Thirty-Five Trillion Reasons the Fed Can't Win the Inflation Fight

Government Debt Fuels the Inflation Fire

Mike Maharrey Mike Maharrey
Midweek Memo
May 1st, 2024 Comments

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The Federal Reserve and the U.S. government have a big problem. The Fed is trying to take down sticky price inflation but it can never win the fight. As host Mike Maharrey explains in this episode of the Money Metals' Midweek Memo, the national debt is part of the problem, and until that is under control, inflation won't be. And here's a dirty little secret -- the central bankers at the Fed know this.

Mike opens the show lamenting the fact that the Tampa Bay Lightning were ousted from the NHL playoffs this week. But he said he knew it was coming because the team just wasn't good enough to win.

"I watched every minute of every game of the serious hoping against hope, but deep down knowing the inevitable outcome. I feel exactly the same way watching the Federal Reserve fight inflation. There is a lot of game left, but the Fed isn’t going to win."

Mike notes that the Federal Reserve will wrap up its FOMC meeting on Wednesday. Nobody expects the central bank to make any policy changes, but everybody is waiting with bated breath to hear what Fed Chair Jerome Powell will say. 

"The funny thing is everybody knows. I watched gold and silver sell off yesterday because the markets anticipate hawkish messaging from the Fed."

Of course, everybody isn't selling gold. Mike provides data showing that the Chinese are gobbling up the yellow metal. 

"But people in the West keep selling gold every time they think the Fed is going to keep the rate higher for longer. That’s because they don’t see the big picture. They don’t understand that the Fed has as much of a chance of winning the inflation fight as the Lightning had of winning the Stanley Cup."

Mike argues that the Fed hasn't done enough to slay price inflation. That's clear in the data. For instance, the PCE index - the Fed's favorite inflation measure - was up 3.9 percent on an annualized basis in March. The bottom line is the central bank hasn't raised rates high enough or reduced its balance sheet low enough to get a handle on inflation given the amount of inflation it has created since 2008.

"But the Fed has an even bigger problem. It’s a $34.5 trillion problem. You might recognize that number. It’s the current national debt. Now, if you ask J. Powell, he’ll claim the debt isn’t the Fed’s problem. Oh, he’ll acknowledge that it’s a problem in the abstract. He might even admit it’s unsustainable. But he’ll claim it’s not the Fed’s issue; it’s the U.S. government’s problem. Guess what. It IS the Fed’s problem."

As Mike explains, a massive national debt hamstrings the Fed's ability to control price inflation.

That’s because the two primary weapons the Fed uses against price inflation are interest rate increases and balance sheet reductions. Both become increasingly difficult to wield as the national debt spirals upward.

Here's a plot twist - the Fed knows this.

Mike highlights a 2022 paper published by the Kansas City Fed that explains why the Fed can't beat inflation with monetary policy alone.

"In a nutshell, federal government fiscal policy adds to inflationary pressures and makes it more difficult for the Fed to effectively wield its monetary policy weapons. ... In this paper – published by the Fed – the authors concede that merely tinkering with interest rates won’t slay inflation if the government continues to spend far beyond its means."

The paper includes a chilling warning.

"If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflationary pressure. As a result, a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise.”

In other words - stagflation. 

And that's exactly what appears to be happening.

Mike closes the show with a call to action.

"Now, do you really want to sell gold when every indication is we’re heading into a stagflationary period? Maybe this is a good time to take advantage of the people who are selling and buy the dip."

Articles Mentioned in the Show

The Fed Hasn't Done Enough to Beat Price Inflation

Could the Shift of Gold West to East Set the Stage for a New Gold-Backed Currency?

More Evidence That Cooling Price Inflation Was Transitory

Robust Chinese Gold Demand Expected to Continue Supporting the Market

Kansas City Fed Paper

Mike Maharrey

About the Author:

Mike Maharrey is a journalist and market analyst for with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.