Inflation and the Curious Fed

          Stocks had another down week while gold and silver continued to rise.  As noted last week, all major US stock indices are now trading below their 200-day moving averages, a technically significant level.

          As a reminder, there is just one week remaining to request the February Special Report titled, “Stock Update:  Is the Crash Upon Us?”.  Visit to request the report for yourself or someone else.

          Inflation remains the dominant news story.  The Federal Reserve called an emergency meeting last Monday that resulted in no action being taken regarding interest rates, a bit of a surprise to many analysts.

          With inflation raging at levels not seen in 40 years, the Fed’s inaction is curious.

          From my perspective, as I outline in the March “You May Not Know Report” real interest rates will need to be positive to make an impact on inflation.  Here is a bit from the March report:

As an aside, but for an important point of clarification, the Fed does not buy US Government debt directly.  The big banks buy the US Government debt and then the Fed buys the debt from the big banks using newly created currency.

I talk to many clients and radio show listeners who ask how much the Fed needs to raise interest rates to get inflation under control.  While there is not a universally accepted answer to that question, the answer that is often given is that real interest rates need to be positive.

Here’s an example to make the point.  Presently, the official inflation rate is 7.84%, which is the non-seasonally adjusted rate as of January.  The yield on the 10-year US Treasury as this piece is being written is 2.035%.  This means that an investor in a 10-Year US Treasury note experiences a real interest rate that is almost 6% negative!

When calculating the real inflation rate using the inflation calculation formula used in the late 1970’s and early 1980’s, rather than using the heavily manipulated Consumer Price Index, one concludes that the real inflation rate is about 16%.

In the early 1980’s when inflation was at this level, interest rates had to be increased to 20% to get inflation under control.  With interest rates at 20%, real interest rates were positive, and inflation was eventually brought under control.

In my view, that is where we now find ourselves.  With the real inflation rate at 16%, raising interest rates to 1% or 2% doesn’t make much of an impact on inflation.  However, it will probably make a huge impact on financial markets.  In calendar year 2018, when the Fed increased interest rates to a little over 2%, financial markets reacted very negatively.  It’s my view they will react similarly again.

            It’s my view that we are headed for higher consumer prices and a stagnating economy and distress in the financial markets.  While the Fed is feeling political pressure to do something about inflation, the math dictates that the central bank won’t be able to raise rates enough to get inflation under control unless the federal government’s budget is balanced or gets a lot closer to balanced.

          Since that is unlikely to happen anytime soon, the Fed’s actions with interest rates will be more form than substance.  Inflation will probably continue and accelerate while financial markets react negatively to small increases in interest rates.

          The reality is that there are many Americans feeling the pinch of rising inflation.  Michael Snyder recently commented in an article he wrote stating that 70% of Americans are now living paycheck to paycheck. (Source:

          This paycheck-to-paycheck existence is directly attributed to inflation.  Here is an excerpt from Mr. Snyder’s piece:

Over the past couple of years, the Federal Reserve has pumped trillions of fresh dollars into the financial system.

You just can’t “undo” that.

And our politicians in Washington have been on the biggest borrowing spree in all of human history.  I think that many of them truly believed that there would never be any serious consequences, but as Forbes has aptly noted, we “are now paying a heavy price for this magical thinking”…

Unfortunately, Americans are now paying a heavy price for this magical thinking. Inflation—spurred at least in part by record government spending and inaction on other issues—is running at its highest rate since 1982. The prices for meat and eggs are up 12.2% since last year. Furniture and bedding is up 17% and used cars and trucks are up 40.5%.

Meanwhile, the Treasury Department recently reported America’s total national debt is now over $30 trillion—the highest ever. To put this in context: If you stacked $30 trillion of $100 bills you could almost reach the weather satellites orbiting the earth at over 20,000 miles above us.

Today, we have absolutely gigantic mountains of money chasing a smaller pool of goods and services because of the pandemic.

As a result, the cost of living has been soaring into the stratosphere.

For example, one new study found that 82.2 percent of new vehicle buyers actually paid above sticker price during the month of January…

A study from the online marketplace found that 82.2% of new car buyers paid over the manufacturer’s suggested retail price (MSRP) in January, up from .3% in January 2020, before the coronavirus pandemic started affecting the industry

The average price paid above sticker was $728, while savvy shoppers were getting a discount of $2,648 just two years ago. Cadillac’s customers led the way by paying a $4,048 premium, followed by Land Rover’s ($2,565) and Kia ‘s ($2,289).

