Rising inflation, interest rates not a welcome combo

There’s nothing simple about macroeconomics, but the more inflation continues to rise in the face of rising interest rates, it’s hard not to wish for the government to return to basics.

While Democrats and Republicans would love for you to think it’s the other side’s fault, the reality is we are facing inflation now because of the overreaction of government, as a whole, to the financial fallout surrounding the COVID-19 pandemic. It’s an interesting saga and one that every American should be aware of, so let’s recap how we ended up where we are today.

When the pandemic hit, the effect on the stock market was nearly instantaneous. From the second week of February to the third week of March 2020, the market lost more than 30% of its value, an unprecedented drop that caused even the most persistent investors to pay attention. American retirees, who were already fearing the health effects of the new COVID-19 virus, had their worries compounded when in less than six weeks 30% of their retirement accounts had ceased to exist.

The government knew it had to act and knew it had to act swiftly.

Within a month, stimulus checks of $1,200 were being sent to Americans, with $500 extra per child allotted. In December 2020, congress approved another payment of $600 per income tax filer and $600 per child.

Under a new administration, President Biden worked with congress to have a third round of checks sent out, this time totaling $1,400 per person and $1,400 per child in April 2021.

But the fun didn’t end there. While stimulus payments totaled nearly $1 trillion, the government ended up going on a $5 trillion spending spree that included “stimulus” operations for municipal governments and businesses.

Inflation is a very simple metric. The more money that exists, the less it is worth.

While government spending got the attention of conservative economists who feared inflation, their worries were quickly explained away by those in favor of stimulus payments. Many analysts pointed out that despite the influx of trillions of dollars into the economy, the American economy was actually undergoing a deflationary period because people were not spending the money.

That’s right, at a time when America was printing the most money it had ever created in its history, money was actually becoming more valuable because the cash was only sitting in bank accounts. After all, there were no restaurants to have dinner at and restrictions prevented money being spent on sporting events, vacations or music concerts.

And that held true, until this year.

Now things are nearly back to normal and all of that money is flooding into the economy, making our dollars worth less and the federal reserve scrambling to fight inflation.

The government completely overreacted to the pandemic from a monetary standpoint, which has led to the inflation Americans are experiencing today.

Plenty of other governments acted in the same way, as China recently announced it has hit the $5 trillion mark in stimulus money handed out, which has only exacerbated the issues we are facing here in America.

The federal reserve, which sets interest rates, is in a predicament. Interest rates are one of the main tools used to curb inflation — the more attractive it is to leave money in the bank (higher interest rates), the less money will be put into the economy through either purchases of stock or retail goods.

As a result, interest rates are typically inversely correlated to the performance of a stock market — the higher rates are, the less inflation will be, but the worse the stock market will perform because more people will be leaving money in the bank.

Each interest rate hike that has been announced by the federal reserve has been met with a drop in the stock market, yet despite the negative effect, we haven’t been getting a positive — inflation continues to inch higher and higher.

The fed must continue with interest rate hikes to defend the middle class in America, who are making less money each year due to a less valuable dollar, but that action will result in workers losing portions of their life savings that are invested in the market.

For older Americans who are invested in the market, inflation is likely the lesser of two evils. However, for younger Americans trying to make it on already tight wages, or older Americans on fixed income without bulky retirement accounts, the only solution to the problems being faced are higher interest rates from the federal reserve.

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