Every 30 days, inflation reduces the value of the US dollar by 1%
According to the latest figures released by the United States Bureau of Labor Statistics, the state of the economy can be clearly summed up as this tweet by Preston Byrne.
“According to official figures, your money now loses 1% of its value every 30 days.”
What is the state of inflation right now?
Inflation for all items has now increased to 6.2%. This means that your dollars are worth less when you pay for products and services. This level of inflation represents the largest increase in the past 20 years.
Of course, the official data itself could be massaged to keep markets calm, as Anthony Pompliano suggests. He suggests the “unofficial figure” is over 10%, which would paint an even darker picture for the US economy.
That’s why Jack Dorsey, the owner of Twitter and Square, with his access to direct merchant data, claimed that we are already at the onset of hyperinflation.
What we do know is how the Federal Reserve’s forecast turned out. At March 17, 2021, the Federal Open Market Committee (FOMC) placed the inflation forecast at 2.2%, like the core PCE (Personal consumption expenditure excluding food and energy). This rate was expected to drop to 2.0% in 2022.
Instead of following the forecast of the world’s most powerful monetary institution, the core PCE doubled, which is no small mistake to overlook. To make matters worse, personal income growth has turned negative, presenting another market force that depreciates the value of consumers’ assets.
Overall, confidence in the economy is weakening day by day, exacerbated by events like the Great Resignation as people become disillusioned with work. Needless to say, this cocktail of failed forecasts, labor shortages and major supply chain disruptions does not bode well for the U.S. economy.
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How did the Fed contribute to inflation
When the first lockdowns were announced in March 2020, the stock market collapsed, an event now dubbed “Black Thursday”.
The Fed came to the rescue by significantly stepping up its quantitative easing (QE) program, pumping unprecedented new money into the economy. It should be noted that the first uses of QE date back to 2008, which makes the program relatively untested in terms of its long-term consequences.
Since the 2008 financial crisis, the Fed has supported the stock market with quantitative easing (QE). This practice of QE is very controversial because the Fed intervenes directly and continuously in the market by buying financial assets and government bonds.
Through its Open Market operations (OMO), created in the 1920s, QE aims to stimulate the economy by injecting new money into it, however, this creates three major effects:
- The money supply grows, resulting in a devaluation of the dollar.
- An overheated economy with assets expanding at an unsustainable rate.
- Liquidity traps, making Fed policies ineffective because confidence in the economy is not strong enough for people to spend, leading them to save more. This makes low interest rates virtually useless as a tool to stimulate the economy.
Liquidity traps are further exacerbated when it is already known that the younger generations save more than they spend.
Can the Fed Reverse Inflation?
Tapering – which means cutting bond purchases to raise interest rates – should hopefully calm the overheating economy. Unfortunately, this is becoming more and more difficult to achieve. Used to cheap money, the stock market has become dependent on the Fed’s QE. Therefore, the last time the tapering was attempted, the stock market responded with a “taper tantrum” in May 2013, which caused the S&P 500 to fall 5.6%.
Suffice to say that the stock market has risen more and more more dependent on the Fed since 2013. When borrowing becomes more expensive after the Fed raises interest rates, the market can drop significantly.
The Fed has spoken of tapering on several occasions, the last November 3.
“… the Committee has decided to begin reducing the monthly pace of its net asset purchases by $ 10 billion for Treasury securities and $ 5 billion for agency mortgage-backed securities. “
While the Fed’s track record of accurate forecasting is poor, the stock market may have already forecast a decline. Nonetheless, the larger context will end up being the deciding factor.
“If we see that inflation remains stubbornly high, or goes even higher in the first quarter, it will scare the market,” he added. Sam Stovall, Chief Investment Strategist at CFRA research.
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About the Author
Tim Fries is the co-founder of The Tokenist. He has a BSc in Mechanical Engineering from the University of Michigan and an MBA from the Booth School of Business at the University of Chicago. Tim was a Senior Associate in the investment team of RW Baird’s US Private Equity division and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and protection solutions. control.