Inflation outlook – A battle lost before it started

After months of consumer price increases and after countless working households found themselves in dire financial straits struggling to make ends meet, in the late May, President Biden finally revealed his grand plan to fight inflation in an op-ed for the Wall Street Journal. The much-anticipated response to the cost of living crisis that has been ravaging the nation sadly did not contain the silver bullet that so many Americans were hoping for. Instead, it consisted of obvious observations and a recipe for “business as usual”.

Not to get mired in too much detail, the plan essentially was threefold: letting the Fed do what it’s already doing, interfering with the free market even more to force prices down in things like housing and prescription drugs and reducing the federal deficit, not by cutting spending of course, but by raising taxes on employers and on the “rich”. Of course, all three steps are as nonsensical as they are irrelevant to the inflation problem. 

For one thing, “allowing” the Fed to tighten or to loosen its monetary policy is legally and constitutionally mandated for any administration, even though politicians always put pressure on their central bankers. But still, merely announcing one’s decision to not openly break the law should not be applauded as an inspired policy stance. And then there’s the counterproductive part of the plan, of course, the one that describes how the US government will attempt to solve the problem it created by flooding the economy with billions of dollars by pumping some more dollars into it. Last but not least, let us not forget the best part of the strategy: Penalizing the very people who actually provide jobs and support the households that are suffering the brunt of the price hikes. 

Naturally, to readers that are well versed in monetary history but also in modern political affairs, none of this is surprising. After all, the unveiling of this grand plan was only the latest step after months of other failed political maneuvers, not just in the US, but in most other advanced economies too. First, both politicians and central bankers alike tried to deny inflation was an issue to begin with. It was “transitory” and “under control”. When that didn’t work, as even the extremely biased CPI figures kept climbing, they tried deflecting the blame. It was “supply chain” issues, and after that, it was the Ukraine war. Still, that didn’t really do much to help the average working citizen who saw his paycheck effectively shrink. So now, we have finally arrived at the usual solution, namely throwing more money at the problem and hoping this will be enough to appease voters. Over in the EU, more or less the same playbook is being followed. Even though tightening hasn’t even began yet, and interest rates still remain negative, both Brussels and individual member states have been funneling fresh cash to their respective economies to “help fight inflation”. 

While it is always a losing bet to underestimate the short-sightedness and the general ignorance of career politicians and bureaucrats, it is hard to see how anyone would genuinely make the honest mistake of assuming that inflation can really be “fixed” by more spending, more checks to the public and more “emergency” funds being released. It is clear, even to the most naive and gullible amongst us, that this is a political fight, one that is entirely focused on self-preservation for governments and not on the best interests of the public, as few things ever are. 

This is also precisely why we can expect the Fed to swiftly walk back its “hawkish” stance once the first cracks really begin to show in the markets and the economy. The writing is, in fact, already on the wall, especially after President Biden’s comments acknowledging that a recession might not be inevitable, but “this is going to be a haul”. And then we have autumn just around the corner too, with yet another wave of corona cases and perhaps an new virus variant too, clearly paving the way for a return to full-throttle printing and spending. In the Eurozone, officials are echoing similar sentiments. And while the ECB President has shown some signs that the bank might finally reverse course on its loose money policies come September, it remains to be seen whether it will actually reach that point. Escalations in the Ukraine conflict, further economic weakness, another corona “emergency”, anything can be used as a reason to keep the monetary support in place.

What this all means for ordinary citizens and savers is quite simple and straightforward. None of us should rely on the grand plans and the promises of those in charge to bring inflation under control. For one thing, even if they actually wanted to pursue this goal, the amount of money that got injected into the system, not just during the peak of the covid crisis but also for a good decade before that, is just too much to be mopped up in time. Secondly, and more importantly, there’s no way that such a fight, if actually fought in earnest, would be anything else but political suicide. “Austerity” no longer exists in any modern politician’s vocabulary and for good reason. 

Thus, in the months and years to come, we can expect to see what has been a long time coming. Fiat currencies are bound to be exposed as the worthless pieces of paper they have always been. And as for physical precious metals, they will more than likely prove to be essential not just for investors and for those seeking to pass on their wealth to the next generation, but for all rational savers and ordinary households, seeking to protect the purchasing power of their hard earned savings even in the short- and medium-term. 

Claudio Grass, Hünenberg See, Switzerland

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland. 

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