Hey There Income Hunter,
The most important information revealed for the market last week was a white paper issued by the Kansas City Fed in conjunction with Johns Hopkins University titled …
The framework for this critical paper states …
Low and stable inflation requires an appropriate fiscal framework aimed at stabilizing
government debt.
Historically, trend inflation is critically influenced by actual or perceived changes to this fiscal policy framework, while cost-push shocks only account for short-lasting movements in inflation.
So, in 2022, as the Fed exerts massive monetary policy tightening pressure … The Fed itselfs admits it is the fiscal policy that impacts inflation.
They go on to say …
If the monetary tightening is not supported by appropriate fiscal tightening then the increase of fiscal deficits leads to even higher inflationary pressure.
In spite of massive monetary policy tightening, the government is adding $2 trillion+ in spending bills and student loan forgiveness.
This is creating a negative feedback loop that will force the Fed to either break the economy or accept higher inflation and go back to QE …
Today, I will share the supporting data for this argument so you can prepare to capitalize on the massive changes coming in the months ahead …
The Bottom Line
Fiscal stagflation, or high inflation/slow growth, is the worst economic environment for any government to face.
The unfortunate reason it cannot be cured today is because of the government’s inability to stabilize its large debt …
Along with the realization that the Fed’s inflation fighting process contradicts voters expected behavior of government officials (politicians).
This is incredibly important to understand because the US is entering its phase of the inflation cycle when monetary tightening is not supported by fiscal or government tightening.
This deterioration in the fiscal deficit leads to even higher inflationary pressure as stimulus from government spending continues.
The result is a vicious circle of rising interest rates, rising inflation, economic stagnation, and increasing government levels of debt.
The Negative High Debt/High Inflation Feedback Loop
- The Fed increases rates in response to high inflation
- This sends the economy into recession
- Recession causes a drop in government tax receipts (income) as companies and individuals are squeezed by higher prices and reduced real income
- Politicians fight for more spending bills to make voters happy in hopes of winning the next election; his fuels higher longer-term inflation
- The Fed is forced to tighten policy further in hopes of lowering inflation …
The Fed’s tightening policy is reaching its breaking point as the probability of a systemic crisis builds.
I am leaning into my prediction that something will break in the next couple of months, causing the Fed to pause its tightening policies.
This pivot will create a couple of awesome trading opportunities …
- It will create a short-term opportunity to profit from higher volatility through September and October
- The inevitable Fed pivot will lead to a reversal in the financial assets meltdown; traders and investors will be hit by a sugar high that will fuel a powerful rally into the end of the year
The government becomes the greater threat to a financial system breakdown because its continued spending builds a foundation of long-term inflation that the Fed is unable to reign in …
Congress Has Zero Incentive To …
Notice the chart below illustrating the government outlays that make up the annual US budget deficit.
Without cutting back on these expenses, the government risks becoming insolvent as expenses rise.
- Cut Healthcare during a pandemic
- Cut Social Security benefits during a retirement crisis
- Announce a Default on US Treasury bonds
- Cut Defense spending during heightened geopolitical risk
Fiscal stagflation when debt is high is a twin killer for the government as expenses rise and tax receipts fall.
The US WILL reach the point where it must lower interest rates to lower the interest expenses on items above.
This can only be done by the Fed reverting back to QE to buy bonds and force Treasury bond rates lower. A similar situation is playing out in Japan today.
Bring It Home
Once you can understand the moving parts of monetary and fiscal policy you will understand the limitations they have in today’s environment.
Knowing these limitations gives you a massive edge as the US progressive to the end game of its 40 years of printing new dollars to elevate financial asset prices.
All that did, in the end, was build massive debts that handcuffed the nation’s ability to maintain a sustainable real growth economy.
We will get there again, but not until this end game plays out.
Stay tuned to the Power Income newsletter for updates as this process plays out …
Or, better yet, sign up to become a Power Income Trader subscriber to get exclusive alerts on the trades I put on – and you can, too – to crush it as the historic end to the US dominance on the global stage plays out.
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As Always,
Live and Trade With Passion my Friend …
Griff