In my entire lifetime, I have never seen anything like this.

Years ago, I remember spending hours hammering a salesman until I was totally satisfied that the dealership would not knock off a single penny more from the price of a used vehicle that I wanted.

But now things have completely changed.

Today, just about everyone is paying above MSRP.

Of course, it is becoming more expensive to fuel our vehicles as well.  On Wednesday, the average price of a gallon of gasoline in California hit a brand new record high

Gas in California hit a record high of $4.72 a gallon on average on Wednesday — and experts say a whopping $5 a gallon will likely be the norm there in a matter of months, if not sooner.

Sadly, five-dollar gas is only just the beginning.

In fact, one expert that was interviewed by Yahoo Finance has actually raised the specter of seven dollar gas

Drivers best start bracing for another surge in gas prices amid the conflict between Russia and Ukraine and years of under-investment by the oil industry, warns one veteran energy strategist.

“My guess is that you are going to see $5 a gallon at any triple-digit [oil prices] … as soon as you get to $100. And you might get to $6.50 or $7. Forget about $150 a gallon, I don’t know where we will be by then,” Energy Word founder Dan Dicker said on Yahoo Finance Live.

Can you imagine paying seven dollars for a gallon of gasoline?

That definitely seems crazy to me.  But soon it will happen.

Housing prices continue to surge as well.  In fact, we are being told that a recent spike in lumber prices has increased the average price of a new home by nearly $19,000

“If people aren’t listening now, the dire predictions that we’ve been making appear to be coming true,” National Association of Home Builders CEO Jerry Howard said on “Varney & Co.” Wednesday.

Volatile lumber prices have caused the average price of a new single-family home to increase by $18,600, according to a new statistic from the NAHB.

Heating our homes is becoming a lot more painful too.  According to the Heartland Institute, the average American family saw their heating and cooling costs jump “by as much as $1,000” last year…

A new analysis by the Heartland Institute reports the typical American family’s home heating and cooling costs increased by as much as $1,000 in 2021 as a result of President Joe Biden’s energy and environmental policies.

          Needless to say, most Americans were not prepared for a dramatic shift in the cost of living such as this.  At this point, 70 percent of Americans are living paycheck to paycheck.

          So how are people making ends meet?  Well, we just found out that credit card debt rose at the fastest pace ever seen during the fourth quarter of 2021…

          As I have been suggesting, the best course of action is to hedge for both inflation and deflation using the Revenue Sourcing™ planning strategy. 

If you or someone you know could benefit from our educational materials, please have them visit our website at  Our webinars, podcasts, and newsletters can be found there.

Inflationary Death Spiral – Part Two

          The economic news continues to concern.

          As anyone who has been a long-term reader of my posts knows, when the Federal Reserve began quantitative easing programs, a.k.a. currency creation, I suggested we would ultimately have inflation followed by deflation or should the Fed be tempered in its approach to currency creation, we could move directly to a deflationary environment.

          Technically speaking, inflation is an expansion of the money supply while deflation is a contraction of the money supply.  Since all currency presently is debt, when debt levels reach unsustainable levels, the money supply contracts.

          Since shortly after the time of the financial crisis, the Federal Reserve has been engaged in currency creation.  When studying history, one discovers that currency creation initially results in prosperity.  A better term to use to describe this prosperity is prosperity illusion since currency creation doesn’t solve the debt excess problem; instead, it temporarily masks the effects of too much debt on the economy.

          History teaches us that eventually, the debt excesses become the dominant economic force and because the central bankers and policymakers have only one response to the recessionary impact of debt excesses, they resort to more currency creation.

          This is the beginning of something that I wrote about last week – the inflationary death spiral.

          If you missed last week’s issue of “Portfolio Watch”, you can read it at

          For reference, I am reproducing the inflationary death spiral chart here again.

          Notice from the chart, that the death spiral begins in earnest when the politicians began to promote the rhetoric that deficits don’t matter. 

          Obviously, with the proponents of the non-sensical Modern Monetary Theory are gaining in number and while their collective voice is getting louder, this theory is being advanced because any theory based on sound economics would require that government spending deficits be eliminated, and reliable currency being adopted.

