Why the Fed will fail to fight inflation until the recession beats it down

You cannot grow a turnip in a pile of dollar bills unless you let them rot first. Depending on the road the Fed takes, that could become the dollar’s highest value and the best the Fed can do to reduce food shortages. Whether the dollar decays depends, in good part, on whether the Fed chooses to fight inflation or chooses to fight the recession that is already bogging us down. It cannot do both; it never has, and whichever it does of one will worsen the other.

It seems to be broadly accepted now that we have both of the ingredients for persistent high inflation fully in full play:

1. The Federal reserve created a whole pile of money beyond anyone dreamed it would do prior to Covid, and the federal government helped distribute it to numerous businesses (including many that didn’t need it) and to almost all Americans.
2. We have massive shortages due to earlier and current Covid lockdowns, and now we add shortages from the war in Ukraine and from the sanctions imposed to combat the war.

In other words, we have a demand-side inflation problem created by all that money enabling companies and human beings to buy more stuff and a supply-side problem that the Fed can do nothing about, leaving humans without all the stuff they want or need to buy, such as food.

How money moves and prices rises

The only inflation front the Fed can battle is the demand-side — the monetary equation where it can diminish demand by pulling money back out of the economy via “quantitative tightening” (QT) as it did back in 2018. We all remember that went over like a lead zeppelin because markets had grown dependent on deep money. But that is what the Fed must do if it intends to do anything at all about inflation that is fueled by the slosh of deep and wide money supply, and stock and bond and housing markets will just have to quiver and shiver into the dust of the earth IF the Fed is going to pursue that route hard enough to attempt to drive inflation back to its 2% target.

(Of course, when it was in their favor to say so, the Fed told everyone repeatedly that it was going to pursue a symmetrical target of 2% inflation. If it were actually to honor its word, then, it should try to erase the overage that has stripped us all of some wealth by going for a year about seven points below 2%, just as it is now that far above 2%. Something tells me we symmetrical is off the plan for good.)

As the Fed is now raising interest, bear this in mind: all the money the Fed has already created is going to keep floating around the economy until the Fed actually sucks it back out with QT. For example, just because you spend all your savings, that doesn’t mean there is less money in the economy. All of your expenditures just moved that money into other people’s pockets. You have less money while someone else has more. Money supply doesn’t go down from people losing money. People can spend money endlessly and lose money on their investments and not lower US savings (and hence money supply) at all. Even if they turn their cash into gold, that just makes it someone else’s cash.

That means all that money can keep causing inflation even if no new money is created via loans. It is the movement of that money that drives inflation. It’s just, the more money floods the system, the freer it generally moves. The more that money is spent back and forth as businesses pay their service providers and their employees and buy more supplies and equipment from other businesses, and those employees spend the money again, the more velocity the money is said to have. And this velocity of money is the big accelerator of inflation on the monetary side. The faster the cycle turns over, the more it empowers inflation like a generator. So, until the Fed starts QT and begins to actually vacuum money out of the economy, we will see more inflation fed from the demand side of the economy, even if the Fed is lowering interest because there is simply too much money already in the monetary system.

Raising the cost of interest, often called “the price of money,” doesn’t remove any money. It just slows the creation of even more money because banks all have the government-granted power to create new money every time they issue a loan by writing out a check. They create the money that they loan out of nothing under our fractional-reserve banking system. (See my ancient article, “The US Federal Reserve for Dummies: What is the Federal Reserve System and What is the Gold Standard?“) We call it “fiat” money because banks all over the nation are decreeing money into being with every loan they write. Rarely, if ever, are those loans fully backed with cash somewhere. The banks only have to reserve fractional coverage. The banks just sign a check to disperse loan funds, and there is new money. Voilà!

Obviously, raising interest slows down new loan issuances, so it slows down the expansion of money; but it doesn’t drain any money out of the system, which is overcharged right now. It just stops loosening it up even more. So, for as long as the excess liquidity in the system is sloshing back and forth from one bank account to another, and to the extent the cycle picks up any speed, you’re going to have higher inflation. And, so long as interest remains fairly low, loans will keep happening, and banks will keep creating even more money in the system. That is why it can take a lot of clamping down to get inflation under control.

It is, however, likely to take far less clamping this time because the other thing that causes demand destruction is an economic recession, which greatly slows the velocity of money as people hunker down on what they have and pay out money in a “stingier” fashion. They take out fewer loans as well. We have just seen that we are already sliding into recession with gross domestic production receding 1.4% this past quarter.

