저자: Plain Finance Reborn · 외국인
다듬은 글
So now inflation is a huge problem. See, inflation was the government's solution to the problem until inflation has now become the problem. And so inflation is going to get much worse. Forget about what these central bankers and politicians are saying about their commitment to fight inflation, how they're resolute, and how they're determined no matter what to bring the inflation rate back down to 2%.
That's never going to happen. We're going to see 20% inflation before we see 2% inflation. And this pretend war against inflation is going to come to an end soon. And the central banks are going to surrender and inflation is going to win. Look, we've already seen the first central bank capitulate and wave the right white flag and that was the Bank of England.
The Bank of England a week or two ago was every bit as committed to fighting inflation as the Fed until the inflation fight threatened a financial crisis and then they cowered out, turned around and they're back to quantitative easing. They went from quantitative tightening to open-ended quantitative easing.
In fact, the Bank of England said, "We're going to print as many pounds as we have to. We're going to keep on buying guilts. We're not going to let interest rates go up." They have to let interest rates go up. If you want to fight inflation, you got to let interest rates go up. But the other thing you have to do to fight inflation is to make government spending go down because government spending is the source of that inflation.
Governments are running deficits and the central banks are monetizing those deficits by creating inflation. Governments are actually funding themselves through inflation. When you have a budget deficit, you're not getting government for free. Every nickel that the government spends has to be paid for by the citizens.
And if they don't pay for it with a tax, then how are they paying for it? Through inflation. So when prices go up, that's the tax that you're paying for all these government programs. And so if the government wants to get rid of inflation, well then it has to get rid of those programs or it has to raise taxes to finance those programs.
And that's not happening. That's not happening anywhere. Nowhere in the world, despite all these governments that claim they want to fight inflation, no government is actually doing it. Nobody is cutting spending. In fact, in the UK, they cut taxes. Well, when you cut taxes, you increase the inflation tax.
So, the British were claiming that they wanted to fight inflation while at the same time creating even more of it. That is the problem. But the same thing is going to happen to the Federal Reserve in the United States. You cannot raise interest rates without creating a financial crisis. the the financial crisis we had in 2008 was a result of a normalization of interest rates.
It wasn't simply a subprime problem. The reason subprime was the problem was because it was debt. People borrowed money and they couldn't pay it back. Why were they able to borrow the money? Because it was cheap. The Fed lowered interest rates to 1%. They created a housing bubble. Housing prices went up.
People borrowed money against those inflated property values. They borrowed money with artificially low interest rates. And when interest rates went up, property prices went down, people didn't want to pay their mortgages, you get a financial crisis because now the banks didn't get their money back.
They loaned all this money out. They didn't get it back. That was why we had a crisis. Well, today we have much more debt than we had in 2008. We had 0% interest rates for almost 10 years. Think about all the debt that was taken on during those 10 years by not only the government, corporations, private citizens.
Do you think they can repay that debt? When rates normalize? Of course not. And what happens when rates go up? Asset prices come down. It's like the other side of a seessaw. The lower interest rates are, the more expensive stocks are, the more expensive real estate is. But as interest rates go up, those prices come down because it's all a function of interest rates.
So if I borrowed a bunch of money to buy a house and now the house goes down, I have no equity and my mortgage payments are up. I'm I'm mailing in the keys. But you have all these companies in America that have been losing money. In fact, in 2021, it was a record year in America for money losing companies going public.
Now, how do all these money losing companies stay in business? Because a company is supposed to generate a profit to stay in business. How do you lose a bunch of money and still stay in business? How do you pay your employees? How do you pay your rent, right? How do you do anything? Well, the companies were selling stock.
You're the public. They were raising money by selling stock. And a lot of companies were borrowing money to pay their expenses, taking on debt. But it was all great when rates were at zero and people were willing to buy these overpriced stocks when rates were at zero. They're not willing to do it when rates are at 4%.
And in order to fight inflation, they got to go much higher than 4%. Despite the rate increases, federal funds rate in the United States right now is about 3 and a/4 to 3 and a half%. Inflation, even the way the government measures it, is 8 and a/4%. That's neg5% real interest rates. You're not going to fight inflation with negative 5% rates.
You're going to create more inflation. The only way that you can fight inflation with higher interest rates is if the interest rate is higher than the inflation rate. And it can't just be a little bit higher. It's got to be meaningfully higher. In 1981, when Paul Vulkar raised interest rates or allowed interest rates to go up, short-term rates went to 21%.
The highest inflation got was 13 1.5. So that's what it took. People had real interest rates. The reason you need that is because you've got to stop people from spending money. That's what's the demand. It's spending. You've got to get people to stop spending and start saving because that accomplishes two things.
