Just days before the Federal Reserve’s latest interest rate announcement, President Joe Biden declared on CBS 60 Minutes that inflation “hasn’t spiked.”
He was trying to say that inflation is not that bad.
Scott Pelley: “Mr. President, as you know, last Tuesday the annual inflation rate came in at 8.3%. The stock market nosedived. People are shocked by their grocery bills. What can you do better and faster?”
President Biden: “Well, first of all, let’s put this in perspective. Inflation rate month to month was just– just an inch, hardly at all.”
Scott Pelley: “You’re not arguing that 8.3% is good news.”
President Biden: “No, I’m not saying it is good news. But it was 8.2% or 8.2% before. I mean, it’s not…you’re ac[ting]…make it sound like all of a sudden, ‘My god, it went to 8.2%.’ It’s been…”
Scott Pelley: “It’s the highest inflation rate, Mr. President, in 40 years.”
President Joe Biden: “I got that. But guess what we are. We’re in a position where, for the last several months, it hasn’t spiked. It has just barely, it’s been basically even…”
Oh? As you can see for yourself on the following chart, inflation has been almost straight up since Biden became president.
The monetary authorities engaged in years of credit and monetary excess in the name of reaching an entirely and irrational rate of inflation.
Maybe they should be congratulated. They achieved their objective of 2% inflation – 2% and much, much more. So much more that they created the biggest speculative asset bubbles in history. Altogether, it is a stock, bond, and real estate market superbubble, and it is clearly popping.
So now, with the air coming out of the Fed’s bubbles, that is the end of inflation, right?
In fact, it might be too late, says bond market observer Jim Grant. He’s not alone. A growing chorus of keen observers is warning that, Fed interest rate hikes notwithstanding, inflation is not close to being contained.
Former Treasury Secretary Larry Summers put it in perspective. Tweeting about the latest inflation number, Summers says, “that the US has a serious inflation problem. Core inflation is higher this month than for the quarter, higher this quarter than last quarter, higher this half of the year than the previous one, and higher last year than the previous one.”
Ray Dalio, the billionaire founder of Bridgewater Associates, says investors are too complacent about long-term inflation, while Doug Noland of Credit Bubble Bulletin points out that even after months of speculative bubbles deflating, consumer price inflation has accelerated.
“The Fed’s hope for transitory price inflation proved wishful thinking,” he writes. “What’s more, Fed expectations for tightening market financial conditions to presage a return to 2% inflation have been deeply flawed analysis…. Bank lending, in particular, is booming, while government deficit spending is unrelenting. The economy is demonstrating powerful and pervasive inflationary biases.”
A MarketWatch headline sums it up: “Markets are waking up to the notion that inflation hasn’t peaked.”
The consensus of these views is that even a big rate bump in the Fed’s policy interest rate won’t fix inflation. That is hard to dispute. Bumping the Fed funds rate to 3.25 or 3.5% still leaves real interest rates (nominal rates minus the inflation rate) deeply negative. (Even as marginally higher interest rates add to Washington’s already insurmountable fiscal burden.)
Negative interest rates are how we got into this inflation mess in the first place. Yet, it will prove politically impossible to raise rates above the inflation rate, which is the medicine it took to wring inflation out of the monetary system 40 years ago. We are not sure that Fed Chairman Jerome Powell would be willing to lead the committee in that direction anyway, but even if he did, support would quickly begin peeling away. As Jim Grant has observed, “the Fed has shown little tolerance for economic pain.”
One thing should be apparent to all: the longer interest rates remain below the inflation rate, the longer inflation will persist and the more powerful gold’s breakout will be. Many believe, on the basis of historical precedent, that continuing negative rates will further cripple the economy and will take gold to astonishing heights. Thus, gold investments made now will prove to be among the greatest opportunities of our time. Especially in an era of today’s rapidly deteriorating geopolitical conditions. But we will save that part of the story for a forthcoming Gold Watch commentary.
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