New Inflation Record at 8.6% – Why it happened and where is it going
As you may be aware, inflation just hit 8.6% on an annualized basis, yet another record, highest in over 40 years. This is deadly to those who are retired or living on a fixed income.
The New York Times says if you want to point fingers, don’t blame the Democrats, blame the Federal Reserve – starting in 2010.
“To put it simply, the Fed created years of super-easy money, with short-term interest rates held near zero while it pumped trillions of dollars into the banking system. One way to understand the scale of these programs is to measure the size of the Fed’s balance sheet. The balance sheet was about $900 billion in mid-2008, before the financial market crash. It rose to $4.5 trillion in 2015 and is just short of $9 trillion today.”
These are scary numbers, on the order of magnitude of nearly half of the total production of the United States in a year. But I’m not buying that it was just the Fed. Yes, The Federal Reserves actions have perhaps been reckless, but it doesn’t happen in a vacuum. Funny how this recklessness began during the spend crazy Obama administration.
A major factor in holding interest rates low has been the size our national debt. If the Federal Reserve increases the interest rates, our debt gets much higher much faster. We can go ahead and blame both sides of the political fence for this.
Look for the Biden Administration to continue to blame Putin. Perhaps they will add China to the list, and find a way to add Trump to the list of inflation culprits.
Where is it going? Former Treasury Secretary Larry Summers has said that inflation will be long term and that we will enter a recession within the next two years. Some say that we are already there.
“I don’t think it’s likely to fall back very, very rapidly,” Summers said. “I think the Fed’s forecasts have tended to be much too optimistic there, and I hope they’ll recognize fully the gravity of the problem in their forecasts when they meet this week.”
To me this statement is ominous – “I hope they’ll recognize fully the gravity…”? This is the same Fed that believed inflation would be fleeting a few months ago. The are the ONLY organization that has all of the information and the expertise to measure this. I’m not alone in questioning their competence in that they didn’t see what was pretty obvious to the rest of us.
Will the Federal Reserve be able to raise rates and curb inflation?
Do the math. Inflation happens when the demand for goods outstrips productivity. Raising interest rates at this point means that we add that much to the Debt. That means that we borrow more, which means we have to create more money, which means, you guessed, more inflation. I’m not a Fed expert (apparently “experts” don’t exist there…), but I believe we are beyond the point where interest rate rises will reduce demand.
So brace yourself. Inflation will have to run its course. Nobody knows how to fix it.