Inflation hit a new high today, but I expect I didn’t have to tell you that. If you’ve gone grocery shopping, filled your gas tank, gotten new lease terms for your apartment, or tried to buy a car, then you already know it.
In fact, I think everyone but the government already knew it. Just like we all know the true inflation rate is higher than the reported 7 percent. Only the government can average together a 37 percent increase in used cars prices, a 14 percent increase in the cost of furniture, a 50 percent increase in oil prices, and a 6.5 percent increase in food and come up with a 7 percent rate of inflation.
Inflation is going to get worse. Even if next month’s results show it is growing at a slower rate, it’s still growing. I think Omicron may give us a brief economic pause as people stay in and spend less, either because they are sick or because they don’t want to get sick, but then it will speed up because of the supply chain disruption. Many companies, including manufacturer and meat-packers, are seeing production drop due to absenteeism attributed to Omicron. This is hurting production line speeds and slowing output, which will result in future supply chain problems.
Even Worse News
As bad as inflation is–and it sucks–there is something worse than high prices. Inflation beyond the Fed’s expectation demonstrates the U.S. economy is out of control. The Federal Reserve, the very folks who were supposed to help keep inflation at its 2 percent target, have run out of tools to moderate inflation. Worse yet, they contributed to inflation by buying too much government debt used to pay for stimulus and other expensive programs.
Why is an out-of-control economy a bad thing? For two reasons: One, you don’t know and can’t predict what will happen next. We might get an inflationary spiral hat gets worse and worse, leading us to double-digit inflation. Two, the standard tools used to control inflation don’t work, so the government will have to bring out the big guns. The last time the Fed brought out the big guns, they raised their interest rate to 20 percent.
Imagine what a 20 percent rate of interest would do to a mortgage payment or a car loan. Imagine what it will do to the economy. Yes, that noise you hear in your imagination is the economy crash.
Here’s another problem. When the United States borrows a trillion dollars at an interest rate of 1.5 percent, it pays 15 billion in interest every year. When the interest rate is 15 percent, it pays $150 billion per year. If that happens, the U.S. will look like your average student loan borrower who can’t afford to cover the interest payments on their loan.
High Interest Rates Suck More than Inflation
For example, in 2021, the U.S. paid $562 billion in interest payments, which was $40 billion more than in 2020. Now picture what would happen to our economy if that number was ten times higher. Interest payments of 5.62 billion? This time, that noise you hear is an implosion as our government collapses under a pile of debt.
If the U.S. defaults on its debt, it will start an economic global collapse. There will be a multi-year period in which the repercussions ricochet around before the world and knock off other governments and financial institutions like dominoes. Eventually, what’s left of the world will adjust and agree on some other monetary standard. Maybe it will be something like Bitcoin. Maybe it will be a new gold standard. It’s unlikely to be the U.S. dollar.
Now I’m not a big fan of our government, but I do acknowledge that we need a government. (I’d prefer one far smaller, much less invasive, and is more focused on adhering to the constraints of a strict interpretation of the constitution.) Without a government, it’s going to be ugly out there.
If the government defaults or declares a Jubilee because it cannot afford its interest payments, it will be a SHTF moment.
Are you prepared for that?