"And the Fed Keeps Doing It"

"And the Fed Keeps Doing It"

by Bill Bonner

YOUGHAL, IRELAND – "Don’t forget. We’re cleaning out our desks, putting our things in cardboard boxes… and saying misty-eyed farewells to the Legacy team. It’s been fun. But now, it’s time to try something new. A new adventure. A new way of staying in touch with dear readers. And a new expedition into a new and treacherous – financial world. We hope you’ll join us…And now, back to our regularly scheduled programming.

Birds do it. Bees do it. Even educated fleas do it. Give them more money from the Federal Reserve… and interest rates below the rate of inflation… and everybody does it. Borrows money, that is.

And who does it best? The U.S. government… Borrower Numero Uno in the whole world. It borrows so much – nearly $6 trillion added to its debt over the last two years – it could never do so honestly. It has to connive with the Federal Reserve to provide more cash and keep interest rates low.

“Inflate or Die” Trap: But now, the central bank is in a tough spot. It encouraged people to take on debt. So if it raises rates… they will lose their investments, their businesses, even their homes. Billionaire investor and hedge fund manager Ray Dalio sees the “Inflate or Die” trap; MarketWatch reports: "Ray Dalio warns Fed’s hands are tied and higher U.S. inflation is sticking around. Democracy, maybe not."

Yes, the Bridgewater jefe understands that the Fed cannot corral runaway prices… and that inflation is ultimately incompatible with consensual democratic capitalism. And word is getting around. Even CNN sees the “Inflate or Die” trap: "The good news is that the Federal Reserve knows how to fight inflation: By tapping the brakes on the economy. The bad news is the harder it hits the brakes, the greater the risk of an accident that ends the economic recovery, freaks out financial markets – or both. “The Fed knows what to do, but they don’t necessarily know how to do it without squashing the economy,” Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, told CNN."

Squashing the economy? Yes… and squashing the elite, too – which just happens to control Congress, the press, the administration, the universities, and the central bank. If monetary policy would go back to normal, stock prices would go back to normal, too.

As we told you on Tuesday, “normal” for the stock market used to be about 80% of GDP. With U.S. GDP at about $23 trillion right now, that would put the total value of all stocks – mostly owned by the top 10% of the population – at around $18.5 trillion… or about $30 trillion lower than they are today. Almost all of the losses would come out of the pockets of the elite. The elite would lose power, too. The ruling party would be voted out of office… And those who take over would be warned: Don’t cut off the money.

The Fed Rolls Over: So, what did the Fed do yesterday? Did it throw the switch, raise rates, and stop “printing” new money? Or will it let the money machine keep working as long as possible? Here’s MarketWatch: "U.S. equity benchmarks closed sharply higher Wednesday, and the S&P 500 missed a record closing high, after the Federal Reserve announced a speedier reduction of its monthly asset purchases in the face of persistently elevated inflation. Fed policy makers also now think official interest rates could rise three times in the coming year, rather than the sole hike penciled in earlier."

That’s right. As expected, the Fed is rolling over. Instead of putting out the inflation fire, it will reduce the rate at which it adds tinder! And nobody, except the financial press, was fooled. But who cares? Not investors. They’re bidding up stocks, sure that the Fed still has their backs. And not the federales either. At the current inflation rate, the real value of federal debt is going down at about $1.4 trillion per year. And the elite? They’re in power… and getting richer. What’s not to like?

What Smart Central Bankers Do: One of our dear readers said he learned in school that “nobody knows what causes inflation.” He’s right, of course. In the real world of economics and finance, nobody knows anything. And inflation is especially wily… devious… hard to control… and impossible to fine tune. How it goes from smoke to flame is poorly understood.

But there are things you shouldn’t do – even if you don’t know exactly how it works. We don’t know when a bull is going to charge… so we stay out of its way. We don’t know if Hell actually exists. But we’re not going to rob a retiree, murder a Democrat, or rape a nun just to find out.

Likewise, a prudent central banker doesn’t multiply a nation’s monetary base three times since 2008 – simply because he doesn’t know the combustion point of paper money. prudent central banker knows what he doesn’t know. He doesn’t know exactly how much new money he can print before inflation rates flare up… But he knows it will be hard to bring the fire under control later.

If he is stupid, he says to himself, “No one knows what causes inflation, so I might as well print more money.” But if he is smart, he says, “Geez, there’s no good way out of this. If I cut off the money, they’ll act as if I had horns and a tail, and get rid of me. But if I keep printing, things will seem okay for a while. I might even be considered a hero, like that fool Bernanke.” So he keeps doing it."

- www.rogueeconomics.com