The Achilles’ Heel of America’s Economy

The U.S. Is Approaching a Critical Moment…

We pick up today where we left off earlier in the week…with more worrisome inflation news.

I wrote to you on Wednesday with my take on the Fed’s inability to tackle inflation.

All the Fed can do is hike interest rates a couple more times in June and July. Both months are likely to see rates go up by half a percentage point.

Alas, that effort isn’t likely to do much to stanch global inflation, which is, well, a global phenomenon and not something specific to America.

These rate hikes are, however, likely to slap Uncle Sam pretty hard in his wallet.

Every rate hike big and small means our debt-reliant government must issue even more debt to pay off the interest on the new, higher-priced debt. That steals money from the productive economy and funnels it toward a non-productive activity—debt payment.

And that’s just Uncle Sam’s side of the ledger.

There’s also our side of ledger—you and me, the consumers and savers of America.

Interest rate increases obviously hit us, too. We, however, aren’t so lucky. While Sam can instruct his minions to legally counterfeit more dollars to cover his bar tab, we cannot just willy-nilly punch a few keys on the computer and make one billion or seven billion dollars magically appear with zero effort.

And, so, we suffer.

Which is where the Fed’s real pain is going to appear soon enough.

See, we as consumers drive the U.S. economy. We represent about two-thirds of all economic activity in America. We die, the economy dies…and therein lies the Fed’s real Achilles’ heel.

With each interest rate hike, rates rise on credit cards, auto loans and leases, and mortgages. This also trickles through prices for the random purchases we make during the day because higher interest rates lead to higher business costs, which businesses then pass along to consumers.

Right now, Americans are packing on debt at a record pace.

Consumer debt climbed by $52.4 billion in March, an annual increase of 14%. Total consumer debt in the U.S. now stands at nearly $16 trillion. That’s about 70% of the size of the U.S. economy.

In the same month, revolving debt—basically, credit card debt—ballooned by more than 35% on an annual basis, the largest jump in nearly a quarter century.

All of that is a big, big problem for the Fed.

It says that many Americans are surviving on the good graces of Mastercard and American Express because their incomes are not keeping up with inflation, yet their ego won’t let them downscale from an aspirational lifestyle.

So, imagine what happens as higher interest rates and higher credit card balances slam into each other.

It means more and more money going to interest payments and less money going to principal repayment…which sees credit card balances increase, even if by small amounts, because households have a finite amount of cash to cover their living expenses.

That’s happening as the cost of traveling to and from work has risen sharply because gas prices have spiked.

And it’s happening as families lose shelter because rental prices are up by such a degree that renters cannot afford the increase.

One of my childhood friends is now on the hunt for a new apartment because his rent is jumping from $1,125 to $1,475 and his fixed income cannot begin to shoulder that costly burden. The upshot, he knows, means sharply downscaling his life to live in a low-quality apartment in a much worse section of town.

He’s pissed. Rightly so.

The Fed can tell Wall Street that it’ll do whatever it takes to wrangle inflation. And Fed Chair Jerome Powell can claim, as he did just after minutes from the Fed’s May confab were released, that “some pain” might be associated with this effort.

But the reality is that the Fed is gumming at a steak it cannot chew…like an ancient, toothless dog that can only lick the bone these days.

Powell also told the world that the U.S. is “a strong economy. Nothing about it suggests it’s close to vulnerable or to a recession.”

Mmm…

Keep on raising rates, and see what happens. See how the consumer crumbles. See how the economy crumbles. See how the savings rate crumbles. See how the jobs market crumbles.

See how America slips and slides right into a recession later this year.

I stand by my contention that we see two more rate hikes—June and July. And then all goes quiet until the fall, when the Fed will be forced to acknowledge that a recession is afoot, even as inflation remains elevated.

We will have officially entered stagflation—a stagnating economy coupled with high inflation.

And it’s us consumers who will feel it the worst.

That’s why I’m going to end by repeating a message I’ve shared many times before…

Protect your portfolio with foreign currencies like the Swiss franc, with gold and silver, and with commodities, low-end food chain, and pharmaceutical/healthcare stocks.

The Fed’s got it all wrong. It’s behind the eight-ball.

It’s a toothless dog barking up the wrong tree.