The debasement of purchasing power and our unit of account is 'horrendous', says Judy Shelton
Summary
- The Federal Reserve's 2% inflation target mathematically guarantees an 80% loss of purchasing power over an average person's lifetime.
- Cumulative inflation under Jerome Powell's tenure (since February 2018) has reached 29%, representing a massive debasement of the US Dollar.
- The Fed's current model of fighting inflation by raising borrowing costs actively harms supply-side expansion by making capital prohibitively expensive for businesses.
- Geopolitical conflicts in the Middle East pose a significant risk of driving energy costs higher, which will complicate future monetary policy and rate cut expectations.
Trade Ideas
"The debasement of purchasing power in our unit of account is horrendous... Under Powell, since he came in in February 2018, during those eight years, the cumulative inflation is 29%." The Federal Reserve's acceptance of perpetual 2% inflation structurally devalues fiat currency over time. To protect purchasing power against this deliberate and ongoing debasement, investors must allocate capital to hard, non-fiat assets with capped or zero-inflation supply dynamics. LONG hard assets and alternative stores of value as a hedge against systemic fiat debasement. A severe deflationary shock or a sudden, highly unlikely shift by the Fed to a strict 0% inflation mandate could reduce the premium on hard assets.
"How are people who are owners of businesses supposed to expand their productive capabilities and increase output? If it's prohibitively expensive to borrow the money to do that." The Fed's strategy to crush inflation via high interest rates directly penalizes smaller, capital-intensive businesses that rely on debt to fund operations and expansion. Unlike mega-cap tech companies with massive cash reserves, small-cap companies (represented by the Russell 2000) will face severe margin pressure and stunted growth as long as borrowing costs remain restrictive. AVOID debt-reliant small-cap equities until the cost of capital normalizes. The Fed pivots to aggressive rate cuts sooner than expected, which would disproportionately benefit heavily indebted small-cap stocks and trigger a massive short-squeeze rally.
"It's so dependent on how long it lasts and what the impact is on energy costs... the impact of potentially much higher energy prices will cause them to raise rates." Ongoing geopolitical conflict involving major Middle Eastern players threatens global oil supply chains. Any escalation or prolonged disruption will immediately price a premium into crude oil, directly benefiting physical energy commodities and domestic energy producers who are insulated from Middle East production risks. LONG crude oil and domestic energy equities as a geopolitical hedge. Rapid de-escalation of the Middle East conflict or a severe global recession that destroys energy demand faster than supply is constrained.