Where does money go when stock values crash?

We talk about the destruction of wealth, but does 80% of the money in stocks evaporate if stocks crash and get written down in market value by 80%?

No. Stock prices are largely based on a perception of value, largely anchored in belief about income streams that haven’t even happened yet. People will spend some of their share of the nation’s money supply to buy stocks if they perceive them as having increasing future value, giving some of their share of the money supply to someone else to buy the stock. If they take out a loan to buy the stock, then money supply increases to make the stock purchase possible, but that money never goes away if they sell the stock or its perceived value drops to where others will pay less to get it. To really drive up stocks, the Fed creates more money, making it easier for stocks to attract more money and rise more in value because people are looking for places to store the new money in investments others will be willing to pay more for in the future. As the stock markets and bond markets collapse, they can destroy demand without destroying money. When stocks crash, all the money invested in stocks all along their journey up is still in the system; it just moves:

Imagine a small island with only three people and one company. All the company owns and consists of is a small grove of coconut palms. Each person stranded on the island jumped off a ship naked with nothing but $10,00O each person brought to the island in a plastic bag when their ship wrecked — a total of $30,000 in island money supply; and the islanders have agreed to use that as their vehicle for trades. Person A — we’ll call him “Mitch McConnell” — also owns the one stock share of the one company that owned the only small grove of coconuts on the island because that was in his bag. (Go figure that Mitch would own all the stock.) Person B — we’ll call her “Tulsi” — wants the share badly enough that she’ll pay $1,000 for it out of her bag because, as an Hawaiian, she not only sees future food value, but she recognizes the value of the coconut oil for protection of one’s skin in the island sun. Mitch loves money and believes he’ll be rescued during the next election, so he exchanges the stock share with her, which says she owns all rights to trees owned by the coconut company, and she gives him $1,000. Mitch now has $11,000 and Tulsi has only $9,000 plus a piece of paper that gives her ownership in the coconut company, which consist of nothing but the trees — not even the land under them. The total money supply on the island remains the same. Person C — whom we’ll call “Sleeply Joe” — still has his original $10,000 because he was drifting away under one of the coconut palms when the deal was made. Island money supply is still $30,000.

Coconuts are the only vegetation growing on the island in order to keep our example simple. (Mitch, Tulsi, and Sleepy Joe are to keep it fun.) So, as people get hungry and tired of eating starfish and limpets, the desire for the limited coconut supply grows. Coconuts become hot commodities, especially as skin starts to turn red and chapped, but the only one who can harvest and sell them is Tulsi. Sleepy Joe’s burning skin wakes him up. Desperate, he now says he’ll pay 5,000 of the dollar bills he brought to the island in his plastic bag for ownership of the coconut stock because he wants to make sure he controls the supply chain. The total stock’s market value on the island just soared from $1,000 to $5,000 because stock’s value in terms of money is only perceived, even though coconuts have real intrinsic value to feed you and help your skin. Tulsi sells her stock to Sleepy Joe because her natural island skin is doing quite well on its own. Now Mitch has $11,000; Tulsi has $14,000, and Uncle Joe has only $5,000 plus the stock and coconut trees. Money supply on the island remains $30,000. It didn’t change a bit just because the Island’s only stock soared in value. Where did the money come from to support the soaring stock value; it just moved. It didn’t move into the stock. It moved from one person’s storage bag to the next.

How high the stock went up had something to do with how much money Papa Powell had packed in the bags before the ship wrecked. (He died in the shipwreck he created, by the way.) Obviously, the stock cannot rise higher than $30,000 in value in this closed system if it can only be traded for money. Obviously, if Papa Powell had only packed ten one-dollar bills in each person’s bag, the island stock would have only sold for something like $1; and instead of getting $1 for each starfish you collected and sold for food, as was happening under the 30k monetary supply, you’d expect to have to collect a lot more starfish to get a dollar out of someone with money supply so tight as ten bucks each. People would be stretching their money quite carefully to make it last, getting the most starfish to eat they could out of their limited funds, because the Fed isn’t creating any more dollars on that island than those Fed bucks that were brought there, so money supply is stable. Under that situation it would take an extreme shortage of seafood to raise the price of barely edible starfishes above a buck each.

