In comments to the US Senate, Federal Reserve Chairman Jerome Powell admitted inflation is running higher than they expected and that how to react to that is a "challenge". His comments are reported in this article on Kitco. Below is a couple of excerpts from the article and then a bullet point list of his key comments.
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"We don't have another example of the last time we reopened a $20-trillion economy with lots of fiscal and monetary support," Powell said. "The challenge we are confronting is how to react to this inflation, which is larger than we expected. To the extent it is temporary, it wouldn't be appropriate to react to it. But to the extent it gets longer and longer, we" have to continue to revaluate the risks that would affect inflation expectations, and that is what we are monitoring."
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Debt was another issue discussed during the testimony, with Powell highlighting that the U.S. is not on a sustainable path.
"Debt is growing substantially faster than the economy. In the long run, that is not sustainable. The laws of gravity have not been repealed. We'll need to get back on the sustainable path at some point. The time to do that is when the economy is strong — unemployment is low, taxes are rolling in. That is the time to do it."
- Inflation is way above the Fed's 2% target - they are "not comfortable" with that
- Current inflation problem is "unique" in history recovering from a pandemic shutdown
- Higher Inflation expectations can lead to higher actual inflation
- Fed will discuss reducing QE if high inflation persists
- Fed will use its tools to fight inflation if necessary
- The laws of gravity have not been repealed
- US debt is growing faster than the economy which is "not sustainable"
- Fed will continue to study a central bank digital currency - not sure if it is needed
- Cyber risks of ransomware attacks is what Powell worries about the most
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My added comments: In these comments Chairman Powell outlines the problem facing the Fed which we have long reported here. The Fed is in a potential no win position. If they continue intervening in the interest rate market to keep rates suppressed, the risk of way too much inflation is clearly present and now the Fed is finally admitting that. However, despite the assurance that the Fed has "tools" to fight inflation (which would mean allowing interest rates to rise), if they take that route they speed up the explosion higher of US debt which Chairman Powell just described as "unsustainable". Higher interest rates means US debt grows faster and quicker towards unsustainability.
It is impossible to believe the Fed is surprised by this situation. Economists and analysts have been predicting this situation for years and almost anyone who understands math can easily figure out propping up a debt dependent system with ever expanding money creation and even more and bigger debt cannot go on forever without consequences.
The problem is that no one has the courage to step up and be honest about how these policies create this kind of problem because the solutions involve inflicting pain and accepting a share of blame for creating the problem. Politicians love spending money because it buys them votes and funnels money to the special interests that fund their campaigns. They want the central bank to just keep bailing them out with more and more new money so they can keep spending without having to pay for it with much higher taxes on the middle class (where all the votes are). Politicians do not like being honest about the mess all this eventually creates and certainly don't have any interest in accepting any share of the blame for their role when problems arise from these policies. The public just mostly ignores the situation until some kind of real world consequences show up in their daily lives. They instinctively know something is wrong about piling up more and more debt and creating money out of thin air to paper over problems, but don't really want to believe a price will ever have to be paid for it and their leaders assure them it's all under control. It's easier to just accept that and ignore reality.
Bottom line: So long as all the parties involved in this process (central banks, politicians, and the general public) refuse to be honest and transparent about how these policies lead to an "unsustainable" system, we can expect that nothing will change and the same policies will continue anyway (even as they admit it's not sustainable) until something forces them to change (the system cannot function). It appears no one is really interested in proactively reforming the policies of the present system leading to unsustainability and accepting any share of blame for them. We can reasonably expect that the various parties involved will all point fingers of blame to someone else if the day of unsustainability does arrive. Politicians out of power will blame the political party in power at the time (too much debt). The political party in power will blame the Fed (too much easy money). The Fed will blame the politicians in both political parties (too much debt). None of that will solve the problem of course, but will just create confusion in the hopes the public will blame someone else for the mess. So we are all reduced to just hoping it doesn't come any time soon, even though Chairman Powell just told us once again it is unsustainable.
Russell Napier: «We Are Entering a Time of Financial Repression»
ReplyDeleteMarket strategist Russell Napier talks about why he sees structurally rising inflation coming, why central banks are impotent – and what that means for investors.
And central banks will have no say in the management of broad money growth?
No, they won’t. This is exactly what happened after World War II. Central banks were impotent during that time. The supply of money was dictated by governments controlling the commercial banking system. I strongly believe that we’re going back to that system. The government can never tell you that, because the whole point of financial repression is to steal money from savers slowly. But this is a fantastic thing for politicians: It isn’t fiscal spending, it isn’t higher taxation, it’s a contingent liability on the government's balance sheet but not an actual liability. It creates politically directed growth, and it creates inflation. For politicians, it’s the magic money tree.
And your case is that politicians won’t let it go again?
Exactly. Let me give you an example: In the UK, usually the longest term fixed mortgage you could normally get was five years. Boris Johnson has now created a 25 year fixed mortgage for first-time buyers, offered by banks, guaranteed by the government. Nobody can pretend that this has anything to do with Covid, and in fact when Johnson announced it, his stated aim was to give young people access onto the housing ladder. This is a good example of how the magic money tree was discovered for Purpose A, i.e. Covid, and is being used for Purpose B, furthering social justice.
Don’t you see a possibility that politicians will return to being fiscally responsible?
Of course it’s possible that politicians, having discovered the easy route to re-election, decide not to use it. I’m betting against it. The introduction of the income tax in the UK was an emergency measure in 1798. It’s still in effect today. Many emergency measures, such as Regulation Q introduced by the US government to control deposit rates in the 1930s, lasted for decades.
Seeing how Republicans in Congress are trying to block Joe Biden’s infrastructure plans: Perhaps there will be a push towards austerity again?
The Republicans were in charge during most of Covid. They came up with the Payment Protection Programme, which was exactly using the banking system for this purpose. History shows that when Republicans are in power, they have endorsed fiscal largesse, price controls, credit controls. Just think of Richard Nixon. Of course it’s possible that some sort of rectitude descends on politicians. But I think it’s unlikely. Politicians will push credit for green investments. There will no doubt be other political problems for which more cheap bank credit is seen as the answer.
The bond market today clearly does not reflect your inflation call. Why?
https://themarket.ch/interview/russell-napier-we-are-entering-a-time-of-financial-repression-ld.4628
Thank you for the comments!
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