The Economic Long Term Forecast & The Inflationary Cost of Debt

I can't predict when things will happen, but I can present a rough idea from writing my Inflation – The Silent Retirement Killer book in 2022 as to what we will likely experience over a long range of time.

I can't predict day to day, week to week. Month to month. Few (if any) can. I'm a long-game player, investor, and business owner. That’s why I don't trade. Trading is a short-term game and consists of more volatility, more risk, and more speculation. 

However, it is possible to observe long-term trends and position yourself accordingly. I call this “riding the waves.” This can be done with wisdom, awareness and experience. It does not require supernatural ability. On the contrary, denying long-term trends is like sticking your head in the sand and denying reality. 

So what is the long-term forecast? 

The Elephant in the Economy

The current public US debt is over 33 trillion dollars and the federal government will be adding another 2 trillion dollars this year alone.

The debt balloon keeps expanding. The current interest payment this year for the government debt (over 33 trillion dollars) is approximately 600 billion dollars. That is equal to the amount that the government will spend on social security this year.

This is unsustainable. Our government is still printing money, and we’ve gotten away with it because we're the reserve currency of the world. The Federal Reserve, and the Treasury, can “print” or digitize more money into the system. But the amount that we’re printing today is immensely more money than in the last several years. A dangerous growth curve is accelerating out of control. 

In 2008, during the Great Financial Crisis, TARP (the Troubled Asset Relief Program) was passed, pumping over $400 Billion into the marketplace (quantitative easing).

During COVID we quadrupled that. That is why we have high inflation, a high CPI, and the highest cost of living experienced in over 40 years. All this in just the last 20 months.

Inflation and the Rise of Interest Rates

Now, the Federal Reserve is trying to fight the inflation it created by attempting to reduce demand in the marketplace by raising interest rates.

But when you raise interest rates you increase the cost of debt financing – what the consumption model in this country is based on. Now, the ability to make payments and expand businesses has been made extremely difficult.

Corporations need to be able to borrow money to expand their business operations and create the profits that drive growth in an economy. When you raise interest rates as fast as we have in the last 20 months, it is a significant change of events. We haven't seen interest rates rise that rapidly in our history.

Serious headwinds will be the consequence. Inflation hurts, particularly, the middle class. Most middle class Americans do not have the bandwidth for it and the higher cost of living will create very upset and angry voters. That is why the Fed is trying to at least make attempts to tamp inflation down.

The Lag Effect is Misleading

Every action the Federal Reserve takes has a lag effect. It takes time to see the effects of any moves they make. This means they don't know how great the effect of their actions will be.

They recognize they need to get out in front of this and show the world and the bond market that they're serious about fighting inflation. The bond market is what drives our entire economic system.

The bond market deals with bonds and the ability to access debt. It provides a basis for the equity markets and pension plans. It's everything that our system is built on. By raising interest rates as fast as they have, the Fed is killing the bond market right now.

How long will this last?

No one can say an exact amount of weeks or months but we will see serious consequences to the system, the financial markets, real estate, and businesses that can't roll over their debt. As the low-interest debt they've been carrying matures this year and next year, they will be forced to refinance at much higher interest rates, putting a major drag on the economy and driving us into a recession.

A Recession is Inevitable and Inflation is Still High

Some still say, “I don't think we're going to have a recession. We're going to have a soft landing. It's all going to be good. The Fed is doing a great job.” 

What makes you think that?

The data that the Fed puts out and that Wall Street puts out, or the Biden administration puts out is heavily manipulated. I think you know that. The data on labor, the data on the CPI. It's vastly manipulated to lean towards their agenda.

They want to create a narrative that calms the markets. If the markets stay calm, particularly the financial markets that are based on emotion, then they think they can hold it steady.

Eventually, that will break. People little by little will start to see through that. It becomes particularly apparent when the Fed keeps saying “We're beating inflation. We're bringing it down.” But ask the average person on the street today if they feel like they have excess capital money to spend on. The response is, “No, we’re barely making it right now with buying gas, food, paying for utilities, property taxes, and insurance.”

Ordinary people are struggling with the cost of living. This means we are not beating down inflation. What does this say regarding the numbers the Fed puts out? They are not representative of what the general population is experiencing.

In fact, if you used the same criteria and metrics used in the 80s to measure inflation, the current inflation rate would be at least 11%. The Fed, however, states we are down to about 4.2% inflation. They brought it down from 9.1%, so “it's all good”. Ask the average person on the street and you’ll get a different story.

