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Forbes: Powell Plays a Dangerous Game with Our Economy and Financial Markets

September 03, 2021
Money Printing Inflation

Article by Bob Haber in Forbes

As Federal Reserve Chairman Powell spoke to the public at the virtual Jackson Hole conference, I wondered if he might admit that the Fed had wildly underestimated inflation and he now saw the need to taper ‘emergency’ money printing. 

While the vast majority in the recent Bank of America Money Manager survey think inflation is transitory, inflation is here and is a fact. Using a 3-month annualized rate (to remove base effects), the Fed’s favorite inflation measure - Core PCE - is up at a near-40 year high, at 6.7%. Instead, Powell, who never saw this level of inflation coming, selectively congratulated the Fed on meeting their never-elucidated inflation objective and pressed on with zero interest rates and $120 Billion of ‘emergency’ money printing, which they may discuss reducing this year.

This is becoming an ever more dangerous game for the financial markets and the economy.

Inflation is the most dangerous, cowardly, and surreptitious way to handle our massive debts and unfunded liabilities. It is a poster child for the concept of “politically expedient “. Is this the best way for the keepers of our currency’s value to deal with the runaway never-sunsetting fiscal spending from Congress and a debt laden economy where debt is close to 400% of GDP (as opposed to 150% of GDP in 1965, when the ‘great inflation’ started).

As Keynes said, “By a continuous process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens”. And it falls, as it is currently doing, on those least able to handle it: the poor, the elderly, and those without assets.

As for the financial markets, Milton Friedman summed it up best: “Inflation is just like alcoholism. The good effects come first”. That’s where we are now in markets. We are on a tear in the stock market believing this beneficial inflation is controlled and accruing positively as far as the eye can see.

To suggest it is Powell’s ‘game’ is to suggest that he, of course, knows these things but plays the strategy anyway. For those who disagree, let me pose some key questions:

1.      At the Jackson Hole speech, Powell used the ‘transitory’ word, yet again, to describe inflation. As calculated by Bianco Research, those transitory portions of the Core PCE inflation sum to about 7% of the index. They include car rental, airline tickets, and hotel prices. They probably have peaked. But why did Powell not mention, or discuss, the 40% of the index that is housing/shelter/rent? Surely, he has read his own Fed surveys showing these trending much higher?

2.      Why does the Fed insist on buying more than all the issuance of the TIPs market? TIPs are an arcane market instrument that are key measures of future inflation expectations, as used by the Fed. In fact, since the beginning of this round of money printing (3/20), the Fed has bought over $210 Billion of TIPs while the government issued only $60 Billion. Could this be an effort to temper one of the most important measures of future inflation expectations?

How will we know this inflation is getting out of hand? Stage one is happening already. Several members of the Fed are speaking out about inflation and they are worried. Thankfully, four of the questioners become voting members in January. Well before then, I expect that we may see action in the three markets that are macro pressure-relief valves: Treasury bonds, the dollar, and gold.

Watch them all because ......

To read this article in Forbes in its entirety, click here.

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