Tag Archives: Federal Reserve

Willful Blindness, Societal Rift & Death of the Dollar, by Michael Lebowitz

History is replete with governments who borrowed themselves to ruin, but not one that borrowed its way to prosperity. From Michael Lebowitz at realinvestmentadvice.com:

“It was assumed, even only a decade ago, that the Fed could not just print money with abandon. It was assumed that the government could not rack up huge debt without spurring inflation and crippling debt payment costs. Both of these concerns have been thrown out the window by large numbers of thinkers. We’ve seen years of high debt and loose monetary policy, but inflation has not come.

So the restraints have been cast aside.”

– David Brooks- New York Times-  Joe Biden Is A Transformational President

Regardless of whether you agree or disagree with David’s politics, he makes an incredibly bold statement above. In no uncertain terms, he argues, massive amounts of monetary and fiscal stimulus can be employed with no consequences, no restraints.

We fear this naïve mindset is not just David Brook’s, but a rapidly growing school of thought among economists, politicians, and central bankers.  We all want unicorn-like solutions to what ails us, but the truth, grounded in history, is there is no such thing as a free lunch.

Since David shrugs off any consequences of aggressive monetary and fiscal policy, we bring them to the forefront.

Who Is Funding Stimulus?

Someone must pay for rampant Federal spending.

Ask your spouse, neighbor, or friend who that might be, and they are likely to tell you the taxpayer is on the hook. To some degree, they are correct but increasingly less so.

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Market Weekly: You Say You Want a Financial Crisis? by Tom Luongo

All central banks can do is create fiat debt instruments. With interest rates rising, they are pm a government debt hamster wheel, continuously creating fiat debt instruments to buy an ever-expanding supply of government debt. It can’t last. From Tom Luongo at tomluongo.me:

gold-dollar-trap

I don’t know what’s more ludicrous at this point, the amount of central bank intervention or the whining from the markets that there isn’t enough.

We’re headed for the mother of all financial crises and from my chair I can’t for the life of me understand how so many smart market analysts can’t see the way it’s being engineered right in front of their eyes.

Despite the headlines and the ocean of money beginning to flood the landscape from the Fed and the Treasury dept. the Fed wasn’t “uber-dovish” on Wednesday. If anything, FOMC Chair Jerome Powell didn’t give the markets what it wanted at all.

All the Fed did was say we’re going to keep doing what isn’t working until 2023 despite what the bond market thinks we should do. Oh, and we’ll make potential credit lines to the banks deeper.

The response was typical. Everything was golden. Taco Tuesday’s are back on the menu and the Fed has our backs.

Because for a brief few hours the algorithms scanned the headlines and reacted accordingly. The weak dollar is here.

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How We Stumbled to the Edge of the Cliff, by Charles Hugh Smith

Like Butch and Sundance (I know I’m dating myself, I don’t care) at the edge of the cliff, the economy’s got nowhere to go but down. From Charles Hugh Smith at oftwominds.com:

Oops. Looks like the Fed’s magic (and our luck) have finally run out.

Now that we’re teetering on the edge of the cliff, it might be a good idea to retrace how we stumbled down to this crumbling, precarious ledge. As I’ve discussed for the past 15 years, there are a handful of systemic forces that have taken us to the point of no return.

1. Demographics have reversed from tailwinds to headwinds. All sorts of extravagant promises could be made back when there were 10 workers paying taxes to support each retiree/state dependent. Now that we’re down to less than 2 full-time workers for each retiree/state dependent, the promises are impossible to keep, with the one exception of printing the trillions of dollars that were anticipated to be paid in taxes–that is, creating near-infinite sums of funny-money out of thin air and hoping the rest of the world will continue to accept it. History doesn’t have any examples of that working, but hey, we’re special and this time it’s different. Oh, right…

The Narrative Of Inflation Amid Depopulation

Just Charts of Demographics (Econimica)

2. The fuel of postwar prosperity, oil, is no longer cheap enough or abundant enough. A great many people are delighted to put their faith in renewables (actually replaceables, as Nate Hagens has described) but as Tim Morgan has explained, the era’s secular stagnation that so puzzled conventional economists can be traced back to the decline in cheap energy available per capita: Mapping the economy:

“The cost element is known here as ECoE (the Energy Cost of Energy), which has been rising relentlessly over an extended period. Whilst ECoE remained low, its omission mattered much less than it does now. This is why conventional, money-based economic modelling appeared to work pretty well, until ECoE became big enough to introduce progressive invalidation into economic models. This process can be traced to the 1990s, when conventional interpretation noticed — but could not explain — a phenomenon then labelled ‘secular stagnation’.”

