The job of the Federal Reserve is to take away the punchbowl when the party is just getting going.
That was the description offered by Fed chairman William McChesney Martin in 1955. Since the Fed has only one trick – it prints money – Martin was saying that the Fed needs to reduce its “stimulus” printing before things get out of hand.
While that advice sounds positively sober compared to the way the Fed has been spiking the monetary punchbowl these days, the truth is the Fed should never have been plying the economy with alcohol, that is goosing the economy by printing money to lower interest rates, to begin with.
Interest rates are the price of money.
Since all prices convey information about supply and demand, information that is vital to commerce, rates should not mislead, but should reflect real conditions of supply and demand. It rates rise, it tends to dampen excessive borrowing and dangerous speculation. Higher rates are just the signal needed to induce people to save money when it is needed. Then the growth of capital in turn allows rates to fall naturally, accurately reflecting supply and demand conditions.
Lower rates that are contrived by money manipulation encourage excesses and the formation of dangerous bubbles that eventually burst with devastating effects.
But compared to earlier Fed chairmen, recent head money manipulators Powell, Yellen, and Bernanke sound more like the singer Pink:
I’m comin’ up, so you better get this party started!
I’m comin’ up, so you better get this party started!
Not even the news that inflation is starting to run hot is enough to stop them from pouring more booze into the economy.
Spiking the punchbowl is a good metaphor, because all that drunkenness is inevitably followed by a painful hangover. The Fed knows this and has made its choice: rather that let the excesses that have built into the economy correct – we are looking at you stock market! – it has no intention of stopping.
Even in the face of today’s sharply rising inflation, the Fed has no intention of stopping. You have heard since we last wrote that the Consumer Price Index jumped 0.8 percent in April. Over the last 12 months it is up 4.2 percent.
Producer prices rose 0.6 percent in April. For the last 12 months wholesale prices are up 6.2 percent.
The Fed maintains that this is temporary, but it continues to print money to buy bonds at the rate of $120 billion a month anyway.
It is a hair of the dog thinking, inflation at a pace deemed unthinkable not long ago. Included in all that money printing is $40 billion a month to buy mortgage bonds. Does the Fed really think it needs to print almost a half trillion dollars a year to goose the housing market? Has anybody there even looked at home prices lately?
In fact, the Fed has no intention of taking the punchbowl away. Mary Daly, the president of the San Francisco Fed said it clearly: “That’s something that worked maybe in the past, definitely doesn’t work now, and we’re committed to leaving that punchbowl or monetary policy accommodation in place until the job is fully and truly done.” Other Fed officials have echoed the point. Atlanta Federal Reserve President Raphael Bostic offered that he sees inflation as a sign of “a healthy economy.”
There is a huge financial hangover in our future.
We urge you to review your portfolio and retirement exposure and protect yourself with gold and silver without delay. Events are moving very fast.
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