Fed Chairman Powell just announced a massive policy shift welcoming inflation into our economy — a move that could have a negative effect on average Americans trying to save for retirement. “Many find it counterintuitive that the Fed would want to push up inflation,” Powell said. Nonetheless, the Fed Chief warns low inflation is “diminishing our capacity to stabilize the economy through cutting interest rates.”
True. The Fed is running out of tools in its arsenal… but, my concern is that they’ve employed too many darn tools to begin with! The Fed wasn’t able to generate much in the way of traditional inflation over the last decade…but, it did manage to run up asset prices. Through this unintended consequence of asset inflation, the Fed is responsible for creating greater inequalities in wealth …thereby enabling the rich to grow richer…at the expense of younger Americans and the poor and middle-class struggle.
Historically, the Fed has always guarded against inflation…so, it’s a pretty big deal that a Fed Chairman is using his pulpit at the annual Jackson Hole symposium this year to announce this monumental change in how the Central Bank will address inflationary pressures. The problem is, if he and his pals don’t get this right…it could have a disastrous effect on your long-term savings.
Think about it… if your savings account is filled with dollars and the government is effectively telegraphing that is wants inflation, thereby causing your dollars to be worth less…then, guess what?
Your nest egg, your savings, is going to be worth a far less than you anticipated! And, the yield curve will grow steeper…thereby making long-term interest rates higher.
Nonetheless, the Fed is hoping to do its part to reignite near-term economic growth amid this pandemic, and, with interest rates already near record lows, it needs to make sure it still has plenty of tools in its arsenal.
As such, Powell is wants inflation to range more broadly on both sides of a target (typically, the Fed shoots for 2% annual inflation)…thereby, enabling inflationary pressures to increase more than normal…all in an effort to stimulate growth.
Some argue we need some revolutionary measures in these extraordinary times. Point taken. (I would say that a near zero-rate policy for more than a decade was revolutionary enough…with significant consequences.) While we should not fear a falling dollar in the here and now, there are some major long-term implications of a lower dollar that are NOT healthy for the American consumer. Indeed, a lower dollar over a prolonged period of time will squeeze the middle class even more, while making the poor….more poor.
Meanwhile, you gotta wonder: why the heck haven’t we had much inflation?! Since the 2008 financial crisis, we’ve seen the Fed embark on a massive money printing venture–all designed to flood the economy with liquidity. That access to capital was gained through various quantitive easing strategies (QE 1, QE2, etc.)
And, yet, here we are…12 years later…after all that spending...and all that printing… and NO inflation?
Or so it seems….
You see, there was , and is inflation…just not in the real economy.
The stock market grew during President Obama’s administration despite the lousy economic policies from the White House. Why? Ben Bernanke. Helicopter Ben came to the rescue…followed by Janet Yellen who was another gift to investors…and, between the two, they helped send markets higher…making the rich, richer…while failing to secure an uptick in middle class salaries.
Working class Americans suffered. Wages were stagnant…while costs for vacation, a home, a car, etc…all went up.
I know everyone always wants to blame the politicians (and, believe me, Obama is at fault for having done nothing in the way of fiscal policy to result in any meaningful changes to poor or middle class Americans) but, in this case…it was a combination of poor economic policy from Obama coupled with an overly aggressive FEDERAL RESERVE. The Fed’s policy of low interest rates helped cause a run up–actual inflation–which was an inflation in stocks, while wages remained stagnant. As a result, we saw a migration of capital away from labor…and, into equities. Why invest in more workers when you could invest in a company that was off-shoring its workforce?
As the pressure to grow corporate earnings intensified, suddenly those with the CAPITAL, the wealthy elites controlling the purse strings… they were the ones left with ALL the power! A disproportionate amount of power.
As such, the Capital-Labor Equation…or Worker-Owner Dynamic…became all out of whack.
Historically, there’s been a better balance in the capital-labor equation. The onset of 2008 financial crisis and aftermath created an outsized role for the Central Bank… that influence, while well intended, has had…and is still having, significant consequences on everyday Americans.
Under normal circumstances, in a ying-yang, push-pull, buy-sell environment, investing in stocks is great.
But, something happened on the way to the forum…
We lost that normal buy-sell dynamic…and suddenly, it was just buy, buy, buy! The Fed has effectively eliminated risk and thereby lost the relationship between economic fundamentals and market prices.
As equity prices inflated, global corporations continued sending jobs overseas. Meanwhile, the administration’s increase in H1-B and other visas, resulted in the depression and stagnation of wages for many otherwise good paying jobs here at home.
And, yet… the QE experiment from the Fed, kept this party going….creating a lasting imbalance in the corporation vs worker relationship that has proved quite debilitating for most of the country. By helping to fuel a run-up in stocks…the Fed succeeded in creating an environment that put tremendous value on capital….at the expense of the workers.
Meanwhile, companies increasingly face pressure to maximize earnings…and, as such, they cut costs. Yet, those “costs” are too often American jobs. And, thus, the squeeze on the middle class… the people that are working every day and don’t have the extra cash on hand to invest in the markets…. the squeeze gets tighter.
While the wealthy…get wealthier.
I suspect Jerome Powell knows this… and yet, his hands are tied. How to you fix the wage issue from a monetary policy point of view? I don’t entirely believe you can…but, it’s not going to stop him from trying.
Nonetheless, I’m not convinced his strategy will work. And, my bigger fear is that this overly aggressive Fed, will “feed the beast” as they say…allowing even MORE inflation in asset prices at the expense of everyday Americans who might seen their savings dwindle as a result of increasing inflation.
Another risk is the dollar. If it depreciates substantially over a prolonged period (again, remember we can handle a lower dollar in the here and now) then the result, ultimately is:
Americans will have LESS money in real terms in their savings accounts… all the dollars they have earned, could fall victim to an inflationary environment, and will therefore – be worth LESS.
That’s a lousy thing to do to people who have worked their entire lives trying to play by the rules, work hard and save a little money! If the Fed permits too much inflation, it will punish savers. One could be even more dramatic and say: by endorsing inflation, the government is effectively robbing Americans of their hard-earned cash.
Now…hopefully, it will be nothing like that. But, I get it, we need a little inflation to help incentivize people to invest and spend…but, too much inflation and we’ve got serious problems. Brazil in the 1990s learned this the hard way. Printing money with little mandate to guard against inflation help fuel a 6000% increase in prices! Restaurants, at the time, couldn’t print their menus because food prices increased so dramatically each day.
I sure hope Powell knows what he’s doing… as someone who studies economic history, it has been my experience that, typically, these Central Bankers do not know what they’re doing. They want to play God with our economy instead of allowing it the proper opportunities it needs to breathe. Intervention by the government…whether it be the Federal Reserve or the White House…should always be limited.
So, stay tuned. We’ll see how this plays out.