I addressed the relationship between hydrocarbons and stagnation in Oil and Debt: Why Our Financial System Is Unsustainable. (2/25/21)

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Bulls, Bears, and Beyond: In Depth with James Grant, by Kevin Duffy

Since 1983, James Grant has published an outstanding newsletter (Grant’s Interest Rate Observer), focused on economics and finance. Reflecting its value, an annual subscription of 24 issues will set you back $1295. This interview is a rare opportunity to hear what Grant has to say for free. From Kevin Duffy at mises.org:

James Grant is editor of Grant’s Interest Rate Observer, which he founded in 1983. He is the author of nine books, including Money of the Mind, The Trouble with Prosperity, John Adams: Party of One, The Forgotten Depression, and more recently Bagehot: The Life and Times of the Greatest Victorian. In 2015 Grant received the prestigious Gerald Loeb Lifetime Achievement Award for excellence in business journalism. James Grant is an associated scholar of the Mises Institute.

Kevin Duffy is principal of Bearing Asset Management, which he cofounded in 2002. The firm manages the Bearing Core Fund, a contrarian, macro-themed hedge fund with a flexible mandate. He earned a BS in civil engineering from Missouri University of Science and Technology and has a passion for financial history, Austrian economics, and pithy quotes. He also publishes a bimonthly investment letter called the Coffee Can Portfolio. Duffy attended Mises University in 1990 after seeing Lew Rockwell on CNN’s Crossfire in 1989.


Kevin Duffy interviewed James Grant for his newsletter Coffee Can Portfolio. It is reprinted with permission.

KEVIN DUFFY: 2020 has been part dystopian fiction, part tulip mania. How do we reconcile the two?

JAMES GRANT: I’m not sure there’s much distinction. To me, the current form of dystopia is the bubble form, so I think this is the year of the dystopian bubble.

KD: There has been a worship of authorities. For the past thirty-seven years you’ve focused mainly on the Fed, but this year we’ve seen a reverence for medical authorities. Who has done more damage?

JG: The medical authorities remind me of the economic authorities. Both pretend to draw a bead on the future. Let’s compare them both to the meteorological authorities. The National Weather Service spends over a billion dollars a year and takes tens of millions, if not billions, of discrete observations of wind, weather, tide, temperature, what have you. But notice the five- and ten-day forecasts on your trusty iPhone are ever changing. This is the weather. Temperature gradients don’t have feelings, they don’t get jealous of the millionaire next door, they don’t watch CNBC, yet our forecasting ability goes out, maximum, ten days. Even so, the economists think nothing of calling next year’s GDP.

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The Fed’s Most Convenient Lie: A CPI Charade, by Matthew Piepenburg

If the Fed allowed the true inflation rate to be publicized, and consequently bond buyers demanded interest rates that offered a “real,” inflation adjusted rate of return, it would be virtually impossible for the government to finance its deficits. From Matthew Piepenburg at goldswitzerland.com:

Despite a penchant for double-speak that would make a politician blush, the Fed tells us that its primary focus is unemployment not inflation.

Let me remind readers, however, that an openly nervous Mr. Powell came out in the summer of 2020 with a specific, as well as headline-making, agenda to “allow” higher inflation above the 2% rate.

This “new inflation direction” ignored the larger irony that the Fed had been unsuccessfully “targeting” 2% inflation for years before changing verbs from “targeting” to “allowing.”

Such magical word choices reveal a critical skunk in the Fed’s semantic wood pile.

If, for example, the Fed was honestly “targeting” inflation to no success for years, how could Powell suddenly have the public ability to then “allow” more of what he failed to achieve before, as if inflation was as simple to dial up and down as a thermostat in one’s home?

