Inflation Could Soar; If it Does, It Won’t End Well Lombardi Letter 2021-03-03 05:24:52 inflation bond market us economy federal reserve It’s important to pay attention to inflation. Even the bond market seems concerned about it. Could higher inflation lead to a financial crisis? Here’s what you should know. Inflation,U.S. Economy

Inflation Could Soar; If it Does, It Won’t End Well

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financial crisis

Higher Inflation Will Have Dire Consequences

Higher-than-normal inflation is coming to the U.S. The writing is on the wall. Be very careful. High inflation will have dire consequences and may not end well.

You see, over the past decade or so, the U.S. The Federal Reserve was printing money and that money was going to the banks, just sitting there. has been printing money and keeping interest rates low. This has created all sorts of monetary inflation. The money supply has gone through the roof. In 2020, the Federal Reserve increased the pace of its money-printing further. In fact, it wouldn’t be wrong to say the Fed’s actions were like throwing gas on a fire.


As the Federal Reserve was printing money, the U.S. government was spending without remorse and racking up immense budget deficits. In 2020, the government accelerated its spending. That spending was needed because there was a pandemic, and if nothing was done, we would have had an absolute economic collapse.

Inflation Follows When Money Moves Around

So, where does inflation fit in here?

Economics 101: Inflation happens when there’s a lot of money in the economy and it moves around.

Over the past decade, there was one thing missing: money was not moving around. Why? Even though the Federal Reserve was printing money, that money was going to the banks, just sitting there. It was not moving around.

Now the situation is completely different. During the COVID-19 pandemic, the money has actually gone into average Americans’ hands. This did not happen after the financial crisis of 2008–2009. Plus, there’s a chance that even more money will flow to them as part of the stimulus package from the Joe Biden administration.

When Americans have money in their hands, they go out and shop, and this moves the money around. In turn, we could get higher-than-normal inflation.

Look at the Bond Market to See Where Inflation Is Headed

Dear reader, inflation may not be talked about much in the mainstream media these days, but it shouldn’t be overlooked.

As I write this, the bond market is panicking and saying there’s high inflation ahead.

Look at the chart below; it plots the 10-year breakeven inflation rate. The chart shows what bond market participants think the inflation rate will be. Keep in mind that inflation is one of the biggest enemies of the bond market. Therefore, bond market participants keep a close watch on it.

(Source: “10-Year Breakeven Inflation Rate,” Federal Reserve Bank of St. Louis, last accessed March 1, 2021.)

As per the most recent reading, the bond market thinks inflation is going to be around 2.15%. This is much higher than what the Federal Reserve says it will be.

But don’t get too fixated on that number. Pay more attention to the speed at which inflation expectations increase. Around the same time last year (March 2020), the bond market anticipated that inflation in the U.S. economy would only be around 0.5%.

The change from 0.5% to 2.15% is significant. The increase in inflation expectations wasn’t that severe even after the financial crisis of 2008–2009.

Why Inflation Matters & Why You Should Be Concerned

Inflation is a silent tax on your wealth, income, and everything else.

If high inflation is ahead, the Federal Reserve will need to do something to curb it. The only weapon the Fed has is interest rates. If inflation surges in the short term, the central bank could be forced to increase interest rates. This, in turn, could break something. The economic system is over-leveraged, and interest rate hikes could hurt those who have a lot of debt.

I will end with some food for thought: If inflation unexpectedly surges and the Fed is forced to raise its interest rates quickly, could it cause a financial crisis?

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