Monday Market Update – December 13

Timeline

I am writing about one factor in the overall cause of inflation, this does not mean it is the ONLY factor. It just happens to be severely overlooked as the media, and politicians try and blame whomever and whatever will make their side, or their news program seem like it’s winning.

The USA was in the middle of the dot com bubble bursting when 9/11 occurred. Global markets understandably sold off. Six days later Fed Chairman Alan Greenspan cut interest rates, and by the time 2004 rolled around, the Fed Funds rate was at around 1%.

At this point we all know, lower rates means it is easier to borrow money, and borrow is what Americans did.

Low rates fueled a debt bubble that grew uncontrollably. Although rates were rising from 2004-2007 Americans were still borrowing. Once the mortgage and debt bubble burst, interest rates plummeted and were near 0% by the end of 2008.

The media hype right now is that we are seeing our highest inflation number since 1982, which sounds scary and makes people want to keep watching or reading. They forget to tell you that inflation for the first 9 months of 2008 was skyrocketing, topping out at 5.60% in July of that year. We saw nearly 3% inflation numbers in July of 2018, so seeing inflation jump, is not something new. Having it in our faces 24 hours a day via news, social media etc. is new.

In 2008, during the housing and jobs crisis, an entire generation of kids were graduating high school and college, and being told there are no jobs, go take out student loans at these ridiculously low rates and get better educated. So, we did, and it has led to a student loan crisis.

Common Denominator 

The common theme throughout all of these events, is low interest rates. When the Federal Reserve makes it incredibly easy and cheap to borrow money, people and businesses will borrow money. In the beginning they will use that money to hire new employees, invest in equipment, renovate their kitchens and bathrooms, and overall add value to their hard assets. As time goes on, they will continue to spend, driving the price of goods up. This will cause inflation.

The rhetoric we are sold is that wage growth, and overall asset value growth should offset the inflation but that isn’t realistic when wages have been stagnant for a very long period of time and if you have low wages, odds are you don’t have a ton of disposable income to be investing to grow your wealth.