Treasury Secretary Janet Yellen has conceded that we may well get more inflation than originally expected with all of this government stimulus. But she said if we do end up with higher inflation and higher interest rates, it’s a good thing. It will be good for society, and it will be good for the Federal Reserve.
Peter Schiff talked about it in this clip from a recent podcast.
Yellen said inflation will eventually necessitate higher interest rates. “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said during an interview with Bloomberg News last month.
Peter Schiff summed it up this way.
So, instead of basically just saying we’re not going to have any inflation, or saying inflation is transitory, now she’s just saying, ‘OK, we’re going to have inflation, but it’s a good thing.'”
Peter has said that inflation is really a tax on Americans and he asks the operative question: how is an even bigger increase in the cost of living good for society?
Does she mean by society ‘high society,’ like the super-rich? Is that who’s going to benefit because high society is loaded up with assets and has a lot of debt on those assets? Is that what she means? High society? But if she means all the people, like the middle class and the working poor, a lot of the people who voted for Biden, if by society, she means the common man, who is she kidding? How is a bigger increase in inflation good for the common man?”
It isn’t. Higher inflation is a disaster for society.
Of course, there are some winners in an inflationary environment. Big debtors – including the US government – will prosper because they can pay off those debts with less valuable dollars. But overall, society loses when the value of its money decreases.
Peter asked another interesting question: if inflation is good for society, why does the Fed have a mandate to keep it under control? If inflation is good, isn’t more inflation better?
Of course, Yellen just thinks there will be “a little bit” more inflation and “slightly higher” interest rates.
Well, we’re not going to have slightly higher interest rates. Ultimately, we’re going to have much higher interest rates. Now, I agree with Janet Yellen that higher interest rates, not slightly higher, but significantly higher interest rates, will be good for society in the long run. In the short, run it’s going to be a disaster because it’s going to prick the bubble. Now, of course, the bubble needs to be pricked. The sooner the better. But we’re going to have to deal with a lot of problems that we have been sweeping under the rug of kicking down the road.”
Peter said Yellen doesn’t understand that. She thinks we can just have slightly higher interest rates and everything will be fine, even with the enormous amount of debt in the economy.
It won’t be fine. And we won’t just have slightly higher rates. We’re going to have much higher rates because look at where we’re starting from. Rates are at zero, right?”
Peter said rates need to double or triple in order to restore “normalcy” and return long-term structural balance to the economy. We need higher rates to incentivize saving and capital investment. And that’s where rates would go were it not for the interference from the Federal Reserve.
We need to have interest rates reflect reality, not manipulated by government. So yes, in the long run, higher interest rates will benefit society. But in the short run, society is going to be in for a world of hurt as we have to finally address the problems that we have refused to address in the past. It’s like the novocaine is finally wearing off and now we’ve got to feel the pain of whatever we were being numbed from by the novocaine.”
But this isn’t what Janet Yellen is suggesting at all.
In fact, higher interest rates scare the hell out of the Federal Reserve and the US government.
That’s why the government and the Fed are doing everything they can to artificially suppress interest rates and now keep them at zero because even a slight increase in interest rates is more than the economy can bear.”
As you will recall, interest rates rose “slightly” to 2.5% in 2018 and all hell broke loose. The stock market crashed, and the Fed was forced back to loose monetary policy.
If we couldn’t handle that back then, we clearly can’t handle it now, because the level of debt is so much greater than it was then. And so, the more debt you have, the lower interest rate is required to be able to service that debt. So, if two-and-a-half percent was too much when the national debt was significantly lower than it is today, then that threshold is much lower. I don’t even think we could survive a move to one percent from the Fed.”
And the Fed has to keep printing money – creating inflation – as it manipulates the bond market creating artificial demand to keep yields low so the US government can continue to service its debt. So, Yellen is acknowledging inflation but claiming it’s a good thing.
At some point, it’s going to be obvious that we’ve got too much of a good thing.”