Tony Lepage

After 16 consecutive rate hikes, the Fed Funds rate sits at 5%. Before this rate increase cycle began, the Fed Funds rate was below 2% for 4 years and for most of that period it sat at 1%. Now that the rate is at 5% watchers are calling for the rate increases to stop.

Throughout history this has been part of the business cycle. Easy money is provided to stimulate the economy and then the money supply is tightened to prevent things from getting out of control. Tightening money prevents bubbles from forming within sectors of the economy. Bubbles grossly misallocate investment and cause severe, harmful corrections.

Nope, no housing bubble here. Dumbass.


Those calling for the rate hikes to stop are doing so because they feel that if the rates are increasing, the cost to borrow goes up and this will slow the economy. This is an incorrect belief and I’ll explain why.

The Fed Funds rate is still lower than inflation and this means it makes sense to continue to borrow money if you are going to invest it to for an average return. If the interest rate is lower than the inflation rate, you simply have to invest into something that returns at a rate greater than (or even equal to) the inflation rate.

This means the current Fed Funds rate is NEGATIVE.

How could this happen? What does this mean? I don’t want to be a dumbass, teach me.

Okay, so when I read that the CPI is 2.1% in news media this means the ‘consumer-price-index’ correct? Wrong! The consumer price index is meant to reflect the change in costs that consumers are paying for items they require everyday. CPI now stands for ‘core-price-index’ and there are not very many people who noticed the switch. Why was this done?

You may have heard me blast arguments about the U.S. government deficits being lower during the Clinton administration. Here is why: the Clinton administration simply took all payments to social services and used them to pay for other government services. In effect, this increased the funds the government had to work with, balanced their books and made it appear the government was running a surplus. The only losers are the baby boomers who will need every cent of social services because they have been brought up to trust these implied benefits will be available for them too. They wont be, and for a long period of time, us 20-somethings will have to pay a large sum to fund this notion until it all completely faulters.

Anyways, the Clinton administration did some magic in that they wanted to decrease the inflation rate by 1.1% so that they could reduce the amount of payments being given out as cost of living supplements to their current social services users. This is an example of CPI manipulation

Since this time, the Bush administration has taken the inflation numbers and added their own twist. They have decided that the cost of transportation, energy and food does not reflect the costs of the average consumer. They think that gas prices are high because of the war and this doesn’t equate higher prices to you and I. This is no joke. If you were to calculate the inflation rate the way it was calculated during the Clinton years ago you would come up with an inflation rate of about 6.5%. The last I read, they were telling us that inflation was 2.1%. However, if you calculated inflation based upon the real cost to consumers, I am sure you would discover inflation is running at about 8%. If you’ve made it this far, I hope you can understand my concern—if the inflation rate is 8% my wages should be rising at this rate too, otherwise I’m getting poorer year over year.

While the Federal Reserve may have most people tricked into thinking that they have been harnessing inflation, they have not fooled me. I’ve created a spreadsheet that I will be using to record the prices of things I purchase most often. I am going to do this monthly and across competitors. Then I will start to publish this data as my own index of inflation.

My message to you: Inflation is higher than you think. Just take a look at all the things that cost you more each day. You shouldn’t be able to notice a 2% annual rise in prices but we’re able to see that things are getting costlier. Just how much costlier remains to be seen. My biggest concern is that if inflation is running at 6-8% (and it more than likely is) no one seems to care. When will we start to care? All of my peers go to school, take on debt, and will eventually (or have already) graduate to work 40 hours a week for a paycheck that they need to live. If they only understood how the money system is currently working against them, then they could perhaps get some real value for those dollars.

Note: I hope that YOU find value in the new type of posts I will be making to this blog. I don’t see any value in creating simple, mindless, and vain attempts to document my day-to-day life highlighted with small snippets of humor (even if I remain “nameless”). Although I could go on and on about my work, party or personal life, I have no intent on publishing that kind of crap on the web. If you really need this kind of stuff wait 10 years and buy my memoirs. If you don’t like this, obviously this isn’t the place for you. It’s actually quite amazing how much heat I’m taking for my $708 post from 2 weeks ago. This will only inspire me to write more. I understand that it is hard to adapt to change.

If you don’t like what I’m saying: don’t read this blog!