Inflation Now, Deflation to Come

I originally posted the following to Facebook on January 18, 2022:

As a new election cycle approaches, the number one concern for Americans is now inflation. This spells a lot of trouble for the incumbent Democrats (even though realistically Trump and the Republicans SHOULD be considered liable for the first year of pandemic over-spending that caused this inflation — the Democrats liable for equally terrible spending since).

Inflation numbers have been much higher than anybody predicted, notably the Federal Reserve (you know… the private corporation that prints all the US dollars and then uses them to buy up most of the US treasury bonds) predicted only “transitory” inflation. Now, the Fed is about to start raising interest rates in an attempt to combat rising inflation (which they wouldn’t do if this was only transitory). The problem with raising rates is that trick only works if the cause of inflation is over lending. But this inflation has instead been primarily on the supply side (a lower supplies of goods can’t meet demand). There’s actually been very little lending (e.g. credit card debt is down to 2016 levels). So what this may actually do is discourage future lending, which could have maybe helped to fix supply issues. Naturally, the market will eventually fix supply issues on it’s own. But when it does, because of the lack of lending, the Fed could find itself with a pendulum rapidly swinging the complete opposite direction toward high deflation. That’s a problem they’ve historically tried to avoid at all costs and they won’t think twice about over-reacting to (negative interest rates, more stimi’s, forgiven student loans, UBI, etc).

This is shaping up to be a very entertaining decade.

December 2022 retrospect

It’s been less than a year since the post, but inflation has continued to rise and seemingly may have now peaked.

Obviously Democrats fared MUCH better in the election than I thought and even their own pre-election polls suggested. I think it had more to do with changes in how elections are conducted during the pandemic (specifically mail-in ballots) than anything else (e.g. Supreme Court’s reversal of Roe vs Wade)— but that’s not a topic I’m interested in delving in to (elections have been rigged since well before Trump/Hilary).

Back to inflation, I do still think the Federal Reserve has overreacted — that the market itself corrected the inflation problem (not the Fed’s raising of rates particularly), and that Fed’s actions will actually swing the economy into a deflationary spiral. Deflation will force politicians to want to issue more stimulus again, and this cycle will repeat with far larger swings.