          Massive deficit spending with existing debt levels automatically eliminates the adoption of reliable, sound money.  Policymakers have two choices – one, act responsibly when it comes to finances, or two, promote a theory that validates your collective irresponsible behavior.

          The current crop of policymakers has chosen the latter.

          But, as the inflationary death spiral illustrates, eventually, this theory will be proven to be erroneous as inflation accelerates in earnest.

          For context, let’s review the first few stages of the inflationary death spiral.

          One, the politicians and policymakers advance the theory that deficits don’t matter.  Two, government spending picks up speed and rises far faster than tax revenues.  The increasing deficit is funded via more currency creation.  Three, consumer price inflation kicks in.  Four, interest rates begin to rise in response which throws the economy into recession.

          I believe that is where we now find ourselves as interest rates began to increase last week and I believe that the economy is already in a recession although not officially.  While its highly doubtful that interest rates will rise from here in a straight line, over time, interest rates will move higher exacerbating the economic difficulties.

          The response to recession will be more currency creation…..and the cycle continues.

          Michael Snyder penned a terrific piece last week that brilliantly describes where we find ourselves economically speaking currently.  (Source:

          Michael begins with some context:

All throughout history, there have been many governments that have given in to the temptation to create money at an exponential rate, and it has ended badly every single time.

So, our leaders should have known better.

But it is just so tempting because pumping out money like crazy always seems to work out just great at first.  For example, when the Weimar Republic first started wildly creating money it created an economic boom, but we all know how that experiment turned out in the end.

          He then continues by discussing some of the recent economic news beginning with consumer price inflation.

Very painful inflation is here, and on Wednesday we learned that prices have been rising at the fastest pace in more than 30 years

The consumer price index, which is a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% from a year ago, the most since December 1990. That compared with the 5.9% Dow Jones estimate.

On a monthly basis, the CPI increased 0.9% against the 0.6% estimate.

If inflation continues to rise at about 1 percent a month, it won’t be too long before we are well into double digits on a yearly basis.

Of course, I don’t actually put too much faith in the inflation numbers that the government gives us, because the way inflation is calculated has been changed more than two dozen times since 1980.

And every time the definition of inflation has been changed, the goal has been to make inflation appear to be lower.

According to John Williams of, if inflation was still calculated the way it was back in 1980, the official rate of inflation would be close to 15 percent right now.

This is a real national crisis, and it isn’t going away any time soon.

One of the factors that is driving up the overall rate of inflation is the price of gasoline.  If you can believe it, the price of gas is almost 50 percent higher than it was last year at this time…

Gasoline prices last month shot up nearly 50% from the same month a year ago, putting them at levels last seen in 2014. Grocery prices climbed 5.4%, with pork prices up 14.1% from a year ago, the biggest increase since 1990.

Prices for new vehicles jumped 9.8% in October, the largest rise since 1975, while prices for furniture and bedding leapt by the most since 1951. Prices for tires and sports equipment rose by the most since the early 1980s.

Even Joe Biden is using the term “exceedingly high” to describe the current state of gasoline prices.

Other forms of energy are also becoming a lot more expensive

The price of electricity in October increased 6.5% from the same month a year ago while consumer expenses paid to utilities for gas went up 28%, according to numbers released Wednesday by the U.S. Bureau of Labor Statistics. Fuel oil rose 59%, and costs for propane, kerosene and firewood jumped by about 35%, the data show.

It is going to cost you a lot more money to heat your home this winter.

          Price increases are occurring while real wages are declining.  More from Michael’s piece:

The Labor Department’s own numbers show that real average hourly earnings are going down

The Labor Department reported Friday that average hourly earnings increased 0.4% in October, about in line with estimates. That was the good news.

However, the department reported Wednesday that top-line inflation for the month increased 0.9%, far more than what had been expected. That was the bad news – very bad news, in fact.

That’s because it meant that all told, real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month.

What this means is that our standard of living is going down.

          Americans are increasingly resorting to taking on more debt to make ends meet.  Household debt is now more than $15 trillion, a record high while credit card usage is increasing, and debit card usage is declining.

          The death spiral is in full swing.

If you or someone you know could benefit from our educational materials, please have them visit our website at  Our webinars, podcasts, and newsletters can be found there.