Recent inflation was primarily driven by fiscal spending, not the bank-lending credit booms of the 1970s. The Fed’s main tool—raising interest rates—is designed to curb bank lending. This creates a mismatch where the Fed is slowing the private sector to counteract a problem created by the public sector.

Due to massive government debt, the Fed's tools work paradoxically. Raising rates increases the deficit via higher interest payments, which is stimulative. Cutting rates is also inherently stimulative. The Fed is no longer controlling inflation but merely choosing the path through which it occurs.

'Fiscal dominance' occurs when government spending, not central bank policy, dictates the economy. In this state, the Federal Reserve's actions, like interest rate cuts, become largely ineffective for long-term stability. They can create short-term sentiment shifts but cannot overcome the overwhelming force of massive government deficit spending.

The Fed's tool of raising interest rates is designed to slow bank lending. However, when inflation is driven by massive government deficits, this tool backfires. Higher rates increase the government's interest payments, forcing it to cover a larger deficit, which can lead to more money printing—the root cause of the inflation in the first place.

It's the volatility and unpredictability within the supply chain environment—rather than the magnitude of a single shock—that can dramatically amplify the inflationary effects of other events, like energy price spikes. This suggests central banks need situation-specific responses.

Alan Blinder notes that politicians, driven by electoral cycles, lack the will to use fiscal tools (like tax hikes or spending cuts) to cool an overheating economy. The last instance was in 1968 under President Johnson, underscoring why an independent central bank is the only reliable institutional defense against inflation.

The strategic value of commodities in a modern portfolio has shifted from generating returns to providing a crucial hedge against two growing threats. These are unsustainable fiscal policies that weaken currencies ('debasement risk') and the increasing use of commodities as geopolitical weapons that cause supply disruptions.

A future Federal Reserve could abandon interest rate manipulation and adopt a "price rule" to stabilize the dollar's value. This approach, similar to Paul Volcker's strategy, would involve adjusting the money supply based on a basket of commodity prices to achieve near-zero inflation.

The U.S. government's debt is so large that the Federal Reserve is trapped. Raising interest rates would trigger a government default, while cutting them would further inflate the 'everything bubble.' Either path leads to a systemic crisis, a situation economists call 'fiscal dominance.'