Inflation: Hit Them Hard

When it comes to money (aka debt) and inflation, I sound like a broken record, I know... but, I can't help it.  In that, I'm just like central banks: they can't help thinking that the only way to solve problems is by printing money.  After all, if the only tool you have is a hammer pretty much everything starts to look like a nail :) 

So, rinse-repeat: The inflation we are going through right now HAS NOTHING TO DO WITH THE WAR. It is all about the monstrous amount of money printed and thrown out of helicopters by the Fed and ECB - two years before the war started.

Proof: 

Bank Demand Deposits (aka cash) Soared As Much As 120% And Are Still Rising 30% Annualized

Inflation Jumped At Exactly The Same Time And Reached 7.5% Before The War Started

The ONLY way to kill this inflation is to shrink the amount of money in circulation by engaging in a determined round of Quantitative Tightening (the Fed shrinks its balance sheet by selling bonds in the open market).  

While the Fed has pretty much pre-announced that it will start doing so in June, I stress that it still hasn't sold anything.  Its balance sheet is as bloated as ever.

Federal Reserve Assets Remain At Record High

The longer the Fed delays QT (it should have started months ago) the more difficult it will become to tame inflation. Inflationary expectations are already feeding through to the labor market, which is itself experiencing unprecedented tightness with near record low unemployment.

I am and have always been a proponent of drastic action: if you must do something, do it fast and do it all out.  Markets are like packs of wild animals, the only thing they understand is fear and greed.  So, a "little" fear is just not going to do the trick.  Hit them with the stick and hit them hard - and then watch as they do the rest of the work for you.

Update:  US Inflation data were just announced today.  Core inflation ex-food and energy came in much higher than expected, ie inflation is rising fast even outside the volatile items.    The chart below shows how average core CPI was tame for decades (green line), but is now soaring.

Core Inflation Soaring Far Above Average For The First Time In 20 Years

It all makes decisive action by the Fed all the more urgent....