Why the price of everything is rising

The definition of inflation is a general increase in prices and fall in the purchasing value of money.

If that sounds like what’s happening today it’s because it is. Getting here has been the result of a series of misguided events by the government and the banking industry.

It all started in 2008 (sort of)

Actually it all started on December 23, 1913 when the federal reserve was created. Since that time the purchasing power of the US dollar has fallen 96% as the Fed has printed money to pay for government programs and wars. But the big inflation numbers we see today can be traced back to 2008.

For those old enough to remember, there was a mortgage crisis in 2008, the result of greedy financial services institutions and inept government policy. The crisis pushed the US into a recession and hit the economy hard. Rather than allowing the economy to fully correct itself, the government implemented measures to soften the landing. These included taxpayer funded bailouts for big banks, artificially lowered interest rates, and the printing of money that was injected into the economy, or “quantitative easing”. While these measures did soften the landing for the economy, the correction will need to come eventually.

2008 - 2020

Lowering interest rates stimulates borrowing and spending, and printing and injecting money into the system further increases spending. The result was an artificial run-up in stocks, bonds, real estate, and really everything. Bubbles were forming everywhere, but it was all based on artificial government policy, not real economic growth. As we stand here in late 2021, the government continues to inject $80 billion per month into the financial system, 13 years after the mortgage crisis! Eventually there will need to be a correction to get where we needed to be in 2008 prior to government intervention and the longer we push it off, the harder we’ll fall.

2021

With so much money in the economy and the cost of money so cheap (low interest rates), the price of everything was bid up higher and higher. Cars, houses, and other consumer goods have seen sharp increases in the past year. Inflation is estimated to be about 6.2%. Really bad. Combine the government actions leading up to 2021 with supply chain bottlenecks and a perfect storm of inflation has hit us.

Nowhere to run or hide

The Fed has two weapons to fight inflation, but unfortunately has backed itself into a corner as both can cause shocks to the economy.

1) Raising interest rates

Raising interest rates fights inflation and they will need to do this eventually, but there are drawbacks. Rising rates will crash the bond markets and cause a correction to the stock market. They also hurt the real estate market as well as other goods people borrow for, such as cars.

2) Reversing quantitative easing policies

This can cause the same problems as raising interest rates.

The Fed is now walking a dangerous tightrope, allowing inflation to rage to avoid spooking the markets. But this game can only go on so long. They will begin to reverse quantitative easing (tapering) as early as December 2021, and shortly thereafter raise rates. We will soon find out what will happen to the markets but don’t expect it to be pretty. The markets always correct themselves. In this case they need to finish what was started in 2008 before the government intervened. But the markets will eventually find their bottom, with or without the government.