The Fed’s Catch-22 Means Dangerous Times Are Coming
In a system dominated by Keynesian economics, the word “deflation” is considered taboo (like saying Donald Trump’s name out loud in a crowded Seattle yoga studio). The screeching reaction you will get is rarely worth the effort of arguing the point.
Every element of modern monetary policy is designed to prevent deflation. Every central bank policy is designed to artificially drive the economy out of deflation at any cost. However much currency must be printed will be printed.
By extension, everything about our economy has become dependent on inflation. Entire sectors of the economy, especially the financial sector, can only thrive in an environment of constantly, steadily growing money supply.
Is inflation really the lesser of two evils?
Of course, deflation is not always a bad thing. It’s the harsh medicine sometimes needed to correct the many problems caused by malinvestment, corporate fraud, consumer debt addiction, government interference in markets and so on.
We saw this during the crash of 2008, but the Federal Reserve refused to let the treatment run its course.
The U.S., like many countries, has become disconnected from the concept of consequences. Moral hazard sometimes comes up in conversation, but not seriously. So what’s the cost? When America’s massive financial system dodges accountability, the cost to future generations can be immense.
So now we’re living in the aftermath of 17 years of persistent money-printing and the inevitable stagflationary crisis it created. The fact that Keynesians like Paul Krugman, Janet Yellen and Ben Bernanke outright denied the existence of the inflation shows, at the very least, that they know inflation is a bad thing for the public.
They denied reality so consistently they looked completely out of touch when inflation rose to 9.1% back in 2022.
The consequences of these inflationary policies are now undeniable. The Keynesian “experts” have been proven wrong – and worse than useless. But this doesn’t mean anything is going to change for the better.
What’s next – inflation or deflation?
My ongoing question with the return of Donald Trump to the White House is this: How are the banks going to pull the rug out from under this administration? Will it be a deflationary crisis, or an even bigger inflationary crisis?
As I noted last month in my article, gold and silver prices seem to be on the verge of going parabolic (beyond the price explosion we’ve already seen this year), which indicates severe inflationary pressures. Or, at the very least, a global expectation among investors and central banks of a crisis event which will precipitate further inflation.
I suspect this is partly due to the astonishing interest payments that the U.S. government is required to make on existing debt ($250 billion every 3 months currently). Central banks and investors are snapping up gold and silver, likely with the expectation that U.S. debt will become unsustainable, thus corroding the dollar’s purchasing power.
Furthermore, despite Federal Reserve intervention in interest rates, consumer spending has not significantly slowed down and debt borrowing continues to climb to record highs. Inflation has slowed dramatically from the Biden era, but prices have not dropped enough to give relief to average Americans.
If the Fed’s goal in jacking up interest rates was to slow spending, they failed miserably.
As I’ve noted in the past, the central bank had to hike interest rates to over 20% in the early 1980s to finally end the decade long stagflation crisis. We didn’t come anywhere close to that post-pandemic. Meaning, the Fed’s fix was the equivalent of a band-aid on a gunshot wound.
The patient is still in critical condition.
But is deflation just around the corner? There are some signs that this is happening. For example, job availability has dropped by 500,000 openings in the past year, and keep in mind around 30% of all advertised employment opportunities are actually “ghost jobs” that don’t actually exist.
There have been increases in layoffs in 2025, but 27% of those are connected to DOGE cuts to government bureaucracy. White collar layoffs rose 19% for the year.
There hasn’t been a noticeable retail spending slowdown, nor a credit slowdown. Prices remain significantly higher compared to pre-pandemic despite softening of the CPI.
The elements needed for deflation to pull prices down just don’t exist, at least not yet.
I continue to suspect that a deflationary event is coming, but I think this will only happen after another round of inflation hits the economy. If the Fed cuts rates to the point that CPI spikes sharply again (which won’t take long), then rising prices will ultimately cripple consumer spending. If they don’t, then the Fed may be forced to hike rates well beyond recent highs, just as they did in the 1980s.
It’s the Catch-22 trap that I have been talking about for years and it’s not going away.
The choice is really up to the Fed: To increase interest rates far beyond what they did in the past three years, or to stimulate and print money.
In other words, the roller coaster starts in 2026 as the central bank continues to cut. Watch for returning surges in the inflation rate in the summer to fall.
Trump’s tariffs, if they are still in effect, will likely be blamed even though tariffs have not triggering the kind of cost crisis that many critics were predicting. How did this happen? Because the critics don’t take into account the massive mark-ups from manufacturing overseas to retail prices on the shelf.
Many goods are marked up by 250% on average once they reach the U.S. Some apparel items see a markup of over 900% when they hit the shelf. The price of labor and materials in Asia is exceedingly low, and the prices on final products in America are exceedingly high. This is why most international corporations can afford to eat the tariffs without much trouble to shoppers.
Tariffs are estimated to have caused an increase in CPI of 0.7% since they began according to Harvard research data; a negligible amount compared to the disaster predictions of many mainstream economists.
That said, inflation continues to loom and tariffs make for a useful scapegoat simply because most people don’t understand them.
There have been no deflationary correction, not since 2008 and not since the pandemic stimulus. Which means high demand has not been quelled, savings are not increasing and excess dollars are still increasing in circulation (the U.S. personal savings rate declined to record lows in 2024-2025).
This tells me the financial system never took its medicine.
This means that as the central bank returns to lower rates, inflation will resurface, likely in the third quarter of 2026 if the Fed continues to cut interest rates into next year.
The Trump Administration is taking measures that could help mitigate prices. Mass deportations will certainly reduce domestic demand for goods and housing, which means more supply and falling prices. But this won’t happen at the kind of pace we need unless Trump finds a way to at least double the current annual deportations. The effects will be cumulative and will take years to influence markets.
Overall, I don’t see a way to escape more inflation in the near term without dramatic changes to economic conditions, or a historic move by the Federal Reserve to hike interest rates to levels not seen since the stagflation crisis of the 1970s. In either case, I expect physical precious metals, gold and silver, to maintain their value as inflationary hedges (and prices will very likely continue to set records in the months and years ahead).