The Fed set this in motion long ago, arguably as early as 1987, and certainly by the early 2000's. Then they shifted up a gear in 2008/2009, and again in 2020.
The era of ever-declining interest rates since the early 1980s allowed the entire economy (as well as government) to lever up with more and more debt. The lower the interest rates, the more debt can be serviced. Raise rates high enough now to truly stop inflation and enough of that debt will end up in default that we won't have a recession, we'll have a depression. They've painted us into a corner.
The crucial break came in 2008/2009, with the introduction of QE after the 2008 financial crisis.
But you're right. Pretty much from Greenspan's tenure as Fed Chair forward, the loose monetary policy has been building up to this conclusion.
How high interest rates have to go is a question, and the only comparison we have is the Volcker rates from 1979 through 1982. Following his example if inflation is checking in at around 9-10%, interest rates have to get up to at least 13-14%. However, Powell's experience with interest rate hikes back in 2018 suggests that he might not have to go that high. If he can keep interest rates below 4-5% and still corral inflation, then there's an outside chance of avoiding debt default.
The key word there is "if". There are a lot of structural differences between the present situation and the late 1970s.
There was already a lot of excess leverage (debt) in the economy in 2008/2009 due to the rates having been artificially low since at least 2001. I won't argue that that the Fed doubling down on low rates via QE instead of allowing what should have been a de-leveraging of the economy was a "crucial break". That also allowed the huge, ongoing federal budget deficits. Without that QE, the bond market would force rates up long ago.
At some point, the piper has to be paid, and I suspect we've reached it.
However, one of the oddities of the present situation is the absolutely bizarre shift that occurred in 2008/2009.
Before then the M1 money supply growth more or less tracked CPI growth (inflation)--exactly as classic monetarist theory would suggest. Asset prices as represented by the Dow Jones and S&P 500 indices moved more or less independently.
Between 2008 and 2019, however, those relationships inverted. The correlations between the market indices and the M1 money supply growth rates approach 1 (perfect correlation), while the correlation between CPI and M1 growth rates diminishes.
According to Friedman and other monetarists, that can't happen. But it did.
2020 onward is another shift altogether.
These departure points are what allowed the proponents of MMT (Modern Monetary Theory) to advance their insane ideas that money printing was a good idea.
The question that has yet to be resolved is what the "reversion to mean" looks like. We have some idea of what can happen by looking at the bond markets in Japan (which went full MMT long ago). Theoretically, Japan should have melted down long ago, but the yen is still somehow holding on to a sliver of credibility.
What does this mean for the dollar (and, by extension, Treasury debt)? I won't even begin to hazard a guess, although I seriously doubt any of this ends well.
Peter, lots talk about CBDC - BIS, but the FED cannot legally print non-liability fiat money, CBDCs because Congress never authorized that after gold standard ended 1971. Powell knows the FED has a legal problem that could be resolved by consolidating the FED and Treasury, but that would open up the FED's books!
FED's illegal claimed liabilities are equity - assets to the tune of Trillions of dollars.
Frankly, I'm unpersuaded that CBDCs have the power and the inevitability that a number of people ascribe to them.
First, there's the real world experience of the digital yuan. A system as thoroughly totalitarian as China can't get its people to use it much. If China can't make a go of CBDC, I doubt more liberalized political systems will have any great success with them either.
Second, there's a structural problem, particularly with the dollar but to a degree with all the major currencies. Chiefly, as proposed, a "digital dollar" is NOT a "dollar". If it's a different currency, then all the existing currency relationships DO NOT COUNT. In other words, the digital dollar would have to establish its own exchange rate with other currencies--including other digital currencies if/when they came online.
On the other hand, if a "digital dollar" is still a "dollar", then the "digital" aspect is merely a Central Bank "wallet". Privacy concerns aside, the use of such a technology effectively nationalizes all holdings that go into the M1 money supply, which kills off the entire banking industry (without deposits their capital base disappears). Not only are there Constitutional concerns with such a transition, but the unavoidable economic dislocations would be Biblically apocalyptic.
