Inflation Isn't Going Away

Banks are dropping like flies.

China and Russia form an alliance to rival US Dollar hegemony.

The US Government is silently banning Crypto.

AI is taking over the world.

Bitcoin going to a Million by June?

Treasury yields at their highest rate since the global financial crisis in 2008.

The US Dollar’s future as the reserve currency is in jeopardy.

Inflation is crippling the global economy.

Global central banks still don't know what the fuck they're doing.

Welcome to 2023.

This is what happens when interest rates are raised from 0% to 5% in just one year. The effects stretch far beyond financial markets. Everything has changed. And we are just starting to feel those changes.

Just a month ago, the “experts” were telling us that inflation is coming back down. The economy is in good shape. And that were in the final stretch of this period of pain caused by rising interest rates.

Fast forward to today, after we experienced the second and third biggest bank failures in the United States since Lehman Brothers in 2008, the landscape looks a lot different. The fact might be the opposite. We might not be in the final stretch, but instead in the first couple innings of a long and dreadful period of economic instability.

Let’s take a step back for a minute and look at the bigger picture. Back in 2020 when the pandemic began, the Federal Reserve Bank of the United States (Fed) printed massive amounts of money to backstop the entire US economy and provide liquidity for banks and businesses.

This process of injecting liquidity into the economy continued on autopilot. With some people saying it will cause inflation, the Fed stated that inflation will be transitory because of the deflationary effects of the pandemic. Meaning there will be temporary spikes of inflation in 2021 but inflation will go back to normal by late 2021.

But inflation didn't cool down. It got worse. The Fed was wrong. They then waited until the first quarter of 2022 to start raising interest rates and end their quantitative easing program (Just a fancy term for printing money). Global central banks followed suit by mid to late 2022.

The Fed then aggressively shifted from 0% interest rates and quantitative easing to hiking interest rates rapidly and quantitative tightening. The goal of the Fed for the past year has been to fight inflation at all costs. Now we are on the precipitous of a major financial crisis.

So no matter what the Fed does, the result is always negative. This is the Federal Reserve Bank of the United States we are talking about. The smartest and brightest economic minds in the world with access to the best financial models are failing to conduct proper monetary policy.

Let's examine the Fed’s policy mistakes over this period of time. First they acted as a life support for the entire economy during the pandemic. Im not going to argue whether this was the right decision or not. That's a whole other separate conversation. But their mistake was overheating the economy by printing money well after the economy recovered from the pandemic.

During the pandemic, productivity sunk which caused supply to shrink as well. At the same time, the Fed was injecting so much money into the system that caused demand to rise at the same time. Too much money chasing too few goods is inflationary. This is basic supply and demand economics from your Econ 101 class.

Dragging on loose monetary policy for too long was the first policy mistake. Then when they realized inflation wasn't transitory as they thought, they waited months until they reversed course. The correct decision would've been to start fighting inflation in 2021. They waited until early 2022 to do this. This put them behind in the inflation race. This was the second policy mistake.

The third policy mistake was raising interest rates at the fastest rate in over 40 years. Some people argue the rate of hikes is justified because we need to be fighting inflation. But if the Fed didn't commit the first two policy mistakes I talked about, they wouldn't need to hike rates that fast.

Also, the economy we have now is very different from the economy we had 40 years ago. In my first blog post last year “The Life Support Economy,” I wrote about the current state of the world economy. A highly leveraged economy overdosing on debt that can’t handle the normal interest rate environment we are currently in.

I wrote, “The Fed is stuck between a rock and a hard place. We now have an economy on life support. Take that life support away and the whole thing comes crashing down.”

The metaphor I wrote about of being stuck between a rock and a hard place is manifesting right before our eyes right now. The rock is high inflation crippling the economy and the hard place is rising interest rates crashing the economy. There is no way out.

The economy is like a drug addict and central banks are the drug dealers. If the drug dealers stop supplying the drugs, the drug addict will suffer. Just like we are witnessing now with the economy.

If the drug dealer keeps supplying the drugs, the drug addict’s tolerance will keep going up. The inflation in the economy represents the tolerance of a drug addict. The more money you inject into the economy the higher inflation will go.

The more the tolerance goes up, the harder it is for the addict to go sober. Just like the more money is printed, the bigger the inevitable crash will be.

The Fed will print their way out of any problem just like they have with the current banking crisis. As this cycle continues, the confidence in the banking system and the US Dollar as the reserve currency of the world will wither.

As for what's going to happen next? Well, I believe we are going to witness a never before seen policy move by central banks; maintaining high interest rates and a return to quantitative easing. They will maintain high-interest rates to keep up the fight against inflation. While still being the life support of the economy and injecting liquidity where it is needed.

This will go on until the real estate market is the next sector of the economy to take a big hit. At that point, the Fed will slash interest rates back below 1%.

Inflation is not going away. The rest of this decade will be a period of high volatility and high inflation coupled with economic and political instability. The dominos are just starting to fall with each passing event. Central banks might come to the rescue every time a domino falls, but eventually, they won't be able to contain exploding inflation.