"Pivot Error"
The Fed's fantastic fumble,
megapolitical currents and serious mental illness...
by Bill Bonner
Baltimore, Maryland - "Last week was a good week for Wall Street. Traders were sure that if the fix weren’t in already, it would be soon. It was just a matter of time, they believed, before the Fed finally ‘pivots’ and the happy days are here again. Here’s the Wall Street Journal, reporting on Wednesday’s Fed press conference: "In September, officials had projected one more hike this year followed by two cuts next year, taking the fed-funds rate to around 5.1%. On Wednesday, officials projected they would lower it to around 4.6% by the end of 2024, the equivalent of three quarter-point reductions from the current level."
That was close enough to a real ‘pivot’ for government work. Traders could take their positions, more or less confident that the Fed has their backs. But what the Fed governors expect to happen usually doesn’t happen. In the 2020-2021 period, for example, everyone with a brain could see that flooding the economy with $6 trillion in new money…while also reducing output by ‘locking down’ much of the economy…would produce higher consumer prices. But the Fed didn’t see it, or didn’t want to say anything.
Still No Idea: Then, when inflation suddenly picked up, the Fed totally mis-understood what was going on, insisting that it was ‘transitory.’ As late as April of 2021, when the Fed should have been aggressively raising the sea-wall before the tsunami hit, the Fed – with its hundreds of Ph.D economists – still had no idea of what was going on. Jerome Powell, April 28, 2021: "We want inflation to run a little bit higher than it's been averaging in the last quarter century. We want it at 2%, not 1.7%," Powell told reporters Wednesday afternoon."
A year later, the CPI was over 9%. Oops. How about now? The CPI is around 4% – it’s come down recently but is still at a high we had not seen for more than 30 years. The federal budget meanwhile, is headed for a $2 trillion deficit, which must be funded somehow. And even now…after 22 months of rate hikes… the Fed’s key lending rate is only 1.3% above inflation.
At this stage, it’s impossible to know whether consumer prices are rising or falling…in the short run. And the major threat investors face is deflation of their asset prices…again, in the near term.
Looking farther into the future, however, it seems unlikely that the authorities will be able to resist inflating the currency. The first wave of consumer price inflation has receded. But the ‘megapolitical’ currents – the deeper, usually invisible trends – are still headed in the same direction. We doubt they will change anytime soon.
Serious Mental Illness: The idea of megapolitics – that the most important trends take place below the surface – was developed by our friends James Davidson and William Rees-Mogg. Here’s how it works. There are said to be 57 million people in the US with ‘serious mental illness.’ Statistically, one out of every 5 members of Congress is likely to be impaired. Likewise, 2 or 3 of the Feds’ 12-member FOMC are probably brain damaged in some way.
It is tempting to blame many of our public policies on mental defectives. But that would be missing the point. Politicians, and other elites, do not do ‘stupid’ things because they are dumb, but because they are being swept along by a megapolitical trend. In the present case, they’ve been corrupted, bought and paid for, in a decaying empire. They get money from the military/pharma/welfare/racism/gender industry; then, they dance to the tunes that are piped for them.
Ours is not to point the finger of blame – neither at the jackasses in Congress…nor at the phonies at the Fed …nor at cronies and profiteers in the private sector. Had we been elected or appointed to public office, we might do the same thing. Ours is merely to figure out what they might do next.
Why does Congress vote for more military spending and more deadly weapons for the Ukraine and Israel? America’s pocketbook is empty. Besides, the Ukraine war is a lost cause (and not a good one). And Israel, the richest and most powerful country in the region, can take care of itself.
But there is too much hot money at stake for politicians to say ‘no.’ In that sense, the Russians and the Palestinians have no one to blame but themselves. Had they gotten their acts together…hired the president’s son…bribed members of Congress…given huge gifts to universities…and bought much of the US media…well, we’d now be sending weapons to Russia and pulling Israeli kids from the rubble.
Bread and Butter: Right and wrong have (almost) nothing to do with it. Politicians argue about what we “should” do…but they are merely mouthpieces for megapolitical forces they neither understand nor control. Technologies come and go. Empires rise and fall. Money, power, status ebb and flow…
It may be theoretically and experientially true that the Fed cannot improve on the decisions made by investors, consumers and business people – that is, the folks with ‘skin in the game.’ But being a celebrity economist at the Fed – pretending to make the world a better place – is not a bad gig. Okay, you have to shake a lot of hands and say a lot of things that you know are just mumbo-jumbo. Still, you earn a decent living, you get your name in the paper, and you can even make a few bucks by front-running Fed decisions. And then, after you leave the Fed, like Janet Yellen, you can collect millions in speaking fees from the banks whose bread you helped to butter.
Yes, that’s the point, dear reader. Things don’t work the way you think they should work. In practice, if it weren’t for chicanery, stupidity and hypocrisy, at least half of all newspaper headlines would disappear and most of what we know as ‘public policy’ would vanish.
The Fed, for example, doesn’t operate in some rarified world of pure logic and innocent decision making. It operates in the real world. The world of megapolitics. Its public announcements may be nothing more than blah-blah and bunkum. But its real mission is to make sure its brethren in the banking business do not have many bad hair days."
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