If Federal Reserve Chairman Jay Powell were a smart man, he would either step down as Fed Chairman when his term ends in February or he would refuse to be renominated by President Biden. The US economy is on the verge of a correction, potentially one that could eclipse the 2008 financial crisis in severity, and whoever holds the levers of power when that happens is going to get the blame.
President Biden of course will take a lot of flak for whatever transpires, and there’s no doubt that he does deserve some of the blame as a result of his continuation of generous federal fiscal stimulus. But the seeds of the next crisis were sown long ago. In fact, much of this predates Powell’s tenure as Fed Chairman, but he has done nothing to attempt to improve the situation.
In fact, you could make a strong case that Powell has not only made things worse, he has also accelerated the growth of the bubble that will eventually burst. The trillions of dollars Powell’s Federal Reserve created out of thin air over the past two years is showing up today in the form of higher inflation that shows no signs of slowing down. And unless Powell gives up the reins and lets someone else hold the bag, he’s rightfully going to take the blame for the worsening economy.
The Origins of High Inflation
It wasn’t all that long ago that the Federal Reserve was attempting to normalize its conduct of monetary policy. The target federal funds rate was increased to 2.5%, and the Fed began to slowly draw down the size of its balance sheet.
The process was always going to be long and drawn out. After all, you can’t expand your balance sheet from $800 billion to $4.5 trillion over the course of several years and expect all of that monetary easing to be undone overnight.
But even that slow and gradual process was unnerving for markets. And the withdrawal of easy money from financial markets was like trying to take heroin away from a junkie. Late 2019 started to see some real uneasiness in financial markets, and the Fed was forced, both through market reaction and political pressure from the White House, to slowly walk back its attempts to normalize.
The real catalyst for the current situation was COVID and the lockdowns that resulted. Immediately the Fed dropped its target federal funds rate to zero and stood ready to ease. And once the federal government began its fiscal stimulus, the Fed began soaking up newly issued Treasury debt by creating money out of thin air.
While the ultimate crisis may have been averted for the time being, it was merely delayed, not defeated. And the Fed now finds itself between a rock and a hard place. On the one hand it is seeing inflation rising at rates that we haven’t seen in 30 years. On the other hand, the Fed is faced with an economy that remains weak and is on the verge of even weaker performance.
Higher inflation would typically dictate a tightening of monetary policy. But a weakening economy would typically dictate a loosening of monetary policy. Thus we have the Fed being pulled between two completely separate policy options. Which one will win out?
The Weakening Economy
While you may read some pundits who credit a strong economy for high inflation, that’s not really true. The rising prices we’re seeing throughout the economy are the result of massive amounts of money creation. And we’ll likely continue to see increases for months to come.
What we’re also experiencing is lingering supply chain issues as a result of last year’s lockdowns. With manufacturers unsure of when they were going to get computer chips and raw materials, the incentive now is to buy as much as possible.
Consumer demand has also been spurred both by massive amounts of stimulus payments (free money) and now by consumer panic as consumers try to buy what they can when they can, before prices rise. As can occur in any inflationary environment, this panic can feed on itself, leading to chronic and persistent shortages of goods throughout the economy.
Millions of Americans remain out of work, while many more are quitting their jobs, frusrated with low pay. Nothing that is happening right now is indicative of a strong healthy economy.
While it’s not the Fed’s job to ensure a strong and healthy economy, that’s increasingly become an expectation. Congress looks to the Fed to step in with monetary support when the economy gets weak, or when markets start to show signs of distress. So the Fed may feel increasing pressure to “do something,” even when that something is something that could make an already bad situation even worse.
Protect Your Investments Ahead of Time
The fact that the Fed will either have to tighten monetary policy in the face of a weakening economy or loosen monetary policy in the face of high inflation means that investors could also face a difficult time. You run the risk that a tightening Fed could bring on a major stock market correction or financial crisis, or that a loosening Fed will allow inflation to spiral out of control. How will you respond?
Since it’s been over 30 years since inflation was this high, and over 40 years since inflation hit double digits, most investors don’t have any recollection of what the economy was even like back then, let alone how to invest. If you’re nearing retirement age, you likely were at the very beginning of your investing during that era of inflation, so high inflation may not have been on your radar screen.
Even more ominously, the stock market boom of 1982-2000 overshadowed many of the negative effects of high inflation. After all, with average annualized gains of over 15%, even 6% inflation wasn’t too big a deal. But with stock markets having only averaged 6% annualized growth since 2000, the 6% inflation we’re seeing today suddenly becomes a big deal, something that could wipe out nominal returns and ensure that your real returns are zero.
This is a time for investors to start thinking about how they’re going to protect and defend their savings and investments in the face of increasing inflation. Time is of the essence, too, as there’s no telling how high inflation will rise and for how long. Delaying protecting your assets could cost you dearly.
Thankfully we have historical experience to draw from when it comes to protecting your wealth against inflation. Precious metals like gold and silver have historically performed well during times of high inflation, such as during the stagflation of the 1970s.
Both gold and silver averaged annualized gains of over 30% over the course of the decade, handily outperforming stock markets and significantly outpacing inflation. If the 2020s end up being another decade of stagflation, there’s every reason to believe that gold and silver could repeat that type of performance.
The options available to investors today, however, are far better than they were back then. In addition to direct purchases of gold and silver coins, investors also have access to investment vehicles such as a precious metals IRA.
With a gold IRA or silver IRA, investors can roll over or transfer assets from existing tax-advantaged retirement accounts such as a 401(k), 403(b), TSP, IRA, or similar account into a precious metals investment. That allows you to keep your retirement savings away from the potential of a stock market crash or a bond market freeze, while simultaneously allowing you to benefit from potential future price growth in gold and silver.
The Fed may very well find itself trapped between a rock and a hard place as a result of its previous policy moves, but that doesn’t mean your investments have to be trapped too. Call the precious metals experts at Goldco today to find out how you can protect your retirement savings with gold and silver.