How the Fed’s Dumb Mistake Will Crush Your Stocks

Lee AdlerLee Adler

The witless high priests of “Economism” and the greed-happy gurus of Wall Street preach this constantly as an article of faith: Raising interest rates suppresses inflation.

Here’s the thing.

These people couldn’t be any more wrong if they made the cable TV talking-head circuit and assured us all that the sun would rise in the west tomorrow.

The truth is that rising interest rates help trigger inflation. In fact, inflation and lending continue to increase through most of a rising rate cycle. Borrowers and consumers want to stay ahead of rising interest rates by accelerating their borrowing and spending. Of course, that only promotes inflation.

I’m going to prove this – all of this – to you beyond a shadow of a doubt, because I don’t want you to get sandbagged by what’s coming; the U.S. Federal Reserve is wrong, and that means it will be behind the curve until the very end, just like 2008, just like always.

When it’s all said and done, when it’s all over but the crying, the Fed will be confronted with the obvious consequences of this faulty thinking. It’ll deny it six ways from next Tuesday.

It might even get raked over the coals (or ashes) for it, but that’ll be cold comfort to people who didn’t listen.

But you, armed with the facts, will be safely in cash, ready to move at your leisure.

So let me show you the proof…

We’ve Seen This Before; the Fed Always Willfully Misses It

The great rate raising cycle of 1977 to 1980 is a case in point.

The Fed began to increase the fed funds rate in the middle of 1977. The Consumer Price Index (CPI) stayed hot, between 6.5% and 7%, in the early stages of that cycle.

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As the Fed began to accelerate the increases, the CPI got even hotter. From 1978 to April 1980, the Fed raised the fed funds rate from 7.5% to 17.5%. CPI skyrocketed – better than doubling – from 6.5% to 14.75%.

The Fed

This is, of course, exactly the opposite of what the textbooks tell us is supposed to happen – and what the economic priesthood caste in the West takes as an article of religious dogma.

The economic high priests never explain why things move in practice exactly the opposite of how they are supposed to in theory. In fact, they act as though facts simply do not exist.

To economists… facts are fake.

I hope you are with me now, but, in case you’re not, once again in the 1994 to 1995 rate increase cycle, CPI and bank lending followed the fed funds rate higher.

crush your stocks

Next came the 2003 to 2006 rate increase cycle.

In this case, CPI and bank lending only followed the rate rise two-thirds of the way. Then, they plateaued. That’s because the housing bubble was on its last legs, and there were fewer and fewer buyer/borrowers – everybody else was already broke.

So in this extraordinary case, CPI did peter out in the last months of the rate cycle. But still, it rose from the beginning through well past the middle of the cycle.

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