It reduces demand but it increases supply. How does it increase supply? Well, when you spend money, I mean when you save money and you don't spend it, that money can finance capital investment that will lead to more production of goods. And so you increase the supply of goods while decreasing demand for goods.
Prices can come down or stop going up. That's what you need to do. Now, if interest rates are negative, that is not going to encourage anybody to save. If ne rates are negative 5%, you're going to lose 5% a year on any money you save. Why the hell would you save? You wouldn't. You're going to spend your money as quickly as you get it.
You're not going to save it and lose 5% a year. Now, if the Federal Reserve raised interest rates up to, let's say, 10% or 15%, then you might save your money. Hell, I could put my money in the bank and earn 15%. I'm not going to spend it. Even if inflation is 8%, I'm still 7% ahead. I'm going to save my money.
I'm going to earn all that interest. I'm going to spend my money in the future because then I'm going to be able to spend the interest that I earned on my money. That's what the Federal Reserve needs to do. But they're not doing that. Also, we are running $2 trillion a year deficits in the United States.
Where's the money coming from? It's coming from the Federal Reserve, or it was. There's no other source because if the Federal Reserve isn't going to print all that money, then the private sector is going to have to buy all those treasuries. But the private sector doesn't want those treasuries. Foreign central banks don't want those treasuries.
They want they need to sell the treasuries they've already got. They don't need to buy anymore. There is no way to finance these deficits. So the government has to cut spending. But they haven't cut any spending. In fact, if you look at the inflation reduction act, that was a spending bill. They increase spending to fight inflation.
How are you supposed to do that? It's the spending that is the source of the inflation because the spending is being monetized by the central bank. So, instead of fighting inflation, they created additional inflation. Instead of putting out the fire, they poured gasoline on the fire and just pretended that they were going to put it out.
But everything we're doing, we just we're forgiving student loans. In fact, we told people that have student loans, you don't have to pay those loans, just go out and spend the money on other stuff. Buy more goods, buy more services, push the prices even higher. You see this, the Federal Reserve and other central banks are at an inflection point.
They're really in a situation where they're between a rock and a hard place. And they're damned that they do and then they're damned that they don't because for years they were able to kick the can down the road by creating inflation and sweeping the problem under the rug. But now that inflation has become the problem, they can't solve the inflation problem by creating more inflation.
Because the solution to every problem has been inflation. The economy is weak. Print money. Lower interest rates. Companies are failing. Let's bail them out. How do we pay for that? Print money. Create inflation. So inflation has been kind of the onetrick pony. It's been a cure all. Whatever als just inflation is going to be the cure.
Well, now that inflation is the disease, where's the cure? There is none any more stimulus and we end up with an overdose and that is where we are right now. And what's keeping everything going? The reason that we haven't already seen a collapse in the bond market or a collapse in the value of the US dollar, the reason we've had a rally in the dollar is because the world is still or still has faith in the Federal Reserve.
The world still believes that the Federal Reserve is serious about bringing inflation back down to 2% and that it has the ability to bring inflation back down, but it doesn't. Remember, it was the Federal Reserve back in 2008 or 2007 that said not to worry about the subprime market. It was contained.
Of course, we saw how contained that was. But even before the subprime problems, they told us there were no problems. They said there wasn't a real estate bubble. And they said even if the real estate prices went down, it wouldn't hurt the economy because it was so strong. So, the Fed has a very bad track record.
And more recently with respect to inflation, first the Federal Reserve said we didn't have enough inflation. Then when inflation got to 2%, they said, "Oh, well, we need to have it a little bit higher than 2% to make up for all the years that it was a little bit below 2%." And then when it got much higher than 2%, they said, "Don't worry about it.
It's transitory. It's all going to go away on its own." And they said that for a year as inflation got worse and worse and worse until they finally admitted that it wasn't transitory. And so now they're claiming that they're going to solve the problem. But that's another lie. It's just like the transitory lie.
They knew inflation wasn't transitory. So why didn't they admit it? Because they couldn't fight it. Because they knew that fighting inflation would crash the house of cards that was built on a foundation of inflation. Everything the Federal Reserve has done has been to artificially prop up an overly leveraged economy.
Well, the minute they try to fight inflation, they knock out those props and everything comes collapsing down. That's why they pretended it was transitory because they didn't have the guts to do something about it. It was only when the problem became such a big political uh uh you know, hot potato and everybody was worried about inflation that the Federal Reserve finally said, "Okay, we're you know, we're going to do something about reigning in inflation." but they don't have the ability to actually live up to those commitments.
Now, they can pretend and they can hope that inflation just goes back down to 2% all by itself because they're talking about how committed they are to bringing it down. But they can't do it without creating a financial crisis. In fact, the rate hikes that they've already delivered, even if there's nothing else behind it, will create a financial crisis.
It's just a question of how much time. See, they'd already happened in the UK or would have happened and we're very close to that point
Comments 0