The Fed Intends To Cripple The Economy

The Fed Intends To Cripple The Economy

The Fed wants a deep recession. There is no getting the CPI back to 2% without crashing the Bubble Economy that it created.

The Fed was faced with a choice: a decade of 1970’s style stagflation or a deep recession. The Fed wisely chose the latter. The Fed has had to move faster than it anticipated (as we predicted in October 2021), and is now looking at a Fed Funds Rate approaching 5% by Q1 2023 (we believe the Fed Funds Rate and the 2-Year Treasury Yield will be well north of 5% by Q1 2023).

A 2% CPI won’t happen overnight, it may not happen this decade, but we can get CPI close to 3% by 2025. This assumes that the Fed does not restart it’s awful QE program AND that the fiscal side (subsidized by the Fed’s money printing operation), does not start allocating “emergency” income to Americans as it did in 2020 and 2021. While many Americans were happy to receive that helicopter money from the Trump and Biden Administrations, we are all paying for that “free” money now via the inflation tax – which is taxation without representation if there ever was such a case.

The Everything Bubble is slow to deflate. The Fed created the Everything Bubble (I’m not sure who coined that phrase, but it is appropriate), with its zero interest rate policy and endless money printing which saw a run-up across asset classes from Housing to Equities to Crypto to NFTs to Art to Consumer Goods… the list goes on. Equities, Housing, Crypto, NFTs and other asset classes have rolled over but are still inflated. Over time these valuations will continue to deflate as the money supply shrinks (M2 peaked in March 2022) and as the velocity of money slows (the velocity of money has not slowed since Q3 2020), as the cost of capital increases causing consumers to spend less on discretionary items and companies to invest less (I believe the largest Technology firms have all announced job cuts or at a minimum plans to slow hiring).

Unemployment as a barometer in the absence of supply-side policies. It will take time for the air to fully come out of the Everything Bubble. The unemployment rate will be a good barometer as to deflationary progress. At present the Fed sees unemployment peaking at 4.4% in 2023 and 2024. The Fed also sees the CPI at 2.3% in 2024 and at 2.0% in 2025. This is not realistic. There is no method by which to take the CPI to 2% so quickly without pushing the unemployment rate above 6% or more given that the Biden Administration will not do the things required to increase the domestic supply of key goods such as Energy.

The CPI is not the end all be all. Inflation is much worse than the CPI suggests. Not only does the CPI not capture certain items (Crypto for example, which has given back over $1 Trillion of its $2 Trillion plus run-up), the reported CPI price increases for food, shelter (purchases and rents), and other related items were or are double-digit percentages lower than the real world price increases (food and shelter are two such examples). Anyone who buys food knows this. Anyone who tracks real world housing data (purchases and rentals) knows this. The good news is that items such as car prices have started to roll over. Housing prices have rolled over (luxury homes are off 28%) while inventories have built up.

Tax increases – now? The above does not contemplate tax increases. If the Biden Administration is able to push through income tax increases on consumers and companies we could be looking at an economic depression rather than a recession. A depression is not out of the realm of possibility. All of the Central Banks except China’s and Japan’s are tightening into a global slowdown. As if that weren’t enough, raising taxes into this macro backdrop would be salt in the wound. With a little luck the Party of Biden will lose Congress in November. With a little more luck the GOP will find its collective balls in November and put a halt to the egregious spending of the past 2-3 years.

Last word. The fact that we in the capital markets spend so much time focused on a government entity runs counter to a free market economy. The fact is the capital markets are not free markets. Borrowing rates are set by the Fed rather than by the market. Today’s Fed is an active participant in the markets through programs such as QE, which was supposed to be a one off event during the Financial Crisis of 2008-2009 but instead became permanent policy. Beyond QE, the Fed actively purchased corporate credit issues during 2020 (Did AAPL really need the Fed’s money?). I can promise you this, you will hear a huge stink made by the largest banks if the Fed uses its forthcoming digital currency to transact directly with the public. Once that happens the Banking lobbyists will be in full force to try to curb the Fed’s behavior, but not before then.

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