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A Simple Explanation for Why the Fed Cannot Fight Inflation

Today's interview by Greg Hunter of of Peter Schiff of and is an excellent one that everyone ought to listen to and understand. Here is that interview: (May 11, 2022)

Most people have a limited understanding of economic principles and practices. As an economics major from UC Davis (with Highest Honors and Phi Beta Kappa and Phi Kappa Phi honor society distinctions) and a Harvard MBA (with second year honors) who went on to become an accomplished Chief Financial Officer for half a dozen troubled high tech turnarounds, I don't suffer from that problem. I can assure you that Peter Schiff in this interview nails the fundamental problem that guarantees that inflation will continue to rob us of the purchasing power of the U.S. Dollar.

As of this writing, the first quarter of 2022 recorded a 1.4% decline in GDP. As of today, the Dow Jones Index has declined by 13.49%, the S&P 500 by 17.96%, the NASDAQ by 28.22%, gold by 9.75% and silver by 18.21% from their highs of this year. We are being told that the Consumer Price Index measuring inflation for April is at 8.3% year-over-year. John Williams of reports that if measured according to the methodology used by the federal government in 1980, the CPI ought to be reported as closer to 15-20%. The U.S. national debt stands at $30.4 trillion. In 2021 the U.S. Gross Domestic Product (GDP) was $23 trillion, which tells us that the national debt is running at an unsustainable level of 1.32 times our annual GDP. In short, the U.S. economic fundamentals and financial indices are painting a picture of a fragile and unsustainable economy, which is precisely what Peter Schiff is saying in his interview.

His main point is very simple: the Fed may talk about tightening its monetary policies, but in truth, it lacks the capacity to do so without tanking the economy because of the unprecedented levels of debt that America is carrying. Hence, Schiff is right in asserting that all the Fed is doing is playing pretend, just like everybody else, that everything is just fine, when the hard metrics are indicating just the opposite. Today, May 11, 2022, the U.S. 10 Year Treasury Note yield was 2.931%; on January 3, 2022, it stood at 1.632%. The difference between those two rates (1.299%) multiplied times the current national debt yields a whopping increase in interest cost of $395 billion a year, if all of the national debt was financed in the form of 10 Year Treasury Notes. For every 1% increase in the 10 Year Treasury Note yield, the interest payments on the national debt go up by approximately $304 billion a year. To put this number into some perspective, the federal budget deficit (spending exceeding revenues) for the first six months of FY 2022 from October 1 through March 2022, according to the Congressional Budget Office was $667 billion. Thus a $300 billion annual increase in spending on interest alone would be a material increase on the annualized deficit of $1.334 trillion (2 x the $667 billion), all of which will get financed with further national debt.

This appears to be no problem until buyers of U.S. Treasury Notes choose not to buy them. Russia certainly isn't buying them any longer, after the United States and European banks seized almost $300 billion of Russia's foreign currency reserves located in those countries' banks and those nations are supplying military weaponry to the Ukraine to defeat Russia. China has similar geopolitical strategic reasons for wanting to unload any U.S. Treasury Notes (U.S. Dollars) that they hold. When those dollar reserves return to the U.S. and flood the market, the result will be further price inflation as more dollars chase the same or a declining number of goods and services here. Saudi Arabia is reported to be negotiating with the Chinese right now to accept Chinese Renminbi in exchange for Saudi oil, bypassing the Petrodollar as the world's current reserve currency for oil payments, further contributing to America's excess liquidity problem of the Fed having printed dollars like a drunken sailor for years. Thus the Fed is having to contend with a problem of their own making that they all fully knew about, but did nothing to halt.

The upshot of all of this is that the Fed's options for fighting inflation are severely limited. The federal government, corporations and individuals are heavily laden with debt today in a very low interest rate environment. If interest rates are allowed to increase materially to try to dampen inflationary pressures, many debt holders will not be able to service their debt obligations and would default, potentially triggering a Great Depression. So all the Fed can do is lie and pretend that they are serious about fighting inflation, when in truth, they have no tools for doing so. If the financial markets drop much further, or if economic output (measured in GDP) continues its decline from the first quarter of 2022 due to disruptions to supply chains and parts shortages that were deliberately manufactured to produce more conflict, it is likely to begin resulting in layoffs and rising unemployment, which is the kiss of death for the party in power during an election year. Therefore, pressures will be intense on the Fed to back off of any interest rate or money supply tightening this year. Therefore, we could very well witness a combination of rising unemployment and inflation later this summer which could result in social unrest and riots.

The bottom line is that none of this is the least bit due to managerial incompetence. this is but one more element of the chaos that the NWO billionaire class is deliberately imposing of the world to compel us to accept their terms for a merger of all nations into their UN, WEF and WHO-based New World Order global surveillance police state from hell. That's the bad news. The good news is that God has other plans. Just wait and see.

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