Inflation – Who Will Save Us?

This is the third and final installment in our series on inflation in the economy. In the first installment, we defined inflation, examined its causes and delineated where I believe inflation may be headed (10%, based on the size of the U.S. money supply). In part two, I wrote about why, despite the huge increase in the money supply, inflation has remained relatively low. (the “lag factors”).

In this final installment, we’re going to talk about who could possibly step in and save us from a 10% inflation rate. In addition, I’ll tell you why I think these players either won’t act in time or act at all.

The Federal Reserve

There are a lot of smart people at the Federal Reserve and chances are, many of them are aware of the peril we are facing. But, they may decline to act on the problem. Why? Because decreasing the money supply in order to curb inflation would have disastrous effects on the economy. This conundrum is at the heart of why inflation is so difficult to control. It may also be why some people are so desperate to believe that massive increases in the money supply do not cause inflation.

Some people may hope that the Fed will simply sell back those mortgage and treasury bonds that it just bought. In theory, the simplest way to reduce inflation would be to reduce the money supply by selling these bonds. But the Fed will not do this, either because if it tried to sell such a large amount of bonds, it would significantly raise interest rates and further deflate the real estate bubble. Also, selling these bonds would soak-up money that has been going into the stock market, fuelling the recent rally. That would not be good for the economy, either.

Congress

Many people are hoping that Congress will finally take steps towards balancing the budget, thus taking pressure off of the Federal Reserve to print more money. While there’s finally some recent movement in this direction, the distance between a $13 trillion deficit and a balanced budget is huge. Tremendous progress would have to be made in a short time in order for any defecit reduction to have an impact on the looming inflation crisis. Timely and forward progress is not something that Congress does well.

An Economic Rebound

Many people (and I think a lot of them work at the Fed) believe that we are in a simple cyclical downturn and all we need to do is provide the massive monetary and fiscal stimuli that will take us to the other side of the cycle. At that point, we can then sell bonds or otherwise reduce the money supply without hurting the economy too much.  Of course, this assumes that we are in a simple economic cycle and not a multi-bubble economy that is popping. In fact, all we are really doing with this fiscal and monetary stimulus is maintaining the bubbles. The economy is not re-starting. Almost all of the stabilization and growth in the economy has come from massive government intervention. We are not in a down cycle that will be self-correcting. This is really a bubble economy that is popping.

The Banks

There have been some suggestions that one way to reduce the effects of increasing the money supply would be to require banks to keep more of their cash in reserves. This would prevent banks from lending out the extra money the Fed printed, thus holding down the amount of cash in circulation.

This would not eliminate inflation, however. It would simply slow the rate at which the money supply is growing. The other problem is that the Fed would have to pay the banks interest on the excess money that they have in reserve and means printing even more more money to pay that interest. This solution keeps inflation down in the short-term by increasing it in the long-term.

Save Yourself

If all of the solutions above do not add up to an effective way to curb inflation, where’s the salvation for those who are in retirement or about to be retired? Although you did not create the problem, you are the only one that can save yourself from it. In all my years as a Wealth Strategist, I have never encountered a single client whose existing personal retirement plan had a provision for dealing with inflation during retirement.

Our Personal Protected Pension Plan^TM is designed to protect you against the impact of inflation on your lifestyle income during retirement. If you believe that your current retirement accounts are not going to protect you from inflation (and at 10%, they probably won’t), please contact Millie at  (866) 998-7699 or email millie@thechuckoliverteam.com to schedule a time for us to discuss your concerns.

We have solutions that are designed to increase your retirement income at a guaranteed 3% per year. Put your retirement money away where it is safe from taxes and provides you with a means to battle inflation once you have retired.