Financial Issues Strategies Team, FISM News
On the topic of inflation, all eyes seem to be on the Fed.
You will hear a lot of talk about what is happening in the short term. There is a lot of evidence that the disinflation process is well underway. This does not mean that prices are coming down, just that prices are not increasing at as fast a pace as they were a year ago.
We have to understand what caused inflation before we will know if what the Fed is doing can contain it. There are several factors that contributed to inflation getting as high as it did.
One factor was the response to the pandemic. Lockdown mode forced us to flip the off switch on most of the world’s economies. When people are locked in their homes, away from work, things stop getting made and services don’t get offered. This caused a massive supply shock to the economy. Throw massive government stimulus to people who are sitting at home, saving money because they aren’t going anywhere, and you have the perfect recipe for inflation. You have too many dollars chasing too few goods.
Another contributor, although to a much lesser extent than the Biden administration would have you believe, was the Ukrainian invasion followed by economic sanctions on Russia. The pandemic and the Russian invasion played their part, but the higher prices we have now are primarily Bidenflation, caused by the green energy ideology and reckless spending of the White House.
The Fed’s repeated “higher for longer” strategy seems to indicate that they know that inflation will be hard to contain and will stick around longer than most expect.
The Fed doesn’t have many tools at their disposal. There are some things that they have no power to change, such as government spending. It is more likely that the Fed “pivot” will not be a pause in raising rates, followed by a process of cutting rates. It will likely be a “pivot” away from the 2% inflation target that we enjoyed for decades to a more realistic long-term goal of perhaps 3.5% or 4%.
We should not be sitting on the edge of our seats waiting to hear what the Fed will do next. We should not base long-term portfolio strategy on short-term news. We pay attention to what is happening so that we can see developing trends that may influence our asset allocation, but we do not try to “time the market.” It is our responsibility to look at the signs of the time and practice discernment.
The impact of our government’s spending on the economy is calamitous. We believe it is the primary cause of the inflation we are experiencing. And unfortunately, we don’t see an end to that under a Republican or Democratic administration. Therefore, inflation will stick around and get worse if the spending isn’t contained. The Fed can do practically nothing about that, except refuse to buy the debt our country is printing.
Politicians will continue their opulent spending, as they have done for so long, as no one is holding them accountable for it. Our federal government doesn’t even run on a budget. When you hear them discuss a “budget deficit,” it is essentially a farce as they haven’t put forth an actual budget in years. Putting forth a calculated spending plan would never happen because politicians cannot agree what to spend money on, and it would give them a measurable standard to be judged upon. We would then see how miserably they fail.
Congress continues to pass resolutions allowing them to keep raising the debt ceiling, keep borrowing more money, and keep building their house of cards that will eventually fall. Democratic leadership will undoubtedly speed up the train toward this end with their socialistic trajectory and relentless spending, but Republicans are taking a slower route to the same destination.
That doesn’t mean that we should disengage, and just let them continue. Our government was built by the people, for the people. We should be involved in the political process of our country. We have a stewardship duty – a duty to steward the freedoms that were fought for and gifted to us at such great cost.
Even if the train of our economy is headed off a cliff, we must remember that the Lord is sovereign over it all. He knows the beginning from the end and how this will all play out and He works it all for our good and His glory. Again, our perspective needs to be the long game, with our eyes fixed on the prize, “pressing on toward the goal of the upward call of God in Christ Jesus.” (Phil 3:14).
Financially, we move forward in a very disciplined, systematic way. That is the strategy for Financial Issues. It’s been the strategy for a very long time, and it’s how we will continue forward.