Protecting Against the Next Great Inflation

Over the past several months, after a year of unprecedented levels of money printing and consumer stimulus in response to the pandemic, totaling over $5T in the United States alone, the media has started to utter whispers about “inflation.” (M2 Money Supply Graph below:)

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But we believe these whispers - largely caged in academic terms - dramatically underestimate the severity of a potential mass inflation on the horizon in the US (and global) economies. Our stated mission at Starting Line is to fund products that serve the 99%; and, accordingly, we are writing the following as clarion call to any entrepreneur building products that can help average citizens hedge or otherwise mitigate the effects of a potential Great Inflation. If you are building this, we want to meet you: ezra@startingline.vc.

The interesting thing about the possibility of Great Inflation is how unaware the general public appears to be of it actually manifesting. In fact, in this Radiolab podcast from January 2021, recorded by NPR/New York Public Radio, and entitled More Money, Less Problems, the host attempt to argue that inflation is mostly a behavioral construct and, should we choose to, we can simply will it away:

JACOB GOLDSTEIN: Yes. What people expect about inflation actually affects whether there is inflation and how much.

JAD ABUMRAD: Wait. I'm sorry. You're saying if I think there's going to be inflation, that somehow manifests inflation into existence?

BECCA BRESSLER: Yes.

JACOB GOLDSTEIN: Exactly right, exactly right.

BECCA BRESSLER: So expecting inflation can literally cause it. But because inflation has been absent for so long...

JACOB GOLDSTEIN: We just live in a world where we expect that prices aren't going to go up very much.

BECCA BRESSLER: And so that expectation...

JACOB GOLDSTEIN: It effectively keeps inflation low.

BECCA BRESSLER: Oh, my God. So it's a self-fulfilling prophecy.

JACOB GOLDSTEIN: It's - it is absolutely a self-fulfilling prophecy.

While “willing” away potential inflation sounds…harmonious…the data suggests its already here, just manifest in places a lot of us aren’t looking (unless you’re trying to repair a garage or run a restaurant):

Because a lot of these commodities are inputs for the products we consume, many of the effects haven’t yet made it into the markets that normal people - such as you or I - spend most of our time in, such as going to the grocery store and buying a box of Cheerios. But just because the outputs haven’t been felt yet, doesn’t mean the inputs aren’t materializing. From Kyle Bass, CIO of Hayman Capital Management - who rose to fame via his prescient bets against the sub-prime housing crisis in 2008 - on CNN’s First Move with Julia Chatterly:

When you look at the way that inflation’s calculated, specifically, 40% or so of the inflation calculation is focused on US rents, and they call it owner’s equivalent – and housing – but as we just saw in the Case-Schiller print, you saw housing prices year over year, nationwide, were up 10%, and yet the housing component of inflation is way down, holding inflation down. And you have to scratch you head and say ‘what’s going on?’

And what’s really going on is the fact in the mismanaged states in the US, ie call it New York and California, you’re seeing rents collapse, and the price at which people are willing to rent things on the coasts is affecting the way that inflation’s calculated. For those of us in the rest of the United States, we’re seeing already substantial inflation. Look at copper – copper’s doubled last year. Lumber prices, doubling. The price to build things is doubling year over year. We’re not talking about a 1% decline in inflation or a flat number, we’re talking about a doubling in many areas of your life. So, I think inflation’s already here and everybody knows it…and people need to be thinking longer term about what they want to own.

Although it’s impossible to know how, why, and what to degree inflationary impacts will ultimately manifest, innovative founders have already begun building the infrastructure to help mitigate its effects. The first category of mitigators we’ve seen evolve are de facto high yield savings accounts that offer material, interest bearing products far in excess of what incumbent banks offer (typically 300-1000bps versus 4-8bps). Most of these players, such as BlockFi, Eco, Donut, Outlet and Linus, offer these products through arbitraging crypto lending markets where demand for digital dollars (stablecoins, such as USDT and USDC) far outweighs demand for traditional fiat dollars.

High yield interest bearing products help mitigate inflation if you have savings to yield against. But what if you don’t? If you’re building products that help normal people hedge future inflation, align with future inflation through synthetic investment products, or even generate yield off intangibles, we’d love to meet you. Please don’t hesitate to reach out.

 
 
Ezra Galston