The Fed has blown it once again!

In June 2021 we warned that the Fed may have made a mistake with its heavy dose of QE - quantitative easing.

Sadly in late 2022 it appears that our fears have been realized. Inflation has gone through the roof, and the Fed has slammed on the brakes. The yield curve has inverted and many forecast a recesson.

The Federal Reserve is only human and does make mistakes. But some of these mistakes have been whoppers.

  • Tightening the money supply at the beginning of the Depression.
  • Dumping the gold standard in 1972 with no preparation.
  • Failing to regulate the mortgage banks in the 2008 runup.

The gold standard came into being in the 18th century to solve the problem of multiple currencies and prior disasters with paper money such as John Law's plan to relieve the debt burden of the French Regency. However by the mid-20th century the size and growth of the global economy reduced its usefulness. For a time the US dollar, backed by gold, took its place. Inflation was non-existent by definition.

Nixon's administration found it hard to keep up to this standard in large part due to increasing oil imports. Rather than devalue the dollar or raise interest rates to attract gold reserves (he was running for election), Nixon talked the Federal Reserve into dropping the convertibility of dollars into gold and going the paper money route. The OPEC countries responded by tripling the price of oil in dollar terms.

The result was a prolonged recession and rapid inflation. As shown in the chart to the right, prices doubled in the next decade.

Inflation has continued since than but at a slower pace - doubling every 30 years. But in 2022 it is running hot at close to 8%

If a repeat of the lost decade of the 1970's is ahead of us, note that all asset classes had negative annual real yields for that decade except:

  • Gold 14%
  • Real Estate 14.6%
  • Commodities 6.2%
The current mess is still in early innings but so far the only asset classes with positive real returns are commodities and single family homes.
November 2022

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