Inflation May Get Out of Control

Currently inflation is approximately 12.5% (using Shadowstats 1980 methodology). However, M2 money growth is currently 30%. Since there is an 18 month time lag, this implies inflation could hit 15% (official CPI or 32% Shadowstats) in 2023. This will exceed inflation in the 1970s.

40% of U.S. dollars in existence were printed in the last 12 months. This is the greatest increase in money in the U.S. in the last 150 years.  Raising  Fed funds by 25 basis points in 2023 will not slow the inflation train down. Inflation may get out of control.  The minimum threshold for hyperinflation is 50% a year.  The Fed Balance sheet could hit $9 trillion by 2023. The National Debt is expected to exceed $30 trillion. Jerome Powell says the Fed may taper QE in 2022, but President Biden's deficits may require the Fed to continue funding treasury issues which have to be purchased by the Fed.  There is not much market demand for treasury issues at 1.5% when official CPI is at 5%. If Leal Brainerd replaces Jerome Powell as Fed Chairman, in 2022, she may find herself trapped with no exit. 

The problem is it took Fed Chairman Paul Volcker to take Fed Funds rate to almost 19% to reign in inflation in 1980.  If the Fed raises Fed Funds 25 basis points in 2023 the stock market will drop 30 percent.  If the Fed allowed the ten year treasury to reach 5%, the interest on $30 trillion in debt would be $1.5 trillion. With an expected deficit in 2023, a $1.5 interest charge would be unsustainable.  Also a 5% ten year treasury would probably cause the U.S. stock market to drop 50%, and throw the economy into a dark hole. In 1980 the national debt in the U.S. was only $908 billion and 32% of GDP.  In 2023 National debt will be $30 trillion and over 125% of GDP.  The Fed is trapped.  If they do nothing inflation will rage. If they reign in inflation with 20% Fed Funds, they will crash the economy.  Ben Bernanke, Janet Yellen, Jerome Powell and Leal Brainerd are academics, and not students of economic history. "Those who cannot remember the past are condemned to repeat it." George Santayana. Ludwig von Mises was a student of the German Weimar Republic inflation.  I met him in the 1960s.  

© 2016 - 2024 Steve Johnston - All Rights Reserved.
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