Dishonest Inflation Reporting

The blunt answer is that the Fed, in sync with the fiction writers at the Bureau of Labor Statistics (BLS), reports consumer inflation as honestly as Al Capone reported taxable income.

In short: The Fed has been lying about (i.e. downplaying) inflation for years.

As we’ve shown in many prior reports, the Consumer Price Index (CPI) scale used by the BLS to measure U.S. consumer price inflation is an open charade, allowing the BLS, and hence the Fed, to basically “report” inflation however they see fit—at least for now.

If, for example, the weighting methodologies hitherto used by the Fed to measure CPI inflation in the 1980’s were used today, then US, CPI-measured inflation would be closer to 10% not the reported 2%.

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The Fed Enabling Biden and Congress’ Destructive Agenda, by Ron Paul

Once upon a time central bankers warned of the dangers of debt. Now they enthusiastically endorse it. From Ron Paul at ronpaulinstitute.org:

According to the Congressional Budget Office (CBO), 2021 will be the second year in a row in which the federal debt exceeds Gross Domestic Product (GDP). CBO also projected that this year’s federal deficit will be 2.3 trillion dollars, which is 900 billion dollars less than last year. However, CBO’s projections do not include the 1.9 trillion dollars “stimulus” bill Congress is likely to pass.

The CBO’s report was largely ignored by Congress and the media. One reason the report did not get the attention it deserves is Federal Reserve Chairman Jerome Powell’s continued commitment to making sure Fed policies enable Congress to spend as much as Congress deems necessary to address the economic fallout from the coronavirus panic.

As financial analyst Peter Schiff points out, the Fed’s commitment to ensuring the government can run up massive debt means the Fed will not allow interest rates to increase to anywhere near what they would be in a free market. This is because increasing interest rates would cause the federal government’s debt payments to rise to unsustainable levels. Yet, the Fed cannot admit it is going to keep rates near, or even below, zero indefinitely without unsettling the markets. So, the Fed continues to promise interest rate hikes in the future and the markets pretend to believe the Fed. When (or if) the lockdowns end, the Fed will find a new crisis justifying “temporarily” keeping interest rates low.

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Yields To Surge As Biden-Yellen Create Record Deficits, by Egon von Greyerz

The deficits over the last year and now projected into the next few years are going to push up interest rates. From Egon von Greyerz at goldswitzerland.com:

Well, right on cue, it looks like the endless creation of fake money by the Fed has now poisoned both the stock market and the bond market. The Dow was down 1,000 (3%) points in two days and the Nasdaq down 7% in two weeks.

Gold and silver are also falling in sympathy. This was expected short term, but the outlook for the precious metals look excellent as I will discuss later.

Is this what the 16th century Swiss doctor Paracelsus ordered? It certainly looks like it. He told us that too high a dosage of anything is toxic. And with a world flooded with toxic money with little value, the levels of poison have reached extremes.

The toxic financial system needs to be cleansed but as we have warned many times, this will have dire consequences for the world.

FRANTIC STOCK BUYING BEFORE THE MUSIC STOPS

Buy high and sell low is the mantra of many investors. And as the stock market surges – buy more! And when it falls, buy still more.

But this time, the method of always being long, which has been fool proof for decades and underwritten by the Fed, will fail hopelessly. Whether investors buy on strength or buy the dips, they will get slaughtered.

As often the case at the end of a cycle, we have in recent weeks seen frantic buying of anything that moves just like with tech stocks in 1999-2000.

Just look at the incredible 16 week inflow to stocks of $414 billion. This is 2X the 2018 peak of $200b and an all-time record.

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28 trillion reasons to have a Plan B, by Simon Black

The US government and its central bank are just going to keep issuing debt until markets stop them from doing so. From Simon Black at sovereignman.com:

At the close of business on Monday March 1st, just a few days ago, the US national debt crossed $28 trillion for the first time in history.

To the penny, in fact, the national debt hit $28,004,376,276,999.35.

