Inflation’s here to stay

Pathetic. Western Central Banks are leading the charge on the out-of-control inflationary spiral we witness today. They have done little – if anything to get a grip on skyrocketing prices. Real inflation has reached levels not seen since the 1970s; a cost of living crisis not seen since the 1930s. The Tories in the UK have been the only government in the world to further cut into households’ pay, raising taxes at a time when households are already being squeezed by exorbitant price hikes. Given the inability of governments and Central Banks to take on the inflation fight, the pinch on real incomes, inducing misery and poverty globally, is likely to continue for years to come.


The coronavirus pandemic ushered in record levels of fiscal and monetary stimulus. In the US, the Federal Reserve pumped an astronomical $4 trillion into the economy through purchasing securities in less than 2 years, increasing its reserves to a total of $9.6 trillion by the end of 2021. This increase in the money supply was unparalleled – the Global Financial Crisis only saw around $1 trillion in bond purchases; the pandemic saw an amount 8x greater. The CARES act passed by the Trump administration gave corporations and individuals money to weather the downturn produced by the pandemic. The deficit grew to over $3 trillion in 2020 and was only slightly less in 2021. Taking both expansionary measures into account, around $14 trillion was added to the money supply in 2020 and 2021. Coupled with interest rate cuts to 0%, further plunging real interest rates deep into negative territory; the blame for the inflation crisis goes to bureaucrats and corrupt politicians.

“Inflation is always and everywhere a monetary phenomenon”

Milton Friedman

Blame diversion

To the surprise of no one, Central Banks and governments are trying to dodge and deflect justified criticism over creating and exacerbating the inflationary spiral of today. Initially, in early 2021, Fed chair Jerome Powell claimed that inflation was ‘transitory’ and was be short-lived once household savings acquired during the pandemic, depleted. As of May 2022, the US savings ratio fell to below pre-pandemic levels – has inflation returned to those same levels? Not at all. This is the same Federal Reserve that had Ben Bernanke in 2008 claim that the economy was strong and the sub-prime mortgage crisis would be contained within the sub-prime market. President Biden has similarly pretended as if inflation could single-handedly be attributed to Russia’s invasion of Ukraine. The thinking is that Russian oil and gas being restricted globally has severely contracted the world’s supply of energy, leading to cost-push inflation. As a result, Biden has pinned the current inflation crisis on rising energy costs from Russia’s invasion. What this alternative view of reality fails to consider is YoY CPI inflation was already at 7% prior to the Russian invasion. Energy prices – including both oil and gas had been steadily climbing throughout 2021, largely due to an increase in the money supply fuelling demand for energy. Then again, this is the same President that struggles to speak a coherent sentence. Should we be surprised at his cognitive dissonance?

After finally admitting inflation was a real issue, Powell began to talk tough on inflation, claiming that he would be tough in grappling with it. But how does this make sense? If he wanted to act tough on inflation, interest rates would’ve already been hiked? Instead, interest rates still sit at 1% which is pathetically low by historical standards. Powell consistently references the ‘strong US economy’ as points to growing consumer spending as a key determinant of this. During Q1, consumer spending reached a record high. However, this is simply because individuals are paying more for goods and services, not buying more. As aforementioned, the savings ratio has reached record lows. Consumers are being forced to cut back on discretionary spending to fund the essential consumer staples. Higher consumer spending doesn’t reflect prosperity and growth but simply higher prices.

Cutbacks on discretionary items have been reflected in corporate earnings. Netflix plummeted following falling users and poor earnings in Q1, down 70% from its record high in late 2021. Similarly, Amazon’s earnings collapsed, sending Jeff Bezos’ stock down to 2020 levels. Lyft, the US equivalent of Uber in the UK, saw a 30% fall in its share price in early May, following consumers cutting back on unessential services and opting for cheaper alternatives. All of this has culminated in the worst week for the S&P 500 seen since 1939, the worst ever week for the Nasdaq.

Inability to hike rates

As a result, the Fed is unable to raise interest rates. They tried in 2016; raising interest rates to 2.5% by 2019. This tanked the economy. Growth slowed and eventually they were forced to cut rates back to below 2% by the end of the year. Interest rates are like coffee. A once-in-a-while coffee boosts productivity and output; similarly, a sharp interest rate cut from previously neutral levels prompts economic output. However, the US economy has been drinking coffee since 2008. Keeping interest rates permanently low following the Financial Crisis of 2008 has made the economy addicted to cheap money. Zombie companies, propped up by cheap credit have led to sluggish economic growth; once interest rates are no longer deep in negative territory, these firms will mass layoff workers, prompting a recession.

The US economy is already halfway to a recession. In Q1, GDP growth was negative at -1.5%. The trade deficit reached a record high of $125 billion in Q1. With growth negative, how can the Federal Reserve afford to raise rates? Raising interest rates will lead to firms firing workers, limiting investment in technology and innovation and leading to negative growth in Q2. The budget deficit as referenced previously has reached record highs. $2.7 trillion worth of borrowing from the Federal Reserve in 2021. Rising interest rates will send bond yields through the roof, leading to the budget deficit rising even more to fund additional debt repayment. Bond yields have already been climbing, rising from 0.5% to over 3% on 10-year treasuries in the space of 2 years. At the same time, the Federal Reserve has announced they will be selling government bonds as a pose to purchasing them. Starting in June, $30 billion worth of mortgage-backed securities and $60 billion worth of treasuries will be sold monthly in a pathetic attempt to fight inflation through tightening the money supply; bear in mind that this is the same Fed that pumped $4 trillion into the economy in less than 2 years. How will $90 billion worth of monthly quantitative tightening counteract the $4 trillion worth of stimulus that gave us inflation in the first place? This puts further downward pressure on bond prices and upward pressure on yields. Previously, the Federal Reserve was the biggest purchaser of treasuries. Who’s going to buy them, now that the Fed is also selling them? The stock market will further lose value as investors pour money into bonds in response to rising rates.

Ultimately, investors globally recognise that a global recession is looming. A cost of living crisis forcing consumers to cut back on discretionary spending, negative GDP growth coupled with record inflation, leaves both the Federal Reserve and government powerless to stop the problem they initially created. In 2008, both institutions could print money and bailout failing businesses to rescue the flailing economy; neither of these tools are available at their disposals this time round. Could we see a repeat of the Great Depression?