The New Year typically instills feelings of optimism and renewal—a moment to embrace a fresh start and the possibility of transformation.
This optimistic outlook is appreciated, but the reality can sometimes lead to profound disappointment.
Reflecting on 2022, many expected it to be a year of redemption and growth. After the challenges brought about by the coronavirus pandemic, the economy appeared to be rebounding. There was widespread belief that the revival of economic activity would usher in an era of prosperity.
However, a series of unexpected events unfolded. On January 3, 2022, the S&P 500 reached a high of 4,796 points. Fast forward just over a year, and it has dropped to 3,808—a decline of over 20 percent.
During this period, the yield on the 10-Year Treasury note surged from 1.66 percent to 3.70 percent, effectively more than doubling Uncle Sam’s borrowing costs.
At the same time, inflation, initially dubbed “transitory,” proved to be persistent, and the gross domestic product (GDP) registered negative growth for the first two quarters of the year.
So, what went wrong?
The new year arrived, but the repercussions of prior decisions remained. A considerable amount of economic wreckage existed, largely stemming from actions taken by the central planners at the U.S. Treasury and the Federal Reserve. The consequences of decades of money printing are far-reaching, affecting your well-being and financial stability.
These repercussions do not simply vanish with the turn of the calendar. Instead, they accumulate year over year like unsightly waste at a landfill.
What strategies will central planners employ to influence your financial situation in 2023? How will the Federal Reserve’s policies affect your job, investments, and disposable income?
Let’s explore this further.
Questionable Choices
The extensive money printing during 2020-21, initiated to mitigate the fallout from government-imposed lockdowns, led to a surplus of dollars that the economy struggled to absorb. Coupled with a shortage of goods and services—also a result of the lockdowns—this created a scenario where an excess of dollars was chasing a limited supply of goods.
Incentivizing people not to work with printed currency was an ill-conceived notion, one that should have been unambiguously recognized as flawed. Nevertheless, elaborate justifications emerged in support of continuing this practice.
Noteworthy figures who should have known better fell for this narrative hook, line, and sinker. For instance, Ice Cube, upon discovering Modern Monetary Theory in 2020, boldly stated:
“America loves to cry broke. But in America, money does grow on trees.”
As a result of this reckless money printing, the American populace faced the brunt of its consequences in 2022, witnessing rampant consumer price inflation throughout the year. While the inflation rate has eased, it remains far above what any stable economy can endure.
The most recent consumer price index (CPI) report, published on December 13, indicates that consumer prices rose at an annual rate of 7.1 percent in November, down from a peak of 9.1 percent in June. The December CPI will be announced soon.
Even if the rate of inflation continues to decelerate, the Federal Reserve must take further action. To effectively control inflation, it needs to increase rates, thus raising borrowing costs. In time, this should make dollars more valuable in relation to goods and services, curtailing inflation.
Will this strategy succeed?
Undermining the Future
It is likely that it will, but the fallout could be severe. Remember, economics is not a precise science; monetary policy is even less certain.
How can the Federal Reserve ascertain the appropriate supply of dollars when it cannot predict the future demand for them?
This is an unanswerable dilemma. The Fed does not know whether consumers will keep driving prices higher or retreat into saving mode. No one does.
A recession in 2023 seems increasingly probable. But what if 2023 brings deflation instead of inflation?
In such a case, further rate hikes would be ill-advised. Still, what options does the Fed genuinely have?
It can make educated guesses about the future demand for dollars, or it can revert to its usual approach, relying on historical data to guide its decisions.
Minutes from the December Federal Open Market Committee (FOMC) meeting were released this week. According to the notes:
“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.”
Given the current CPI figures, this suggests further rate hikes will be implemented, along with their inevitable repercussions. The Fed may need to inflict damage on the future to salvage it.
Are You Ready for a Hard Landing?
How will the economy respond to sustained higher interest rates?
The prospect of a soft landing seems increasingly implausible. After years of ultra-low interest rates, the economy is not prepared to gracefully transition into an extended period of higher rates.
There’s simply too much existing debt—government (federal, state, and local), corporate, and consumer. We foresee substantial challenges in meeting debt obligations throughout 2023.
The repercussions of elevated interest rates will be twofold: diminished borrowing and spending will stifle economic activity, inevitably leading to higher unemployment. Slower or declining economic growth will exacerbate the difficulty of servicing debt, further impacted by raised interest rates.
This trend is already underway. Amazon’s CEO, Andy Jassy, recently announced a plan to eliminate 18,000 positions, adding to nearly 125,000 job cuts from significant U.S. companies throughout 2022, according to the Forbes layoff tracker.
While many affected workers will rebound and continue meeting their financial obligations, others may struggle.
The ramifications of past errors and poorly allocated investments are being starkly uncovered by the current interest rate environment. This turmoil might escalate into a significant financial panic.
Perhaps a major corporate or municipal default will spark this crisis. Alternatively, it could be triggered by a significant investment fund suspending withdrawals.
It is then that the realization will hit that a Federal Reserve bailout is not forthcoming—a stark contrast to the support offered since the Fed put was instituted in 1987.
As both the debt and stock markets experience simultaneous declines, which assets will investors flock to? Will there be a rush toward the dollar? A surge in gold? Or perhaps another alternative?
Without a doubt, a hard landing looms ahead. Are you prepared?
[Editor’s note: Anticipating and strategically positioning your investments before the impending panic could present an opportunity for transformative wealth. Click Here to discover more about this unique opportunity and how to capitalize on it!]
Sincerely,
MN Gordon
for Economic Prism
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