FIVE CRISIS SCENARIOS 33chasing power since 1913 — one hundred years. That’s true,
but the late seventies was a case where it lost fifty percent of
its purchasing power, not in 100 years, but in five years. That
could happen again.
The Fed spent 30 years getting the inflation genie back in
the bottle. It started with Paul Volcker and continued through
the 1980s, 1990s and the early 2000s. They succeeded, even-
tually getting inflation under control.
Now, however, the Fed is trying to open the bottle and let
the genie out once again. They have their reasons. First, the
United States can’t pay its debt so inflation is a way to reduce
the value of that debt. They still owe the same amount of money
— around $17 trillion — but in real terms, it’s worth a lot less.
We can’t pay $17 trillion, but maybe we could pay $8
trillion so, they can reduce their bill by cutting the value of
the dollar in half.
The Fed also wants to get the economy going again. To
do so, they’re using what’s called financial repression. You
force the banks to buy bonds and use other regulatory means
to keep interest rates low. Meanwhile, you try to stoke infla-
tion. Whenever inflation is higher than interest rates, you have
what’s called a negative real rate.
That’s like free money. In fact, it’s better than free money.
The bank actually pays you to be a borrower because you get
to pay the bank back in cheaper dollars.
The Fed is trying to engineer a situation like that to get
people borrowing, lending and spending again. They think
that will get the economic machine going. But what they don’t
understand or what they misapprehend is that once they do
that, they’ll have to change expectations.
Right now, inflation expectations are extremely low.
Investors fear the opposite of inflation right now — deflation.
It’s very hard to change those expectations, but once you do,
they can go out of control.