The Fed’s Two Disagreeable Choices

Dr. Fauci – a quack – is disturbed by all the holdouts.  He wants to “full-court press” the selfish anti-vaxxers who refuse to take one for the team.

Don’t they know caution and skepticism are not tolerated in a permission based society?  Don’t they know it’s their American duty to just take the jab – and every forthcoming booster jab?  Can’t they see glory is within reach?

The popular narrative at the moment is that a great economic boom has arrived.  First quarter gross domestic product (GDP) growth was recently clocked at 6.4 percent.  Government economists all forecast the robust growth will continue.  The rationale is generally as follows…

The economy’s reopening.  Businesses are hiring.  Summer is nearing.  Pent up demand and excess stimmy cash are coalescing into a great big consumption binge.

You can already see it.  Neighbors are rushing over to Lowes to buy new patio furniture and wood pellet grills.  Coworkers are driving up the coast for weekend getaways and shopping sprees.  Middle-aged men are putting dye in their hair.  Folks are heading down to the ballpark to root, root, root for the home team.

The great reopening is a time of great weirdness.  You may be vaccinated.  But you should still where a mask at all times…even when outdoors.  Restaurants can seat you indoors, so long as you’re separated from adjacent parties by Plexiglas.

Limited capacity requirements.  Superfluous precautions.  Idiotic safety guidelines.  Who cares?

You can now mow down a basket of dry rub Buffalo wings and Louisiana voodoo fries from an interior window seat at Wingstop.

The good life is finally here…and it’s electric!

Very Substantial, Very Interesting

The COVID-19 government lockdowns provided cover for flooding the economy with trillions of dollars in printing press financed government stimulus.  But expanding the money supply without a commensurate expansion of goods and services is bound to cause problems.

There’s not enough stuff at the moment to sop up the flow of excess currency.  This imbalance is causing prices to go haywire.

Should it be a surprise that reopening the economy following a forced shutdown is not as simple as flipping on a light switch?

Up and down the supply chain – from raw goods to manufactured products to transport and delivery – links are broken.  Moreover, with all the funny money now looking to be put to use, production cannot keep up with demand.  Computer chips.  Lumber.  Iron ore.  Steel.  Rebar.  You name it…prices are going up.

American folk hero and billionaire investor Warren Buffett says the U.S. recovery is “red hot.”  While speaking at the Berkshire Hathaway annual video conference last week, Buffett also warned about inflation:

“We’re seeing very substantial inflation – it’s very interesting.  I mean, we’re raising prices.  People are raising prices to us.  And it’s being accepted.  Take home-building.  I mean, you know, the cost of—we’ve got nine home builders in addition to our manufactured housing operation, which is the largest in the country.

“So we really do a lot of housing.  The costs are just up, up, up.  Steel costs, you know, just every day, they’re going up.  And there hasn’t yet been because the wage– the wage stuff follows.”

Indeed, costs going up, up, up may be very interesting to a billionaire fat cat like Buffett.  For the typical worker this amounts to a significant pay cut.

And now the central planners can’t seem to keep their story straight…

The Fed’s Two Disagreeable Choices

Federal Reserve Chair Jay Powell says price inflation is transitory.  That it’s nothing to worry about.  That rising prices are merely a statistical artifact of last year’s low inflation readings dropping out of the twelve-month calculation (i.e., the so-called base effect).

Yet what’s this?  On Tuesday, Treasury Secretary and former Fed Chair Janet Yellen veered off script.  In a brief moment of candor, Yellen said what everyone else already knows…

That interest rates will have to rise to keep the economy from overheating.  Later in the day, perhaps after a phone call from Powell, Yellen said inflation won’t be a problem.

What to make of it?

Powell and Yellen can say whatever they want.  However, the more they say things that are at odds with reality, the more they discredit themselves.  At this point, practically all honest observer have concluded these two spew claptrap.

The fact is, inflation is already a problem and interest rates are already rising.  Moreover, as supply chains are reconnected and production is ramped up, the full extent of the Fed’s extreme dollar debasement policies will become apparent.

For example, what if the broken links in the supply chain are fixed, yet prices continue to surge?  What then?

The Fed, of course, will have a very disagreeable choice.  Do they:

A.  Jack up interest rates, pop the asset bubble (i.e., stocks, property, cryptocurrencies, etc.), bankrupt Washington, and push upwards of 50 percent of households and businesses into bankruptcy?

Or, do they:

B.  Keep inflating the money supply until all remaining value of the dollar is totally vaporized, ending with a hyperinflationary blowout and subsequent collapse?

These, no doubt, are the sorts of choices clever fellows must face after their relentless intervention has destroyed honest price signals, including the price of credit.  Without question, the planners will do the expedient – whatever that may be – until the bitter end.

Sincerely,

MN Gordon
for Economic Prism

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