The Fed’s Great Inflation Conundrum

Inflation, Yes — But How Much? [The Daily Reckoning] October 17, 2022 [WEBSITE]( | [UNSUBSCRIBE]( The Fed’s Great Inflation Conundrum - “Bad news is good news” strikes again… - The Fed’s inflation conundrum… - The Fed wants inflation to return to being the “silent thief”… [Crash Warning: EVERYTHING Just Changed]( Today's inflationary crisis has sprouted a head and morphed into a far more dangerous beast. And For the past 50 years, my firm has helped investors navigate some of the darkest moments in our history. In this new briefing I detail what this crisis means for you, your money and your future, including: How you can avoid its wealth-destroying impact … and potentially even grow your portfolio with seven simple investments… [Click Here For More Details]( Portsmouth, New Hampshire October 17, 2022 [Jim Rickards] JIM RICKARDS Dear Reader , The stock market was up big today, but it was nothing compared to last Thursday’s huge rally. In fact, last Thursday was one of the wildest days of trading in the history of Wall Street. But don’t mistake that for the return of good times. It simply serves as a good example of just how volatile markets are these days — and the power of narratives to challenge fundamental analysis. In other words, there’s a lot less there than meets the eye. Let’s break it all down… The action started at 8:30 Thursday morning when the government released inflation data that showed consumer prices had surged 8.2% in September on a year-over-year basis. The clear implication of this was that the Fed would continue tightening including a 0.75% rate hike on Nov. 2 because the fight against inflation was nowhere near over. That suggests stocks should fall, and they did. From a closing level of 29,210 on Oct. 12, the Dow Jones Industrial Average plunged to 28,709 by 9:40 a.m. on Oct. 13, a 501-point dive, down 1.7% in a matter of minutes. Then the narrative took over and stocks soared. By the close on Oct. 13, the Dow was at 30,038, a 1,329-point gain, or 4.6% surge from the lows of the day. What had changed? Bad News Is Good News Substantively nothing had changed. But a new narrative took over market psychology. What was it? The narrative is a version of the old saying “Bad news is good news.” Traders said that the more extreme version of Fed tightening expected would kill inflation faster than expected and set the stage for interest rate cuts early next year. Those expected rate cuts would be good for stocks, so it makes sense to buy stocks now! But this narrative is nonsense for several reasons. The first is that the Fed has made it clear they have no intention of cutting rates anytime soon. September inflation rose 8.2% on a year-over-year basis, near the highest rate of inflation in 40 years. It was also higher than expectations. Importantly, core inflation (which excludes food and energy costs) also rose 6.6% on a year-over-year basis, the highest since August 1982. Inflation may come down but the Fed’s target rate is 2% and the current 8.2% is still a long way away. [Urgent Note From Jim Rickards: “You’re Running Out Of Time!”]( [Click here for more...]( Your exclusive “Pro level” upgrade to Strategic Intelligence is ready to be claimed. This is your chance to claim 3 exciting new benefits along with a whole new level of service. Hurry… you only have until the timer hits 0 to act… [Click Here ASAP]( The second problem is that if the Fed actually did cut rates early next year it would not be a sign of success but a sign of dismal failure. It would mean that the economy was in a severe recession, which would be awful for stocks. The Thursday turnaround was a highly condensed version of the Fed pivot narrative that caused stocks to rally in late July until mid-August. Markets seemed to come to their senses on Friday when a sharp decline occurred in response to the previous day’s rally. There will be no Fed pivot, at least not for a while. It’s just another bear market trap. Don’t fall for it. Meanwhile, I want to address a conundrum that the Fed faces with respect to inflation… Doesn’t the Fed Want Inflation? The national debt is over $31 trillion. Total U.S. debt, public and private, is over $92.6 trillion. Inflation lowers the real value of debt, which makes that debt easier to pay. That raises a fundamental question: If inflation is one way to manage excessive debt by melting the real value of the debt, why is the Fed so dead set against inflation? Why is it trying to reduce inflation if inflation is the ultimate way out of the debt? Of course, taxation is one way that governments take money from citizens to pay off government debt. But taxes are unpopular and hard to get approved by Congress. Inflation works much better. It reduces your real income since the dollars you earn are worth less. It reduces the government debt because the money the government owes is easier to repay for the same reason — the dollars are worth less. So inflation works the same as a tax increase except that you can’t see it and Congress doesn’t have to lift a finger. So, again, why is the Fed undertaking a crusade against inflation? [Strange 2021 Prophecy Rapidly Coming True]( [Click here for more...]( America’s #1 Futurist George Gilder is telling American’s to “brace yourself” for the coming $16.8 trillion revolution. This same revolution could redefine millions of jobs and radically transform the way just about every major corporation does business. It could even change the way you get paid, save and invest for retirement. And, says George, it could make you exceedingly rich… [Click Here To See Why]( The answer to the question requires understanding the difference between high inflation and low inflation and the basic math of debt monetization. Here's a simple example: Inflation is a form of theft from savers, consumers and those on fixed incomes. Imagine a mother has $50 in her purse in small bills. Her 9-year-old child wants to steal the money from her to buy candy. But he knows that if he takes all $50 he’ll be discovered and punished. Instead he takes $3 on the view that Mom won't notice. That might work. It's the same with inflation. ‘We Can’t Make It Look Obvious!’ If inflation is 8% or 9% everyone notices, politicians lose elections and central bankers get hounded out of office. But if inflation is, say, 2% then hardly anyone notices. The effect is still devastating over time. Inflation of 2% per year will cut the purchasing power of the dollar in half in 36 years. It’ll cut the purchasing power in half again in another 36 years. So the purchasing power of the dollar is destroyed by 75% in 72 years (about an average lifetime) with only 2% inflation. If inflation is 3%, the same 75% reduction in purchasing power takes place in just 48 years. Of course, as the real value of money is destroyed, so is the real value of the debt. So central bankers and politicians are not against all inflation. They’re just fine with inflation of 2–3% that will destroy the value of the debt. It’s much more subtle and it just takes more time. But they’re not fine with inflation of 6% or higher because people notice and it embarrasses them. It makes them look incompetent (which they are). There are adverse consequences to that kind of inflation that the Fed wishes would go away. The Fed wants to be the kid who slowly steals his mother’s money to buy candy. It doesn’t want to get caught by stealing it all at once. Seen in this light, current efforts by the Fed to reduce inflation should be understood not as eliminating inflation, but merely reducing it to the point where Mom (and voters) won't notice. They want inflation to live up to its reputation as the “silent thief.” Regards, Jim Rickards for The Daily Reckoning P.S. This is one of the most critical times investors have ever faced, with so much going on in the world… from inflation… to the war in Ukraine… and much more. That’s why I decided to make [some big changes to my service, Strategic Intelligence.]( I’m taking my newsletter to an entirely new level. In short, I’m adding 3 exciting new additions to [this all-new “Pro level” of Strategic Intelligence.]( And I don’t want to see you miss out on all the benefits it has to offer. These days there’s just too much at stake. That’s why — for a very limited time, you’ll be able to upgrade to this new “Pro level” by [clicking here.]( But you need to hurry, as you’ll learn when you see my note. [>> Click here now for all the urgent details.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please read our [Privacy Statement](. 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