The beatings will continue until morale improves. The Hon. Jerome H. Mr. Powell, in statements this Tuesday:
There is a long way to go to maximum employment… We live in a time where there is significant disinflationary pressures around the world and where essentially all major advanced economy’s central banks have struggled to get to 2% (inflation). We believe we can do it, we believe we will do it. It may take more than three years…
Here Mr. Powell’s understrapper — Federal Reserve Governor Lael Brainard — grabs the knout:
The economy remains far from our goals in terms of both employment and inflation, and it will take some time to achieve substantial further progress.
That is, you can expect additional years of suppressed interest rates… of monetary delirium… of skyshooting debt.
That is, you can expect years of ongoing beatings.
Haven’t the brutalities endured long enough — without an appreciable uplift in morale?
Set aside the stock market and its jubilations. Take the Federal Reserve on its own terms… and look at inflation…
Years and Years of Futility
For 12 years running, the Federal Reserve has gone at inflation hammer and tong. Its savageries defy all standards of civilized decency.
Yet the men remain dispirited… and demoralized… despite the beatings.
A sustained 2% (official) inflation rate remains as elusive as the holy grail itself. Why would more bludgeonings yield the prize?
There is an excellent reason to believe they will not.
Debt turns deflationary come a certain point… as benign substances turn toxic come a certain point.
As Mr. Lance Roberts of Real Investment Advice recently noted in these pages:
“Monetary policy is ‘deflationary’ when ‘debt’ is required to fund it.” More:
Beginning in 2000, the “money supply” as a percentage of GDP has exploded higher without a resulting rise in inflation or economic growth…
With each monetary policy intervention, the velocity of money has slowed along with the breadth and strength of economic activity…
Despite perennial hopes that economic growth and inflation would arise from lower rates, more government spending, and increased “accommodative policies,” each iteration led to weaker outcomes…
In an economy saddled by $82 Trillion in debt, the debt is no longer productive as more debt is issued to cover ongoing spending needs…
Decades of (the Fed’s) monetary experiment have succeeded only in reducing economic growth and inflation and increasing economic inequality.
Yet the Federal Reserve does not reconsider its enforcement mechanisms.
It concludes — rather — that its pummelings have lacked the requisite oomph. The victim requires greater bruising.
And so the brass knuckles are out. The battering may run three years yet by Mr. Powell’s own estimate.
“Insanity is doing the same thing over and over again,” runs the old saw, “and expecting different results.”
Our esteem for the monetary authority is mighty. We would never in one million years insinuate it is in insanity’s grip.
A cheekier fellow might. But we refrain in decency, likely misplaced decency.
Yet what is this? The Federal Reserve is acquiring additional muscle?
The Fed Tag-Teams With the Treasury
Monetary policy — quantitative easing and zero interest rates — has failed to lift morale.
It has largely inflated assets. But not the consumer price index. The money simply has not oozed over into the broad economy.
The beatings must therefore continue. Harsher beatings.
And so another goon is ganging in… a roughneck with years of hard experience cracking skulls… and breaking legs.
The name is Janet Yellen. She is the latest Treasury Secretary. And she has a good hard clubbing in mind.
She is adding her fiscal muscle to the Federal Reserve’s monetary punch. Each lacks knockout wallop. But together?
The “One-Two” Combination
Crackerjack analyst Lyn Alden Schwartzer, author of Stock Waves:
The Federal Reserve can create base money out of thin air in a process they call “quantitative easing” or QE for short, but has very limited methods to inject it into the broad money supply. They can only buy bonds and certain other assets with it. They have no way to send money to real people and businesses in the economy, outside of financial markets.
The Treasury Department, on behalf of Congress and the President, can send money out to people and businesses, but needs to issue bonds associated with that spending, which just moves money around. The bonds pull capital out from one place (the lenders) and puts it in another place (where it is spent). Therefore, the government also doesn’t have many ways to directly increase the broad money supply within the context of the existing legal structure.
But together the Federal Reserve and the Department of Treasury may deliver the one-two combination…
A straight cross of monetary policy… succeeded by an upper cut of fiscal policy:
However, the combination of the Treasury Department and the Fed working together, with the Treasury Department sending checks out into the broad money supply and the Fed creating new base money to buy the bonds associated with that spending (rather than extracting that money from real lenders buying the bonds with existing money), outright increases the broad money supply.
Exploding Money Supply
Deficit spending has expanded to dimensions truly extravagant.
Treasury debt jumped $5 trillion this past year… from $23 trillion to nearly $28 trillion.
Observe the increase in M2 money supply — the broad money supply — then lift your jaw from the floor:
The M2 money supply has swollen some 25% within the space of one year. Yearly M2 expansion had never exceeded 15% prior to 2020.
Meantime, a $1.9 trillion bill is on the stocks, awaiting passage. Mr. Biden plans to expend an additional $4 trillion later this year.
Will the twin bombardments of the Federal Reserve… and the Treasury… finally yield the grail of 2% inflation, sustained?
It is a ferocious assault. What if it meets — or exceeds expectations? What if inflation finds its roar?
Interest Rates and Debt Approaching Collision
Long-term interest rates would jump. 10-year Treasury yields are already bubbling on “reflationary” expectations.
At 1.5%, they remain historically low. But note the trend — it is up. Last August 3, yields hovered at 0.56%.
This economy and this stock market cannot withstand a substantial interest rate increase. They depend too heavily upon cheap debt… as a corner sot depends on cheap liquor.
As the drunk cannot afford pricier drink, these tosspots cannot afford pricier debt.
The question then arises: What interest rate would break them? The aforesaid Lance Roberts:
The limit of that increase in rates is between 1.56% and 2.19%. At these points, rates will collide with the outstanding debt.
In this telling, interest rates and outstanding debt are locked on a colliding course. A wreck is not imminent. But opposing masses are in violent motion.
Thus the Federal Reserve is hung upon the hooks of a dilemma. Concludes Roberts:
The surge in inflation will limit their ability to continue “unlimited QE” without further exacerbating the inflation problem. However, if they don’t “monetize” the deficit through their “QE” program, interest rates will surge, leading to an economic recession.
It’s a no-win situation for the Fed.
The fellow draws the scene in dark colors. A no-win situation is an all-lose situation.
Yet we advise you to keep heart. After all…
Our collective fate is in the infinitely capable hands of Jerome Powell and Janet Yellen…
Managing Editor, The Daily Reckoning