In 2019, the yield curve inverted.  The 3-month Treasury yield exceeded the 10-year yield.  An inverted yield curve points to a recession ahead, typically 6 months to a year in to the future.

We got a recession in 2020 after the inverted yield curve – sort of.  It was a strange situation.  It wasn’t strange just in the fact that the world shut down over a virus.  It was strange economically.

In March 2020 when coronavirus hysteria set it, the Federal Reserve immediately started massively inflating.  It was already in full gear when most of the world shut down.

Just look at this from an economic perspective and how different this central bank business cycle played out.

When there is a recession, the Fed usually takes dramatic action after the recession has begun and is evident.  There was already major trouble brewing in 2008.  In fact, it is now said that the actual recession started in late 2007.  Yet, the financial crisis didn’t become evident until September 2008.  The Fed started creating massive amounts of money and lowering interest rates to near zero after the economy was already in a deep recession.

In March 2020, we didn’t see major signs of a recession at the present time.  We had an inverted yield curve in 2019, and the repo market blew up in 2019.  So the Fed was already starting to go back to an easy money policy.  But if you looked at the headlines on CNBC, there was no indication of recession at the beginning of March 2020.

So the Fed started inflating like crazy before a recession had fully come on, or at least before it was evident.  This, in itself, was somewhat unique.  The Fed usually reacts after we are already in a recession.  On top of this, the Fed’s reaction was dramatic.  The only thing comparable in modern times is the 2008 financial crisis, when the Fed also dramatically increased its balance sheet in a short period of time.

Because of coronavirus hysteria and the lockdowns, the fall in economic activity in March and April 2020 was not blamed on previous Fed policy.  It was blamed on a virus.  The smarter people blamed government policy (hysteria and lockdowns) instead of directly blaming a virus.

There is no question that closing down “non-essential” services had a major economic impact, but there is a feeling that the Fed was let off the hook.  We probably would have seen a recession in 2020 anyway.

Not only did the Fed have something to blame, but the people at the Fed also had an excuse to dramatically inflate, thus getting ahead of the recession.  There is no question that the Fed’s actions made the recession short and mild, at least on paper.  There is still a question of whether we actually had a recession in 2020 at all.

The stock market went down in March and part of April and then just absolutely boomed for the next year and a half.

The problem, of course, is that the Fed didn’t allow a correction to take place and set us up for an even bigger disaster, which we face today.

The Fed’s massive monetary inflation has finally caught up with us.  The Fed got away with massively inflating in 2008/ 2009 up until 2014.  Although there was a massive misallocation of resources happening, we never got significant consumer price inflation.

Things are different now.  The Fed is faced with price inflation of over 9%.  That is why the Fed has essentially been forced to tighten.  As the Fed slowly deflates its balance sheet and raises its target rate to fight the price inflation it created, the bubble is going to pop.

As I write this, the Treasury charts show the 2-year yield is well above the 10-year yield.  There is about a 20 basis point difference (0.2%).

The 10-year yield has stopped rising and has actually been falling lately.  Meanwhile, the 3-month yield is rising, and it will likely continue to rise as the Fed is forced to raise short-term interest rates.

The 6-month yield already exceeds the 10-year yield.  I believe it won’t be long before we see an inversion of the 3-month yield and the 10-year yield.

There is going to be a major recession later this year or in 2023.

I don’t think the Fed can do what it did in March 2020.  Even if we get another virus, or another variant, or some other event, it will be difficult for the Fed to massively inflate like it did in 2020, and even 2008.

If the Fed reversed course and massively inflated from here, then the CPI number would take off.  We would be facing massive double-digit price inflation that could beat out the 1970s.

As bad as the Fed officials are, I don’t think they want to risk hyperinflation and losing the U.S. dollar.  They would be jeopardizing their own power.

If there is monetary inflation, it will have to be more targeted.  Maybe they’ll bail out a few of their friends, but it won’t be on a massive scale as we have seen in the past.  I don’t think we are going to see trillions of dollars in bailouts and stimulus payments.  If I’m wrong on this, then you really better be prepared for tough times ahead.

The damage has already been done by past monetary inflation and artificially low interest rates.  It is just a question of how we deal with the damage now.

It is better to take some pain now in the form of a recession and popping of the Everything Bubble.  That is the least bad option.  It would be far worse if the Fed returns to monetary inflation and risks some form of hyperinflation.  Even a world with 25% annual price inflation is scary.

As of right now, it is best to prepare for a hard and deep recession ahead, knowing that the Fed does not have as much room to step in and “save” the economy from a recession.