When the Titanic first grazed an iceberg on a frozen Atlantic on April 14 1912, the hull’s tremor likely caused a profound sense of panic amongst the passengers. But this fear soon subsided as it was assuaged by the reassurances of an overly confident crew. Or perhaps these assurances were the intentional fabrications of a Captain conscious of pending doom, but fearful of mass hysteria. Regardless, many on the ship must have intuitively sensed both pending catastrophe and the dangerous shortage of life rafts in the time between collision and calamity. The U.S. economy may be in the same sort of dangerous calm just before the tanker goes under and, as may be expected, there are not enough rafts.

To be clear, the fundamentals of the economy are far more secure than they were in 2008, as many of the banks have survived and stabilized. But the country has still not seen the inflation that everyone feared as the result of several rounds of quantitative easing (“QE”). It may never come–but it may also ravage the dollar and therefore every American dependant on that dollar. Commodity prices are already rising steadily but they are yet to hit consumer pocketbooks hard; however, as rising input costs are incorporated into the price of consumer goods, consumers will likely soon notice. Predictions of five-dollar-a-gallon gas are already circulating.

However, an important and less discussed risk of the current QE policy is that it actually over-stimulates the economy. The Wall Street Journal recently reported that the U.S. commercial banking system, the system of banks that borrow from the Federal Reserve and lend to nearly every American and business, is collectively opening the proverbial lending spigot. QE has already mathematically diminished the relative value of every American dollar. This is not problematic if the lending stimulates substantial growth and production increases raising the output level to match the increased capital supply. If there is more money but also more stuff, no one is worse off. But imagine for a moment that QE encourages
too much lending such that borrowed capital is inefficiently used. In this case, where production fails to justify the increased capital creation, we may see serious inflationary effects, perhaps reminiscent of the 1970s (or worse), destroying the purchasing power of every American.

Those who invest in equities and commodities will likely diminish the negative impact of inflation as the market grows to accommodate price increases. Thus, the upper crust and portions of the middle class may be spared if their 401ks and investment accounts grow with inflation. As always, however, the have-nots will suffer greatly. Any laborers, including significant portions of the middle class who do not maintain significant equities will see their purchasing power diluted without any means to counteract the effects of inflation. Where workers barely make ends meet, there is no opportunity for savings and the poor will get poorer as the rich and upper echelons of the middle class try to keep pace. In short, in a
world where the wealth divide is already a primary source of civil discord, the delayed inflationary effects of QE (in conjunction with the country’s astronomical sovereign debt), could be the gash that eventually sinks the supposedly unsinkable ship. Just like on the Titanic, those in the underbelly of the ship may never make it to a raft.