According to Elon Musk, the Federal Reserve (Fed) affects the current US economy more than the ‘current mild inflation’.
We are getting used to hearing the word ‘recession’ and ‘inflation’ more and more in the recent period. And how can we ignore it? The prices of elementary ‘goods’ needed for everyday life is the highest it has been in the past 40 years. Households are greatly affected by this, as what was considered ‘normal’ income is no longer enough to buy the essentials.
Elon Musk Blames The Federal Reserve For Destroying The US Economy
In the US, the Federal Reserve introduced an aggressive monetary policy in order to relieve the people. Even though this helps the people in short term, the economists are concerned that getting back to normal, or the landing, may reflect the economy in a very bad way. In other words, the Federal Reserve risks causing a recession. A recession from which it will be hard to come back.
Small and medium businesses are the ones that feel inflation the most. Their expenses are on a constant raise, and thus they need to raise the prices of their products. Aside from this, companies started laying off workers as well. This is not good for the global economy. And it is even worse for the common people working in those companies.
Big companies also hint at layoffs. For example, Google warned that by the end of the year it might introduce layoffs. They calculated that with this they will be 20% more efficient than now.
“The more we try to understand the macro economy, we feel very uncertain about it.” – Google’s CEO Sundar Pichai said. “The macroeconomic performance is correlated to ad spend, consumer spend, and so on.”
The Fed has the job of maintaining the stability of the prices. It has a job to fight inflation and until now it’s doing its job as it should.
“We need to act now, forthrightly, strongly as we have been doing, and we need to keep at it until the job is done.” – Fed chairman Jerome Powell said. “The Fed has and accepts responsibility for price stability.”
However, from the other side of the economic specter, Elon Musk totaly counters Fed’s views on solving the situation. According to Elon, the richest man in the world, if Fed continues with these massive interest rate hikes, deflation is inevitable. In other words, after a certain period, most of the goods and services will need to be extra cheap.
“A major Fed rate hike risks deflation.” – Elon released a statement via Twitter. “If history is any guide, not many will make it past the next recession.”
This tweet comes only after Federal Reserve Governor Christopher Waller warned of a significant interest rate increase. We are to expect it later this month. He continued by revealing that this is not the last interest rate increase this year. He expects interest rate increases throughout the whole of next year. The goal of this action is to bring inflation closer to the goal of 2%.
Even though Musk’s tweet is short and doesn’t give any further explanation on that how did he come to this conclusion, it created massive reactions. One of the countering sides is Europac’s Chief Economist and Global Strategist Peter Schiff.
According to Schiff, Elon Musk has this completely wrong. According to him, it is quite the opposite. Schiff says that this major hike by Fed will be followed by hyperinflation and a very bad recession. The Chief Economist warns that the world will witness a worse crisis than in 2008.
“It risks #hyperinflation. Higher debt service costs, a severe #recession, exploding Federal budget deficits, and collapsing asset prices will produce a worse financial crisis than 2008. The #Fed will respond with massive quantitative easing, tanking the dollar and sending consumer prices soaring.” – Schiff says.
The easiest way to explain what deflation is – it’s actually the opposite of inflation. Essentially, the prices for all products fall to a ridiculous level and the bad side of it is that households might decide to postpone their purchasing decisions while waiting for further price drops – causing a deterioration in the financial situation of borrowers. This usually leads to a drop in the overall consumption of all ‘goods’ and services. This might cause a drop in sales in companies, hense many businesses might be left without work. As a result, they would reduce their productivity and lower their investments.
What actually Elon Musk predicts happened twice in the past. First in the 1930s, and then 60 years later, in the ‘90s.
“This really will be a world of abundance. Any goods and services will be available to anyone who wants them. It will be so cheap to have goods and services, it will be ridiculous.” – Elon Musk told Chris Anderson during an interview in April. “It will be a world of abundance. The only scarcity that will exist in the future is that which we decide to create as humans.”
Fund manager Cathie Wood is siding with Musk on this. She said that the Fed should cease raising interest rates.
“The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation. Leading inflation indicators like gold and copper are flagging the risk of deflation. Even the oil price has dropped more than 35% from its peak, erasing most of the gain this year.”
What is your take on this? Is Elon Musk right about the ‘certain’ collapse of the economy in the following period?
