Here comes the big hit. Call it a reckoning for human nature overriding basic truths – where feelings of superiority mocked history’s hard-earned lessons, and now comes the payback.
Call it the Great Reckoning because the fallacies supporting the “New Normal” cover the waterfront. The powerful dual causes behind all the missteps are the U.S. government’s trillion-dollar deficit spending and the Federal Reserve’s forced negative-real interest rates while it created money to buy and warehouse $trillions in bonds.
The ignitor of the Great Reckoning is inflation
The irrefutable measure of all-is-not-well is inflation – the cheapening of a country’s currency. Protecting the currency is a primary responsibility of both the U.S. government and the Federal Reserve. Having both protectors go so far off track, even to pursue “good works,” is the recipe for a nasty comeuppance in the end.
To see how out of whack the current environment has become because of inflation, look at the longer-term graph of interest rates vs the CPI annual rate of change (the red, dotted line).
The CPI’s burst of strength is not a supply issue. It is the inevitable fallout from $trillions in excessive deficit spending and debt issuance. Worse, inflation’s rise is producing incentives that could entice $trillions of excess cash into action along with $trillions of potential bank lending (the other source of real money supply growth). Add to all that the U.S. Government’s desire to deficit spend $trillions more. That enormous increase of money beginning to flow hither and yon, once started, will be unstoppable without drastic actions being taken.
The Federal Reserve’s inactions add gasoline to the inflationary fire
Meanwhile, the Federal Reserve sits, holding rates near zero. (Sure, they’ve said they may increase them in 2022, but they’ve already waited too long.)
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What a huge mistake. Once inflation gets a toehold, it is difficult to turn around without making unsettling financial adjustments and producing economic pain. In the late 1960s and early 1970s, the Federal Reserve was actively, but only periodically, bumping rates up to temper inflation’s rise. They failed.
Remember, the Federal Reserve and other leading economists made the erroneous, wishful pronouncements that this inflation rise was temporary, soon to settle. Instead it unleashed a bout of price raising. Now they are taking the lukewarm position similar to the response in “Don’t Look Up” as a planet-killer comet approaches earth: “Sit tight and assess.”
I know. Looking out the window, listening to the news, and tracking the stock market make everything look normal (except for Covid). You’re right. And the December 2021 Google Trends (of searches) shows the lack of inflation interest vis-a-vis Covid in the financial world.
The problem is… A lack of worry about inflation doesn’t mean it’s not a concern. This is exactly the type of environment that can produce a dramatic shakeup. Rising inflation is one of those insidious risks that, even when it becomes evident, does not hit us emotionally right away. Instead, it creates a steady erosion of purchasing power.
The bottom line… The inflationary cycle has started
Beware the inflationary cycle. When it begins, it gives the false impression of growth and increased well-being. However, it soon becomes a race for protection and gain that creates inequalities and takes time from productive activities to use in inflation finance management.
The cycle roughly begins with excess money spurring demand-driven price rises for both organizations and consumers. Those higher costs hit budgets that require making negative adjustments. When the costs go beyond “temporary” there is the felt need for more income, and actions are taken. At that point, the inflationary cycle is in full bloom.