Inflation Drowns an Economy Surging Towards the Edge

First it was war. Then came food shortages. Then inflation surged over 8%¹. Next up is recession.

As inflation drowns consumers, the Federal Reserved abandoned the “Greenspan Put” to focus on bringing down prices². On June 15th, the Federal Reserve raised interest rates by 0.75%, the largest single hike in 28 years³. This hike won’t be nearly enough to stop inflation, but will almost certainly push the struggling economy into recession.

This Time is Different

During every recent boom, the prevailing wisdom was that “this time is different”. In every case, the Fed lowered interest rates, greatly expanded borrowing, and blew up asset bubbles. Predictably, each ended in recession when rates normalized. So really, nothing was different; people were euphoric due to the abundance of cheap money.

This time, however, things are different. The US economy is sick, like death-bed sick. And the only way to stop inflation will be much higher interest rates. It will probably take double digit rates before prices drop again. The last time the US economy faced similar inflation, Paul Volcker raised benchmark rates to 17.6% before curing the inflation fever⁴.

So the Fed clearly knows how to stop inflation. But the problem is that today’s economy can’t absorb high interest rates like it could during the 80s. Back then, America was the world’s largest creditor nation. Now, it is the largest debtor nation. Household debt has nearly doubled, in relative terms, since those days too⁵. The federal debt has skyrocketed to over $30 trillion dollars⁶. And the federal government vastly out spends anything it could ever collect via taxes.

Triple Whammy

With all this in mind, America’s central bank is determined to lower inflation. Why? Because they have no choice. The current rates of inflation would lead to severe political and social unrest. Just look to Weimar Germany for the worst case senario⁷. The current regime already faces an uphill battle in the upcoming midterm elections. Regardless how bad the other guys are, not being able to afford food and gas will surely lead to an overwhelming defeat.

However, as the Fed raises interest rates, the economy will crash. Depending on how high rates goes, the stock market and housing bubbles will surely burst. There is already clear evidence of the bust with interest rates still historically low. US stocks entered a bear market, while cryptocurrencies were slaughtered⁸. House prices will take longer to fall, but have plenty of room to drop from today’s astronomically high values.

When the economy crashes, tax receipts will drop for all levels of government, including the federal government. At the same time, higher interest rates on the debt will squeeze the budget. If rates reach 10% on US treasuries, debt payments would be higher than all taxes collected, combined⁹. This impending fiscal disaster is closer now than ever, and is a real possibility if the recession is deep enough.

There are no Easy Solutions

You have to assume the Fed knows the problems they’re up against. Whether politicians know this or not is irrelevant; they simply don’t care. Politicians would be happy stealing from passengers as they jumped off the Titanic. Sadly, this is true of both parties. Whatever financial pain the average American suffers in the looming storm, the political class will be there to rip them off.

Realistically, what options does the Fed have? In the short term, I expect them to continue raising rates. In fact, I suspect they will continue to raise rates even if a panic ensues. Just like 2008, banks are massively overleveraged in the derivates markets. It is only a matter of time before one of the major banks or hedge funds fails, leading to yet another financial crisis. Last time, rates were slashed and banks received trillions of bailout money. If another crisis occurs in the next 6-12 months, I just don’t see how rates could drop because inflation will still be a major problem.

But don’t think for a second that bailouts are off the table. Publicly, interest rate must stay high to fight inflation. Privately, however, the Fed is free to do whatever it wants off of its balance sheet. The central bank’s secretive and opaque operations make it impossible for anybody to know exactly what’s going on. With an unlimited printing press available, they will absolutely bailout the well connected, ultra-rich at the expensive of recession and inflation. Just like it did with the secret bailouts of $48 trillion dollars in 2020¹⁰.

Sovereign Debt Crisis, Part Two

Unfortunately, the US is only one of many countries with a fiscal squeeze in its future. Japan and many European nations, especially Italy, face a similar day of reckoning¹¹. Rates for their bonds won’t come anywhere close to covering the risk of default. And default will come, either in the form of restructuring, inflation, or outright bankruptcy. However you look at, the major democracies of the world are bankrupt. Their irresponsible governments and ignorant masses gave us this disaster of epic proportion.

They say when the tide goes out you see who isn’t wearing clothes. The pending recession will show us all the that the emperor wears no clothes. Only time will tell how everything shakes out, but I have no doubt that things will get much worse before they get better. Is this the end of the dollar and reckless sovereign debt? Or will central banks kick the can down the road for another decade? I know for sure they will try to kick the can down the road; they always do. But eventually, politics will trump fiscal policy. When people can’t afford to eat, they will burn everything down until there is new leadership, even if it is a crazed maniac.

Disaster can take many forms. Will it be inflation that prices everything out the reach of the poor? Will it be skyrocketing unemployment? Or maybe it will be massive cuts to social spending, so called austerity. It could even be the collapse of the dollar as the reserve currency. Any of these are possible, along with frightening combinations of all the above. I don’t know, but I know times will be rough. Buckle up because it will be a wild ride. And keep reading my blog, because you won’t be able to trust a damn thing the media or politicians tell you.

Crypto Bubble

I haven’t written much about cryptocurrencies but they are impossible to ignore after such a massive crash. These so called “currencies” amount to nothing more than a sophisticated Ponzi scheme. I believe the decentralized technology is academically intriguing, but the idea that crypto currencies have real value or are investment vehicles is outright lunacy. Late last year at its peak, the market cap for all cryptos reached just under $3 trillion. Now it is less than $900 billion, a lose of nearly 70%.

And I see no reason for the crash to stop. Value buyers will eventually jump in, but I suspect they will be massively outnumber by sellers trying to pay for gas and food. Anybody that purchased on credit will surely be wiped out. Celsius Network, a crypto-debt platform, recently froze withdrawals of its 2 million customers¹².

Unlike government sponsored banks, there isn’t a chance they will be bailed out. Loses incurred by investors and consumers are their burdens to carry. And I’m sure it won’t be long before politicians use the crash to call for greater regulations, which could strike a fatal blow to the industry.

Conclusion

The economy is a subject that only matters to voters when a recession hits. Otherwise, they want as many hand outs as possible. Worse, most voters live in complete ignorance of the interaction between central banking and the health of the economy. Their ignorance and indifference has given politicians and their billionaire backers a blank check to pillage the economy. And pillage they have. We face a day of reckoning of epic proportions because of the crimes of these villains.

As for the outlook, there simply is no way for anybody to know for sure what will happen. I know the banking cartel will protect their friends at the expense of us all, but otherwise, it is difficult to predict the future. At some point, insolvent governments, like the US and Italy, will default on their bonds. Will that happen now? I don’t know. My best guess is that they have one more grand party left before the finale. They will try every trick known to man to kick the can down the road for as long as possible.

Whether this is the finale or not, the next recession will be deep. The US is long overdue for a correction and inflation must be solved for the economy to have any chance of recovery. My only advice is to ignore media lies and make sure you have a good financial planner that understands the edge of the cliff that we’re staring at.