Intractable Inflation

The clueless and fatuous Fed is once again turning a blind eye towards asset bubbles. Only this time around its existence is so humongous that one would have to be totally and willfully ignorant to ignore it.

But once the Fed achieves escape velocity on inflation is when its luck runs out. This is because it is a historical fact that all central banks have displayed a tremendous amount of difficulty controlling inflation in either direction. It cannot easily raise CPI above 2%. In 7 out of the last 12 years, the Fed has been unable to achieve average annualized CPI of at least 2%. Yep, 58% of the time, the Fed has failed to reach its minimum inflation goal. This is true despite the fact that our central bank printed $6.4 trillion and left interest rates at 1% or below for 9 of those 12 years. And, by the way, it is easier for the Fed to achieve its 2% target using the CPI metric than the more benign Core PCE Deflator.

Also, contrary to what the Fed and the MSFM would have you believe, our central bank has also had a miserable history of getting inflation under control once it becomes intractable. Back in 1971, both the Fed Funds Rate and CPI were in the mid-single digits. This was when the great monetary experiment began when President Nixon ceased all redemptions of the USD for gold. Inflation then spiked to double digits by 1975 and, after a brief pause in '76-'77, eventually spiked to 14.6% by early 1980. During this process, our central bank found it necessary to raise rates from 3.75% in February 1971, all the way to 20% by the middle of 1980.

(Click on image to enlarge)

(Click on image to enlarge)

The truth is there is nothing in this data that lends any credibility to the idea the Fed can easily fight deflation. It is also true that it cannot easily bring inflation under control after the confidence in the dollar begins to get significantly hurt.

There is zero evidence the Fed can eventually bring year over year inflation to 4%--or whatever rate it thinks is symmetrical after years' worth of disinflation and deflation--and then automatically prevent CPI from rising higher from that point. As mentioned, the great Fed Chair Paul Volcker had to raise rates to 20% before the inflation monster was vanquished. But while Mr. Volcker did engender a sharp recession in the early '80s to accomplish this task, he had a much better economy to start off with. Total U.S. debt to GDP was just over 150% during the '70s and early '80s. Today, that figure is close to 400%. And, the stock market was much less inflated 40 years ago. That ratio spent most of its time, around 40%. However, that ratio now stands around 150%!

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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