There's a new economic theory that suggests that raising interest rates isn't the only way to curb inflation.
You may have heard of the concept of Modern Monetary Theory or MMT for short. I'll add some links where you can get a more detailed explanation.
Here's a basic summary:
1. The basic premise is that the government can never run out of money as long as it has the ability to control the currency and print more money.
2. Deficits are not that big of a deal as long as you can ramp up the economy and get to full employment.
3. Inflation is still a big concern, however, you can control inflation by slowing down the money printing press, increasing taxation, rather than raising interest rates. (Taxing private corporations and the wealthy, not the middle class)
Here's a link to a 4-part series on MMT from the Fraser Institute.
The government leaders in both Canada and the US believe in this and we are now a part of an experiment to see if this theory will work. Why is this so important? Because as you know inflation is already spiking fast. The better question is if this is transitional, as we emerge from the pandemic, or is it a run-away train that will lead to hyperinflation? From an investment perspective, the stock market is trying to figure out how this is going to play out. The coming months are going to be very interesting.
The above was written a year ago (May 2021).
So here we are, a year later, May 2022, and what has happened? We are dealing with the fallout of bad monetary policy (theory). Inflation is a runaway freight train with no slowing in sight. And, the government is clueless to solve it. Since the 2008/2009 financial crisis the main tool that governments have used to solve all problems is to throw more money at them. That strategy has created a balloon of debt and easy money for everyone. It was a temporary measure and we are now having to deal with the consequences.
What can we do as just ordinary investors trying to grow some savings and retire? Wait and see how this plays out. To sell and crystalize losses would not be a prudent strategy. Unfortunately, this mess will take some time to flesh out and we all have to be patient and let it run its course.
Our business is all about helping clients declutter their lives by first getting their total financial house in order and providing the clarity and confidence to retire sooner than later. You can learn more about our process by clicking here.
Fee-only Retirement Income Planning
Willis J Langford BA, MA, CFP
Nancy Langford CRS
