At the time of this writing, the Federal Reserve central bank(FED) is caught in a Catch 22. On the one hand, it must fight high, relative to the past several years, consumer prices, popularly referred to as inflation, even though true inflation is the increase in the money supply, not just prices, as explained here; high prices are the typical and expected effect, not the cause of or the actual inflation itself. For the remainder of this post, Inflation will refer to the sharp rise in consumer prices relative to the past several years leading up to 2022. To fight this inflation, the Fed is pressured to raise the Federal Funds rate, which shall be inter-changeable with the term interest rate in this post. The Fed has already raised the interest rate in multiple intervals in 2022, starting from a 0.5% interest rate to the current 1.75%. However, the cost of these interest rate hikes is the economy, ranging from the financial markets in stocks, bonds, and derivatives, to the economy outside that, such as the variety of retail, office, and few remaining industrial enterprises in the nation. The Dow Jones Industrial Average(DJIA), and some other major stock indices have declined considerably since the initial rate hikes, with the DJIA losing over 2% of it’s original value since. The literally trillion dollar question becomes: will the Fed keep interest rates at these high levels, or will it lower the interest rates again to reverse the recessionary decline at the cost of letting inflation run high again? This leads to the forecast for this post; within the next eight months from the time of this writing, the Fed will reverse course and lower the interest rates to reverse the recessionary decline in the economy; along with that, gas prices will not come down much, especially over a sustained and long period of time.
Logically, from a public relations standpoint, the FED cannot let the economy and financial markets stay in recession because if the economy goes through a prolonged recession, the public will perceive the FED as a failure, and by extension, Joe Biden’s administration too. People aren’t going to approve of the FED’s performance if there are numerous business bankruptcies and layoffs, a very possible consequence of the recessionary impact of the current rate hikes, especially if the rate hikes are to continue. Furthermore, when the Fed does lower the interest rates again, the impact of higher consumer prices that lowering rates could cause will take a while to materialize, which means that the Fed will have time to prepare for and/or avoid risking the ire of the public due to high consumer prices.
Regarding the forecast on gas prices staying generally high, as they are at the time of this writing, the critical aspect is whether federal regulations to lower production costs and increase supply will be enacted. Thus far, the Biden administration has had no qualms about shutting down federal leases for oil and gasoline production, ramping up other regulations on oil and gasoline producers, and continuing the still slow and somewhat disrupted global supply chains on mostly all physical consumer and industrial goods. However, to reverse its low approval ratings, especially considering this current year is when the midterm elections are occurring, there is a chance, though a highly improbable one, that the Biden administration will roll back some of those tight regulatory policies, including the Green New Deal, the common name of the overall agenda to diminish and eventually eliminate the oil and gas industries. While the Biden administration will more likely try to get foreign importers, like Saudi Arabia and Venezuela, to boost the supply of imported gasoline to the U.S., rather than loosen regulations and restrictions on domestic producers, this attempt will likely fail to meaningfully reduce gasoline prices, especially over the long-term. Perhaps gasoline prices might come down somewhat temporarily, but long-term, they’ll remain almost as high as prior to the FED’s rate hikes.
Just like during the Great Depression of the 1930s, even when the FED raised interest rates and tightened the supply of available money and credit, regulations and taxes on enterprises, beyond only oil and gas companies, were not eliminated or reduced, which, similar to today’s economic environment, prevented producer and consumer prices from declining with the financial market prices, which exacerbated and rendered the initial healthy recession into the Great Depression. History is repeating itself, as always seems to be the case.
Furthermore, however much oil foreigners will import to the U.S. will need to be refined. On that note, the Biden administration’s policies don’t allow the opening of new refineries and also severely restrict the output of current refineries, especially far more severely than the preceding Donald Trump administration did. Because the additional refining output will not accompany whatever excess supply of crude oil may, or may not, come from any cooperation from foreign exporters like Saudi Arabia, gas prices will likely not decrease substantially. Unless the Biden administration abandons its deranged and unreasonable hatred for fossil fuels, which is next to impossible, regulations on refinery output and overall gasoline production won’t be meaningfully reduced, which will preclude oil and gas companies from reducing their costs to supply gasoline(gas), which will result in a failure to meaningfully reduce gas prices, especially over the long-term. Furthermore, the Biden administration continues to ban fracking, further hindering confidence by oil companies that friendly and auspicious regulatory policies, like those under Donald Trump, will return and prevail, especially long-term. Further along the low business confidence in the oil industry, oil and gas companies have profoundly struggled financially thus far under the Biden administration’s unfriendly business policies, especially compared to the prior Donald Trump administration. As such, these companies are more likely to believe, and prudently so, that this strategy of relying far more on foreign imports vs. expanding domestic production will be too risky to lower their prices, and thereby thin out their profit margins. Plus, it’s likely that oil and gasoline companies don’t trust the Biden administration to remove the unfriendly regulations and policies since he took office; quite frankly, it’s hard to blame anybody for not trusting the Biden administration. Furthermore, many of these companies likely have losses and revenue shortfalls from the past that need to be restored; therefore, lowering prices would delay healing those prior financial injuries. Lastly, gasoline companies know that the vast majority of Americans will still buy gasoline, regardless of whether prices are high or low, because the reality is, most Americans simply can’t practically live without gasoline. Tying this prognostication back to the FED’s conundrum, even if inflation does come back up when the FED reverses course by lowering the interest rate, the Fed won’t want to risk sending the economy back into recession. While inflation will be highly unpopular, recessions, especially prolonged ones, will be far more unpopular, and so the FED will keep interest rates low, marking the end of the relatively short-lived rate hikes. Plus, compared to the lag in consumer price increases following a rate cut, the recessionary decline in the economy following a rate hike usually occurs fairly and relatively quickly.
It is also critical to understand that hyperinflation is highly improbable even if, and when, the FED returns to lowering the interest rate. First of all, the FED might not expand the money supply and do more quantitative easing(QE), to cause any further TRUE inflation. Additionally, even if the FED did QE of a few trillion dollars more, that increase would represent too small of an increase in the total existing money supply to trigger hyperinflation. Lastly, in addition to a radically large increase in the total existing money supply, hyperinflation requires people’s incomes to rise sufficiently. This is because if people aren’t able to afford higher prices beyond a certain limit, they just won’t buy as many of those too highly priced goods and services. Therefore, suppliers won’t be able to raise prices too high, precluding hyperinflation, and so the FED won’t risk causing hyperinflation simply by either reversing course through cutting rates again or through a new round of QE. Therefore, what is far more likely is stagflation, the simultaneous existence and impacts of high inflation and stalled gross output, or productivity; stagflation in 2023, after the Fed lowers interest rates again, is the forecast of this post.
Prices will still be high, people won’t be able to afford as many goods and services, and so people will curtail their spending accordingly, similar to what has already been happening at the time of this writing. Because people will be spending far less, some enterprises will go out of business, and so the employees of those enterprises will lose their jobs, making it even harder to raise prices, because more people have no income, and therefore no means to afford higher prices. As Peter Schiff has commented as of late on his podcast, most likely, the businesses that sell what people want vs. what people need will have a harder time staying in business, at least more so than businesses that provide what people need, and therefore still must and will buy, regardless of a recession. For example, businesses selling luxury clothing will be more likely to face bankruptcy vs. those that sell groceries.
Let’s pray that this post’s forecast of long-term high gas prices and stagflation ends up being dead wrong.