Then comes a hurricane that blows down all the coconut trees, and they float irretrievable far out to sea. CononutCo’s stock, since the company’s capital was all wiped out, now consists of nothing of intrinsic or perceived value; so, it’s stock price crashes to zero. It’s a total wipeout. No one on the island will ever be willing to pay for the stock again. Was any money wiped out? No. Mitch still has $11,000; Tulsi has $14,000; and C has $5000. (We’ll leave out any change in the money flow form their starfish and tilapia trades to keep things simple). Money supply remains exactly $30,000. All that has changed is Sleepy Joe is both a lot poorer in dollars and in coconuts, and the little island has less intrinsic value to anyone because it now can’t feed anyone anything but seafood. Joe tosses his stock share into the sea as something that will never again have value and goes to sleep his losses off, finding himself even more disgruntled than he usually is because he now has no coconut palm for shade and no source of oil in the future for his tired skin.

Money, of course, continues to get exchanged for limpets and starfish and other marine niceties that the people obtained from the sea; but all that changed the whole time was where the available money supply was held. If someone’s bag was getting a little flat, they started getting a little selfish with the starfish, a little more reluctant to use their few remaining dollars to buy a pointy thing called a fish that was not a fish.

The story ends when Mitch was teetering on a rock to scrape off a star fish beneath him and a big wave swept him away. Tulsi saw him go by but didn’t go out to save him, even though it was Election Day when he was certain he’d be saved, because he looks like Yurtle the Turtle, so she simply thought he was a huge turtle swimming in the wave. And Sleepy Joe, it turned out was dead, but Tulsi didn’t know because, well, who could tell? Fortunately, Tulsi was alive and well because she loved dining on tilapia and starfish and drinking fish-egg wine, and she remained on the island until some wise soul came along and scooped her up.

Oh, but she had already thrown all her money away because, when there is no one left who will trade with you, your money loses all its worth because it has zero intrinsic value. (Some say a lesson the US should learn with respect to its trading partners, but that is a story for another day on a bigger island.) A coconut, however, could become worth all the money in your little world, if there were someone to trade with, as it is far nicer to drink than fish-egg wine, and the container it is packaged in serves as its own handy drinking cup. It has, in other words, intrinsic value that money doesn’t have. Tulsi would not throw the island’s last coconut away, even if there were no one to trade with. She’d eat it, but she can’t eat money. Finding another bag of it floating in on the sea won’t create more coconuts to end the new coconut shortage. If two albatrosses came along and landed on the shore with one clenching the bag of Mitch’s money it had found floating on the sea and other clutching a coconut it had found on a drifting palm, Tulsi would run for the one with the coconut, not the one with the bag full of money because more money doesn’t end a shortage that wasn’t caused by lack of money.

The moral of the story is, if you’re going to be in the Democrat majority, be Tulsi. If you’re going to be a Republican minority, don’t look like a turtle.

So, money supply is never increased or decreased by any amount by the rise and fall in stocks. All that changes is where the money is stored — who or what entity has a claim on portions of the total money supply that exists. It’s no different than if you buy a house as an asset, instead of a stock. If you spend all your cash on a house and the house blows up, no money was lost from money supply. It’s just that the money isn’t in your pockets anymore, and you’re not in a house anymore.

Recessions and stock crashes can create demand destruction.

While neither a recession nor a stock-market crash change money supply by one cent, they can destroy demand or supply because, for one thing, they tend to destroy barely solvent companies like the hurricane that wiped out the coconuts. Employees are laid off, so the money cycle slows because those people are not getting paid, and they are, thus, tighter about paying anyone else for anything. Thus, the velocity of money drops, and that’s deflationary. As we saw on the island, the more money there is in the system, the more freely people move it around to get what they want so it cycles up with more velocity and becomes worth less as there is more and more of it. When the money’s tight, people cling to their bags, and it has to squeak out between the lips of the bag one bill at a time. You better have a lot more starfish to sell if you’re going to get any of the money supply into your bag.

In a recession, fewer people are earning money, so they don’t have as much to spend, so money becomes more prized, even though there is the same amount of money in the system; it’s tending not to flow but to be locked away in vaults or computers (or plastic bags). Valuations of stocks in companies that are failing are written down, but all the money is still there somewhere. It just doesn’t move to employees and others, so circulation slows way down. Prices deflate, meaning it takes fewer dollars to get what you want. The perceived value of money in the bag, which has no intrinsic value, rises because everyone has agreed to use it as the vehicle of exchange for all goods.

Thus, recessions tend to be deflationary, even though they don’t change money supply on their own. They just reduce the velocity of money. They reduce the willingness of banks to loan money, etc. However, they are not always deflationary. Companies going out of business don’t produce supply either, so you can have a recession where inflation continues because of extreme shortages on the supply side. That’s where the lesser amount of money in circulation (same amount in total supply) finds a lot fewer goods to chase, so goods become more precious.

