Oct. 17, 2022

Windfall, The Inflation Scam

Each time inflation comes around. There is a fraud that unscrupulous politicians like to pull out of their bag of tricks. It's called Windfall. Windfall is a complete illusion, a delusion hoisted on the nearest flag pole to win votes. But the actual result is to divide the country and create resentment.

Let's begin with an understanding of where today's inflation began. Back in

August, we discussed the principal source of inflation here:

 

 

https://www.valueside.com/blog/why-inflation-answer-4-16-20/


Massive money pumping took M1 Money from $4 trillion to $20 Trillion—the single most inflationary move of our lifetimes. Radially increasing the supply of money dropped the value of the dollar.

Shortages have been the second major cause of inflation. It began as a series of "Supply Chain" restrictions that caused the price of most imported goods to escalate.

Then President Biden's war on fossil fuels. First, halting the Keystone XL Pipeline, stopping oil leases on Federal Lands, and finally, boycotting Russian Oil Imports (representing about 10% of our daily oil supply). All of these moves caused shortages, which caused the price of gasoline and other fuels to rise.

The third source of inflation is entering the economy: food shortages. The most recent measure of inflation at the Wholesale Level (the Producer Price Index) saw food inflation for the first time exceed energy inflation.

As we recount these proximate causes of inflation, it's important to note that at least two of these causes are political—the out-of-control money printing purely political. And the War on Energy is also strictly political.

And in typical "don't blame me, I'm from the government" fashion, what's the first thing our politicians do in a situation like this? That's right, run as far away from taking responsibility for their actions as possible. And Windfall gives them the perfect cover for their initiatives.

There appears to be appreciation, but when driven by inflation, it's an illusion. When inflation hits, virtually all physical assets rise in value. Or, more correctly, the dollar declines, raising the inflated price of those assets.

During times of inflation, assets such as gold and silver are considered a good hedge against inflation. I expect that in the long term, precious metals will appreciate as a result of the current inflation. Just remember, what's happening is that the dollar is losing value while precious metals are merely retaining value. Nominal value is a concept that may be difficult to grasp at first. But it is essential to understanding the true nature of inflation. Inflation, in a nutshell, is just currency destruction/devaluation.

All this is true for all of the physical assets that you own. In the long run, the "dollar value" of any land you own, your house, your car, and so on, will likely appreciate.

Right now, and for the next several months, that fundamental rise in dollar-based price is being clouded by other factors distorting the markets. Look for dramatic drops in prices, where people must sell assets in foreclosures and margin calls. We are just beginning massive asset sales caused by excessive leverage.

But that's a side note.

The point today is that overall, in an inflationary environment like we're in currently, prices of physical assets rise in the long term. For you and me, that will mean that our home and automobile will probably be worth more in a few years than would be the case otherwise.

But beginning in the 60s, certain politicians looked at corporate balance sheets and noticed that the assets they owned also rose because of inflation. Oil companies are particularly noticeable. For instance, they own oil still in the ground on leases they hold. Called "proven reserves," these are an asset on the books of the oil company. Proven reserves appreciate during times of inflation.

That appreciation is a Windfall Profit, says Gavin Newsom, Governor of the State of California. So let's levy a Windfall Tax on oil companies. Forget that the expense side of the ledger has also gone up with inflation. The men, machinery, and energy used to drill for oil have also inflated. In absolute value, the oil companies have gained nothing.

This Windfall narrative appeals to the naive among us, those who aren't paying attention. These people see the higher prices at the gas pump and are looking for someone to blame. Oil companies are an easy target. Hit them with a Windfall Profits Tax.

And the oil companies are far from alone. Any corporation with sizable physical assets, assets that are "appreciating" because of inflation, is liable to be hit with the Windfall Tax.

Unfortunately, many average Americans don't see the ones who started all this. The real culprits in this inflation storm are politicians who created this inflation and now call for a Windfall Tax.

The very politicians who pumped up the money supply, and though sanctions and boycotts create today's shortages, are the ones we need to hold accountable. But somehow, these politicians are immune. After all, "they're from the government."

 

Notes

 

This week's big news will be the 20th Congress of the Chinese Communist Party, the CCP. The Congress got underway last night, our time, and will continue all this week. We expect a principal address by General Secretary Xi Jinping, among others. Tonight, China will announce its latest reading on the country's Gross Domestic Product.

Analysts expect a healthy growth rate from China at better than 3%. Economic Growth will likely mean that the Bank of China will not see any further interest rate cuts to spur their economy.

China, after all, has been on precisely the opposite monetary course as the United States, where the Federal Reserve Bank has been busy raising interest rates and slowing our economy.

Moving around the globe to the British Isles, there's good news for embattled Prime Minister Liz Truss. As those who follow British Politics know, Ms. Truss' economic initiatives were roundly criticized, especially by the Bank of England. Truss then reversed her positions, especially those tax cuts. This morning, she is rewarded, at least by the bond market, where the yield on the Gilts is down by 40 basis points. The second-largest drop on record for British sovereign debt is perhaps a sign that this new government has gained much-needed support from the financial markets.

It's a light day in economic news here in the United States, but a possible headline maker is on deck, the Empire State Manufacturing Index. Usually a real yawner. But this Index shocked Wall Street to its core in August when it dropped 31 points. An unexpected decline and a real sign that this economy was not nearly as resilient as the Street thought. And the beginning of some fundamental weakness in stocks. So keep a sharp eye out for surprises in today's Empire State Manufacturing Index.

Earnings season began on Friday, and we're carrying through this morning with a group of financial companies. Bank of America, Charles Schwab, and Bank of New York Mellon lead the way. All three companies are trading higher in the pre-market, basking in the glow of higher spreads caused by those higher Fed-driven interest rates.