Market Insights, The US Dollar

Hello Inflation, My Old Friend

Gold Alliance disclaimer

When I read about the Federal Reserve’s new approach to our economy, I was reminded of the opening to Simon & Garfunkel’s “The Sound of Silence” about meeting your worst fears again.

Hello, darkness, my old friend.
I’ve come to talk with you again.

After all, the Fed has announced its welcoming inflation that could ravage our economy just like it did in the ’70s.

As you know, inflation means higher prices for goods and services or reduced purchasing power for your dollar. But did you know that inflation has other destructive effects, such as potentially bringing about much higher taxes?

What is inflation?

While Inflation is often defined as increasing prices and diminishing purchasing power, the general consensus among economists is a slightly different definition: they view inflation as a result of the supply and demand for money. The more money we print, the less each dollar is worth, which pushes the overall price level up. Following that definition, it becomes apparent that the Fed via its massive money printing has created the inflation it is now welcoming. See the chart below, published by the Fed, which details the total money supply (blue line) and the additional money supply each year (red line) created by the Federal Reserve. Pay particular attention to 2020.

The Federal Reserve's money printing is exploding, necessitates the need to protect your portfolio with gold as an investment.

The Fed’s New Policy is Welcoming Inflation

With the Fed’s new policy, the central bank is less concerned about rising inflation, and they will target average yearly inflation of 2%. So, to “make up” for the low inflation we are currently seeing, the Fed won’t step in if inflation goes above 2% for some time, and the average inflation may therefore exceed 2%.

While we feel inflation, the officially reported numbers for inflation have been low for many years, so when inflation goes up further, it could become quite high before our central bank steps in. The big question is whether the Fed will then be able to control inflation and put that genie back in the bottle. Based on the many mistakes the Fed has made over the past century, my bet is they won’t. According to their new policy, the Fed now views unemployment differently. When unemployment is low, their previous policy was that inflation is usually right around the corner, so interest rates should be raised, but the Fed’s newly stated policy is to not raise interest rates even when unemployment returns to its low pre-pandemic numbers. Why?

In our recent article, we outlined how the Fed is in a no-win situation: they must keep interest rates low to keep the costs of servicing our nation’s debt low, but they must also keep inflating our economy, which is terribly addicted to cheap money at low to no interest. Their recent announcement means that even when eventually Americans will return to business as usual, the Fed will not put its money printing on pause, although it may lead to higher inflation and reduced purchasing power for all of us. If you were not completely convinced that the Fed cares about our financial well-being like Marie Antoinette cared about her serfs’ well-being, with this policy they basically state that.

Inflation Effects

If you experienced the ravaging inflation of the 1970s, you’ll remember just how horrible it was. It’s a harsh reality for anyone with retirement savings as you could see your retirement being postponed for years, but it was even worse for anyone relying on a fixed income such as pensions, annuities, and Social Security: because inflation diminishes your purchasing power, you would be able to afford fewer goods and services each month. As a result, many retirees were pushed into poverty during the ’70s.

Inflation and higher taxes

Money printing by the Fed is one of the alternatives available to our government when our country’s deficits grow. This path, which has been used and abused by the Fed in the last two decades, was in many cases unnecessary. The Fed inflated bubbles, then had to inject more and more money to patch up the damages when the bubbles burst, thus reinflating them. 

When COVID hit, our country’s debt was already over $20 trillion. The analogy to where we are today from a deficit perspective is post-WWII, which was a very costly affair. To pay for it, income taxes were raised higher than ever before and stayed high for three decades—through the ’50s, ’60s, and ’70s, the highest tax bracket was 70%. Today, fighting the financial effects of the pandemic is as costly, and someone will have to pay for it—ahem, someone like you and me—in the form of high taxes. 

When inflation occurs, the loss of purchasing power is not reserved for us; it affects the government as well. So, they need to place higher taxes on us to afford the services they were able to provide when taxes were lower in a noninflationary environment. They will be forced to raise taxes much higher than they would if we would have had low or no inflation. Now, you see the double whammy. We will have lower purchasing power, and a larger portion of what we have left will be taken as taxes. 

So, what should you do about inflation?

We went through the nightmare of inflation with high taxes in the ’70s, and I believe it’s coming back ushered by two decades of loose and reckless monetary and fiscal policy.

On a national level, there is nothing you can do and, in my opinion, little we can do at this point. We have continued past the point of return, so this dance of destroying our currency will most likely continue to its worst outcome.

On a personal level, there is a lot you can do. Think of how you can protect what you have. During this decade, playing defense will bring you growth. Silver and gold should be the leading assets of our decade of massive money printing leading to currency destruction. The proof: according to Bloomberg, silver is the number 1 performing asset this year already, and gold is right behind it as number 3. This is just the beginning as it was the exact same way during the ’70s when gold rose 8-fold and silver 11-fold. If you’re worried about your portfolio, consider gold as an investment.

Hello inflation, my old friend,

Not happy to be seeing you again…

May you be healthy and safe during these trying times.

For a more detailed look at gold as an investment, click here.

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