Tag Archives: Federal Reserve policies

Settling Wreckage from the Past, by MN Gordon

Cascading government debt, suppressed interest rates, and wholesale debt monetization have completely boxed in the Federal Reserve, leaving it with nothing but unpalatable options. From MN Gordon at economicprism.com:

Settling wreckage from the past with realities of the present can be difficult and painful. If you do the crime. You must do the time.

When it comes to financial markets and the economy, this can take many forms. Some of the most common include bankruptcy, shuttered businesses, and collapsing share prices.

This week Federal Reserve Chair Jay Powell and his cohorts at the Federal Open Market Committee Meeting (FOMC) raised the federal funds rate 50 basis points. This marked the first 50 basis point rate hike since 2000. It is part of the Fed’s initial efforts to settle up on wreckage from the past.

The world has changed markedly over the last 22 years. Certainly, the economy and financial markets have become twisted and warped. Without the proper perspective everything from the price of a gallon of gas to the price of a house is muddled and confused.

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Busting The Myth That The Fed Can Control Or Predict The Economy, by Jon Wolfenbarger

Nobody how many times this myth is punctured, it keeps coming back. There’s not a shred of evidence to support the widespread notion that the economy is a puppet dancing on strings controlled by the Federal Reserve. From Jon Wolfenbarger at Bull and Bear Profits via zerohedge.com:

The Federal Reserve states that it “conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.”

Let’s look at how well the Fed has done that job since its founding in 1913.

Economy And Long-Term Interest Rates

Since 1913, the US unemployment rate has ranged from 2.5% in the early 1950s to 25% during the Great Depression. Inflation has ranged from positive 24% to negative 16%. Inflation is currently 7.9%, well above the Fed’s 2% target. While the Fed has some influence over money supply, they have no control over money demand or how money is spent, which has a significant impact on employment and inflation.

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What is the Strike Price of the Powell Put? by MN Gordon

The level of the stock indexes may be far below where there are now for the Federal Reserve floods the system with liquidity, because past such infusions are already fueling raging price increases. From MN Gordon at economicprism.com:

The Federal Reserve, through a multi-decade series of shady practices, finds itself in a very disagreeable place.  Policies of extreme market intervention have positioned the economy and financial markets for an epic bust.

Price inflation.  Unemployment.  Interest rates.  Stock market valuations.

These metrics are presently situated in such a way that the “Powell put” will be impossible to successfully execute for the foreseeable future.

Price inflation is at a 40 year high.  The unemployment rate is 3.8 percent, which is near its low.  The 10-Year Treasury note is yielding 2.15 percent.  While this key interest rate is certainly trending higher, it’s still near a historical low.

And for all the wild price swings and gnashing of teeth over the last two months, the S&P 500 has hardly slipped.  In fact, as of market close on Thursday March 17 of 4,411, the S&P 500 is down only 7.83 percent from its all-time record close of 4,786 reached on January 3.  It still has another 12.17 percent to fall before reaching official bear market territory.

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Why This is the Most Reckless Fed Ever, and What I Think the Fed Should Do to Reverse and Mitigate the Effects of its Policy Errors, by Wolf Richter

It’s far easier to document the Federal Reserve’s depredations than it is to get the Fed to admit or rectify them. From Wolf Richter at wolfstreet.com:

The Fed’s credibility shifted from Inflation Fighter under Volcker to Wealth Disparity Creator and Inflation Arsonist under Powell. And everyone knows it.

As stunningly and mindbogglingly bizarre as this sounds, it’s reality: Inflation has been spiking for over a year, getting worse and worse and worse, while the Fed denied it by saying, well, the economy is recovering, and then it denied it by saying, well, it’s just the “base effect.” And when inflation blew out after the base effect was over, the Fed said it was a “transitory” blip due to some supply chain snags. And when even the Fed acknowledged last fall that inflation had spread into services and rents, which don’t have supply chains all over China, it conceded that in fact there was an inflation problem – the infamous pivot.

By which time it was too late. The “inflationary mindset,” as I called it since early 2021, had been solidly established.

I’ve been screaming about it for over a year. By January 2021, I screamed that inflation was spreading broadly into the economy. By February 2021, I screamed that inflation was spreading into the service sector. And I screamed about inflation in the transportation sector. By March 2021, it was obvious, even to me, that “something big has changed,” based on the fact that consumers were suddenly willing to pay totally crazy prices for used cars, when many of them could have just driven what they already had for a while longer, which would have brought the market down, and with it prices.

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Oops…Is the Crack-Up Boom Here, by Ron Paul

The primary beneficiaries of inflation are those who are first in line for the newly created money, at the top rather than the bottom of the financial ladder. From Ron Paul at ronpaulinstitute.org:

Bloomberg News recently solicited advice from Argentinians who lived through that country’s high inflation on how Americans should cope with rising inflation. The Argentinians suggested Americans spend their paychecks as fast as possible to avoid future price increases. They also suggested taking out loans that can be paid back later in devalued currency.

