During the 1970s, inflation, as measured by the CPI, started to reemerge as a national problem. By the end of the decade, the US had “Double Digit Inflation.”
Paul Volker, the FED chief at the time, observed a steep rise in long dated Treasury Bonds, and slowly raised the short term Fed Funds interest rate, to keep the “spread” between the two rates reasonably close together. At the time, Volker was roundly criticized in the financial press for being “behind the curve” for being late consistently in raising the FED Funds rate.
To raise the rate, the FED had to slow down its creation of new paper Dollars. (As economist Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.”)
The result, eventually, was that price increases began to slow, and the long rates came down as inflationary expectations fell. The much criticized Volker became a kind of folk hero for taming inflation. As rates headed downward, Volker resumed previous FED policy of fast printing of paper Dollars.
One of the imperatives of the Reagan administration was that inflation had to remain tamed. The CPI had to be managed. Thus began a tradition, continued through both Republican and Democratic administrations, of screwing with the way the CPI was calculated. Each revision of the methodology separated the reported CPI from the original intent of the measure – to report what a constant basket of items cost to consumers.
According to economist John Williams at www.ShadowStats.com, the current CPI under-reports prices, compared to the 1980 methodology, by about 8%!
Though the FED, under Volker, Greenspan, Bernanke, and now Yellen, have continued debasing the US Dollar with huge additions to the money supply, the new and continuously improved CPI kept Americans’ perceptions of inflation misinformed. And as the newly created Dollars were used to buy Treasuries – up to 80% of new supply in recent years – interest rates have been managed lower, a process known as “Financial Repression.”
Savers, mostly older people who have had many years to accumulate savings, have been hurt on a massive scale. And what little interest they receive is diminished further by inflation and by taxation!
Much of the borrowing encouraged by the low rates went to buy homes (the Housing Bubble), buy stocks (the current Stock Market Bubble), buy bonds (the Bond Market Bubble), and various consumer items. The mortgage and consumer buying encouraged expansion in the over-production of what was being bought.
We now find our country in the predicament that people are starting to realize that prices are rising faster than they’re being told, consumers don’t have the money or the credit score to keep buying so fast, and several million Americans technically are not unemployed either because they are working part time or have given up hope of finding any job.
While the FED has officially ended QE3, they still are buying massive amounts of Treasuries, as witnessed by the fall in the 10-year Treasury yield this year, from 3% down to a little over 2%.
The time of “kicking the can” farther down the road is coming to an end. If the FED continues to print money to keep the Economy artificially supported, then inflation – even after the lies – will take off. John Williams at ShadowStats expects this is what will happen and has forecast a hyper-inflation alert for 2015.
If the FED were to slow its money creation, that would allow interest rates to rise, bursting the Bond Bubble, which in turn would burst the Stock Market Bubble.
US Government Budget Deficits are expected to go back up to $1 Trillion a year during the next few years, so if the FED stops the printing presses, there is nobody else who can buy the new US debt. Foreign countries are trying to get rid of US debt, and US consumers are tapped out.
With the weighted average Treasury debt maturity approaching 6 years, the new debt plus 1/6 of the old debt will have to be refinanced at ever higher rates. The higher interest on the combined new issuance will mean even larger deficits needing to be financed. It shouldn’t take a rocket scientist to realize that this is not sustainable.
One way or another, the US government will renege on its promises. It won’t be able to pay the interest, let alone repay the principal, on the National Debt. It won’t be able to continue paying for most items currently being funded – think Social Security, Medicare, Defense, Welfare, etc.
Recipients of all this government largess, as well as government employees will have to take a big hit. The only question is: Do we wait for the S&*% to hit the fan, impoverishing tens of millions of Americans all at once, or do we address the underlying overspending today, to minimize the intensity of the pain which surely is inescapable?