President Kennedy uttered a line after the Bay of Pig calamity that went something like this: “Success has a thousand fathers, but failure is an orphan.”
U.S. monetary policy has been such a failure that the interventionists and money manipulators are starting to fight among themselves, disclaiming parentage for today’s inflation debacle. Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen have both announced that “transitory,” the word they used all year to describe surging inflation, is now retired.
Perhaps it’s the policy and the policymakers that should be retired.
Although he hails from the same interventionist, Keynesian policy school as Powell, Yellen, and Bernanke before them, Larry Summers has taken the lead in distancing himself from the Fed’s failures. The former treasury secretary and Harvard economist so loudly disowns today’s (and tomorrow’s) inflation, it’s as though he is demanding a paternity test.
Summers said earlier this year that the Fed’s suggestion that it may not raise interest rates for some three years was creating a “dangerous complacency” about inflation. When that policy needs to change, said Summers, it will come as a surprise that will do “real damage to financial stability, and may do real damage to the economy.”
The real damage that Summers and others are talking about is the popping of the “everything bubble,” the stock market, bond market, and housing bubbles, all floated aloft by the Fed’s artificially manipulated interest rates.
The following chart of the yield on 10-year U.S. Treasuries shows 40 years of Fed interest rates repression.
Six months ago, when it was obvious to all that inflation was like a shirtsleeve relative ready to move in to stay, the Fed passed on an opportunity to bring it under control; the pain was too high and the inflation lobby – interest groups, politicians, and Wall Street influentials – was too powerful. One example: The U.S. government, the Fed’s most powerful constituent, cannot afford normalized interest rates. In 2021, interest on U.S. debt was $562 billion. A five percent average rate on the government’s $30 trillion debt would add a trillion dollars a year to the government interest expense.
This is not the Fed’s first encounter with the prospect of letting rates rise. In 2013, like today, the Fed hinted it would ease up on its bond-buying, money printing. A nasty interlude of spiking bond yields ensued that became known as the “taper tantrum.” The Fed apologized and backed off.
Powell initiated another Wall Street tantrum in 2018. Hints at turning down the money spigot and four small interest rate bumps collapsed stock prices. By Christmas Eve, the S&P 500 had fallen 20 percent from its high just weeks earlier. It didn’t take Powell long to backtrack.
And now here we are with inflation at 30-year highs. Feeling the heat in November, the Fed announced it plans to wind down its bond-buying program by next June, to be followed by interest rate hikes. But now, just weeks later, there is a change of plans. Inflation has become so politically costly that the Fed is talking about doing everything it was going to do, only sooner.
But there are problems. Omicron has the Fed worried that the COVID variant’s repressive effects will effectively dogpiling on its promised monetary tightening.
And then there were the weak November jobs creation numbers. Wall Street expected an increase of 573,000 nonfarm payroll jobs. The number came in at less than half that, only 210,000. Another dog on the pile.
But there is something even bigger. JPMorgan analysts foresee oil hitting $125 a barrel in the year ahead and $150 in 2023. That is up from $69 as we write. OPEC and other producers like Russia are “firmly in the driver’s seat” now, say the energy analysts. Maybe President Biden should have thought of that on his inauguration day when he canceled the Keystone Pipeline. It would have delivered 800,000 barrels a day to U.S. consumers.
We keep hearing that corporate boards are unwilling to commit the necessary capital to future petroleum development and production projects. They fear the administration’s net-zero carbon dioxide emission conceits. Under the circumstances, a doubling of oil prices is totally plausible. (And that is without factoring in the growing prospects of a war of principals or proxies with Russia.) Meanwhile, natural gas recently hit an all-time high in Asia. China is already experiencing energy blackouts and cutbacks. Since nothing escapes the load of higher energy costs, JPMorgan’s predicted price hike would be like adding another huge tax on households and businesses.
How much can the economy take? High inflation, lockdowns, supply chain disruptions, snd now higher rates, and an energy crunch threaten the stock market with a one-two combination blow.
It is not just the stock market that is vulnerable. The Fed has inflated real estate prices by buying down mortgage rates. Since March 2020 it has purchased $1.2 trillion of mortgage securities. What happens to the housing boom when the Fed wraps that operation up, now perhaps as early as March?
These risk dynamics militate strongly against the Fed seriously tightening. Especially in 2022, an election year. All the hawkish talk about higher rates stops when Wall Street throws a fit. The Fed may announce something perfunctory in the new year, like a quarter-point increase in the Fed Funds Rate. Followed by one or two more of the same. That would be all show and no substance, leaving rates still deep in negative territory. After all, the Fed Funds Rate is currently only 0.25 percent, while consumer prices are rising at over 6 percent. That means the inflation-adjusted (real) Fed Funds Rate is less than –5 percent.
We will try to find a new metaphor if we have warned too often that the Fed was painting itself into a corner. But this is that corner. If the Fed tightens monetary and credit conditions meaningfully, all the speculative bubbles begin to pop.
At that point, the Fed does what it always does: It furiously pumps out more money — faster than before. The late Dow Theory writer Richard Russell named this crossroad “Inflate or Die.”
And gold explodes higher.
We have seen it all before. Only this time the debt and money printing numbers are much, much bigger. That is why we recommend wealth preservation practices by taking money out of the at-risk stock and bond markets now. Avoid the Fed’s policy errors and protect your retirement with gold during the turmoil that is about to begin.
Let us provide you with a free one-on-one consultation to help you protect your retirement.
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.