These strategies may make sense for individuals. However, encouraging debt and discouraging savings is disastrous for the country. Relying on debt and spending one’s paycheck immediately encourages people to seek instant gratification instead of planning for the future. This depletes both economic and moral capital.

November’s 9.6 percent increase in the producer price index, combined with the consumer price index’s increase to levels not seen since the early 1980s, shows why fears of inflation have become the public’s number one concern. Even the Federal Reserve has acknowledged that inflation is not just “transitory.”

The Fed recently announced it is accelerating the timetable to reduce its monthly purchases of Treasury and mortgage-backed securities. The Fed also announced it is planning three interest rate increases next year. However, the Fed plans to increase rates by no more than one percent. So even if the Fed does follow through on its promise to hike rates, it will do little if anything to combat rising prices. If the Fed allowed interest rates to rise to anything approaching market levels, it would make the federal government’s debt servicing costs unsustainable. This puts tremendous pressure on the Fed to maintain low rates.

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The Fed Is Hawkish Now? I’ll Believe It When I See It. By Ryan McMaken

Pouring a little less gas on a fire doesn’t make you a fireman. From Ryan McMaken at mises.org:

If you did any Fed watching this week, you probably heard all about how Jay Powell has turned (or perhaps returned) to hawkishness, and how the Federal Open Market Committee is all about fighting price inflation now.

A particularly cartoonish version of this claim was written by Rex Nutting at MarketWatch, who declared, “Everyone’s a hawk now. There are no doves at the Fed anymore.” He wrapped up with “This means that inflation no longer gets the benefit of the doubt. It’s been proven guilty, and even the doves will prosecute the war until victory is won. For the inflation doves at the Fed, Nov. 10, 2021, was bit of [sic] like Dec. 7, 1941: Time to go to war.”

This reads like a parody, so I’m still not 100 percent convinced this writer isn’t being sarcastic. But one will find no shortage of articles making similar claims throughout the financial media—albeit in a less over-the-top fashion.

We’re told about the “Jay Powell pivot” and how the Fed will even soon be “normalizing.” Let’s just say I’ll believe it when I see it. In fact, the evidence strongly suggests the Fed is still of the thinking that only a few tweaks will set everything right again. All that’s needed is a slight slowdown in quantitative easing (QE), and maybe an increase of fifty or a hundred basis points to the federal funds rate, and happy days are here again.

In other words, the Fed is still thinking the way it has thought for the entirety of the twelve years since 2009, when today’s QE experiment began. In that view of the world, it’s never the right time to end unconventional monetary policy. It’s never the right time to sell off assets. It’s never the right time to let interest rates increase by more than a percent or two. Meanwhile, the reality for ordinary people has been one of the weakest and slowest recoveries in history. But the Fed justifies it all to itself because Wall Street is happy.

That’s been the reality for more than a decade. And there are no signs that the Fed is “pivoting” away from that any time soon.

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The Fed’s Monetary Policy Has Screwed Americans, by Lance Roberts

With free markets in debt and interest rates, it’s virtually impossible for real interest rates (the nominal rate minus the inflation rate) to remain negative for any length of time. That they have remained negative for years in both the US and Europe bodes poorly for their economies and financial markets. From Lance Roberts at realinvestmentadvice.com:

The Fed’s monetary policy has screwed Americans. Such is the basic premise of a recent Washington Times article discussing inflation. To wit:

“Do you find it odd that banks and other financial institutions provide mortgage loans to millions at an approximately 3% interest rate for 30 years, while the government reports that inflation is over 6% at an annual rate and rising? Are you frustrated that you are a responsible and prudent person who saves for a ‘rainy day’ or retirement, and your savings account only pays 1% or so interest, while inflation is many times that? Do you find it odd that the government official most responsible for inflation – Treasury Secretary and former Fed Chairman Janet Yellen – several months ago told us that inflation would be mild and transitory, neither of which has turned out to be correct? Do you suspect that she may not know what she is doing, particularly when she says that more record government spending will bring down inflation?”

There is a lot of truth in that statement. However, it is not just Janet Yellen’s fault. The problem lies directly with the Fed’s monetary policy decisions implemented since the turn of the century, and particularly, the Financial Crisis. As each bailout of the financial system occurred, yields fell along with inflationary pressures and economic growth.

Fed's Monetary Policy, The Fed’s Monetary Policy Has Screwed Americans

Of course, as discussed in “Fed Issues Stock Market Warning,” the only thing the Fed succeeded at was inflating a “valuation” bubble of epic proportions.

At 40x trailing earnings, current valuations are higher at the peak of the market in 1999.

