There was a lot of Fed-talk on Friday and the big theme was inflation.
For quite a while, Peter has been asking an important question: what is the Federal Reserve going to do when the inflation level gets above 2%? Well, it looks like its setting the stage.
In fact, the real rate of inflation has been above 2% all along. The way the government scores inflation keeps the number artificially low.
“But eventually, it’s going to be so high that even the government’s own doctored-up, gimmick numbers are not going to be able to show a rate below 2%.”
To answer his own question, Peter has been saying the Fed will tolerate the higher level of inflation because there is really nothing they can do about it.
“They can’t fight inflation. They put themselves in a box where fighting inflation is impossible. Look, they had to stop raising interest rate at two-and-a-quarter percent because the stock market cratered into a bear market and because the US economy is going toward recession.”
If the economy can’t tolerate even 2.25% interest rates, how in the world will the central bank fight inflation? How could it ever raise rates to 5 or 6%?
“So, the Fed can talk all they want. They can bark all they want about how they would fight inflation if it ever reared its ugly head, but they can’t fight.”
So, the Fed talk last week centered around changing the way the central bank looks at inflation. Instead of keeping the number at or below 2% annually, the central bankers just want to ensure it “averages” 2%.
Because they want to use all of the years where inflation was below 2% over the last decade to justify allowing inflation to rise above 2% in the future.
“We want to make up for all the past years where there wasn’t enough inflation by having excess inflation in the future, and then it’s all going to even out — which is all a bunch of nonsense.”
This raises a more fundamental question: why do we want the cost of living to go up in the first place?
“This is all ridiculous. Inflation is not a good thing. Two percent is not better than 1%. One percent is not better than zero. When it comes to inflation, no inflation is better than any inflation. And in fact, when it comes to inflation, deflation is better than no inflation.”
As Peter pointed out, inflation and deflation aren’t really the right words. Inflation actually means an increase in the money supply. When the Fed and government officials talk about inflation, they mean rising prices – an increase in the cost of living.
“And when it comes to consumer prices, the lower the better.”
A falling cost of living means a higher standard of living. That’s what we all want, right?
“Why would we want our standard of living to rise more slowly by imposing an increase in cost of living? This is all Fed-speak. This is all nonsense to try to pretend that we’re better off with rising prices than stable prices, or that we’re better off with stable prices than falling prices.”
The real reason central banks want to sustain inflation is because they are trying to keep the air in asset bubbles, and more importantly, they are trying to inflate away debt.
“They’re trying to destroy the value of the debt that they encouraged everybody to take on. After all, when you have this much debt, inflation is your only way out. The only way to screw your creditors is to have inflation do it. If you’re not going to default then you need to inflate. So, that is the real reason that the Fed wants higher inflation, not because a rising cost of living is good for the economy. It’s not. It’s lousy for the economy. But it’s trying to help them paper over their mess, to control this asset bubble.”
So, now the Fed is saying we had inflation below 2% for a while and now we’re going to have inflation around maybe 2.5% or 3% for a while and it’s all going to be good. It’s not going to be good.
“They’re going to get a lot more inflation than they bargained for. The Fed is basically trying to get the market a little bit pregnant when it comes to inflation … We’re not going to get a little bit pregnant. We’re going to get all the way pregnant because that’s the only kind of pregnant you can be.”
Peter said the bottom line is inflation is not going to stop at 2.5 or 3%. It’s going to go a lot higher.
“There is no stopping it. All the Fed is doing now is preparing the markets to be north of 2%. But don’t believe that it’s going to stay anywhere close to 2%. But this is going to allow the Fed to get away with it for a little bit longer, because when the Fed doesn’t immediately respond to rising inflation, the markets would have said, ‘Hey, what’s going on? Why is the Fed allowing this?’ So, now the Fed is getting out in front of it.”
Peter went on to put this inflation talk in the context of the latest economic news. Make sure you listen to the whole podcast.