As regards merging the Treasury and the Fed--legally not possible. The Federal Reserve is a system of outwardly private banks, with the nation's commercial banks being members/investors in whichever Federal Reserve bank serves their particular region of the country. To merge the Federal Reserve banks with the Treasury would require the Treasury to purchase outright the Federal Reserve banks, and even if there were a sufficient store of capital to do so, such an outright nationalization of the banking system would never get past the first Constitutional challenge (nor would the Congress go along with the idea because to do so would also destroy all their investment portfolios that hold the bulk of their ill gotten gains).
Mark Wauck had an interesting take on this. He thinks the Fed is doing this to break WEF, using inflation as cover story.
If that is tbe case, I don't know that it's needed. The WEF/DAVOS war in Ukraine may do it nicely. No Russian or Chinese raw materials means no chips.🤷
The Fed's rhetoric has basically put them in the position of throwing the markets pretty much under the bus.
As for the consumer/worker/ordinary American--he always gets thrown under the bus. Volcker did it. Greenspan did it. Bernanke did it big time. Yellen did it. Powell did it.
The markets are convinced Powell is going to cave on rates and restart QE. But if he doesn't soon, it won't much matter.
Warren Buffett once made an observation about investing to the effect that once the tide goes out you can tell who's been swimming naked. That sums up the situation for Wall Street rather nicely, I think. And the longer Powell lets the tide roll out, the more naked swimmers will be exposed.
After a while restarting QE would be a pointless exercise.
The perversity of the whole situation is that if Powell does trigger a Volcker-like recession AND the economy and the country survive it (big "ifs" all around), the economy would be in a healthier state of balance in the end.
It's shock therapy with one hell of a price tag attached. One that everyone is scared to pay (and with good reason).
On the stock market front: higher interest rates and a tighter monetary policy will push down prices. Stock market funds that rode the indices on the way up will get shellacked on the way down.
On the housing front: the picture is a bit murkier. Mortgage rates are sure to keep rising in the short term. This will cool off housing demand, but it will also likely cool off housing construction and investment. The net effect on housing prices is still likely to be ultimately disinflationary, but the timing is up in the air.
On the job front: there will be layoffs. Some are already starting.
Food price inflation is likely to stay elevated through the rest of the year. Outlook for 2023 depends on how good the harvests are the rest of this year.
Energy (gas for your car) is going to get more expensive. Some pundits are talking about $200 for a barrel of crude oil.
Disposable income is likely to keep declining, as job cuts reduce overall weekly earnings.
That will cut into overall consumption. Less disposable income means less money to spend.
If Powell sticks to the Volcker playbook, interest rates will stay high for a while, forcing a long and deep recession, vis-a-vis the 1980-1982 recession.
If Powell capitulates and restarts QE--basically printing money --inflation will go high, stay high, and potentially destabilize the economy, precipitating a 1929-style crash and depression.
These are, of course, not good outcomes on either side. Working folk take it in the shorts either way. Even the bottom tiers of "the rich" are going to feel some pain, as their investments crater and their assets shed value.
How certain is it that these things will come to pass? Broadly speaking, the inflation is going to happen, and the disinflation as inventories turn into gluts is going to happen. Job losses are already starting, and future unemployment figures are likely to start trending up.
How bad will the magnitude of these things be? That is a question yet to be answered. I am not sanguine about the odds of the magnitudes being small.
The US has several structural advantages over Sri Lanka, not the least of which is the capacity to wholly provide its own food supply (and even energy at least for a time). Sri Lanka, like a number of developing countries, depends heavily on food and energy imports.
Food and energy are, along with housing, the most crucial economic goods there are, for obvious reasons. A country which cannot provide them internally is always going to be vulnerable to external shocks.
People can withstand not being able to buy new iPhones and Nike running shoes. They cannot withstand not being able to buy rice, beans, meat, and other essentials for survival.
The Fed set this in motion long ago, arguably as early as 1987, and certainly by the early 2000's. Then they shifted up a gear in 2008/2009, and again in 2020.
The era of ever-declining interest rates since the early 1980s allowed the entire economy (as well as government) to lever up with more and more debt. The lower the interest rates, the more debt can be serviced. Raise rates high enough now to truly stop inflation and enough of that debt will end up in default that we won't have a recession, we'll have a depression. They've painted us into a corner.
The crucial break came in 2008/2009, with the introduction of QE after the 2008 financial crisis.
