Investors are on the edge of their seats for any sign that Fed central planners will someday “pivot” to cutting interest rates, instead of raising them. They forget that recessions and major stock bear markets have occurred after the Fed started cutting rates and the yield curve spread shifted from negative to positive.

The Fed has been very clear that they now have “that old-time religion” of former Fed chairman Paul Volker to fight the inflation they created when they increased the money supply by 40 percent after the covid panic in 2020. They now say they need to see inflation clearly slowing to their arbitrary 2 percent target (which cuts the value of the dollar in half every thirty-four years) before they will even consider cutting interest rates. They claim they learned the mistake of the 1970s that cutting rates too soon before the inflation battle is won likely prolongs the misery of high inflation.

The Trillion-Dollar Question

The trillion-dollar question is: when will inflation clearly slow toward 2 percent?

No one can say for sure, particularly Fed bureaucrats who have proven their inability to predict anything. But a recently published paper by investment research firm Research Affiliates attempts to answer this question by looking at prior historical periods of high inflation. This paper, titled “History Lessons: How ‘Transitory’ Is Inflation?” Analyzed all cases where inflation rose above 4 percent in fourteen developed countries from January 1970 through September 2022.

History Lessons for the Fed and Investors

During this period, inflation rose above 4 percent in these fourteen countries. In six of those instances, inflation proceeded to rise over 20 percent fifty-two times. More than 60 percent of the time, inflation did not exceed 6 percent. But if inflation rose over 8 percent, as happened in the US and most of Europe this year, inflation rose to 10 percent or more over 70 percent of the time.

The following graph shows the number of times inflation exceeded a given level, with the green shading showing the number of times inflation peaked at that level and the red shading showing the number of times inflation accelerated to the next level.

Source: Rob Arnott and Omid Shakernia, “History Lessons: How “Transitory” Is Inflation?,” Research Affiliates, November 2022.

The graph below shows the median number of years it took for inflation to fall in half after it reached a given level. The shaded area shows the range for 60 percent of the outcomes, excluding the top 20 percent and bottom 20 percent.

Source: Rob Arnott and Omid Shakernia, “History Lessons: How “Transitory” Is Inflation?,” Research Affiliates, November 2022.

This graph shows that after inflation rises above 4 percent, 20 percent of the time it falls to 2 percent within a year, but 20 percent of the time it takes 10 years to fall back to 2 percent. The median time is 2.5 years. As the authors of the study wisely ask:

When inflation was already crossing 4 percent in April 2021 (2 percent of which was in the prior three months, which was an 8 percent annualized rate!), what were Powell and Yellen thinking in declaring the inflation transitory? Should we consider a median expectation of 2½ years to revert to a 2 percent inflation rate as transitory?

If inflation rises above 6 percent, it takes a median of ten years to fall back to 2 percent. As shown in the chart below, with inflation of 8 percent to 20 percent, it takes a median of nine to twelve years for inflation to fall below 3 percent. But, as the authors caution: “This lengthy period may actually be understated because of the handful of cases missing from our dataset in which inflation has failed to return to 3 percent, to this day.”

Source: Rob Arnott and Omid Shakernia, “History Lessons: How “Transitory” Is Inflation?,” Research Affiliates, November 2022.

Since US inflation rose above 6 percent a year ago and above 8 percent eight months ago, history says the median number of years for inflation to fall below 3 percent is ten years, with a 60 percent percentile range of six to nineteen years! Clearly, the Fed and investors are not prepared for such a possibility.

As shown in the chart below of the Fed’s projections of the federal funds rate, after inflation was already near 7 percent a year ago, the Fed still expected the federal funds rate at the end of 2022 to only be 0.88 percent! The federal funds rate is now 3.75 percent to 4.00 percent and the two-year Treasury rate they follow is at 4.36 percent. Why does anyone listen to these failed central planners about anything?

Source: Rob Arnott and Omid Shakernia, “History Lessons: How “Transitory” Is Inflation?,” Research Affiliates, November 2022.

US Inflation History Supports This Conclusion

The chart below shows US inflation since the Fed was created in 1913. The US dollar has lost 97 percent of its value since then, as cumulative inflation has been over 2900 percent. The horizontal red line shows five periods prior to now when inflation rose well over 7 percent. The first instance was caused by money printing for World War I, which resulted in the highest inflation rates in modern US history at over 20 percent. It took about four years for inflation to return to 2 percent after that. Then there were three instances during the 1940s and 1950s when it took two to three years each time for inflation to return to 2 percent.