Fed's Monetary Policy, The Fed’s Monetary Policy Has Screwed Americans

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Alternative Economists Were Right – the Stagflation Crisis Has Arrived, by Brandon Smith

The Fed kicked the can down the road during the last financial crisis, forestalling but not preventing the ultimate crash that’s an inevitable consequence of their policies. From Brandon Smith at theburningplatform.com:

Alternative Economists Were Right, The Stagflation Crisis Is Here

For many years now there has been a contingent of alternative economists working diligently within the liberty movement to combat disinformation being spread by the mainstream media regarding America’s true economic condition. Our efforts have focused primarily on the continued devaluation of the dollar and the forced dependence on globalism that has outsourced and eliminated most U.S. manufacturing.

The problems of devaluation and stagflation have been present since 1916 when the Federal Reserve was officially formed and given power, but the true impetus for a currency collapse and the destruction of American buying power began in 2007-2008 when the Financial Crisis was used as an excuse to allow the Fed to create trillions upon trillions in stimulus dollars for well over a decade.

The mainstream media’s claim has always been that the Fed “saved” the U.S. from imminent collapse and that the central bankers are “heroes.” After all, stock markets have mostly skyrocketed since quantitative easing (QE) was introduced during the credit crash, and stock markets are a measure of economic health, right?

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Stockman: A (Bad) Tale Of Two Inflations

Monetary inflation has inflated the prices of both financial assets, which is good for those who own them, and the necessities of life, which is bad for those who must pay for rent, food, medical care, utilities, and gas. From David Stockman at zerohedge.com:

Authored by David Stockman via Contra Corner blog,

Our paint by the numbers central bankers have given the notion of being literalistic a bad name. For years they pumped money like mad all the while insisting that the bogus “lowflation” numbers were making them do it. Now with the lagging measures of inflation north of 5% and the leading edge above 10%, they have insisted loudly that it’s all “transitory”.

Well, until today when Powell pulled a U-turn that would have made even Tricky Dick envious. That is, he simply declared “transitory” to be “inoperative”.

Or in the context of the Watergate scandal of the time,

“This is the operative statement. The others are inoperative.” This 1973 announcement by Richard Nixon’s press secretary, Ron Ziegler, effectively admitted to the mendacity of all previous statements issued by the White House on the Watergate scandal.

Still, we won’t believe the Fed heads have given up their lying ways until we see the whites of their eyes. What Powell actually said is they might move forward their taper end from June by a few month, implying that interest rates might then be let up off the mat thereafter.

But in the meanwhile, there is at least six month for the Fed to come up with excuses to keep on pumping money at insane rates still longer, while defaulting to one of the stupidest rationalizations for inflation to ever come down the Keynesian pike: Namely, that since the American economy was purportedly harmed badly, and presumably consumers too, with the lowflation between 2012 and 2019, current elevated readings are perforce a “catch-up” boon. That is, more inflation is good for one and all out there on the highways and byways of main street America!

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The Upshots of the New Housing Bubble Fiasco, by MN Gordon

When the current housing bubble pops, it won’t be as bad as the pop in 2008-2009, it will be worse. From MN Gordon at economicprism.com:

“The free market for all intents and purposes is dead in America.” – Senator Jim Bunning, September 19, 2008

House Prices Go Vertical

The epic housing bubble and bust in the mid-to-late-2000s was dreadfully disruptive for many Americans.  Some never recovered.  Now the central planners have done it again…

On Tuesday, the Federal Housing Finance Agency (FHFA) released its U.S. House Price Index (HPI) for September.  According to the FHFA HPI, U.S. house prices rose 18.5 percent from the third quarter of 2020 to the third quarter of 2021.

By comparison, consumer prices have increased 6.2 from a year ago.  That’s running hot!  But 6.2 percent consumer price inflation is nothing.  House prices have inflated nearly 3 times as much over this same period.

Here in the Los Angeles Basin, for example, things are so out of whack you have to be rich to afford a 1,200 square foot fixer upper in a modest area.  Yet the clever fellows in Washington have just the solution.

Massive house price inflation has prompted the FHFA, and the government sponsored enterprises (GSEs) it regulates, Fannie Mae and Freddie Mac, to jack up the limits of government backed loans to nearly a million bucks in some areas.

Specifically, the baseline conforming loan limit for 2022 will be $647,000, up nearly $100,000 from last year.  In higher cost areas, conforming loans are 150 percent of baseline – or $970,800.  What gives?

If you recall, ultra-low interest rates courtesy of the Federal Reserve following the dot com bubble and bust provided the initial gas for the 2000s housing bubble.  However, the housing bubble was really inflated by Fannie Mae and Freddie Mac.  The GSEs relaxed lending standards and, thus, funneled a seemingly endless supply of credit to the mortgage market.

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