Higher Inflation Is Here To Stay

Higher inflation is not going away, and the Federal Reserve is constrained from taking the actions necessary to cure it. The problem for everyone is that the Federal Reserve statements and the media reports are both superficial and misleading.

Therefore, we need to do self-help studies to prevent being caught in the coming “surprise” turbulence. “Self-help” means doing our own research and analysis. By doing so we can better anticipate where things are heading.

Three self-help steps

1. Know and understand “fiat money inflation” – the destructive form of inflation that is at work now
2. Research and comprehend the 1965-1967 launch of the lengthy U.S. inflationary period. While conditions were different, human nature was the same.
3. Analyze and evaluate this Federal Reserve’s series of major money market manipulations:

• First, to cure the Great Recession financial and economy turmoil (2008-2009)
• Second, to foster economy and employment growth (2010-2016)
• Third, to return control to the money market (2017-2018)
• Fourth, to reclaim control by reversing that third action (2019)
• Fifth, to offset the Covid-19 pandemic financial and economic turmoil (2020-2021)
• Sixth, to halt and reverse the fast, large inflationary climb (2022-current)

1. Know and understand “fiat money inflation”

“Fiat money” is currency that is not backed by (redeemable into) something of intrinsic value – like gold. Simply put, fiat money inflation is the erosion of a currency’s purchasing power caused by the expansion of the money supply beyond basic growth needs. The two main sources are:

• Bank lending (because banks only need to keep “fractional” reserves for depositors’ accounts)
• Central bank (Federal Reserve) actions (like by buying securities with newly created demand deposits)

The simple, but flawed, logic is that more money = more buying = economy growth. While that can be the initial characteristic, prices soon rise and conditions reset or worse. The “worse” is because not everybody gets an income boost that offsets the rise in prices.

Nevertheless, the strategy of increasing the money supply to boost growth has been tried in various forms throughout history – yet it never works. The best account is what happened in France, even after the country had tried the strategy before and failed. “Fiat Money Inflation in France” by Andrew Dickson White has been reissued many times. (I found it at a library book sale in 1972 for 10 cents. It was my most valuable purchase for understanding the inflation that was upon us and would last for ten more years.)

2. Research and comprehend the 1965-1967 launch of the lengthy U.S. inflationary period

An excellent way to access the reasoning and reactions to what was happening is to use the New York Times’ “timesmachine.nytimes.com.” (It requires a delivery or digital subscription.) It provides quick access to all articles back to 1851. Just enter the date range and keywords, then sort by date or relevance.

Each article has a brief description. Click on a chosen one, and it takes you to the newspaper page on which the article is located. Click on “PDF” to get the readable version. At that point, you will have three browser tabs: The search results page, the newspaper page, and the PDF page. That makes researching easier.

Here are the types of articles that provide the picture of how and why the inflation period started along with the Federal Reserve’s attempt to control it.

3. Analyze and evaluate this Federal Reserve’s series of major money market manipulations:

The important point here is that today’s inflationary period did not start in 2022. It was launched by Fed Chair Ben Bernanke’s years-long 0% interest rate (a negative -2% inflation-adjusted rate) and periodic QEs (“quantitative easings” – AKA printing money).

Fed Chair Jerome Powell’s short-lived attempt to return the Federal Funds interest rate to normal (he labeled it “neutral” so as not to imply that Bernanke’s 0% rate was abnormal – which it was).

Then came the spark that lit the inflation fire: Powell’s Covid-19 actions of a 0% interest rate and enormous bond purchases (creating new money). Then, when inflation jumped, the Fed hesitated. After many months, the Fed took action, but only slowly.

The bottom line – Inflation’s ill effects won’t melt away

An inflation rate, whether it be 2% or 5%, is compounding over time. Therefore, the effects accrue, regardless of what the future inflation rates are. Take, for example, the damage done to retirees with fixed pension payments. Their lowered purchasing power is here to stay and will worsen even with only 2% inflation. Only deflation can reverse some of the lost value.

Based on the Fed’s stated goal, the best we can expect is a 2% inflation rate. However, that goal necessarily means having a recession to kill the price-raising strategies that are now prevalent. That’s human nature at work in an inflationary environment. Of course, a recession introduces new problems, particularly unemployment.

Even so, this Fed continues to sell the dream of a “soft landing” where inflation melts away, interest rates fall, yet the economy continues to grow with full employment. History and common sense say stopping interest rate raising now and leaving most of the $trillions of added money supply intact means higher inflation is here to stay.