Imagine the island economy, as measured in dollars exchanged (GDP) slowed to a crawl one year because the coconuts got wiped out, and fish supply plunged, too. There was almost no successful fishing and certainly no coconut harvesting, so the economy was deep in recession compared to prior years. If a coconut washed up on shore with the money supply still being at $30,000, can you imagine what it would be worth as everyone started bidding over who gets the coconut?

It’s not a given, then, that a recession will cause deflation because of how it also changes the supply side. It curtails demand but also cuts back supply. It is even less likely that a recession causes deflation if th recession is caused by supply problems like the wipe out of coconuts and fish harvest. When inflation continues during a recession (meaning a time when the movement of dollars has slowed because there isn’t much to trade for), we call that “stagflation,” which is the only thing we have to thank former Treasurer Larry Summers for — the handy word he created. We have a stagnant or receding economy with continuing inflation. If shortages get bad enough, and the Fed creates a lot more money to try to raise GDP, welcome to the Weimar Republic.

To go all Weimar, you have to reach hyperinflation, and here is how that can happen: If inflation in prices still exists as the economy recedes because goods are becoming scarcer even as money is not circulating as quickly, the Fed has two ugly options: Curb the inflation by cutting money supply to make money even more scarce, but that will turn the recession into an all-out depression by making people cling even tighter to their money.

So, the Fed may choose to fight the recession, instead of the inflation, and will want to print more money to loosen up the flow. However, without an increase in supply, that money only raises prices. Imagine if the Fed made a helicopter drop of money on the island but nothing else. Suddenly the island was awash in more cash than waves, but the number of people fishing for tilapia remains the same. Those that don’t want to fish, like Sleepy Joe, will just shell out a few more “shells” and get their fish the easy way so they can keep sleeping under the coconut palms. (Not a safe place to sleep, by the way; as fully loaded, a ripe coconut in its husk weighs a solid five pounds or more. Which might be how Sleepy Joe died because Tulsi did see a coconut in its husk right beside him, though who could tell?)

Normally, easy money might goose production and jump-start employment and supply; but not if the supply issues are causing the recession and not being caused by a recession. The Fed increasing money doesn’t get anything produced if the fish and nuts aren’t there to harvest. In the kind of recession the world is now moving into, businesses are shutting down because trade routes are closing and parts and materials are not available and because people would rather sleep under coconut palms than go back to work. The old-school thinking of creating more helicopter money, in that case, will just drive inflation up without reopening businesses that can’t use the money to get parts anyway, and it will keep the people sleeping since their work only gains them money that the government drops from the sky, and, voilà, Weimar Republic or something equally bad from a return to loose money in that kind of situation.

The Fed’s weapon of mass destruction

The Fed is hoping to avoid the recession part of the demand-destruction that it has to engineer if its going to curb inflation by taking away money supply. It almost always fails to avoid that because you cannot reduce money supply without shutting down the weakest businesses, reducing supply further. For the most part, Fed tightening achieves its effect against inflation by creating a recession. It’s almost impossible to take down the money supply and not take out the weakest hands in business, writing down stock values, laying off employees, and creating knock-on effects to the people and companies all of those businesses did business with or owed money to. Making a soft landing in a lead zeppelin (meaning an economy that can’t fly) is not easy. Right now, it’s likely to exacerbate supply shortages in a shortage-driven recession.

The Fed believes it can finesse such a landing this time, though it has a terrible flight record even when there have been no shortages. Papa Powell says he can do that because there is a surplus of jobs, so supposedly his plan shouldn’t create any significant unemployment because those fired from the weak hands that go out of business can go right out and find a new job. But we know that works on the drawing board while failing in reality due to mismatched skills, mismatched locations, early retirement choices, and now it increases supply problems — just like we saw when we reopened the economy after the Covid lockdowns and many did not return and supplies ran short. Closing production facilities that were already marginal because they can no longer afford the credit that was keeping the able to make payroll isn’t likely to help avoid recession.

So, recession is going to finally win the day and do its dirty work of clearing out the excesses and the dead wood; but it’s likely to be a rough one because of how we tried to solve everything with more money for so long and because we keep damaging our already badly damaged supply lines with needless and destructive wars and sanctions and continued Covid lockdowns. Humanity is doing this to itself.

