The grey areas in the graph below are recessions. Note how whenever inflation is above 3% and going up fast it suddenly goes down and there is a recession? The Fed has to take away the punch bowl as part of its mandate is to control inflation. When it does this there is a recession. Note we are above 3% and going up fast. People think the Fed can keep the same easy money policy for the next two years. Inflation would be way too high if they do that. This should be last call for the punch bowl.
You can also see this in a graph of the PPI:
These two graphs make it look like there should soon be a recession.
However, this time it may not be possible to take away the punch bowl. The Federal government is spending twice what they get in taxes and has huge debt. They need the Fed to keep buying their bonds and to keep interest rates low. If not for the Fed the interest rates would be much higher. If interest rates on the debt were 5% it would take about half the taxes just to pay the interest. In this case the Federal spending would be about 4 times the income left after paying interest. They would be clearly insolvent and nobody would want to buy their bonds. They really need the Fed to keep buying. But if the Fed keeps buying then inflation will get out of control. Probably inflation will get out of control.
It is strange that people can see the government making trillions of new dollars and then be surprised when inflation comes. If you survey your friends, I bet your Libertarian friends are less surprised than your Democrat friends.
My question is how to you preserve wealth in this type of scenario? Your material seems to echo some of Ray Dalio's economic cycle content about QE --> Currency Devaluation --> (Hyper)inflation --> Debt Restructuring...
ReplyDeleteSo holding cash is clearly a bad idea.
Let's say I have real estate assets that have appreciated given the low interest rate environment (due to more leverage from borrowers and a higher "NPV" due to low cost of borrowing)... what do we do know? Sell or hold and lock in rates for 10 years?
If we were to sell and converted to cash, what would be another good asset class?
Gold? Yuan or another growing currency? Other real estate? Or is there a window to hold the proceeds as cash and wait for prices of housing and stocks to "correct/crash" and hope that inflation hasn't devalued the currency too much, and pick up those assets at a lower price?
Curious on your thoughts :)
Ray Dalio said he thinks it is a good time to own gold.
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