I listened to an
interview with Jay Powell on Marketplace about 10 days ago, after he was re-confirmed as
head of the Federal Reserve. He was adamant that he was going to get inflation down to 2%. In his opening comments, he said:
Quote:
"...we understand that inflation is very painful, that the Fed is accountable to get inflation down to 2%, and that we have the tools and we have the, you know, the strong desire to get inflation under control. And we’ll do that."
When the interviewer, Kai Ryssdal, pressed for details, Powell doubled down:
Quote:
"...we fully understand and appreciate how painful inflation is, and that we have the tools and the resolve to get it down to 2%, and that we’re going to do that."
Lest he be misunderstood, about a minute later, Powell said:
Quote:
"...we need to get back to 2% inflation, that’s the main thing. The main lesson is we must do whatever, you know, what we need to do to get inflation back to 2%. And we have the tools to do that. And we will."
And just to ensure that nobody could miss the point, a few minutes later he said:
Quote:
"The committee and I are firmly committed to getting inflation back down to 2%."
So, despite my habitual cynicism about believing government employees, I tend to suspect that the Federal Reserve Board of Governors really is going to try to get inflation down to 2%.
They are going to do that by raising interest rates. They have a handful of tools that are technically different, but the use of any of those to decrease inflation means that they are going to slow growth.
Inflation is basically too many dollars chasing too few goods. It is happening now, and that situation is going to continue. On the 'dollar' side, we have seen the US government dump billions into the economy in response to the pandemic. On the 'goods' side, supply chains are still screwed up, and the former largest exporter of cheap goods on the planet - China - is experimenting with ruinous lockdowns in a misguided effort to totally squash the Corona virus.
In short, there are lots of dollars and not enough goods. Both sides of the equation are tending towards more inflation over the next several years.
This, IMHO, is a monster of a magnitude that Powell and company do not fully appreciate. And it is not transitory.
So when the Board of Governors tries bring inflation back down to 2%, they are going to have to push interest rates through the ceiling. They are going to kill growth. They will push the economy into a recession.
In other words,
we are going to have a contracting economy AND inflation, otherwise known as stagflation.Enough of economic theory for the moment. Let's look at practical issues:
1) The job market favors the employee more than it ever has in U.S. history. This will change when businesses cannot afford to invest in growth. The change in investing in employees will be sudden.
When businesses have to pare down, it takes months or even years to efficiently divest capital goods like forklifts or buildings. But employees can be dismissed in five minutes.
Thus the change in employment opportunities will be very sudden.
So, if you have a job, keep it. If you are going to change jobs, do it now, so that you are through your probationary period when the music stops.
2) If you are invested in large caps, sell them off soon. ( It may be too late for this even now )
3) Do not hold cash - other than enough to cover your bills. Put your money in something that may hold its value in inflationary times. Gold or silver may work, as will firearms. Real estate should be good too - as long as you don't need quick sales. ( Personally, I'm about 1/3 in rare books and 2/3 in real estate. )
Hang on. It is going to be a bumpy ride.
For details of your future pains, look at
https://www.marketplace.org/2022/05/12/ ... some-pain/