The current economic situation in the united states is quite dire. We saw over the last two years that loose monetary policy created an asset bubble and everyone felt like they were getting rich. Now the federal reserve says we will destroy inflation.
They’ve stepped in and they said that they are going to destroy inflation. This means that they are going to punish the average citizen until they stop buying consumer goods or services. Why are they doing this well it’s because we have persistently high inflation. The June 2022 inflation number came in it was 9.1 percent. It’s the highest in over forty years. So what is the fed’s plan to destroy inflation? Well, they really only have two tools.
The first is that they are going to raise interest rates going all the way back to March of 2020. What they did when we had the liquidity crisis related to covid. They dropped interest rates down to 0%. Now the Fed is just reversing course and they’ve started to raise interest rates. What happens is When the federal reserve raises interest rates it makes capital more expensive. If capital is more expensive fewer people want to borrow. If fewer people are borrowing then that means that they have less money to go buy things like homes or other types of goods.
You must be thinking that the federal reserve can only rise interest rates but they also have a balance sheet just like you have a personal balance sheet or your company has a corporate balance sheet. On that federal reserve balance sheet, they have increased their assets by more than 10x over the last decade or so.
The current plan for the federal reserve is to conduct something called quantitative tightening. Where they essentially are gonna sell assets off of the balance sheet rather than be a persistent buyer in the market. They now claim that they will be a seller. If you take the bid from the federal reserve out of the market that means there’s less demand for assets and asset prices will start to come down.
As we’ve seen over the last eight months that the federal reserve first it was talk and now it’s action. They have been crashing asset prices stocks, bonds, real estate, crypto everything continues to go down. It’s because the federal reserve is in control the old adage don’t fight the fed has a lot of truth to it,
As the federal reserve conducts this quantitative tightening as they aggressively raise interest rates. More and more investors look around and they say a recession may be upon us. If a recession could be coming I don’t want to spend money I don’t want to be an investor in the market. What I want is cash I want a strong balance sheet I want strong cash flow.
If I’m able to prepare myself with that strong balance sheet and strong cash flow then just maybe I’ll be able to capitalize on the opportunity as it presents itself. The federal reserve continues to see that 9.1 percent inflation rate. They don’t know how high it can go nor how long we can stay in the sustained inflationary environment.
They understand it is the responsibility of the federal reserve must destroy inflation. This is a tough task but we are hoping that the federal reserve will be successful. At least to the people on the ground the average family they’re counting on inflation not staying at 9 plus percent for very long.