The CPI data for December buoyed markets and raised hopes that the Federal Reserve is winning its war against inflation. But in his podcast, Peter explained that the Fed isn’t winning the war. It is losing and will ultimately surrender to inflation.
Markets rallied after the CPI data appeared to show further cooling in price inflation. Most people assume that means the central bank can be less aggressive and ease up on rate hikes in the coming year. And if there is enough progress, many people think the Fed will reverse course and start cutting interest rates later in 2023.
Peter said he agrees that there is a good chance the Fed will cut rates this year. And he thinks there is an even better chance the central bank returns to quantitative easing, whether it cuts rates or not. But this pivot won’t be because of a victory in the war against inflation.
No. They’re going to surrender. Inflation is going to win that war. The Fed is going to run to fight another battle — at least it’s going to try to fight because it’s going to lose that battle too. That battle is going to be recession, maybe financial crisis, maybe a battle to try to prop up the US government whose insolvency is becoming a bigger problem with rising interest rates.”
The US government continues to run massive budget deficits even as its interest costs rise. Interest payments on the debt rose 41% in 2022. According to the Peterson Foundation, the jump in interest expense was larger than the biggest increase in interest costs in any single fiscal year, dating back to 1962.
If interest rates remain elevated or continue rising, interest expenses could climb rapidly into the top three federal expenses. (You can read a more in-depth analysis of the national debt HERE.)
Because servicing this debt is going to become so problematic in 2023, that’s another reason that the Federal Reserve is going to back off of its rate hikes, and, in fact, may have to go back to quantitative easing because they will need to buy Treasuries that private buyers don’t want at interest rates that the US government can’t afford.”
Along with the massive federal debt, there is also a growing level of consumer debt that will create problems for the Fed’s inflation fight for the same reason. The average credit card interest rate has ballooned to 19.6%. Meanwhile, credit card debt alone grew by 15% in 2022. It was the biggest year-over-year gain in 20 years.
The fact that credit card debt is skyrocketing as savings rates are plunging — this is very problematic for the economy. It shows that Americans are struggling to make ends meet.”
Rising consumer debt also indicates overall credit is expanding. That is, by definition, inflation. Keep in mind, inflation isn’t just rising prices. Properly defined, it is an expansion of the money supply and credit. People can use credit to buy things and bid up prices.
Consumers are dealing with rising prices not so much by cutting back and buying less, although in some circumstances they are. But they’re also taking advantage of credit so that they can just keep buying the same amount and just making up the difference by borrowing money. So, the Federal Reserve is still keeping interest rates too low and allowing credit to grow too plentifully so that additional credit is available to consumers to continue to bid up higher prices. And so they’re not being priced out of the markets because they’re staying in the market because of their access to credit. So, in other words, the inflation is continuing in the credit markets.”
The bottom line is that the increasing level of debt is not a sign of a strong economy. It’s a sign of economic weakness. And it is exacerbating the inflationary pressure. It’s indicative of the fact that the Fed is losing the inflation battle.
The Fed needs to discourage spending and encourage saving. But that’s not happening.
The Fed is raising interest rates but consumers don’t care. They’re just borrowing more money and spending more money. So, the credit supply is expanding and that is going to continue to put upward pressure on prices. The Fed is making no real headway in its battle against inflation.”