What is going on with all this inflation? The Fed is telling us this is all transitory and to not worry. The question is, what does that mean and how does it affect us? For the most part, I believe they are right. Inflation is transitory, just not in the way you think. I was talking to Matt and he summed it up quite nicely. He said used car sales prices went up over 10% for 3 months in a row then it only went up a little over 1%. Transitory! It’s not like we’re going back to the good ole days. I remember my Dad telling stories of getting a pickle and a coke at the movie theaters for under a buck. We are not going back to that! I’m not planning on prices staying at the very peak, but they will stay high then flatten out. It’s just a new normal so we should get used to it.
The strange thing to wrap our mind around is that the Fed needs inflation. We have this debt problem. We have a lot of it, $28.6 trillion to be exact. Our tax revenue is a little under $4 trillion and we’re spending around $7 trillion a year. We need to inflate that away. There is no way to pay that down no matter how much we raise taxes. It’s a spending problem not a revenue problem and that won’t change. We live in a world today where we are trying to please everyone and the story changes depending on who we speak to. If we are talking to the rest of the world, we are saying we are going to be responsible, we are going to quit printing money, we are going to raise interest rates, and we are going to slow or stop our bond repurchases. This is what the rest of the world wants. They have around $7 trillion invested in our US government debt. That’s the important word...Invested. They don’t want to see us devalue the dollar or inflate our debt away. We need for them to believe that. If the rest of the world stops buying our treasuries then that will have a really nasty affect on the value of our dollar. So, we have that story we are telling and at the same time we are here at home printing and spending and giving everyone money. Today we are spending twice of what we are making. We haven’t even got into the next infrastructure bill and this DELTA thing. It won’t slow down.
One thing to remember is that this can continue on for a long time. This can keep going for decades. If you look back, it has been going on for decades. The currency world is all relative. The US dollar is priced relative to the YEN, or the EURO, or all the other numerous currencies in the world. They are in the same boat as us. So, looking at the dollar; its scary. Looking at the dollar compared to YEN or the EURO doesn’t look bad. Don’t let the trillions of dollars get you down. Think of your kids having the excuse of “everyone else is doing it too”! One thing we know is all the rules have changed. The Fed will turn on the money printer at the spur of the moment. They will buy up our risky assets if the market falters. They are propping this all up. The most important thing is having some dry powder when the market does falter. If history is our guide, we want to buy when things get ugly because Uncle Sam will be right behind us to do the same and bail us out.
Back to the question of is inflation transitory, the answer is yes. We will have bouts of inflation, then it will cool off, then we will do it again. It’s the new normal. We will continue to over spend and print money until the world loses confidence in the US. This is where we need to be looking. As long as the US dollar is strong, nothing has to change.
If you have questions, we would love to talk with you about this. Stay safe out there.