“With a gun a man can rob a bank; with a bank a man can rob the world.” Carter Glass
Admittedly, this post’s title is a pun, but not meant to be so much humor as exasperation. I wrote a post on 09/25/20 titled “Remember Hyde?” for how this cabal of manipulation was created. Given the horrors of QE in the 2008 Financial Crisis, I could not imagine how much more damage this insidious institution could inflict on the American people, and I have been told that I have a very active imagination, but obviously not active enough.
As to the quote, funny how the man who co-sponsored the Federal Reserve Act, and served as both Secretary of the Treasury and Chairman of the Federal Reserve Board could say something so prescient. But life is funny, unless you’re on the receiving end of the joke. For today, I’m still muddling through the confusion created by Jerome Powell in his press conference regarding yet another rate hike.
I almost felt sorry for the poor schlub, caught between inflation and credit crises, but not quite; he played the old QE game that created these problems, the consequences of which were apparent to anyone who took basic economics, and predictable based on historical records. The problem is that in the musical chairs of that game, he’s left standing alone. Yes, there is Janet Yellen, but she’s a useful as a rubber crutch, so it’s poor Jerome on his own, literally. When asked why the administration promotes fiscal policies so antithetical to the Fed’s monetary fight against inflation, he basically said he had to deal with whatever arrived at his door; translation, no comment.
On one hand you can’t fault Powell for saying so as he’s not the President or Congress, but then there’s the Fed’s decision to bailout the likes of SVB with loans and assumption of debts, the very essence of QE, which is also antithetical to the Fed’s monetary fight against inflation. The message is that the Fed has no policy; in essence, its “Forward Guidance” is reactions to headline news, so tune in tomorrow. The reality is that the Fed is stuck in the quicksand of economic planning, an impossibility that statist never understand. No matter what you plan, based on whatever your theory is, the infinite number of individual choices people make, called the market, will ultimately prevail; when you attempt to dictate against that, bad things happen, and we have that in the real world now.
The market’s reaction to this was predictable; there was so much uncertainty created in the confusion of that press conference that the market tanked. Contrary to the norm that when stocks go down, bond yields go up, that didn’t happen. Further, the financial sector got hit hard as banks have a huge amount of unrealized losses given their bond holdings, not to mention that many “Zombie” corporations have loans due they may not be able to meet. So will someone please explain why Yellen keeps telling us that it’s different this time, and not the same as 2008? True the details are different, but like a soap opera, the script is the same.
As Powell was pummeled with questions about the future of rate hikes, he kept singing the 2% mantra, but refused to project when that could happen. We keep hearing about the “terminal rate”, meaning the rate at which no more hikes are required because inflation is done; that’s not likely to happen soon with inflation per the CPI still at 6%, but is it actually higher? Up until 2002 the BLS used a ten year data base to calculate the CPI, but that year it adjusted the index to a two year average as the Bush administration attempted to change the public’s perception of the economy by adjusting the calculation for inflation for a lower CPI. Since that appeared to work for Bush, why not Biden, so last year the BLS again changed its CPI calculation based on the single year of 2021; as is all too common with politics, if you don’t like the result, redefine it.
What is so meaningful anyway for inflation at 2%? It’s like “Death by a Thousand Cuts”; no single one is fatal, but taken together you get death. I remember a funny line by Jay Leno who said “I was reading in the paper today that Congress wants to replace the dollar bill with a coin. They’ve already done it. It’s called a nickel.” Pretty accurate actually; since the Federal Reserve Act of 1913 the US Dollar has lost about 95% of its value, a slow death indeed. Another word that has crept into the lexicon of Fed Speak is “sticky inflation”, meaning that American’s perceptions of prices are responsible for persistent inflation; so if we just changed our attitude toward ticket shock the price would get lower?
There are signs that more and more Americans are beginning to understand that the Wall Street slogan “You can’t fight the Fed!” is a dangerous submission to the ultimate manipulation of a nation’s economic health. Consider that all US currency denominations state at the top “Federal Reserve Note”; a note is a debt security obligating repayment of a loan, at a predetermined interest rate. Now imagine if you go to the Fed and attempt to redeem that note, what do you think you’ll get? Well since it’s not commodity money, all you’ll get is the good faith and trust of the US government; try taking that to the “bank” and see where you’ll get.
Then consider that the Fed, like many of the banks under its supervision, have a huge amount of unrealized losses given its bond holdings, mortgage backed securities and what it disingenuously called “Deferred Payments” for what it owes the US Treasury now. In common sense language, when your assets are less than your liabilities, you are bankrupt; what will the new word wizards come up with to explain how the “lender of last resort” has nothing left to lend? Oh, my apologies, I forgot they have the printing press, exactly what got us into this mess to begin with. As Ron Paul once said of the Fed years ago, “The Federal Reserve system is nothing more than legalized counterfeit.”