Great article, I really like it, fakery even reaches the jobs report.
Regarding the Fed, yes they will try to tighten, but to stop inflation you need like at least 5-6% interest rate, which in turn will eventually kill the federal budget due to greatly increased interest expense.
So in my estimation the US dollar will eventually burn up, but not before the Fed earnestly tries to tighten and crashes the stock markets.
Assuming top-level inflation is actually 7% interest rates have to rise above that in order to corral inflation.
The easy way to look at it is that interest rates are the price of money, and inflation is a rise in prices. Therefore interest rates have to exceed inflation in order for them to work on inflation.
Depending on how accurate the CPI measure is, interest rates might need to climb as high as 10%.
Volcker raised rates to 20% when inflation topped out at 14%.
The last time Powell raised rates, he got all the way to 2.25% before the markets forced him to back off.
Right now, the markets are worried about a total 4 or 5 25bps rises, which would bring interest rates up to around 2%. The markets would implode if Powell put the rate hikes in place that are needed.
The Federal budget deficits don't even come into play, because the global financial system crashes long before the Treasury can't finance any more spending.
The kicker: people forget HOW the dollar became the global reserve currency -- Bretton Woods. By formal agreement, the world's currencies were pegged to the dollar which in turn was pegged to gold.
When Nixon closed the discount window Treasury secretary Connally famously told the other central bankers it was "their problem". They blinked, and Nixon effectively took the whole world into the era of fiat money -- leaving the dollar in place as the global reserve currency.
So when the Fed incinerates the dollar, the other currencies quickly catch fire.
I am stocking up on popcorn. Your analysis is mostly correct. Neither you nor I know the counterfactual -- how much the Fed rate SHOULD be to curb inflation -- but we both agree that it should be a lot more.
But do not worry, the Fed is losing control of the rates very quickly.
I own some TLT puts (TLT is a portfolio of 20 year long treasuries)
Great article, I really like it, fakery even reaches the jobs report.
Regarding the Fed, yes they will try to tighten, but to stop inflation you need like at least 5-6% interest rate, which in turn will eventually kill the federal budget due to greatly increased interest expense.
So in my estimation the US dollar will eventually burn up, but not before the Fed earnestly tries to tighten and crashes the stock markets.
Assuming top-level inflation is actually 7% interest rates have to rise above that in order to corral inflation.
The easy way to look at it is that interest rates are the price of money, and inflation is a rise in prices. Therefore interest rates have to exceed inflation in order for them to work on inflation.
Depending on how accurate the CPI measure is, interest rates might need to climb as high as 10%.
Volcker raised rates to 20% when inflation topped out at 14%.
The last time Powell raised rates, he got all the way to 2.25% before the markets forced him to back off.
Right now, the markets are worried about a total 4 or 5 25bps rises, which would bring interest rates up to around 2%. The markets would implode if Powell put the rate hikes in place that are needed.
The Federal budget deficits don't even come into play, because the global financial system crashes long before the Treasury can't finance any more spending.
The kicker: people forget HOW the dollar became the global reserve currency -- Bretton Woods. By formal agreement, the world's currencies were pegged to the dollar which in turn was pegged to gold.
When Nixon closed the discount window Treasury secretary Connally famously told the other central bankers it was "their problem". They blinked, and Nixon effectively took the whole world into the era of fiat money -- leaving the dollar in place as the global reserve currency.
So when the Fed incinerates the dollar, the other currencies quickly catch fire.
I am stocking up on popcorn. Your analysis is mostly correct. Neither you nor I know the counterfactual -- how much the Fed rate SHOULD be to curb inflation -- but we both agree that it should be a lot more.
But do not worry, the Fed is losing control of the rates very quickly.
I own some TLT puts (TLT is a portfolio of 20 year long treasuries)
Actually, the Fed lost control some time ago. They just don't know it yet.
Pretty much you are right.