Why Washington ❤️’s Inflation

Jay Powell is now the current “inflation hawk-in-chief” at the FOMC. Except for one thing…

He’s not really.

I’ve said it again and again, the Fed is out of their league when it comes to the inflation we’re facing today. Primarily because this is the first time in over 40 years that the Fed will be hiking rates due to actual supply-driven inflation — as opposed to a little economic overheating.

They’d be in a bad situation, if they were actually trying to get a lid on nearly double-digit inflation.  

But there’s a certain level of dishonesty that’s associated with Chairman Powell’s hawkish stance. It’s not just him. It’s been pretty much all Fed Chairmen going back to Alan Greenspan.

You see inflation actually serves a very important purpose for them — and their “investing” pals on Capitol Hill — when it comes to the national debt… 

How does that work?

Back in 2015, IMF economist Carmen Reinhart wrote a white paper titled “The Liquidation of Government Debt” that pretty much laid the whole nefarious thing out.

Let me explain how they’re using basic 4th grade math to minimize the debt and make you poorer in the process…

Understanding Two Basics of Debt… 

How do you measure debt? 

In dollars, of course.  

But… how do you measure the significance of debt (i.e. how badly in debt you are)? 

As a percentage of your overall wealth.

When it comes to sovereign countries, that calculation is known as the debt-to-GDP ratio. It’s an estimate of a country’s economic health. 

In 1946, just after WWII, the US national debt was $269 billion and represented 119% of GDP.  We were deep in the hole.

By 1966, 20 years later, the country’s debt to GDP ratio had shrunk to only 40%.

Did we pay down all that debt?  Not at all…

Our national debt had actually grown to $320 billion — 19% higher than it was in 1946. But GDP over the same period had increased 252%.

It’s basic 4th grade math: Increase the divisor of any ratio and the resulting number goes down.

During the pandemic, the Fed’s debt monetization sent our national debt soaring to levels higher than those in 1946 — nearly 137% of GDP.

And yet throughout late 2020 and most of 2021, debt-to-GDP was reduced fairly substantially…

US Debt-to-GDP

Source: Macrotrends.net

Rigorous financial discipline on the heels of rampant stimulus?

Hell no.

Soaring Inflation to the Rescue

GDP is the monetary value of all goods and services produced by a country — a dollar value of everything that’s sold.

For the better part of a year, the Fed led us on about inflation being transitory (when in reality it was pretty much raging.)

And measured in inflated dollars GDP, your divisor, basically soared. Not because of massive economic growth, but because out-of-control inflation that raised the price of everything. (A note to you economic buffs: the debt-to-GDP calculation uses nominal or “current dollar” values of both debt and GDP so the effects of inflation are eliminated from the calculation.) 

Put another way, inflation isn’t something the Fed is really looking to fight, because it’s a boon for the government.  It (ostensibly) allows Congress to spend at crazy deficit levels, piling up the debt, without actually facing the costs of that irresponsibility. (Until they have to raise the debt ceiling again!) 

Unfortunately, that same inflation is also draining your personal wealth making you poorer in the long run. 

And they’ve got another trick up their sleeve to make you poorer still. I’ll tell you about that in your next letter…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily