How Easy Money Reshaped Inflation and Redefined Risk

The Point of No Return for Inflation

After an enormous amount of cash was used by the Federal Reserve to sustain the markets during the Covid scare of 2020, inflation has remained elevated. But the Fed's strategy of propping up markets with easy money didn't start there. It traces back to the housing market crash of '08, when quantitative easing (QE) became the main tool in its playbook.

Quantitative easing is a policy that involves buying up large quantities of financial assets. While the Fed doesn't directly print money to make those purchases, the effect is similar, as the downstream result is more liquidity in the system, which essentially acts like money printing. And as you likely already know, the dollar is backed by nothing, so every new dollar put into circulation erodes the spending power of Main Street.

After the first round of QE took place during the 2008 financial crisis, the Fed's balance sheet was around $2.1 trillion. During the 2020 Covid crisis, it increased to nearly $9 trillion! As expected, the expansion of the Fed's balance sheet led to a massive inflationary spike, which it knew would happen. But its actions were deemed "necessary" in the name of keeping equity markets afloat.

While the Fed and the White House have taken some measures to reduce inflation, most of the inflationary effects from QE cannot be unwound. Prices may not be rising as quickly, but they're never going back to where they were. It would be illogical for merchants to slash rent, food, or other key goods and services. Government officials may claim that inflation is retreating to the long-run baseline of 2%, but that number is largely fabricated.

Official Inflation Doesn’t Feel Real

In the United States, inflation is reported monthly via the Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS). The BLS is technically separate from the White House and isn't supposed to be politically influenced, but its methodology choices allow the government to frame a narrative, if desired. It decides which goods make it into the basket, how each is weighted, and how quality changes are adjusted.

Furthermore, the CPI formula itself was adjusted in the 1980s and 1990s. If we used pre-1980 methods today, inflation would likely appear much higher. While these adjustments in data/reporting are not the result of direct manipulation, they understate the real-world cost increases that people actually feel.

Despite what the official inflation number may be, one thing is for certain: the world is becoming more expensive each year as the dollar's purchasing power continues to decline. So how do you protect yourself? Do you follow the old advice of holding bonds and parking cash in savings accounts? Or is there a better way?

Rethinking Risk in a World That Won’t Let Markets Fall

Growing up, you probably heard the old mantra: "diversify your portfolio to capture the upside, but also limit the downside." That advice may have worked 40 years ago, when inflation numbers were honest, but in today's world, it doesn't. We need to rethink how we view money, purchasing power, and risk. Twenty years ago, being fully allocated to the S&P 500 was considered extremely aggressive, and many older investors still see it that way. But risk isn't what it used to be.

The S&P 500 contains 500 of America's largest companies. Owning a piece gives you a stake in the global economy (a fundamental reason for Trump's proposal to give each newborn a piece of the S&P 500, but that's a topic for another article). And yes, the S&P can experience sharp drops, such as during the Covid scare and the recent tariff tantrum; however, these drops tend to reverse quickly, as both retail and professional allocators have nowhere else to park their money.

Traditional financial metrics may deem a 100% allocation to equities "risky," but you have to adjust to the reality we currently live in, not the one we used to live in. In that light, the S&P 500 starts to look like a new-age savings account as opposed to a risky vehicle. Nearly every dollar you spend, whether at the gas pump, at a hockey game, or on Amazon, is feeding into the profits of companies in that index. So why not capture some of that growth for yourself? Most importantly, the White House, regardless of its current ruling party, has one unspoken mission: don't let the S&P 500 drop.

Most importantly, the White House, regardless of its current ruling party, has one unspoken mission: don’t let the S&P 500 drop.

The Unspoken Pact Between Washington and Wall Street

No president wants to preside over a market crash. Every administration is aligned with keeping the S&P 500 afloat, and with today's record fiscal deficits, the incentive has never been greater. Any misstep or slow reaction to market turmoil risks a debt spiral, so the government has become more aggressive than ever in propping up equity markets.

Trump's recent actions are an example of this. He has openly pushed the Fed to lower rates, blurring the line of long-standing Fed independence. He's also pushed through the "Big Beautiful Bill," which will expand the deficit by nearly $3.4 trillion over the next decade. There's no serious plan to reduce the deficit at this point, so the goal has instead shifted to "grow out of it." And both parties will continue to play this game until something breaks. Old-school valuation metrics may scream "overvalued," but they don't matter in an environment like this.

We've entered a new age, one of sticky inflation, endless deficit spending, and a government that will do almost anything to keep markets at record highs. Unless a president is willing to tank their own legacy to slash the deficit, or take the country down a socialist path, the S&P 500 will remain the best vehicle to fight inflation and preserve your spending power in a world that is getting more expensive by the minute.