But you're right. Pretty much from Greenspan's tenure as Fed Chair forward, the loose monetary policy has been building up to this conclusion.
How high interest rates have to go is a question, and the only comparison we have is the Volcker rates from 1979 through 1982. Following his example if inflation is checking in at around 9-10%, interest rates have to get up to at least 13-14%. However, Powell's experience with interest rate hikes back in 2018 suggests that he might not have to go that high. If he can keep interest rates below 4-5% and still corral inflation, then there's an outside chance of avoiding debt default.
The key word there is "if". There are a lot of structural differences between the present situation and the late 1970s.
There was already a lot of excess leverage (debt) in the economy in 2008/2009 due to the rates having been artificially low since at least 2001. I won't argue that that the Fed doubling down on low rates via QE instead of allowing what should have been a de-leveraging of the economy was a "crucial break". That also allowed the huge, ongoing federal budget deficits. Without that QE, the bond market would force rates up long ago.
At some point, the piper has to be paid, and I suspect we've reached it.
I suspect you're right.
However, one of the oddities of the present situation is the absolutely bizarre shift that occurred in 2008/2009.
Before then the M1 money supply growth more or less tracked CPI growth (inflation)--exactly as classic monetarist theory would suggest. Asset prices as represented by the Dow Jones and S&P 500 indices moved more or less independently.
Between 2008 and 2019, however, those relationships inverted. The correlations between the market indices and the M1 money supply growth rates approach 1 (perfect correlation), while the correlation between CPI and M1 growth rates diminishes.
According to Friedman and other monetarists, that can't happen. But it did.
2020 onward is another shift altogether.
These departure points are what allowed the proponents of MMT (Modern Monetary Theory) to advance their insane ideas that money printing was a good idea.
The question that has yet to be resolved is what the "reversion to mean" looks like. We have some idea of what can happen by looking at the bond markets in Japan (which went full MMT long ago). Theoretically, Japan should have melted down long ago, but the yen is still somehow holding on to a sliver of credibility.
What does this mean for the dollar (and, by extension, Treasury debt)? I won't even begin to hazard a guess, although I seriously doubt any of this ends well.
Peter, lots talk about CBDC - BIS, but the FED cannot legally print non-liability fiat money, CBDCs because Congress never authorized that after gold standard ended 1971. Powell knows the FED has a legal problem that could be resolved by consolidating the FED and Treasury, but that would open up the FED's books!
FED's illegal claimed liabilities are equity - assets to the tune of Trillions of dollars.
Frankly, I'm unpersuaded that CBDCs have the power and the inevitability that a number of people ascribe to them.
First, there's the real world experience of the digital yuan. A system as thoroughly totalitarian as China can't get its people to use it much. If China can't make a go of CBDC, I doubt more liberalized political systems will have any great success with them either.
Second, there's a structural problem, particularly with the dollar but to a degree with all the major currencies. Chiefly, as proposed, a "digital dollar" is NOT a "dollar". If it's a different currency, then all the existing currency relationships DO NOT COUNT. In other words, the digital dollar would have to establish its own exchange rate with other currencies--including other digital currencies if/when they came online.
On the other hand, if a "digital dollar" is still a "dollar", then the "digital" aspect is merely a Central Bank "wallet". Privacy concerns aside, the use of such a technology effectively nationalizes all holdings that go into the M1 money supply, which kills off the entire banking industry (without deposits their capital base disappears). Not only are there Constitutional concerns with such a transition, but the unavoidable economic dislocations would be Biblically apocalyptic.
As regards merging the Treasury and the Fed--legally not possible. The Federal Reserve is a system of outwardly private banks, with the nation's commercial banks being members/investors in whichever Federal Reserve bank serves their particular region of the country. To merge the Federal Reserve banks with the Treasury would require the Treasury to purchase outright the Federal Reserve banks, and even if there were a sufficient store of capital to do so, such an outright nationalization of the banking system would never get past the first Constitutional challenge (nor would the Congress go along with the idea because to do so would also destroy all their investment portfolios that hold the bulk of their ill gotten gains).
. "Revenge spending will settle."
Huh? Wth is "revenge spending?"
Taking out a hit on someone?
Yeah, I didn't even try to unpack that one.
