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Column | The Cow Guy

Shellady: How the pandemic set up the inflation play

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The Internal Revenue Service (IRS) says thresholds on income tax brackets will rise in 2022.

I have been biting my tongue for a while now. It is hard to watch what is happening, especially when it comes to our farmers and ranchers without saying anything about what I am seeing. The whole country is up in arms over inflation. We see it come across our TV screens on a nightly basis. It is a large part of what I talk about on the networks every day and it absolutely comes up when I am talking inputs with our farmers. There is nowhere to hide.

How did we get here?

That is what I want to address. I will do it just the way that I would want someone to tell it to me. I am going to make it obvious as to why we are seeing the price spikes that we are seeing, sometimes daily but definitely monthly.

Way back in 2008 when the economy originally wobbled and then ultimately crashed. The FED thought it would be a good idea to inject a lot of capital into the market as well as make interest rates zero, or as close to zero as policy. There was even a name for it – ZIRP – "zero interest rate policy."

Some countries went even further with NIRP – yep, you guessed it, "negative interest rate policy." At the time, it was considered very risky because if money was virtually interest free, there was a massive risk of inflation. I did the rounds on all the networks for a while – actually years. We watched intently at the inflation rate, but it never really budged in a meaningful fashion. We were pumping hundreds of billions of dollars into the economy, and we were struggling to get even close to the FED’s mandated goal of 2% inflation. There was something wrong. Inflation wasn’t taking hold. If the economy was an engine, whatever we were putting in the tank, wasn’t coming out of the exhaust. There was a leak somewhere, even under the Trump administration and we just couldn’t find it. We were begging for some sort of meaningful inflation but even with interest rates as low as they were, the housing market wasn’t even taking off. It was moving along but was not on fire. Consumer prices and Producer prices were not skyrocketing either. Some countries around the world that went into a negative rate environment (one where you pay back less than you borrowed) had their constituents even enter a period of distrust, not quiet really grasping the whole negative interest rate thing. To that point, some of those countries struggled with actual deflation, because people began to be so suspect of the negative interest rate environment that they put their money in their mattresses and called it a day. No spending, no buying, just saving. Talk about an unintended consequence. This was verging on the point of the perverse. You see where I am going with this. So much liquidity was pumped into the system that the citizens began to not trust the system. That was a new one on me.

Back home, we continued with pumping our own economy with capital in the hopes we didn’t slide into some tailspin that we could not recover from. We succeeded in that. The downward spiral was avoided, and we found out footing. We were sluggish but it looked as though we were going to be healthy. That situation went on for a while – even with Trump in office. For all the good he did with the economy, we still way overspent and there were a few cracks in the system that did not go reported. So, we glossed over the bad, what little of it there was, and celebrated the good – and there was a decent amount of good. But even with all the tax cuts and regulations being pulled back, we still didn’t have any meaningful inflation. What was the problem? I know that there were a lot of talking heads that thought they knew but truth be told, nobody actually knew.

Enter the pandemic.

I was very vocal in my resistance to a lockdown. I said it was an economic killer as well as a societal killer. Unfortunately, I think that I have been proven to be right. When the government locked us up, took away our right to assemble, they needed to compensate us for that, and they did.

They sprinkled a load of money all over the U.S. citizens that were sitting at home watching Netflix. People began to shop and shop they did. But soon there was a problem. We ran out of inventory and there was nobody on the supply line to make more stuff for us to purchase. They had all been sent home for the pandemic. The stuff left on the shelves began to fly - and that was the initial spark of inflation. Self-inflicted.

Then we began the war on fossil fuels. The new administration and its Green New Deal are trying to push the American citizen towards renewable energy like wind and solar. We all would go to renewables if they could support our American power needs. Unfortunately, they are nowhere close. We are being pushed to something that can’t be sustained – just yet. Maybe it is a viable alternative down the road, but right now it is a nice to have not a need to have. By deemphasizing the fossil fuel industry, we have put Americans out of work (Keystone Pipeline) and have energy companies on the run to reinvent themselves so Wall St. will buy their stock. The result is that the move to renewables needs to be an evolution. The administration is trying to make it a revolution and it is just not working. They have failed at trying to force a behavioral change but succeeded in making the price of fuel go through the roof. Distribution shutdowns, pipeline shutdowns and no more research and development have left us scrambling for energy. Gas for your car – through the roof. Natural gas to heat your house – through the roof. That is just to name a few. And, you guessed it, self-inflicted.

When you make fuel go up by more than 40%, that will basically touch everything. Fuel is used in the making, the transporting, and the storing of most of our goods and services. Energy touches everything. When you see the price rises in the energy we use, the goods and services will go up to compensate for it. It is just that simple. The pandemic set up the inflation play, and the current administration lit it on fire and executed it.

Vince Lombardi would be jealous of that type of execution.

Scott Shellady serves as markets anchor for RFD-TV and appears regularly on CNBC, Bloomberg, CNN and Fox Business News. His early years were on a farm in Jo Daviess County. He later worked on the floor of the Chicago Board of Trade before teaching finance at DePaul University.

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