Source: Bureau of Labor Statistics, FRED.

The longest-lasting bout of inflation occurred during the 1970s and early 1980s, when it took thirteen long years for inflation to return to 2 percent. And to do that, Fed chair Paul Volker had to raise the federal funds rate over 15 percent for two years to break inflationary psychology and it still took six years for inflation to fall to 2 percent after he started.

Does the current Fed chair, Jay “Wrong-Way” Powell, have the fortitude to do that in the face of a recession?

Federal Bureaucrats Are to Blame for Our Falling Living Standards

The authors of this study concluded by blaming Federal monetary and fiscal bureaucrats for this colossal mistake that is lowering our living standards:

It was a mistake for the Fed to declare inflation transitory when it was rising rapidly and when history tells us that, even at a relatively modest 4 percent rate, it often is not transitory. The Fed inflicted serious damage, both to the macroeconomy and to its own credibility, by following a too-easy policy for a dozen years and then continuing its transitory messaging as inflation lofted past 6 percent, then 8 percent. The same messaging continues today, albeit in different words. . . . Is it possible that inflation will recede to 4 percent and then to 2 percent in the coming year or two? Of course it’s possible! History says it is unlikely. . . . Our fiscal and monetary policies have done far more harm than good in recent years. . . . We perceive a resistance to alternative views, in both fiscal and monetary circles, a desire to create an echo-chamber of similar views, and a reluctance to learn from past mistakes. We are fools if we allow our hopes for a rapid dissipation of inflation to become our central expectation.

Conclusion

Price inflation is caused by two factors: 1) money supply and 2) money demand, which is driven by inflationary psychology. Money supply growth has already slowed from 40 percent in 2021 to under 3 percent now. But money demand will depend on how confident the public is that Powell and his fellow government central planners will be aggressive in their fight against inflation, even with a recession likely having already started.

Based on history and Powell’s constant flip-flopping, it will likely be at least a year and could be a decade or more before inflation falls back to the Fed’s 2 percent target. People need to protect themselves from the lower living standards caused by high inflation rather than hoping government bureaucrats will rescue them.

The Supreme Court of the United States will hear plaintiff and defendant oral arguments for Biden v. Nebraska in February 2023. That case will determine whether the Biden administration has the constitutional authority to forgive student loan debt and thereby make taxpayers responsible for the debts that students have incurred.

This past year President Biden announced that his administration would forgive federal student loans. According to the Congressional Budget Office student debt forgiveness would cost taxpayers $400 billion. Taxpayers are already taxed for public schools and for the public universities within their states and, in some instances, within their cities. Therefore, there is no reason that they should assume the loan debt that students chose to amass by attending colleges that have tuitions that they cannot afford.

Each of the fifty states has public universities. The tuitions for in-state residents at the public institutions of higher education are lower than the tuitions at private institutions. In all states, out-of-state residents pay higher tuitions than in-state residents. For instance, in New York State there are forty-five public universities (SUNY), and there are twenty-five public colleges in New York City (CUNY). The undergraduate tuition at CUNY is $305 per credit. The average SUNY undergraduate tuition per credit is $295 for in-state residents.

However, in some instances based on residency, grades, family income, and other criteria, tuitions are free at CUNY and SUNY. If some New York State or New York City high school students choose to attend public colleges out-of-state or to enroll in private universities in New York where the average private college tuition is $929.75 per credit, they will pay tuition rates that are higher than if they were to enroll in CUNY or SUNY, even if they did not meet the standards for free tuition

Tuitions at private institutions are generally higher than out-of-state or in-state public college tuitions. During the first two years, all colleges, whether public or private institutions, have the same core liberal arts, mathematics, and science classes; for the next two years, students take electives and requisite courses for their majors. Courses, taken during the freshman and sophomore years can be transferred from public to private colleges and conversely within the same state. Interstate course transfer acceptance is discretionary. A three-credit English composition class carries a higher cost at a private college than the same course at a public college. A student chooses to pay more tuition for the same course at one college than at another college.

In order not to incur debt, students should attend colleges based on their economic comfort level; however, some do not. Many students choose to attend colleges that neither they nor their parents can afford. Both they and their parents accrue loans that will take years to pay off. Loan repayment, depending on the amount borrowed, can take anywhere from ten to thirty years to repay.

