Like the perennial loser sports team that finishes each disappointing season cheerfully proclaiming, “There’s always next year,” the Federal Reserve hopes against hope that inflation will come down all by itself by-and-by.
Mañana. Maybe next month. Maybe next year.
But “there’s always next year” is not an option for people whose retirement plans are going up in smoke.
You’re not supposed to notice that inflation has been running hot for 20 months, with annual rates over 8% for seven months in a row now.
But rising prices of everything from gasoline to groceries are only part of a picture that fatally burdens retirement dreams. The Fed raises interest rates at the stock market’s peril. Heritage Foundation economists point out in a New York Post piece this week that 401(k) retirement plans have had investment losses of $2.1 trillion just since the first of the year! In less than a year, the average 401(k) retirement plan has lost 25% of its value.
More traditional pension funds also are getting flattened by inflation. At the beginning of this year, pensions in the U.S. had $27.8 trillion in assets. Now, it’s under $24 trillion, a drop of about 15% that has wiped out the last two years’ worth of gains — nearly $4 trillion.
Many union and government pension funds were already facing financial shortfalls to be able to pay promised benefits. The combination of high inflation and a bear market in stocks means insolvency is a real threat. Some may need bailouts or will have to sharply cut promised benefits.
Let’s be clear. The Fed raises interest rates in hopes of taming inflation. But this is key: according to the precedents it cites for this policy, the Fed must raise rates a lot more than it has so far, further tanking the stock, bond, and real estate markets. So, the Fed dawdles, hoping the problem will solve itself.
For those Pollyannas who say wait until next year, let’s look at what is already in the inflation pipeline for next year and beyond.
In the last three years alone, the Federal Reserve has digitally conjured $5 trillion out of nothing at all. Milton Friedman identified long and variable lags between new money creation and the time it shows up in price inflation. Friedman describes “the fool in the shower” who turns the hot water on full blast with no apparent effect at first – until it suddenly scalds him. We can’t be certain when the full inflationary impact of all the Fed’s money printing will hit, but Friedman has identified some lags lasting years.
Added to our considerations is the $4.8 trillion the Biden White House has added to the deficit. We don’t mind calling that inflationary, too. It reminds us of the 17 Nobel economists who wrote a joint letter in the New York Times pooh-poohing the fear that Biden’s policies would cause inflation.
That was last year. The inflation rate has been higher ever since.
We feel we have been here before, especially in the stagflation decade of the 1970s. Nor are we the only ones. Famed economist Nouriel Roubini, who warned about the last bubble, the housing crash, and the global recession that followed, now says we are headed for a “stagflationary crisis unlike anything we’ve ever seen,” one characterized by “massive insolvencies and cascading financial crises.”
Of course, Roubini favors gold.
By the end of the last stagflation decade, with Fed interest rate manipulations that look frenzied in retrospect and a stock market that, measured in constant dollars, fell for more than a decade, all the victories went to gold and silver.
Maybe that is why, away from the headlines, not captured in the price action of the “paper gold” and gold-substitute markets on Wall Street, regular people here and abroad are rushing to buy physical gold and silver. Indeed, there is a divergence between the international benchmark prices which are lower, and the real prices for real physical gold and silver, supplies of which are growing thin or in some cases even disappearing altogether. Take note.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.