"Jerome Powell, Arsonist"
by Brian Maher
"An unwitting menace - perhaps four years of age - seizes a book from a tabletop… It is not a child’s book. It is a matchbook. This innocent sets upon his discovery with the ferocious curiosity of a child typical of its years. Eventually… a match slides across a rough surface... and a flame is born. The arsonist cheers his triumph and his bulldog tenacity But within seconds, the drapes are ablaze. Within minutes, the house is a conflagration of flame.
Within the hour, it is an embering heap. Today we propose an analogy: The match-playing child is Jerome Powell. Inflation is the match... And the dollar is the house.
Playing With Matches: For years the Federal Reserve has been toying furiously with matches. It is frantic to strike a 2% inflationary flame. A mild inflation is an economic blessing, they argue. A 2% inflation burns through a dollar at 2% per year - a bearable rate. But the consumer smells the smoke wafting from his wallet. He senses heat against his hip He is eager to pass his dollars along to someone else… as he would pass along a potato too hot to the touch.
And so inflation prods the consumer to spend. He purchases goods this year because his dollar fetches him more than it will next year. This year’s purchases - in turn - post a gain to the gross domestic product. A controlled burn of the dollar therefore keeps consumers on the jump, the economy on the hum… and business in funds. Under deflation, conversely, the opposite dynamic obtains…
The “Evils” of Deflation: Next year’s dollar collars more goods than this year’s dollar. The item that costs a man $1,002 this year may cost him $979 next year. He therefore postpones his purchase until the price falls to him. What is the evil result of deflation’s postponed purchasing? Goods wallow upon shelves, stockrooms overflow, industry loses its bustle. The greater the deflation... the greater the headaches it inflicts. If left alone, the entire economy may plunge into the vortex of deflation… and the hell flames of depression will soon be licking at the door. Thus is deflation the chief bugaboo, the king hobgoblin of most economists.
Is Deflation so Bad? But is it true? Is deflation really the supreme monetary evil? Why then do consumers keep purchasing computers and large-screen televisions? Their prices drift lower year after year. Yet computers and large-screen televisions do a very brisk trade – despite consumer expectations of falling prices to come.
If deflation was so vicious… why do consumers continue purchasing them...rather than waiting for next year? Never you mind, says the Federal Reserve. It is hot for inflation. And the matches are out… "The Fed wants higher inflation,” says Goldman’s crackerjacks. And "what the central bank wants is usually what it gets, sooner or later.” After years of misstrikes, the Federal Reserve may finally be kindling an inflationary flame. But like the child untutored in the arts of arson, it may ignite a blaze - a blaze that could ultimately tear through and gut the dollar.
Future Kerosene: The M1 money supply represents the stock of cash, coins and checking account deposits. It is the most liquid money supply. Within the space of one year, M1 has ballooned from $4.5 trillion to $18.1 trillion - a preposterous 450%. The M2 money supply, meantime, includes saving deposits, time deposits, certificates of deposit, and money market funds. These deposits and money market funds are considered “near money.” They are non-cash assets. But they convert easily to cash. Hence, “near.”
M2 has jumped 30% within this past year… from $15 trillion… to nearly $20 trillion. Not since the Federal Reserve began tracking it has the money supply expanded at such delirious rates. That is, never has the Federal Reserve toyed so recklessly with matches.
We mention - in passing - that the Federal Reserve has ceased reporting M1 and M2 data. Why? We have our theories. But we will keep them dark for now. Regardless, inflation is beginning to bubble and percolate…
Surging Commodities: World Bank data reports energy indexes have jumped 192% since April last. Metals have leapt 68%. Agricultural products, 27%. Copper prices have soared 67%, gasoline 50%, lumber 193%. In some locations, a plywood sheet that went for $15 one year ago may go for as much as $65 today.
The Federal Reserve is convinced the inflation is a fleeting spark, a transient effervescence, a temporary flash. It is the result of pandemic-induced shortages colliding with surging demand as economies reopen. And so the Federal Reserve is willing to permit inflation to “run hot.” Inflation must exceed 2% for a long, long while before it reaches for the hoses.
Timetables of Inflation: But as the report of a distant cannon lags the blast that produced it... price inflation lags the money creation that produces it. Recall, M1 money supply has erupted 450% since last March. M2 has risen 30%. The barrage has yet to impact. When will the inflation come down?
Johns Hopkins economist Steve Hanke gives the timeline: "The dramatic growth in the U.S. money supply… that began in March 2020 will do what increases in the money supply always do. Money growth will lead in the first instance (1–9 months) to asset-price inflation. Then, a second stage will set in. Over a 6–18-month period after a monetary injection occurs, economic activity will pick up. Ultimately, the prices of goods and services will increase. That usually takes between 12 and 24 months after the original monetary injection. Given this sequence, it’s as clear as the nose on your face that we’re going to see more - perhaps much more - inflation entering the system in the coming months… the recent March year-over-year CPI inflation rate of 2.6% is simply a harbinger of what is coming in the future: more inflation."
Assume price inflation emerges 12-24 months after the March 2020 unleashing. Inflation would barrel in anytime between now and March 2022. Jim Rickards - incidentally - also believes inflation will menace in 2022. Increasing commodity prices suggest its advance scouts are already upon us. But the main force will follow.
The official Consumer Price Index (CPI) is up 2.6% year-over-year. But what if true inflation runs higher than 2.6% - far higher?
Is 10% The True Inflation Rate? Like an arsonist who conceals his mischief, the Federal Reserve conceals true inflation. It hides behind the smoke of “hedonic adjustments” and similar razzle-dazzle. Mr. John Williams - proprietor of the ShadowStats site - is on to its tricks. Mr. Williams claims inflation runs to 6% if tracked by 1990 standards. And if calculated by the metrics of 1980? Inflation goes at 10%. What might the true inflation rate read next year? We hesitate to hazard an estimate.
Wrong About Subprime, Wrong About Inflation: Jerome Powell says any inflationary gurgles will pass. Have another guess, says macroeconomist Peter Schiff: Powell is assuring everybody that there is nothing to worry about. Well, inflation is every bit as transitory as subprime was contained. The Fed was wrong then and they are even more wrong now.
More: "In order to fight inflation, especially inflation as high as it’s going to be after the Fed is finally satisfied that it’s high enough, the degree to which they would have to raise interest rates... and reduce the money supply would destroy this recovery… The minute the Fed starts to fight inflation, the recovery is over and the depression begins, which means they will resist picking that fight as long as possible. But again, eventually, it’s not just depression that we’re going to get, but massive inflation…"
Will a terrible inflation sweep on through? Will it follow the timetable set forth above? We are not fool enough to claim we hold the answers. Phantom fires have foxed us before. But this we do know: If a child toys with matches long enough… he will eventually set the house ablaze…"