The Fed Can’t Solve the Inflation Crisis
Another month, another hot inflation number. I have a solution to it, but more on that in a moment.
For January, inflation hit 7.5% on a year-over-year basis, the highest reading in four decades.
No signs yet that this is transitory, as the Federal Reserve once promised.
In fact, I’d argue just the opposite. This is likely to be our future for some time.
All the free money that Western governments have dumped into their economies has created a deep pool of available cash for consumers to spend. Supply-chain woes, meanwhile, have limited what consumers can buy.
The upshot is a supply crunch mashed together with an abundance of money, which is the breeding ground for inflation.
The Fed is going to address this by raising interest rates, no question. It will likely do so at its next policy meeting in March, unless it decides to call a special meeting this month. Whatever the case, interest rates are about to start rising.
But, frankly, that’s not likely to mean very much to our wallets.
Once there was a time when interest-rate increases flowed through to higher savings rates, helping our money (theoretically) keep pace with inflation and the wealth we lose to that.
This time could be very different.
As I’ve noted in previous dispatches, the Fed is toothless bear. It can growl and roar and stand menacingly tall, but it has no real bite because of Uncle Sam’s mountain of debt—some $30 trillion as of January.
Back in the late ’70s and early ’80s, then-Fed Chair Paul Volcker had the capacity to radically raise interest rates to 20% to douse inflation running in the low- to mid-teens.
Today, inflation is 7.5%, but there’s not a snowball’s chance in Hades that current Fed Chair Jerome Powell can raise rates to a level anywhere near that.
Forty years ago, debt was not a problem for the U.S. government, the American consumer, or Corporate America. Today, debt is a massive problem for all three. Each cohort now holds record levels of debt. As interest rates rise, the debt-repayment costs rise, hitting corporate profits, family wallets, and Uncle Sam’s ability to function.
So…while rates will go up, they can’t and won’t go up very much.
Which means rates won’t go up meaningfully on savings accounts, monkey-market accounts, or certificates of deposit.
There is, however, an option: crypto-banks.
I mentioned this in one of my presentations at the International Living Retire Overseas Bootcamp conference in Las Vegas last weekend, showing attendees where they can grab yields of around 9% to more than 12% on U.S. dollars.
To be clear, these are digital representations of dollars known as “stablecoins,” but they act just like dollars in your wallet in that that are, well, stable. They don’t bounce around with crazy volatility, like bitcoin and Ethereum do. At most, they fluctuate by fractions of a penny and always self-correct back toward par value with the greenback.
That makes them an ideal way to earn a real rate of return on your idle cash.
The example I used in my presentation compared a $10,000 deposit at Wells Fargo with an equal deposit at CoinLoan, a European crypto-bank that plays by strict European financial rules.
At Wells Fargo, your $10K earns 0.6% per year, or about $60 per year. That is not going to help you outpace inflation.
At CoinLoan, your $10K earns 10.3% per year, or about $1,030 per year—around 17x what the traditional bank offers. You’re beating inflation.
My bet is that crypto-banks are going to see mass adoption as inflation really takes root and as mainstream savers go in search of real returns that help them earn way more than they’ll ever get at a traditional bank.