There's No Cure For Inflation
The Fed can't stop it, the Government can't stop it, and you need to be aware of it.
Allow me to walk you through a timeline.
April 28th, 2021 - Federal Reserve Chairman Jerome Powell calls inflation “transitory” - Reuters
May 1, 2021 - “The Inflation Scare Doesn’t Match Reality” - Forbes
June 26, 2021 - “Inflation looks bad now, but it’s pretty much sticking to the script” - CNBC
August 27th, 2021 - Federal Reserve Chairman Jerome Powell reiterates that high inflation is “transitory” - Reuters
October 18, 2021 - “Opinion: Don’t rant about short-staffed stores and supply chain woes” - Washington Post
October 22, 2021 - Federal Reserve Chairman Jerome Powell says that slowed delivery and high prices due to inflation are “likely to last longer than previously expected, likely well into next year.” - New York Times
And finally this (now deleted) tweet from MSNBC.
See how the narrative has changed over the course of the last few months? From denial all the way to saying there’s benefits to your dollars being worth less.
And just this week, the Fed finally admitted that inflation is on the rise, saying that the trailing 12 month inflation numbers have now hit a whopping 6.2%. Source.
According to unofficial numbers, it’s likely closer to 12-15%, but also it is important to remember that everyone purchases different goods, so your personal inflation rate will be different from mine. If you’re unfamiliar with this concept, check out one of my previous articles You’re Getting Legally Robbed Everyday.
There’s nothing the Fed or Government can do about rampant inflation. Seriously.
The bottom line is the Fed can’t actually raise rates enough to fight inflation.
In order to curb inflation, the Fed would have to raise rates high enough to get out in front of inflation. Meaning a 0.5% increase, or even an increase to 1% wouldn’t really make a difference. With inflation officially coming in at 6.2%, the Fed would have to raise rates to something greater than that… Say 8%.
What would happen if the Fed raised rates to 8%??
Before even entertaining that question, let’s look back at recent history. In Q4 2018, the Fed hiked rates up to 2.5%, marking the fourth increase in that calendar year. Source. Then what happened?
From CNBC, on December 31st, 2018. Source.
For the first time ever, the S&P 500 will end the year with a loss after being positive for the first three quarters. The benchmark index was up 9 percent through the first three quarters of the year. Then the October sell-off began. The S&P 500 fell 7 percent in October and accelerated those losses this month, in what is likely to be the index’s worst December performance since the Great Depression.
Another headline…
“The stock market is on pace for its worst December since the Great Depression.” - CNBC, 12/17/2018
The author of the first article even included a nice image to illustrate what is going on for the readers! I’ve included it below because it’s priceless.
So clearly that didn’t work and the Fed had to reverse course to avoid the economic equivalent of more people tumbling down this grassy hill above.
Here’s the (not so) funny thing. A big rate hike literally cannot happen because of the incredible amount of debt the United States carries. Thanks to stimulus and money printing, the national debt now stands at $28.529 Trillion dollars. That’s not even a fathomable number. And the chart is astonishing.
But we mitigated high inflation in the 1970s… Can’t we just do that again?
In short, no. Here’s why.
For those unfamiliar, Paul Volker served as the 12th Chair of the Federal Reserve from August 1979 to August 1987. He is widely credited as having ended the high levels of inflation (14.8% in March 1980) in the 1970s and 1980s. So what did Volker do?
Volker hiked rates up from 11.2% in 1979 all the way to 20% in June 1981. The effects were dramatic. Construction, farming, and industrial sectors all slowed dramatically, and indebted farmers even protested by driving their tractors and blockading Government buildings in 1981. The unemployment rate rose to just over 10%, and the 1980-1982 recession ensued.
In 1982, the Fed relaxed rates, and a period of sustained economic growth followed.
That brings us back to today.
Aside from the cascading effects that raising rates to anywhere near 8% - much less 20% - would have, let’s talk why my neighbors dog has a higher chance of being President of the United States than seeing a headline tomorrow detailing a rate hike to 8%.
In 1980, when the Fed raised rates, it only impacted the new budget deficits. It didn’t affect the national debt because the national debt was financed with 30 year treasury bonds.
Today, the national debt is financed with treasury bills, or T-Bills. The key distinction to understand here is that 30 year treasury bonds that pay a fixed rate of interest every six months for 30 years. T-Bills have a maturity of one year or less.
We have a $28.5 trillion dollar national debt, financed at 1-2%. If rates rose to 8%, the entire national debt would have to be refinanced at those levels, within a matter of a few years.
Where would the Government get trillions of additional dollars to pay the increased interest on the debt? Hint: They’d have to borrow or print more - Which defeats the purpose because the United States doesn’t produce and export enough goods to make up the difference. The US already has a yearly budget deficit of nearly $3 trillion dollars this year. If the Fed raised rates, this number would accelerate even further!
See below for how bad the budget deficit has gotten.
If the Fed raised rates to the levels needed to curb inflation, the deficit would skyrocket and all of the US markets would collapse. Stock market, real estate market, industry, farming, construction, you name it. The debt would be too much to bear.
This would cause a positive feedback loop. As industry, equities, and investment ground to a halt, the deficit would increase further, sending the United States further into a spiral. If you’ve read my previous articles, you’ll recognize my term for this - A snowball rolling downhill.
In 1980, when Paul Volker and the Fed raised rates, the United States was the largest creditor nation in the world. Meaning the United States actually produced goods, exported them, and had the money to finance other countries debt.
Today, the United States is the largest debtor nation in the world. Trade deficits hit a record $80.934 Billion Dollars last month. Source. There’s barely money flowing into US borders. Only out.
If you don’t remember anything from this article, remember this.
The United States literally cannot afford to raise rates. Because of this, inflation will continue to not just persist, but accelerate.
Or in other words - the United States cannot stop inflation, because the cure for inflation would destroy the economy.
And no matter what the headlines say - Rampant inflation is not good for you. It means your dollars are worth less every single day.
So what can you do about it? Hint: You can do something about it… Stay tuned - We’re going to cover that in my next article.