Powell’s Pivot to Nowhere

Slow growth.  High prices.  The U.S. economy – and the global economy – was already facing these disagreeable prospects before Putin invaded Ukraine.

But now, with Russian tanks rolling through the “borderland,” negative supply shocks to the global economy will take things to a whole new level.  The dial on nastiness has been cranked up to maximum.  How all the madness is reconciled will be equally nasty.

The major stock market indexes, for example, had already been slipping and sliding since early January.  But now they’re beset with panic and fear…and sudden moments of greed.  These emotions play out in erratic wave patterns that can be characterized as massive freefalls punctuated by episodic relief rallies.

The initial delight that the potential world war would slow forthcoming Fed rate hikes quickly faded to a sucker’s rally.  The reality of it all is much greater than the variance between a 25 or 50 basis point rate hike.  The fact is, even with the stock market’s decline over the last two months, there’s still much, much further to fall.

The obvious immediate effects to the U.S. economy will be from higher oil prices.  This week, a barrel of West Texas Intermediate Crude – the light sweet stuff – topped $112 per barrel.  And here in the LA Basin, a gallon of regular grade gasoline is over $5.39.

Consumer prices were already at a 40 year high before this latest bout of war madness was triggered.  Now, with oil and gas prices going through the roof, consumers will soon be tapped out.

High prices, in this respect, would appear to be the solution to high prices.  But not so fast…

There’s not only oil supply shocks to contend with.  There’s also food supply shocks…and broken supply chains.

The price of wheat has spiked up to a 14 year high.  This has the makings of a mass food price inflation.  Moreover, the global shipping industry, which was already constrained from two years of coronavirus madness, is being further disrupted.

Bottomline, supply shocks, and greater scarcity, will further propel consumer prices higher.  Inflation has much higher to run.

Here’s why…

Inflationary Depression

When Thomas Friedman proclaimed the world is flat back in 2005 and advocated the virtues of globalization he didn’t anticipate the fragility of the elaborate supply chains that were being constructed.  Nor did he foresee what would happen if there was a breakdown in the system.

The virtues, remember, were low-priced cheaply made knickers from Asia in return for the hollowing out and offshoring of America’s industrial base.  But now that supply chains are broken, and are proving slow to repair, low prices are turning into high prices.

Supply shocks, especially when ‘just in time’ inventories are quickly consumed, are incredibly damaging.  When the supply chain breaks the system is thrown into chaos.  This is best demonstrated by the shipping industry, which, according to Phaata Logistics, earned twice as much in the first three quarters of 2021 as it did in the entire period between 2010 and 2020.

The point is, we’ve already entered what will be a decade – or two – of consumer price inflation chaos.  And there’s little the Fed’s pivot to nowhere will do to rein it in.

For wage earners, savers, and retirees this will translate into a pronounced loss of purchasing power.  Public services will cost more and will provide less.  Infrastructure will decay further into disrepair.

Decades of self-serving politicians, financing  promises of something for nothing with the Fed’s printing press money are what got us into this mess.  Debts, deficits, and dependents have piled up like homeless encampments beneath Los Angeles bridge abutments.   No simple policy adjustment or legal action can magically make all these mistakes disappear.

Sound money, and the just discipline that comes with it, would have prevented this madness to begin with.  Without all the fake money being pumped into America’s economy, consumers would never have been able to buy so many imports from China.

At this point, mass bankruptcy, liquidation, failed pensions, extended pain and misery, personal responsibility, and a return to honest living will be needed to clean up this mess.  This will also serve to clear much of the bloat out of government.

Yet it won’t be an honest deflationary depression.  Rather, it’ll be a double-dealing inflationary depression.

Powell’s Pivot to Nowhere

With this backdrop, and the burgeoning blowback to financial markets from sanctions against Russia, Federal Reserve Chairman, Jay Powell, addressed Congress this week.

These testimonies to the House Financial Services Committee and the Senate Banking Committee only come twice per year.  They generally offer cheap entertainment.

For several weeks – or more – the testimonies were billed as the unveiling of the Fed’s policy pivot.  The expectation had been for Powell to telegraph a 50 basis point rate hike at the Federal Open Market Committee (FOMC) meeting scheduled for March 15 and 16.  This was supposed to kick-off the Fed’s great inflation fighting effort.

But then Putin invaded Ukraine and the world suddenly changed.  Powell was gifted an excuse to go soft.

For Powell, the task at hand this week was twofold.  First, demonstrate the central bank would be taking measures to control inflation.  Second, show Wall Street the Fed still has its back.

Thus, Powell went middle of the road.  He’ll be proposing  a 25 basis point rate hike at the upcoming FOMC meeting.

“We’re going to use our tools, and we’re going to get this done,” said Powell to the Senate Banking Committee.  In other words, he’s effectively doing nothing to fight inflation.

What gives?  Is this some kind of joke?  How’s a 25 basis point rate hike supposed to rein in inflation that’s officially raging at 7.5 percent?

Clearly, Powell’s pivot is a pivot to nowhere.  High consumer price inflation is here to stay.

Sincerely,

MN Gordon
for Economic Prism

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