And bear in mind that figure doesn’t include the $1.9 trillion in ‘Covid stimulus’ that Uncle Sam is about to pass, let alone all the other deficit spending that they were already expecting for this current fiscal year.

So you can already see how the debt will quickly rocket past $30 trillion in no time at all.

It’s noteworthy that it took the United States more than two centuries to accumulate its first trillion dollars in debt– a milestone first reached on October 22, 1981.

In those two centuries (74,984 days, to be exact), the US fought two world wars, battled the Spanish Flu pandemic, dealt with the Great Depression, waged Cold War against the Soviet Union, fought the Civil War against itself, put a man on the moon, etc. before breaching $1 trillion in debt.

This most recent trillion of debt took a mere 152 days to accumulate.

Think about that: nearly 75,000 days for the first trillion, 152 days for the last trillion.

Even more startling, it was only September 2017 that the national debt first crossed the $20 trillion milestone.

So when the debt undoubtedly hits $30 trillion over the next few months, that means it will have grown $10 trillion in less than four years.

And there is absolutely no end in sight. The Treasury Department and the Federal Reserve are both in lockstep fanaticism: no amount of debt is too much, no amount of money printing is too much.

They find it perfectly logical for the government to restrain large portions of the economy and provide financial incentives for people to be economically unproductive, but then make up the difference by printing money and going into debt.

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Robinhood Thursday and the Washington Idiots at Work, by David Stockman

Central banks’ profligate production of fiat debt liquidity is behind the Gamestop fiasco and stock market valuations completely untethered from underlying economic value. From David Stockman at David Stockman’s Contra Corner via lewrockwell.com:

Today, especially, the “idiots at work” sign should be flying high over Capitol Hill.

We are referring to the boisterous congressional hearings about who is to blame for the crash of GameStop, the alleged nefarious machinations of the hedge funds and Robinhood and the purportedly innocent victims in mom’s basement who thought call options were the greatest new video game since Grand Theft Auto IV.

But among today’s silly foibles, the incessantly repeated idea that the Reddit Mob was a victim of a “pump and dump” scheme surely takes the cake. If these people were stupid enough to think that the value of a company dying in plain sight (i.e. GME) could go from $400 million to $23 billion in less than six months while its reported finances continued to deteriorate, they deserve to loose every dime of the stimmy money they threw into the Robinhood pot.

Still, the fact that the greedy, dimwitted Reddit Mob got its just desserts isn’t the half of it.

What was really on display Thursday in the recently christened (since January 6th) Holy of Holies of American Democracy is the utter cluelessness on both sides of the political aisle with respect to the financial elephant in the room: Namely, that the Fed has transformed Wall Street into a giant, destructive gambling den, which is now sucking a growing share of the populace into the pursuit of instant get-rich speculations that have no chance of panning out.

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Doug Casey on Robinhood, Hedge Funds, and Class Warfare

The Federal Reserve has turned financial markets into casinos so we’ll see more “all in” crazy action like we saw with GameStop and Robinhood. From Doug Casey at internationalman.com:

International Man: We seem to be entering a new paradigm in the financial markets. Social media has allowed a large number of small investors to band together and move markets in ways that were previously inconceivable.

What are your thoughts on this and what lies ahead?

Doug Casey: To start with, most of the people on Robinhood are ultra-unsophisticated—mostly unemployed kids living in their mothers’ basements. A lot of the money that the government sent them—the COVID checks—went into the market.

Of course, Robinhood itself is somewhat problematic with its commission-free trading and no minimum trade size. How can a company make money if it doesn’t charge its customers anything? It does so by having cozy arrangements with hedge funds. In essence, you get what you pay for, and if you don’t pay anything, you can expect to be treated like you’re a product, not a customer. I don’t have any problem per se with Robinhood’s business model, but Robinhood’s real customers are probably the hedge funds, not the public.

I don’t have any sympathy for anybody involved in this—hedge funds, the brokers, or the public. In the markets, eventually, everybody gets what they deserve. Still, the fact that some hedge funds have lost billions is front-page news. And the stock running from like $3 before collapsing from $450 to under $50 at the moment means plenty of late-arriving small fry will have been wiped out on the way down.

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