The real world is messy and rarely looks like the battle plan does on the drawing board. But the Fed is hoping to seriously take down demand without creating a lot of battle scars. It has the power for certain to back down or all-out destroy demand, but it is highly questionable, based on its own history, whether or not it has the finesse to do that in this present environment filled with major hostilities, a plague, and droughts and hard winters and trade routes that have been getting damaged for several years now and not create mass demand destruction at a time when the economy is already receding. It’s QT may turn out to be a weapon of such mass destruction in a mess of explosives situations that.

The Fed has made it clear it is not backing off from that path. Well, until their stock-holding bankster buddies all hate them, and all the people feel the Fed’s normal Weapons of Mass Deflation used to battle inflation take effect in this unchartered, volatile environment to where the masses start pressing their members of congress to beat on the Fed’s door for some relief … or maybe actually storm the Eccles Building — the Fed’s aptly-named ecclesiastical temple — now that storming government buildings is the new politic. Then the Fed may risk QE and throw more money into the fire to raise the flames higher because their kind of money does burn. In that case, repeat the word “Weimar” after me.

The picture I’m trying to paint is one that shows stopping this roaring inflation is a multi-dimensional mess because the Fed has no control over the global supply problems that are rapidly proliferating and causing recession, and it cannot both goose an economy that is slowing due to supply-side recession and cut money supply to curb demand and reduce inflation. Those goals are mutually exclusive.

There is no path here that works. In the past decade, if the Fed’s tightening caused problems, it rushed back in with astronomical amounts new money because it couldn’t seem to cause inflation to save its soulless self anyway (because it was giving all the money to banksters and their supremely wealthy friends to save stocks and bonds from falling in value but none to the average person while pretending that would trickle down to the average person through the clenched fists of bankers). So, all inflation happened in the assets people stored the money in where inflation was wanted.

This time, the masses will be banging the Fed’s door down for money because they’re hungry and food is pricy or because their stocks are falling in a time when the Fed cannot go back to that kind of general QE, distributed either via the federal government or via new Federal Reserve individual bank accounts (as we talked about in a much earlier Patron Post) when it has to fight inflation that people are also going to be screaming about. I keep hearing investors claim the Fed will rush back to QE based on its history, but it’s not as easy as that this time. This time truly is much different because of the supply problems all over the world, and I think the Fed knows that.

The Fed, believe it or not, cannot grow corn. There may be a few Fed banksters who grew up on farms and have the know-how and who own enough land to grow some, but that isn’t going to make a dent in the corn shortage; and that is the best the Fed can do to solve supply problems. Throwing out free money to farmers does not plant fields that are covered in snow or strewn with missiles that were duds, now punched into the soil, that you surely don’t want to hit with your plow, lest you leave a crater in the place where you and your tractor once were … or fields that were, for all the farmer knows, seeded with mines.

The Fed cannot take away sanctions, which spread around the earth to create even more shortages, raising prices through scarcity. It can give free money to farmers to buy fertilizer that has become expensive because the fertilizer isn’t there to be purchased; but that only drives up the price of fertilizer by fueling the demand side without boosting production/supply/transport of fertilizer. These are political problems, largely created by a hostile humanity at war with itself and at war with disease and at war with the environment, damaging it in some cases, or at war with each other over the environment to save it. The hostility in humanity and inability to agree on wise solutions or even longstanding basic ideas we once held in common has grown to such extremes that we’re killing ourselves without using weapons of mass destruction.

There is no monetary solution to a supply-side inflationary problem. Wars have to end. Sanctions have to end. Forced economic lockdowns have to end. Midwest fields must be freed of their burden of late-spring snows and then dry out. Fields in Europe’s breadbasket have to be cleared of explosives. People must go back to productive work. Water supplies have to stop being overused by overpopulated areas that keep insisting on bringing in more people.

If global warming is adding to droughts, that’s on us, too. Even if we’re not the cause of droughts, we still have to deal with them and have economic resiliency to do so. Switching to all electric vehicles in states that are already crying out about electrical shortages this year certainly will be an electrical-shortage disaster in the near future that no one is being realistic about. It will require more hydro, more nuclear generation, more petri-fuel generation, more windmills beating the birds and more solar panels starving the soil and taking up habitat.

