When it comes to inflation, we put it this way…
It is putting the metaphorical cart before the horse.
It’s confusing cause and effect.
To be clear what we’re saying is the market is reading it all wrong.
The market thinks the Federal Reserve is battling against inflation. The reality is… the Fed is doing all it can to boost inflation.
We’ll try our very best to explain more below…
The Market Has It All Wrong
We return to this subject (in truth, we’ve never really departed from it) due to its importance.
And the fact that the market and investors fail to see what’s really happening.
We continue to say that, based on a story from Bloomberg yesterday:
Bond traders are once again growing doubtful that the Federal Reserve will deliver the two interest rate cuts that were priced into the swaps curvejust last week.
How can we put it?
The market seems to think the Fed won’t cut interest rates because it is trying to combat high inflation. And that it won’t cut rates until inflation falls.
We say that’s hogwash.
Our take is the Fed won’t cut interest rates because it isn’t yet done with keeping inflation as high as it possibly can.
The reason interest rates are high, and will stay high, is because the Fed doesn’t want to “overcook” their inflationary plans and let it get too out of control.
Cutting rates would make it harder for the Fed to inflate away government debt to the extent it wants… because the Fed would have to pare back its inflationary policies to prevent an inflationary panic.
But by keeping rates higher, it provides a great cover story. The markets and investors think the Fed is their friend… they think it’s trying to battle against inflation…
And so they give the Fed a pass… and let it carry on doing what it’s doing. And just what is it doing?
It’s allowing inflation to erode the value of savings to the tune of 3.4% a year (based on the most recent Consumer Price Index — CPI — number).
So as the Fed and the Treasury work together to create money from nothing, the government gets to repay old debts with new devalued money.
And it doesn’t matter that interest rates are higher. Because as we noted in Monday’s Daily Cut, the real inflation rate is likely three times higher than the official number… if you calculate it the same way before the method changed in 1983.
So forget the idea that inflation at 3.4% is below the official interest rate of around 5.5%… giving you the false feeling that you’re keeping ahead of inflation.
The truth is that real inflation is around the 9–10% range… meaning the interest rate you receive on savings is only around half of what you lose from inflation.
Sucks, huh?
But that’s how it is. No wonder gold has returned to near a new record high above $2,400 per troy ounce.
This inflation story isn’t ending anytime soon. Don’t expect the Fed to cut. It still has a whole bunch of inflating to do.
Cheers,
Kris Sayce
Editor, The Daily Cut