The Federal Reserve is not Bluffing : The Clear and Present Danger of an Upside-Down Depression

Many investors today cling to the hope that the Federal Reserve will abandon its aggressive contractionary monetary policy once markets begin to capitulate. Given the fundamental conditions at play, however, investors would be wise to abandon such fantasy. Instead, this paper argues that the Federal Reserve is highly unlikely to abandon its policy prematurely, which means that Americans should prepare for economic pain that is more severe than what they have experienced over the past decade. The reason is that elevated levels of inflation, while normal in a post-pandemic economy, are threatening to morph into a Great Inflation-level event. Many people do not appreciate that the Great Inflation was a stretch of U.S. history that was nearly as painful as the Great Depression. In a sense, it can be thought of as a Depression turned upside-down. This paper explains the fundamental dynamics of the Great Inflation, and why the Federal Reserve is unlikely to allow it to repeat in the 2020s