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The prevailing view today is flawed. They ignore the reality of inflation cycles. The economy and financial system continue to face further challenges, and ongoing actions and inactions are exacerbating the problem. They are based on flawed positive thinking.
Disadvantage #1 – Viewing the inflation cycle as a short-term event
Inflation cycles are a long-term problem that will gain momentum unless unpopular action is taken. Mr. Powell accurately said in his early comments that “pain” is necessary. But that view disappeared, along with the false hope that a “soft landing” for the economy would be enough to stop the inflation cycle.
Unfortunately, the Fed’s slow and slow “fight” on inflation has allowed this inflation cycle to take hold. To make matters worse, the Fed is now pausing interest rate hikes and continuing its too-slow reversal of massive money supply creation, falsely suggesting that those actions created nirvana, the defeat of an inflationary cycle without recession. I am adding hope.
Disadvantage #2 – Reliance on short-term inflation protection
Focusing on the most recent 12-month inflation rate eliminates the ugly underlying picture. Speed, not distance, is probably the metric to focus on. To see reality, we need to keep the inflation cycle intact since its birth with the easy money policy launched in early 2020. The chart below shows where this inflation cycle has taken us compared to the Fed’s 2% annual target. .
So, what is clear is that inflation, the factor that destroys the value of currencies, has risen dramatically (18%) in just three years. In terms of the purchasing power of the US currency, the value of the dollar has fallen by 15% since 2020.
Drawback #3 – Ignores active cumulative damage
Wall Street is notorious for focusing on the next six months and forgetting about what came before. That may be fine in innocuous times, but it’s a flawed approach for an economy and financial system beset by inflationary cycles. This is because the damage sustained remains. If that accumulated damage is not corrected or at least alleviated, disease will spread.
This graph shows what it would take to partially or fully correct this inflation cycle.
The point is that the Fed (and Wall Street and the media) are acting as if 2% (or even 3%) inflation is a success in the inflation war going forward. But watch how these “low” interest rates add to the existing damage and the cumulative amount grows even larger. They should be considered unacceptably high. Additionally, note that the current cumulative excess inflation (above the 2% trend line) will take 5 years for the 0% inflation rate to return to his 2% trend line.
Conclusion: history repeats itself
In fact, it’s worse than history. Compared to what happened with the erroneous “soft landing” of 1966, the same and worse mistakes have been made and continue to be made. (For a more detailed explanation of this period, see my article “The Fed Changes Too Quickly – What Now?”)
So the damage caused by this inflation cycle will continue until the Fed finally takes the unpopular action necessary to offset and reverse it. When will that happen? It won’t be soon.
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