It’s been a little while since we’ve shared our views on the topic of inflation, (beyond our day-to-day client meetings, where we’ve shared them ad nauseum), and what we should be focused on in that regard. But we just read some data that makes us want to scream because it’s so misguided, so we are compelled to, maybe not scream, but to write, in an effort to redirect your attention to the real issue.

When we mention the word inflation, most minds go to rising prices; what we’re paying at the pump, what our grocery bills look like, or to the ever skyward shooting health insurance premiums we pay. But much like a fever is not the root illness, price increases are not the root cause of inflation. Rather, price increases are a symptom of inflation. By definition, inflation is the erosion of value in a currency. When the value of a currency, the US Dollar in our case, degrades, we have to come up with more of them to complete the same transactions that fewer used to afford.

The Federal Reserve talks a lot about price stability, because maintaining it is part of their self-directed mandate. But this is classic misdirection. Think supply and demand here. When more of a resource becomes available, the bits of that resource that were floating around prior become worth at least a little bit less, and vice versa. The Fed created (they don’t print them anymore because printing all that paper would deforest the entire planet in short order, so they just create them digitally with their computers) $9 trillion new dollars between the GFC (Global Financial Crisis) and March of 2022. The Fed used all these new dollars to buy Treasury bonds, which reduced the cost of borrowing for Congress, and Mortgage Backed Securities (MBSs), which reduced borrowing costs for mortgagors.

To give you a little context on what that number really means, The Fed held between $700 billion and $800 billion of Treasury notes ($0 MBSs) on its balance sheet before the recession. $700 billion goes into $9 trillion 1,285 times!

Now, it’s important to understand that this is a new tool for the Fed. The Bank of Japan used it prior. In fact, they coined the term Quantitative Easing (QE) in the early 2000’s. But this was the first go at it for the Fed, and the US economy is very different from Japan’s, so there were bound to be some unintended consequences. QE helped drive interest rates to 0% (along with their action of lowering the interest rate they charge their member banks to 0% for years), which was intended, drove stock and real estate prices into the stratosphere (also very much intended), but also resulted in a lot of those dollars ending up in the hands of consumers when Congress distributed them to help us through the pandemic. This was NOT intended and had the unexpected and very unwelcome effect of driving up the cost of durable goods. To misdirect our attention, the Fed pointed at supply chain bottlenecks, which were really only a problem because we consumers were spending all these dollars on vastly more durable goods than we had before.

After the bottlenecks released and traffic resumed, but prices kept rising, the Fed was forced to acknowledge the inflation genie was out of the bottle and had to take steps to avoid a complete and irreparable meltdown in the value of the US Dollar. Their response was to raise their lending rate sharply and rapidly and begin deleting the dollars from the system as their Treasury bonds and Mortgage Backed Securities matured. They’ve implemented the Quantitative Tightening part of this two-step dance a lot more slowly, however (if you think $70 billion or so a month doesn’t sound slow, please direct your attention to the math above). This is why inflation is not coming to heel at the Fed’s target of 2% any time soon.

The supply of dollars circulating in the economy is still sky high relative to where it was before. Human nature dictates that the law of supply and demand cannot be broken.

There are myriad other sources of upward pressure on prices brewing in our social and economic environment, but we’ll write about them another time. So, you have that to look forward to.

In the meantime, there are strategies you can employ to mitigate the effects of this problem on your own personal financial position, and most other financial advisors are not talking about them. Because they’d be cutting off their own revenue supply and violating the employment contracts they have with their broker dealers.

But we can.