And where all of those problems exist, they’re clearly not getting resolved this year by rancorous people who cannot compromise on anything in government anymore who are enraged by government shutdowns of free speech and draconian health laws and with each other over those things. The Fed isn’t going to solve a crisis that all of humanity is creating together where families increasingly hate each other over politics, Left and Right can no longer meet and discuss because both sides have worked up their masses. Dishonesty in media abounds more than ever. People read only what they want to hear. Races are being baited to hate each other. Male and female don’t even exist as rational distinctions or words that even have an agreed meaning anymore. So, we’ve lost common ground at the most basic levels of human understanding. Children are told they cannot tell what they are by looking and must all figure it out, and we pretend that is somehow kinder to the children to foist that quandary on them when most never gave it a thought all their lives long. They take the dilemma as for truth because the adults ought to know.

Not all of that is cause of the depression we are going into, but it certainly doesn’t bode well for our solving this financial crisis, rather than making it worse because we have to agree on numerous tough economic decisions that put more equity and less greed in the system if we want it to function smoothly, and we can’t seem to agree on basic concepts, once prized, like free speech or even on what a man or woman is. The Fed can’t fix stupid with money. The Fed IS stupid with money. That’s because it needs to be stripped down to one sole task — manage the currency for zero inflation in all environments. That would disempower it in a major way.

It is not the Fed’s job to save the economy, but we’ve led it to believe it must and it can. The Fed’s sole job should be to manage the money supply so that money supply remains as neutral as possible in the equations between us. The Fed should never be attempting to manage GDP (recession v growth). The Fed is a banker, not a central economy planner. It should be focused on managing the dollar for inflation v. deflation and nothing else, not even employment.

Other problems are best solved by difficult political choices and laws that appropriately restrict known greedy behavior, such as the kinds of speculation that turn stock markets into nothing but casinos where businesses are mere playing chips, where greedy people are allowed to toy with our companies and our economy. We need to create and enforce laws that level business playing fields so older businesses don’t have undue advantage over new ones, rather than throwing money at the problems. We need to make things that are too big to fail smaller and stop allowing endless conglomeration of corporations into larger corporations that dominate everyone and stomp out the little guy.

We don’t HAVE to let things like BlackRock or JPMorgan come into existence at the dominant scale they have. Corporations are artificial entities, created by law, in the first place. Their conglomeration can be limited by the very laws that allow them to exist. There is a point where their dominance is more threatening than efficiently beneficial to a vibrant society. Their artificial creation that is created via corporate laws can be changed.

Those are the kinds of economic fixes we need to focus on. If inflation or deflation is a supply problem, the Fed cannot do anything about it; so it shouldn’t even try. It shouldn’t even be empowered to try. We have to solve the causes of supply shortages as the only way to truly rectify inflation due to scarcity, and we especially have to stop creating supply problems, which is something hyper-reactive control-obsessed governments and leaders are doing.

Stop overreacting with entire metropolitan lockdowns or by killing tens of millions of chickens or pigs because only one or two were sick. Gas the one chicken house that had the sick bird to put the chickens to sleep and light it on fire if you must and quarantine the one farm, but don’t kill half the chickens in the upper midwest over a couple of birds! Government needs to stop overreacting. So do people. The Fed cannot fix the many reasons we are sliding into collapse — not even economic collapse. We want an easy one-stop solution. There isn’t one. We have to stop pretending there is, or recession will grind us down until we are forced to face that and make some major changes. We may not solve everything, but right now we’re not solving anything.

My next article will be a Patron Post in which I’ll show how much inflation is already on the producer (supply side) of the economy that has not been passed along to consumers in prices yet. I’ll lay out more of the forces that will add to those supply problems. I’ll also point out some areas of the Consumer Price Index that are already grossly understating actual price increases that have happened to consumers … much more than they are normally understated.

Because they are not in the CPI headline number now, they may be added to it later. Regardless, they’re digging into most people’s pocket books a lot deeper than CPI is letting on. I’ll show you why the vast supply-side problems that are part of today’s kind of inflation are not going away this year, so the Fed can helidrop all the money on our little island it wants, but it’s not going to restore the coconut economy. It won’t float edible and desirable bananas into our republic either, even if it turns us into a banana republic by trying.

If the Fed falls back to the easy-money path to avoid resetting the economy when all markets crash through a recession that is likely to run as deep as a depression or just to save stock valuations that are bloated far above intrinsic worth of the companies owned via those stocks, learn to say “Weimar” or “Zimbabwe” or “Venezuela” or “Argentina” because somewhere along that continuum of collapsed currencies is where we end up. By going down that road, this supply-side recession remains, but the currency crashes. So, in my next Patron Post, I’ll go back to analyzing the supply-side problems that are coming and that must be solved with something other than Fed policy.

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Article originally published: Why the Fed will fail to fight inflation until the recession beats it down