Ben Bernanke told us the problems in subprime real estate were contained. Alan Greenspan told us derivatives decreased risk and increased the resiliency of our largest financial institutions. Irving Fisher told us in the fall of 1929 that stocks had reached what looks like a permanently high plateau. All of these statements from members of the intellectual elite preceded catastrophes of monumental proportions. Each catastrophe traces its roots in dire situations directly related to and diametrically opposed to what the intellectual elites were telling us. The intellectual elites, in short, got it exactly wrong.

We will never know if these pronouncements were made out of ignorance or deception? I suspect it has something to do with incentives. The intellectual elites have different incentives than most of the rest of us–some are chasing votes; while some have a reputation to uphold. We just want to protect our purchasing power.

Biden, in his short time in office, has overseen one of the worst increases in inflation in the past 40 years. The Biden administration isn’t the sole cause of the inflation–those forces have been building up for several years as the Federal Reserve has combated one crisis after another by pumping liquidity into the U.S. economy. The balance sheet of the reserve has increased from under $1 trillion just prior to the global financial crisis in 2008 to $9 trillion today, reflecting a nine-fold increase. The Federal Reserve’s balance sheet reflects the assets it has purchased in the open market and every dollar it spends buying assets is a dollar of liquidity injected into the U.S. economy. The root cause of the inflation we are seeing today is this ocean of liquidity that is sitting in the economy.

The Biden administration is contributing to this ocean of liquidity, but it isn’t the only source. Far from it. He just happens to be in the office when the chickens are coming home to roost. He and his administration – including Jerome Powell at the Federal Reserve – are the anointed ones that have to clean up the mess.

Yet, what we see and hear are finger-pointing and arm waving. Biden’s approach to tackling the growing problem lurches from at times denying that it exists, to pin it on the supply chain, to blaming the energy industry, to laying it at the feet of Putin. We have yet to see an honest assessment of the situation nor a systematic approach to fix it. The Biden administration must first admit we have a problem. It must then take real responsibility to fix it. Only then do we have some hope of actually addressing the core problem of inflation.

As we observe the finger-pointing and arm waving from the intellectual elites in Washington, we don’t have much confidence in the truth that we are nowhere close to fixing the core problem of too much liquidity. The hand wringing and stress involved in the Federal Reserve’s raising rates 25 or 50 basis points, or God forbid a 75 basis point raise, is quite disturbing. Meanwhile, Brazil of all places, is leading the way in the global fight against inflation. The country’s inflation isn’t that much higher than what we are seeing in the United States today, yet it raised its short-term policy interest rate from 2% early last year to nearly 11% today. Ours in the U.S. stands at 0.5% with the prospect of a 50 to 75 basis point increase at the next Federal Reserve meeting. 

The administration is not taking the problem seriously. That isn’t a political statement. It’s an observation. As investors and citizens trying to protect purchasing power, we can’t rely on what the administration says. They have incentives, but one of them is not protecting our purchasing power.

Preserving purchasing power means getting investments and investment income in the right types of assets. Investing in companies with built-in and automatic price increases with no lag or delay is a good place to start. We also like investments in companies with exposure to rising prices but not rising costs, companies with revenues in a jurisdiction that is not debasing its currency, and companies whose cost advantages relative to competition increase with inflation. Now is the time to examine your investment portfolio through a lens of persistently higher inflation in the years to come.