The Next Stage of the Federal Reserve’s Hyperinflation

DRIGGS, IDAHO – They’re accelerating bond purchases…

Between July 8, 2020 and January 13, 2021, the Federal Reserve grew its balance sheet at a pace of $15.3 billion per week. (A period of 27 weeks.)

From January 13, 2021 until today – a period of nine weeks – the Fed has grown its balance sheet at a pace of $39.9 billion per week.

It could be nothing. Or it could be the next stage of the balance sheet hyperinflation starting…

More below…

Getting Ready for London

Greetings from Driggs, where we are busy preparing for our move to London…

We’ve bought our air tickets. We bought one-way fares. They cost $370 each. We fly from Idaho Falls to Denver, Denver to Chicago, Chicago to London.

I’ve organized storage for our car in Idaho Falls. We’re paying $40 a month to park it on a secure lot near the airport. I paid four months upfront as the owner only accepts cash and we don’t know when we’ll be back.

I’ve organized the COVID-19 tests. We need three tests each: one before we leave Driggs and two after we arrive in London (on day 2 and day 8). All five of us must have these tests.

I paid $1,330 for them, which was the cheapest price I could find. (We had to pre-book them through UK government-endorsed suppliers.)

Finally, I’m meeting with a local accountant this week to finalize our 2020 taxes.

All that’s left now is to throw away everything we’ve accumulated in Driggs, pack up our little suitcase, and hit the road again…

We leave in three weeks.

Gargantuan Demand for Dollars

Back to the Fed’s balance sheet growth…

For two years in these Postcards, we’ve argued that there aren’t enough lenders to satisfy the Treasury’s gargantuan demand for borrowing dollars at the current low interest rates.

By suppressing interest rates while the government runs $3 trillion annual deficits, we predicted the Fed would end up inviting large portions of the government bond market onto its balance sheet.

We also predicted that inflation would further exacerbate this imbalance.

And that’s exactly what’s happening…

Of the $4.4 trillion in net new debt the Treasury issued in 2020, the Fed purchased 54% of it, according to Tavi Costa of Crescat Capital. (Foreigners purchased 5.2% and U.S. banks bought 17%.)

With the $1.9 trillion American Rescue Plan just signed into law this month and a big infrastructure bill slated for later this year, the Treasury’s gargantuan demand for borrowing dollars will only increase.

Meanwhile, inflation is soaring.

The bond market expects the Consumer Price Index (CPI) to increase by 2.5% per year for the next five years, judging by the difference in yields between the 5-year Treasury and the 5-year inflation protected Treasury (TIPS). That’s a 12-year high.

The Wall Street Journal reports:

Prices are surging for the raw materials used to build American homes.

Lumber, one of the biggest costs in home-building after land and labor, has never been more expensive and is more than twice the typical price for this time of year. Crude oil, a starting point for paint, drain pipe, roof shingles and flooring, has shot up more than 80% since October. Copper, which carries water and electricity throughout houses, costs about a third more than it did in the autumn.

Prices for granite, insulation, concrete blocks and common brick have all pushed to records in 2021… Drywall and ceramic tiles are short of records but have also climbed.

Final Stages of the Greatest Financial Experiment

Inflation further reduces demand for government bonds, all else being equal.

Last June, the Fed pledged to buy Treasury bonds at a pace of $80 billion per month… or about $17.5 billion per week.

We’ve known this wouldn’t be enough… and we’ve been waiting for them to increase their bond buying.

It looks like that time is now…

The Fed’s balance sheet is currently at $7.7 trillion. If we’re right, the Fed’s balance sheet could be about to inflate to $10 trillion… $15 trillion… even $25 trillion… much faster than anyone expects.

Our stance remains the same. We’re in the final stages of the greatest financial experiment in history. And it’s not going to end well.

I continue to recommend a portfolio of physical gold and silver, mining stocks, and shipping stocks. (To get the names of the stocks I recommend – along with the best ways to buy physical gold and silver – watch this to learn more.)

– Tom Dyson

P.S. Fed chief Jerome Powell says they have the tools to control inflation, should it keep rising (which I think it will). By tools, he means “tighter credit conditions.”

But wait a minute. The last time the Fed started tightening credit conditions (in 2016), the stock market ended up having a 20% meltdown in the fourth quarter of 2018. (It probably would have gone down even more, but Powell relented on the tightening.)

Today, the economy is 22% more leveraged (on a debt-to-GDP basis) than it was at the end of 2018… the stock market is 24% more overvalued (per the S&P’s CAPE ratio, a common valuation measure)… and the unemployment rate is 59% higher (per the Bureau of Labor Statistics).

Even if inflation keeps rising, there’s no way Powell will have the courage to tighten credit… and crash the stock market.

Like what you’re reading? Send your thoughts to [email protected].

Last week, Tom lamented that he hadn’t spent more time with his mother before she passed away from Parkinson’s Disease, and shared he wants to live close to his kids once they grow up. Readers share his sentiment…

Reader comment: We wanted to settle where our kids would settle down, and we wanted to settle in a place that was conducive to family life and away from big cities. Because my job was in a big city, though, all of the kids went to college and got established in big cities, with high-paying jobs, and now, they can’t bring themselves to give it up.

If you don’t settle in an area that all of you are fond of, it’s unlikely your kids will settle near you. Try to find a place before they get into high school.

Reader comment: My sympathy for the “loss” of your mother. My father transitioned about five months ago and I’ve been experiencing such a profound depth of grief and regrets over how I’ve lived. Away from my parents most of the time after graduating college.

Why did I move so far away from my parents? Why have so many of my peers done the same? I think it is because we did not question the mainstream culture’s “propaganda” or “narrative” about how we are supposed to live this life. We’re supposed to get a good education and a good job and become financially independent, and be “successful” in our chosen career, etc.

My mom transitioned to the other side some years ago. I did not get to spend any time with my dad before his transition. Finally, my father’s transition made me really realize work/career/money/other things in life are not as important as making my loved ones’ lives easier, especially at the end-of-life care situation.

This is an obvious truth, but when we don’t know when it will be our time to transition to the other side, it is not easy to see what is important in life clearly and make decisions accordingly.

Tom’s note: As always, thank you for writing in! Your kindness keeps us going. Please keep writing us at [email protected], and I’ll do my best to answer your questions in a future Friday mailbag edition.