The Fed Wanted More Inflation – They Got It!

Starting in the 2000s the Fed was worried about deflation and started on its course of very extended super-low interest rates in an effort to boost inflation to at least 2%.

I said for years that 0% interest outside of a financial crisis and continued massive expansion of the Fed’s balance sheet were bad ideas that risked high inflation. We were told no, it was all right because the result was just financial asset inflation and everyone wants that, right

Then came COVID. I said and posted at the time I thought the COVID lockdowns were a really bad idea that would cause a lot of problems, especially as certain parties sought to keep extending them, but I greatly underestimated how much of an effect they would have. I could see supply chain disruptions but I didn’t expect how tight labor would become after the very stupid pay them more to stay at home than work and then keep extending the benefits ceased.

Third, I said that the $1 trillion 2009 emergency stimulus would become a new baseline spending level and I was right about that but who could foresee that it would continue under a Republican president and then accelerate as it has lately?

Those were the stimulants for inflation and only one of them has been reversed. You can add in the Ukraine conflict but that is mainly a European story with some wider effects on grains and energy.

Speaking of conflict, China is on a very nationalistic course and a huge expansion of a modern military at the same time our military is shrinking, especially the Navy, the most important branch where the Pacific is concerned. The trends in the number, availability and reliability of our ships and planes is absolutely dreadful. In the next 10 years China will be emboldened to be much more adventurous militarily because there will be no one with the will and capability of stopping them. They will of course start with Taiwan. 

Interest on the national debt is now 7% of the budget and that will soon be 15%. Most of the debt is financed short term with an average overall interest rate of 2.25%. A 6-month Treasury bill now pays 4.2% and will soon be 5%.
Federal spending has gone from $4.4T in 2019 to $6.8T in 2021, a 50% increase in two years and that doesn’t count college loan forgiveness and the massive spending package passed recently. Spending bills recently have ridiculous gimmicks like programs that cease after only two years.

Investing over the next few years, especially next year is going to be very interesting. It will take discipline, foresight and creativity, not a time for DIY investing or “advisors” that are really salespeople.