March 22, 2023
Despite the turmoil in the Banking Sector, the Federal Reserve, (Fed) did as widely expected, and raised short term intereest rates another 1/4 point. This is in the Fed’s belief, that raising interest rates, will eventually result in a lowering of inflation, to the target rate of 2% per year.
History strongly suggests that an inverted yield curve, which is where short term rates are higher than long term rates, signals an impending recession. So the Fed is hoping that by causing a recession, and rising unemployment, that workers’ will not be able to achieve higher wages, which they believe is the cause of the current inflation. Wrong, Wrong, Wrong.
I believe that the inflation we are seeing these days, is due in large part to the large annual budget deficits the politicians have allowed to develop, year after year, beginning in 2000. Ever since President Clinton was the last President to pass a budget surplus, for which he was roundly critisized by both Republicans for raising taxes, and byDemocrats for cutting social spending. we have watched the GOP pay lip service to the need for a “balanced budget.”
You cannot fight overseas wars without paying for them and we should have learned our lesson long ago that “tax cuts do not pay for themselves.”
Why do budget deficits produce inflation? Because, the Federal Reserve needs to make up the diffence by printing extra money. More money chasing a limit supply of products, such as stocks, farmland, works of art, etc, forces prices higher. Although many economists have different causes for inflation, I like this one proposed by former Fed Chairman Arthur Burns during the Nixon years.
For those interested in financial history, I must remind people, that it was that conservative, President Nixon, who severed the tie between the Dollar and Gold. That opened up the Government to print unlimited money without any real restraints. Yes, they did put in place an artificial limit, called the Debt Limit. But since 2000, such limit has been increased time and time again.
The current debt limit is $31.4 Trillion Dollars which was reached in early March of 2023. Now this is money which has been already been spent and the interest on this debt is going to become a major expense item, almost as much as we need to spend on Defense Spending each year. The threat, by some GOP House members, to let the Country default on this obligation, would likely cause an event like the Hindenberg trying to land in New Jersey, during a thunderstorm. (Watch the YouTube Video).
As I pointed out several weeks ago, there are significant warning signs flying that suggest that stock markets are heading into financial headwinds. I tend to be a worrier but I see several canaries in several coal mines acting strangely.
Once again, I say, talk to your professional advisors. But for my two cents I will stay close to shore in short term 3 month and 6 month U.S. Treasury Bills. Of course, I am not giving out investment advice and I am not an investment advisor.
This newsletter and Posts are for educational purposes only.