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New Inflation Record at 8.6% – Why it happened and where is it going

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.

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  1. James

    We are victims of joe Biden’s stupidity

  2. frank stetson

    Well, we will start today with yet another significant Wall Street drop.

    “So brace yourself. Inflation will have to run its course. Nobody knows how to fix it.” Good story, IMO, except a little heavy on the Dems blame part. Nor is it just the FED, imo, it’s all of us, and the Fed. This will take some time, there will be pain, we have far fewer dollars to throw at it than we did only a few years ago, and we are nearing or are already at the tipping point for a complete economic collapse.
    One can always wonder when one writes a piece citing: “The New York Times says if you want to point fingers, don’t blame the Democrats, blame the Federal Reserve – starting in 2010,” and then does not link the source….. Turns out The New York Times ACTUALLY said: an op-ed piece written by a guest writer, ideas expressed are not from The New York Times as Joe hints at. In this case the guest is, IMO, a very competent journalist from Missouri.

    Isn’t it refreshing to see Joe, a devotee of The Big Lie, as told by The Big Liar, rely on The New York Times for his news? Oh wait, it was an op-ed written by a guest to the times, and sent in for publication. The Times didn’t ask for it, pay for it, or even stand by it. It’s this guy. But since he skewered the Koch Bro’s before this, I’m in for the fin. But I can’t help but wonder if Joe believes this from the Times, does he firmly believes Maureen Dowd’s “Donald Trump, American Monster,” written and printed in the same space the day before…… :>)

    Good piece imo Joe…..except…..the author left part of the balance sheet on the floor. The excess reserves liability for $3.6T which is matched on the asset side with Fed investments. This was a nifty piece of legislation to allow taxpayers to pay interest to banks that store excess reserves at the Fed, the cost of being a bank. We all know the reserve requirement that banks must hold, but that’s chump change, like $50B in 2007. Interest payments were established in 2006 under Bush Jr, a Republican. Supposedly to start in 2011, pulled forward by Bush after the collapse. Obama did not stop that. By the end of Obama, the reserve had risen to half of today’s number. Under Trump’s giveaways, it doubled. This liability has a double jeopardy — first, it’s a liability, worse yet a liability that taxpayers pay interest on. This year we will pay close to $50B in interest, the entire amount of the liability in 2007. Worse yet, we only pay just under 1% in interest; as interest rates rise, and they have more than doubled since the Fed raised the prime, banks will be more likely to loan the money since it will make more than the Fed pays. Each dollar released into the money supply from this fund, may hit the entire money multiplier to equal over $9 of new money in the money supply. That’s a real sword of Damocles inflation that’s been hanging over us since Obama. There is nothing holding these deposits in the Fed, they can enter the money supply at any time if the Banks opt to loan instead of to save.

    FYI: although the author did not note it, allowing interest on excess reserves is another reason (and liability) why we have not had rampant inflation with Obama or Trump giveaways, aka —stimulus, emergencies, whatever, printing money. Lately, I have also been thinking Trump, and Republicans, may have it right with trickle down economics, on giveaways only. When Trump gave money to everyone, mostly those in higher incomes on the tax cuts, those in upper middle and higher incomes just put it in the bank, the bank put it in excess reserves, and voila, no money supply expansion, no money multiplier, no inflation. Obama did a similar thing but with much tighter loan requirements so banks just took the easier route and banked it with the Fed. So, the pump was primed by this requirement legislated during Bush, implemented during Obama and when Biden gave free money to everyone, the pandemic slowed, we went off to the races and began spending instead of hiding it in excess reserves. Now, with interest rates rising, we may be unleashing the excess reserves Kraken.

    I have been whining about this since it burned me with Obama where I anticipated high interest, invested accordingly, and got stiffed. NTW, I did rebound from the hiccup and probably will soon run to fixed assets again to weather the pending recession storm that’s on the horizon. Think we are at 2.5% interest on fixed assets today so it’s more than doubled since the inflation monster came to town.

    Good story Joe. As noted above, I don’t think this is the Dems alone to own, but certainly on Dems watch today. It’s a complex problem dead center in our economy which, combined with our terrible debt/GDP ratio signals an unclear but present danger to our economic way of life. The problem is, as I keep saying, is we have never been where we are today in the economy. Yellen does not make me feel better about that. If she says oops again, I goofed, I learned on this one, her teachable moment crash will be life-ending for many. No one knows the tipping point here, but if it tips, inflation won’t be the problem, it will be the least of our worries. When everything stops, the pandemic will look like a cake walk. GDP/debt ratio warning is generally thought of as 100%, a point we cleared during WWII, took 35 years to drag down, started up again in Regan. Dabbled with 100% during Obama, he beat it back, it went around 104% under Trump and today, has skyrocketed to 135% at the end of the reign of Trump and is currently at around 120% under Biden. This is dangerous, unknown territory, the result could be investors leaving the US Fed which would collapse the entire economy as in: game over.

  3. Daniel H. Donovan

    Mr Stetson would you please take my retirement pension money and invest it. You seem to know what you are talking about. It is not a “blame game” now, it is a do something fast moment. The Biden people don’t care about us. They have their money invested in oversea banks and places safely outside America and won’t be bothered with our destruction as much. I’m glad I’m at the end of my life and feel sorry for the younger “know nothing” generation that will have to live through this. Keep staring into your iPhones youngsters with your earplugs in while the country falls apart.

    • Daniel H. Donovan

      YOU MEAN CENSORING my response!