“Reducing inflation is likely to require a sustained period of below – trend growth.” Fed Chairman Jerome Powell recently said in Jackson Hole Wyoming “Moreover, there will likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation (italics mine), they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.”
Unfortunate for whom? Certainly not Jerome Powell who was just appointed to another four year term as Fed Chairman despite being the primary author of said inflation. He kept interest rates too low for too long and ran around D.C. the last couple years encouraging every politician who would listen to abandon any sense of fiscal restraint and keep the pedal to the metal in terms of spending.
Keep in mind this is the same gentleman who said there would be no inflation and when no longer able to deny it, assured us it would be “transitory.”
The most important thing to understand about inflation is there is nothing transitory about it, never has been, never will be.
The three major bouts of inflation experienced by our economy during the 20th century lasted an average of four years. As mentioned in our previous blog “DSTs Dumb and Dumber,” the Great Inflation of 1973-’81, lasted 8 years.
In this regard, the American people would have been better served had Mr. Powell, who is an attorney by training, studied history rather than law as a post-graduate.
As there appears to be no accountability at the highest levels of government for bad decisions that adversely affect the lives of millions, this is all water under the bridge. We then need focus on what lies ahead. We cannot change the past but we can hedge against future risk.
We posit the primary risk to real property investors and the value of their assets is the duration of the recession we now find ourselves in. This is why we have italicized the part of Powell’s statement claiming, “While higher interest rates, slower growth and softer labor market conditions will bring down inflation.”
Once again, Mr. Powell is wrong. History tells us that to bring inflation under control, monetary policy (The Fed) and fiscal policy (Congress and the President) must work together.
Interest rates are not all that matters. How can raising rates to control (shrink) the money supply possibly bring inflation under control when government spending ($739 billion “Inflation Reduction Act & $469 billion-$519 billion student loan debt cancellation) continues to fuel the inflationary fire? The obvious answer is it can’t and won’t. To maintain otherwise is the most profound act of intellectual dishonesty possible.
Because Powell and Biden are working at cross purposes regarding inflation, its duration may well be greater than most expect. Furthermore, “increasing rates without the appropriate fiscal backing could result in fiscal stagflation.” (Johns Hopkins University and the Chicago Federal Reserve).
Therefore, income property owners must prepare for the worst; continuing inflation and stagnating economic growth. We first pointed this out in November 2021 in “DSTs & ‘70s Style Stagflation.”
This interval will certainly last as long as Mr. Biden remains in office, minimally another two years, probably more. Until the Fed and White House are able to act in concert with each other, households and businesses must be prepared to be punished.
We fear the policies of lower taxes, less regulation and a business friendly environment necessary to tame the inflationary beast are still as long way off.
We believe defensive asset allocation is crucial, rental housing, healthcare, food and storage may very well be the order of the day in the foreseeable future.