managed to remember some of them long enough to write them down, despite having to get up and play peek-a-boo at 4 am with a wet nostril. I thought I’d share the insights with you here.

But first I should mention that my daughter has an Olympic ability to kick off blankets. So I don’t think she was in any danger sleeping in the middle.

Back to my dream. It featured the financial historian Russell Napier giving a lecture to a group of students, including me.

Napier is a very cool guy, if you ask me. He can hold the attention of the room with a very understated manner. The combination of vast and specific historical knowledge, and having been right about financial markets for many years, helps.

What made Napier interesting is that he stuck with his prediction of prolonged deflation in the face of QE1, QE2, QE3 and so on and so forth. While many financial analysts were worrying about hyperinflation, let alone inflation, Napier said we’d see a lack of inflation.

And he was right. To the anguish of those who kept on about money printing. Including me…

But, recently, Napier changed his mind. He is now anticipating a reversal. A breakout of inflation. Which is why he caught our attention.

Why and how inflation will make a comeback is for paid up subscribers of The Fleet Street Letter Monthly Alert only. It’s to do with what really causes inflation and what truly moves the money supply.

But here’s what Napier was telling us in my dream…

He pointed out that inflation expectations would soon kick in with ferocity. They’re the surprise and the source of inflation’s power.

For inflation to happen and speed up, people need only believe it will happen. Usually, inflation begets inflation because, when people are expecting it, they try to dump their money and flee for other assets. This causes inflation, as well as being a consequence of inflation. Hence the downward spiral. Or is it an upward one?

What Covid-19 has done is spark the inflation kindling. It has alighted the inflation expectations. And that means inflation could rear its ugly head surprisingly fast. It could, in a sense, happen before it should. A self-fulfilling prophecy.

How and why the inflation spark hit in the first place is behind our paywall. But recent economic data is proving Napier right. US consumer prices rebounded in June. Money supply growth measures are surging there too.

The second point Napier made in my dream – which he may completely disagree with in real person of course – is that central bankers have lost the ability to rein in inflation with interest rate hikes.

This is true for several reasons. But Napier mentioned one in my dream.

Right now, central banks are conducting monetary policy in odd ways. QE may feel normal by now, since they’ve been doing it for years. But it’s still odd and unusual in the age of inflation targeting by central banks. In other words, central bankers have never had to reign in inflation at 0% interest rates and billions in QE.

Instead of hiking and lowering interest rates, central banks now print money and buy things. They manage part of the money supply, not the price of money.

In this world, the ability to control an outbreak of inflation is more restrained than usual. Because interest rate hikes are the more effective way to control inflation.

In my dream, this was explained with a supply and demand chart. The price of money, the Y axis, is the interest rate. The quantity of money is the X axis. Borrowers demand money and savers supply it. An equilibrium is found between the two at a given price and quantity. Which the central bank then tries to influence by fiddling with the interest rate.

But the graph doesn’t make much sense when QE is being used and at 0% interest rates. That was the point Napier made. A new tool is in the hands of central bankers. And it’s less good at reigning inflation in than the tool of interest rates were.

If inflation breaks out, central bankers will be a few steps behind the curve as they busily reverse QE instead of hiking the cost of borrowing. They’ll be removed from control of the banking system – where the money supply is truly controlled.

Napier explained that central bankers no longer control the money supply, nor its price. (The real Russell Napier also did that, by the way.)

This loss of control is of course by design. Politicians are now trying to engineer inflation in order to inflate away their government debt. If interest rates at central banks were raised to rein in inflation, that would negate the effect of inflating away the debt. Politicians need central bankers to be QEing at the wheel.

Instead of controlling inflation, central bankers are busy making sure the government has enough money to pay for furloughs and other Covid-19 spending. The UK government almost went bust according to the Bank of England governor. Only the BoE’s money printing saved the chancellor.

“This loss of control over the money supply is why central banks will allow inflation to get out of hand,” Napier explained in my dream.

And that’s when my five-month-old daughter stuck her wet finger up my nose and I woke up…

Nick Hubble
Editor, Southbank Investment Research

Category: Market updates

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