Page 7 - Inflation -The Killer of Your Retirement Savings

The Fed capitulated, choosing to indirectly monetize most of this new debt, hence the massive balance sheet expansion we saw in 2020, with the Fed more than doubling the size of its balance sheet before it peaked earlier this year.14 And that sowed the seeds for the inflation we’re seeing right now.
Unfortunately that set a precedent that the government can now exploit. And if federal spending doesn’t get reined in, and the Fed has to keep monetizing newly issued debt, it could only exacerbate the problem of inflation. In short, the larger the national debt grows, the more likely it is to contribute to higher inflation.
2. Monetary Policy
During the 1970s, Federal Reserve chairmen failed to see how serious the problem of stagflation was. All throughout that decade the focus on full employment overshadowed concerns about inflation.
It wasn’t until Paul Volcker became Fed Chairman that the Fed really focused on reducing inflation, and Volcker received the credit for bringing inflation down from nearly 15% in 1980 to under 3% in 1983.15 Unfortunately, that required taking the economy into recession, something which the Fed today might have to repeat.
Fed Chairman Jay Powell is the first Fed Chairman since Volcker not to have a Ph.D. in economics, and in order to curb inflation he is likely going to have to copy Volcker’s conduct of monetary policy, focusing on lowering inflation rather than worrying that tight monetary policy could send the economy into recession.
Previous Fed chairmen have rushed to the printing presses at the first hint of an economic downturn, trying to paper over market weaknesses over the past decade. Now that we’re facing persistent high inflation, Powell has to focus on fighting inflation, even if pressure from Washington and Wall Street may try to get him to backtrack in the name of economic stability.
We’re essentially in the middle of a big experiment, discovering whether or not the Federal Reserve actually has what it takes to be able to control inflation. And your retirement savings are part of that experiment.
Inflation has taken a big bite out of your savings over the past couple of years, and if the Fed is unsuccessful at bringing inflation down we could see a return to stagflation, with years of high inflation eroding the value of the money you worked so hard to invest.
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