. "Revenge spending will settle."
Huh? Wth is "revenge spending?"
Taking out a hit on someone?
Mark Wauck had an interesting take on this. He thinks the Fed is doing this to break WEF, using inflation as cover story.
If that is tbe case, I don't know that it's needed. The WEF/DAVOS war in Ukraine may do it nicely. No Russian or Chinese raw materials means no chips.🤷
I've run across that thesis before. Not sure how plausible it is.
Although I agree with you that the Russo-Ukrainian War is going to have some interesting consequences, on all sides.
What those consequences will be depends on which narrative is closest to reality.
Wow, those numbers are terrible!
They have painted themselves in to corner but good.
Are we looking at the mother of all bailouts again?
Not right away, at least.
The Fed's rhetoric has basically put them in the position of throwing the markets pretty much under the bus.
As for the consumer/worker/ordinary American--he always gets thrown under the bus. Volcker did it. Greenspan did it. Bernanke did it big time. Yellen did it. Powell did it.
The markets are convinced Powell is going to cave on rates and restart QE. But if he doesn't soon, it won't much matter.
Warren Buffett once made an observation about investing to the effect that once the tide goes out you can tell who's been swimming naked. That sums up the situation for Wall Street rather nicely, I think. And the longer Powell lets the tide roll out, the more naked swimmers will be exposed.
After a while restarting QE would be a pointless exercise.
The perversity of the whole situation is that if Powell does trigger a Volcker-like recession AND the economy and the country survive it (big "ifs" all around), the economy would be in a healthier state of balance in the end.
It's shock therapy with one hell of a price tag attached. One that everyone is scared to pay (and with good reason).
I’m having trouble visualizing what this scenario looks like in real life. What does it mean?
On the stock market front: higher interest rates and a tighter monetary policy will push down prices. Stock market funds that rode the indices on the way up will get shellacked on the way down.
On the housing front: the picture is a bit murkier. Mortgage rates are sure to keep rising in the short term. This will cool off housing demand, but it will also likely cool off housing construction and investment. The net effect on housing prices is still likely to be ultimately disinflationary, but the timing is up in the air.
On the job front: there will be layoffs. Some are already starting.
https://www.minds.com/newsfeed/1389377970904240137
Food price inflation is likely to stay elevated through the rest of the year. Outlook for 2023 depends on how good the harvests are the rest of this year.
Energy (gas for your car) is going to get more expensive. Some pundits are talking about $200 for a barrel of crude oil.
Disposable income is likely to keep declining, as job cuts reduce overall weekly earnings.
That will cut into overall consumption. Less disposable income means less money to spend.
If Powell sticks to the Volcker playbook, interest rates will stay high for a while, forcing a long and deep recession, vis-a-vis the 1980-1982 recession.
If Powell capitulates and restarts QE--basically printing money --inflation will go high, stay high, and potentially destabilize the economy, precipitating a 1929-style crash and depression.
These are, of course, not good outcomes on either side. Working folk take it in the shorts either way. Even the bottom tiers of "the rich" are going to feel some pain, as their investments crater and their assets shed value.
How certain is it that these things will come to pass? Broadly speaking, the inflation is going to happen, and the disinflation as inventories turn into gluts is going to happen. Job losses are already starting, and future unemployment figures are likely to start trending up.
How bad will the magnitude of these things be? That is a question yet to be answered. I am not sanguine about the odds of the magnitudes being small.
So you’re predicting we won’t be Sri Lanka 2.0?
Whew.
The US has several structural advantages over Sri Lanka, not the least of which is the capacity to wholly provide its own food supply (and even energy at least for a time). Sri Lanka, like a number of developing countries, depends heavily on food and energy imports.
Food and energy are, along with housing, the most crucial economic goods there are, for obvious reasons. A country which cannot provide them internally is always going to be vulnerable to external shocks.
People can withstand not being able to buy new iPhones and Nike running shoes. They cannot withstand not being able to buy rice, beans, meat, and other essentials for survival.
Sri Lanka is experiencing the latter situation.
You Will Own Nothing and Be Happy...WEF...
https://www.youtube.com/shorts/aztvWxRKqDQ
The problem is there will be nothing to own.
That's the part the globalists fail to comprehend.