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Soaring Inflation in the U.S. Closer Than You Think Lombardi Letter 2020-10-26 08:30:51 There’s a very high chance that inflation could be a big problem for the U.S. economy in the coming years. If this is the case, there could be severe consequences. Here's the full story. Analysis and Predictions,Inflation https://www.lombardiletter.com/wp-content/uploads/2020/10/exchange-W3DYFQA-150x150.jpg

Soaring Inflation in the U.S. Closer Than You Think

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High Inflation

High Inflation a Problem for the U.S. Economy Sooner Than Later

Soaring inflation is coming to the U.S. much sooner than you’d think. Be careful. It’s going to have detrimental impacts on everything.

Going back to basics: inflation essentially refers to a general increase in prices. This happens when there’s a lot of money going around in the economy.

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Have you looked at the money supply in the U.S. at all recently?

You see, during the pandemic, the Federal Reserve printed money without remorse. Just look at the chart below. It plots the total money supply in the U.S. economy.

In January of 2020, the overall money supply in the U.S. was around $17.0 trillion. Now it’s at $21.3 trillion. Simple math: this represents a jump of over 25% in just matter of few months.

Mind you: even during the financial crisis of 2008 to 2009, the Fed wasn’t this aggressive.

(Source: “MZM Money Stock,” Federal Reserve Bank of St. Louis, last accessed October 6, 2020.)

By printing a lot of money, the Federal Reserve created monetary inflation.

Look at the U.S. government…

Not too long ago, the U.S. government sent out stimulus checks to Americans. At that time, it was needed, or else many Americans would have had a hard time getting through this crisis. In the near future, it’s possible that more checks will go out to Americans.

Don’t forget that inflation is when lot of money moves around in an economy. What do you think Americans will do when they get stimulus checks? They will go out and spend.

Putting it in simple words: a lot of the money that could be sitting in the banks for now (thanks to the Fed’s printing) could see some daylight—it may start circulating in the economy. This could open the doors to soaring inflation.

Here’s a bold statement, but worth making: don’t be shocked to see inflation in the U.S. economy running at five percent to six percent a year.

Why Worry about High Inflation?

Dear reader, know that inflation is kind of a silent tax on everything you do.

Let’s say you buy an investment for a year and it generates a return of six percent. If the inflation is running at four percent in the U.S. economy, your real return is just two percent. In easier words: inflation eats your investment returns.

If you are a shopper, it’s bad for you as well. Higher inflation essentially means you will now pay more for same amount of goods and services.

If you are a business, you are in trouble, too. Soaring inflation creates a lot of uncertainty for operations. You don’t know how to price your products or how to make a trade deal, your investment decision could be impacted, and so on and so forth.

Know that higher inflation could cause a financial crisis as well. How so? The bonds market, for example, is highly sensitive to inflation. Rampant inflation could mean the Fed will be forced to raise interest rates. If interest rates soar, bonds prices come down. The bonds market is bigger than the stock market, and if the bonds market faces headwinds, there could be consequences across the board.

Wouldn’t you say it’s possible that banks face severe stress ahead? It’s possible.

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