Elon Musk just warned the fed! Incoming deflation may be worst than inflation
I am sure everyone is familiar with what happened after the pandemic. The Federal Reserve printed an insane amount of money and flooded it into the economy. Russia-Ukraine War followed. One thing after the other made the inflation rate skyrocket. Elon musk just issued a warning about deflation. We are not out of the woods yet. In fact, we are at the beginning of the worst.
What is deflation? It is when the value of the currency increases causing the prices of goods and services to drop. Imagine that everything you want is reduced in price. That’s a good thing right?
What is the problem then?
In the short run, it may be good for consumers. But let’s look at the perspective of business owners. Everything you sell is reduced in price. You sell the same amount of products but you make less money. Eventually, you will have to cut business expenses in order to keep the business running. You start laying off workers at best, and at worst, your business shuts down.
This is just at the micro-level, at the macro-level, multiple small businesses collapsed, and Large businesses lay off workers. Unemployment on a large scale occurs. The economy reduced economic activities causing a recession. So, is it worth it to reduce the prices of goods and services in exchange for your job?
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Let’s see how we got here,
On Jan 25th, 2022, The Fed said that inflation is under control and there is nothing to be worried about. However, in March, the Fed saw that inflation is getting out of control and started raising rates. This is what happened;
March: 0.25% hike
May: 0.5% hike
June:0.75% hike
July:0.75% hike
Sept:0.75% hike
The fed stated that there will be ‘more pains ahead’, hinting that there will be more rate hikes until inflation is back down.
My thoughts
We are already seeing signs of deflation. The value of the dollar rose higher and higher, asset prices dropped and the market crashed. Even banks are on the edge of collapsing. It is now clear about the Fed’s stance is. They don’t seem to care about the market or employment rate. Their sole objective is just to bring inflation down to 2%. I agree with Elon Musk, the continued raise of interest rates will crush the market and cause a recession. However, I understand it is not possible to start stimulating the economy again because inflation will eat us away slowly. That is why we need to keep a close eye on the economy.
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