Loss of purchasing power directly parallels inflation diluting savers’ future purchasing power. Inflation can be measured by dividing the amount of money and credit created in a given year by the total existing supply of money and credit. Holding the supply of goods and services constant, the added supply of money and credit will exert pressure on asset prices, goods, and services in fairly unpredictable fashion. A U.S. dollar is a claim on the current and future supply of goods and services. As the government creates more money (an increasing money supply and an increasing deficit) it chases the same amount of goods and services, therefore inflation.

Contrary to popular belief, recessions initially exert pressure on published CPI numbers if the supply of goods and services contracts more quickly than the supply of money and credit. It is only until default rates pick up and credit becomes rationed that pressure on CPI is eased. However, you can expect that the Fed will have long reversed course and even reach for its “emergency measures” toolbox if fears of another Great Depression pop up again. Whether these measures ultimately work depends entirely upon the U.S. dollar’s reserve currency status; you should not automatically assume the status quo, but, instead, consistently monitor the situation as it unfolds. This is the only way to successfully navigate these tumultuous Fed managed interest rate hikes.

Chairman Ben Bernanke is likely to be menaced by persistently high core CPI numbers while housing and consumer spending is clearly slowing. Whether or not you believe in the necessity of the Fed to “manage the economy”, you must at least acknowledge that its task of managing inflation expectations has rarely been more difficult than it is now. The Fed is facing increasing pressure to “pause,” but it risks are creating inflation. You will want to start to think about positions in gold and silver not stocks.