Students’ lives are curtailed by those loans. Where and in what types of residences they will live, when and if they will marry, and when and if they will have children are instances in which student loan debt is the prevailing predicate. Choice then is the underlying economic catalyst for students’ debts,

To curtail or to eliminate debt, students have the option to attend in-state public universities or private universities that do not charge tuition. In all cases students should be very cautious when considering any tuition-charging private institution.

Some television pundits proffer the opinion that tuitions increase because the federal government continues to hold student debt and that while students accumulate large debt balances colleges will increase tuitions. However, those pundits forget that debt is the choice of students, and, as with any purchase, economic prudence in college choice is essential. Students wrap themselves in debt because they choose not to wait for their self-sufficiency; their debt is a choice and should not be the burden of taxpayers. Caveat emptor.

First, they came for the oil, now they’re coming for the cows. Environmentalists have no shame or sense and farmers around the world are, forget the pitchforks, “setting hay bales ablaze and dumping manure on motorways,” report April Roach, Tracy Withers, Jen Skerritt, and Agnieszka de Sousa for Bloomberg.

Never mind that food prices have spiked around the world. For instance, grocery prices are up 13 percent in the US this year. The Dutch government said it would buy out as many as three thousand of the biggest emitters (farmers) in a voluntary one-time offer. While the weather turns cold and gas supplies become scarce the green gang in Holland is setting aside €24.3 billion ($25.6 billion) to fund the transition. “Those who refuse will be forced out of business,” reports Bloomberg.

Bloomberg’s quartet of reporters doesn’t say what the government will do with the land once they seize it, but you can detect their point of view with this, “Intensive farming—and decades of official inaction—have devastated biodiversity in the Netherlands, forcing the government to impose drastic measures.”

“Devastated biodiversity?” This is food we’re talking about. Something humans require. Mother nature deals farmers enough bad hands, what with droughts, floods, fires, and pests. Now, the heavy hand of government believes it must get rid of cows because, well, they fart and urinate.

“From farm to fork, the food system generates about 31 percent of global greenhouse gas emissions,” the Bloomberg quartet explains. “Cows and sheep emit planet-warming methane simply by digesting food; their manure and urine are a source of nitrogen oxide which, in large volumes, throws ecosystems off kilter.”

 Having millions of people go hungry sounds more “off kilter” to me. “If action isn’t taken fast, researchers estimate that food-related emissions alone would push the Earth past 1.5C of warming that world leaders set as a target in the 2015 Paris Agreement.” Oh no.

In heavily farmed New Zealand, where agricultural exports account for half the country’s exports, the government passed a law in hopes that net agricultural emissions will be reduced 24 per cent by 2050, with farmers being forced to cut emissions 10 percent in just three years, when the emissions levy comes into force.

“The so-called ‘fart tax’ will be reinvested in the industry through incentives, research and technology so New Zealand can reposition itself as a leader in ethically produced, higher-value food, a market that’s growing as consumers become more climate and health conscious,” Bloomberg reports.

Bryce McKenzie has reduced his herd by 50, but that’s not enough. “We don’t want a country planted in pine trees and then not be able to grow food,” says McKenzie. “We want food security for the future.”

Farms produce about a third of greenhouse gasses in Ireland and farmers are expected to cut emissions by a quarter, compared with three-quarters percent targets for electricity and by half for transport. In Canada, farmers expect to lose $8 billion in foregone output this decade to comply with government mandates. “We’re being asked to do something to benefit all of society yet we’re the ones left with the bill,” says Chuck Fossay, who farms with his brothers on 3,600 acres outside of Winnipeg that’ve been in the family since the early 1900s. “We have to do what we can, but it has to be achievable, and it has to be fair.”

Back in the Netherlands, that government’s issue with cow urine has politicians requiring farmers to slash emissions by as much as 70 percent. And the closer a farm is to one of the country’s 160 protected natural areas, the tighter the limits.

To meet government mandates, “livestock numbers must shrink by a third overall. If the government gets its way, the biggest polluters will be closed by this time next year.”

Dutch ecologists claim cow urine will kill all the trees, while farmers claim it’s an unwarranted government land grab. Caroline van der Plas, leader of the populist Farmer-Citizen Movement says farmers are “ordinary people but they feel treated like criminals. Everything farmers do is bad; poison sprayers, environmental polluters, mistreatment of animals.”

Sadly, ordinary grocery shoppers will blame the grocery store as food prices continue upward and environmentalists pat themselves on the back and are feted as heroes in the mainstream media.