"How the Fed Came to Love Inflation"
The US economy doesn’t need cheaper credit. Just the opposite;
it could use higher interest rates to lower inflation.
As it is, consumer prices are still going up at about two times the Fed’s target.
by Bill Bonner
"The principle of spending money to be paid by posterity, under
the name of funding, is but swindling futurity on a large scale."
- Thomas Jefferson
Dublin, Ireland - "We left off yesterday with the provocative idea that the Fed doesn’t really want to stifle inflation. It wants more inflation... enough to lower the real value of US debt. Today, we examine the swindle behind it.
At 5% inflation, other things remaining the same, the US would cut the real value of its government debt by $1.7 trillion in a single year. Trouble is, other things don’t remain equal. At current levels of deficits, the US adds $1.7 trillion in new debt per year. Tough situation. The feds need either more inflation... or less spending. Our longstanding prediction: they will choose inflation.
On the surface, the Fed is four-square, dead-set against inflation. It will swear upon a Trump Bible that it intends to get the CPI down to 2%, and that it will look neither to the right nor to the left until the job is done.
More to the Story: But there’s always more to the story. Who wins? Who loses? Who decides? There’s the superficial, political analysis... and there are the deeper currents of history, the Megapolitical analysis. In public, the Fed fights inflation; in private, it encourages it.
The media report that two things are pulling the Fed in different directions. Some recent inflation news, for example, is ‘negative.’ That is, it tells us that the economy is weakening and could use a dose of EZ money. The job market is weakening. New jobs posted in April were fewer than expected. Total employment rose... but at the lowest rate in three years. Unemployment went up. Job openings went down.
A better measure of the job market is the actual number of hours worked; the last reading of that measure was negative, indicating a weaker economy. And manufacturing (according to the Purchasing Managers’ Index) signaled recession. But what ho! Among the surface chop there was some ‘positive’ (inflationary) news, too.
The Case-Shiller measure of house prices went up to another all-time high in February. Labor costs (including wages and benefits) rose more than expected. Prices at the wholesale level rose to their highest level in 2 years. (A sign of higher inflation to come?) And the decline in the US money supply seems to be bottoming out.
False Conclusion - All of these things suggest that the US economy doesn’t need cheaper credit. Just the opposite; it could use higher interest rates to lower inflation. As it is, consumer prices are still going up at about two times the Fed’s target. Economists argue about which of these data points is most important... and whether the balance of opinion leans towards rate cuts... or a rate hike.
The typical observer might draw a completely false conclusion: that the Fed has the power to tip the scales in whatever direction it wants. He might think that the Fed can always control interest rates... and with wisdom that surpasseth understanding can guide the economy along the path to prosperity and growth forever, neatly inflating with cheap money when needed and cutting off the stimulus when growth and inflation threaten to get out of hand. But that’s not the way it works. Beneath this newsy blather is a much different story - one with a beginning and an end... and a moral.
The genesis came in 1971, with the introduction of a new dollar that the deciders could diddle. Over time, the Fed’s easy money - especially during the 2009-2021 ‘zero interest rate’ phase - led people to borrow far more than they otherwise would. Today, total US debt - household, business and government - approaches $100 trillion, nearly 4 times US GDP.
You can see the problem. The higher the debt, the more of your current earnings you must use to pay the interest. At a uniform 5% interest, for example, America would need to use almost 20% of its GDP just to pay interest... while swindling the next generation by leaving the principal amount unpaid. The lead borrower was, of course, the US government itself.
On the flip side of borrowing is repaying. Mathematically, the US could pay down its debt. It would require abandoning its global empire, however. And trimming domestic social welfare programs too. Politically, it is impossible to make those changes; like an alcoholic, the country will have to ‘hit bottom’ first.
That leaves inflation as the only real option. The feds know that. They need to get the inflation rate up, not down, so that the real value of the government’s debt goes down to a more manageable level. That’s why, even with inflation at twice the Fed’s target, Powell is still insisting that the next move will be to lower rates, not raise them. The public may not want higher prices. But the people who matter do – Big Money, Big Business, and Big Government. Stay tuned."
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