The Dollar vs the Economy

Keeping interest rates high is good for the dollar. It's bad for gold because gold needs to have a devaluing currency. Right now the dollar is high because interest rates are high. But high-interest rates affect the bond market, which our economic system runs on. If the bond market is having a difficult time, our economy will get worse.

Ultimately, where will the Fed land this thing? They can't keep the dollar strong with high interest rates and also keep the economy strong with high interest rates.

Something will give. And when we see the markets begin to plummet – the beginning of the massive correction we’ve been delaying – followed by a banking crisis, liquidity problems, and credit contraction… the Fed will have to reverse its course of action.

Part of the reasoning for the Fed increasing the interest rates this past year (quantitative tightening), and reducing the balance sheet, is to give themselves a little bit more dry powder or margin to work with.

And when things do go down, they can start to drop interest rates again and go back to quantitative easing. They will do this in a heartbeat.

What will that do to the markets?

It will eventually stabilize them. But they will first hit a low point and then a period where they steadily rise. It will be slow. The reality is there will be a drop and you need to be prepared for it. 

How To Prepare for a Market-Low

You need to take higher ground and avoid riding the market down. No one can time market crashes exactly, but you can always prepare for them.

I have been getting out of equities, in general. I'm not in the financial market so I'm talking about real estate equities.

I have been exiting equity investments and leaning more heavily toward private credit or debt lending. This is called being a lender like a bank. A prime example are treasury bills. 

I'm not getting the same returns I could get with leveraged real estate, but the market is not set for growth right now. We are currently on the deflationary side of the asset cycle. Inflation causes a decrease in consumer spending which triggers the Fed to increase interest rates which in turn causes asset prices to decrease. It is possible to have consumer inflation and asset deflation at the same time. 

Asset prices will drop dramatically at some point and when it does I want to be on higher ground so I can watch and be ready on the backside of this downturn to acquire lower-priced assets.

On the backside of this devaluation, the Fed will come back to the rescue and start the inflation overdrive that will save the bond market and revive the economy. Of course, this is adding more debt to the balance sheet.

The Issue of Our Debt Will Not Be Resolved

Continuing to increase the US debt will be a weight we will eventually not be able to bear. It will cause this country great problems. I can’t predict if those issues will be near term but I see the next decades being more problematic than ever.

Historically, all governments in crisis prioritize saving the bond market. Save the system at the expense of the currency. This eventually causes a currency crisis.

Even though the dollar is high now, the dollar will eventually take a major hit. Inflation will be the long-term result and a battle we will be revisiting over and over again.

In the short term, we will experience deflation in asset prices. However, the short term could still take several years. Not weeks, months, or quarters. Years. Then it will still take some time for the Fed to gear things back up and for the markets to respond.

It’s in this period where I believe we will be fighting hyperinflation for many years. Things will still be volatile with ups and downs because the Fed will be pressured by middle-class voters to try to fight inflation.

The Road Ahead Will Only Get Tougher

The massive amount of debt our politicians have irresponsibly taken on in our country spells trouble and volatility up ahead. Trouble and difficulties that future generations will have to deal with.

This means an entirely different model of planning will be required for maintaining your wealth. Retirement planning and everything that you used to know will be useless. The general advice from general financial advisors on how to set up your portfolio allocations in stocks, bonds, 60-40 split, blah, blah, blah. That's not going to work anymore. (A recent WSJ article expands on this.)

You will have to be more on the top of your game. Use advisors of course, but you have to make the decisions and discern what the best model is. Find advisors and counselors who understand the reality of the markets and are not blindly promoting old outdated models. Don’t just do what everyone else tells you to do.

If you're not prepared to do that, then you will have to take what the market gives you even at its lowest and it's not going to be pretty. I am not fear-mongering. It's not to be “doom and gloom”. This is just the reality. This is where we are. This is what history shows.

Every regime or nation recorded in history has let the currency drop to save the day as long as they can. Politically, that is the only viable way to go. However, monetizing the debt through hyperinflation is what kills currencies.

We are all seeing the effect of the weakening dollar. Not in terms of its buying power today, but in terms of how other countries are “de-dollarizing”. They are moving away from the dollar and that is how we will run out of the room we've had to be so irresponsible.

This will come back to hurt the country. And there may be some kind of a reset or revolution somewhere, somehow. I don't know how this will play out but you have to be prepared for volatility and upheaval. The decades going forward will be vastly different from what we’ve experienced.

We've had it pretty good for many years. Unfortunately, that's coming to an end. We need to be more on top of what we're doing with our personal lives to protect ourselves and our Freedoms in the days ahead.