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$4.25 Filet Mignon Now Costs $70: Understanding Inflation, Stagflation And Commodities
Historical Inflation Insights
The concept of inflation refers to the general increase in the prices of goods and services over time. This rise in prices diminishes the purchasing power of a fixed amount of money. For instance, a purchase that cost $100 a decade ago might now require $150 to buy the same product due to inflation. Inflation stems from the fundamental principles of supply and demand. An increased money supply leads to a decrease in the value of money over the medium and long term, as more dollars chase the same amount of goods.
Short-term fluctuations in money supply often don’t immediately affect the economy due to a phenomenon called "money velocity," which measures how quickly money circulates. However, over the long term, all newly printed money finds its way into the economy, eventually causing prices to rise.
The Roman Denarius provides an ancient example of inflation. As the Roman Empire expanded and engaged in costly military campaigns, the silver content in the Denarius, a once valuable coin, was progressively reduced. This debasement led to inflation, as the increased supply of coins caused prices to skyrocket. By the end of the Roman era, what once cost a fraction of a Denarius became prohibitively expensive, demonstrating the destructive power of unchecked inflation.
Modern inflation has seen similar patterns. Recently, we've observed a 15-fold increase in the price of a filet mignon at the Banff Springs Hotel, from $4.25 in the 1950s to around $70 today. This shift reflects broader trends in global food inflation, with the United Nations' FAO Food Price Index indicating a 33% increase in food prices globally over the past year.
While some officials argue that excluding certain categories like meat can downplay inflation, the reality is stark: food inflation affects nearly everyone. The average American household spends about $8,000 annually on food, representing roughly 10% of their income. For many developing nations, this percentage can climb to 35-50%, highlighting the disproportionate impact of food inflation on poorer populations.
Supply and demand dynamics play a crucial role in driving commodity prices. For example, rising feed costs can push up beef prices, while fertilizer expenses can spike corn prices. These interlinked factors contribute to the overall inflationary pressure. Furthermore, the global money supply has surged significantly, particularly in the U.S., where M3 money supply has increased by 33% since December 2019. This flood of cash has boosted demand, fueling inflationary pressures.
Stagflation—a combination of economic stagnation and inflation—is a potential concern. The 1970s serve as a cautionary tale, where excessive monetary expansion led to stagnant growth alongside rising prices. Despite inflation boosting nominal GDP, it doesn't necessarily translate to improved living standards unless accompanied by productivity gains.
Equipment manufacturers like Caterpillar and John Deere are poised to benefit from inflationary environments, as rising resource prices stimulate demand for their products. However, the long-term sustainability of debt levels remains a pressing issue. Since the 1960s, global debt-to-GDP ratios have soared, and while governments can print their way out of immediate crises, this strategy carries the risk of hyperinflation.
Leading experts like Dr. Michael Burry, Michael Ashton, and Peter Schiff have consistently highlighted the inevitability of inflation. Burry warns of a potential repeat of the German Weimar scenario, emphasizing the historical precedents of monetary debasement. Ashton, meanwhile, underscores the growing recognition of inflation as a critical economic factor, particularly amid current monetary policies. Schiff advocates for understanding the historical context of debt cycles and the importance of preparing for higher inflation.
For those interested in staying informed, following these experts and monitoring economic indicators can provide valuable insights into navigating inflationary times. Understanding the mechanisms behind inflation not only helps in managing personal finances but also in appreciating the broader economic landscape.