Warning: Both the Fed and the Treasury WANT Higher Inflation
Posted June 10, 2021
Over the last week, we’ve been outlining Treasury Secretary Janet Yellen’s absurd beliefs on higher inflation and higher interest rates.
By quick way of review:
1) Secretary Yellen believes that President Biden’s $4 trillion spending program would be good for the U.S. even if it contributes to higher inflation and results in higher interest rates.
2) Inflation is already roaring in the U.S. before President Biden’s $4 trillion spending program. Higher inflation would NOT be good at this point as Americans are already experiencing rising costs of living.
3) Higher interest rates would also be extremely problematic as the U.S. now has $28 trillion in public debt. This massive debt load requires extremely low interest rates for the U.S. to avoid a debt crisis. The last time interest rates spiked higher in 2018, the corporate debt market froze, and the stock market collapsed 20% in a matter of days.
Now, Yellen is one of the two most important and powerful figures in the financial world. As such, her views on this are extremely significant when it comes to determining what policymakers will be doing going forward. As far as the Treasury is concerned, inflation will be allowed to rage.
A Voice of Sanity?
This leaves Fed Chair Jerome Powell as the only potential voice of sanity from a senior policymaker perspective. Unfortunately for us, Powell is likely to prove just as delusional as Secretary Yellen when it comes to issues of inflation…
The first sign of this came in 2018 when Powell used his first Jackson Hole symposium to glorify former Fed Chair Alan Greenspan’s economic insights and “considerable fortitude” in not raising interest rates back in the late ‘90s.
Yes, Powell believed Greenspan was a genius for not raising rates in the late’ 90s. If you don’t remember what stocks did at that time, it looked like this:
In light of this, the quote below from Powell’s 2018 speech is quite revealing.
The FOMC thus avoided the Great-Inflation-era mistake of overemphasizing imprecise estimates of the stars. Under Chairman Greenspan's leadership, the Committee converged on a risk-management strategy that can be distilled into a simple request: Let's wait one more meeting; if there are clearer signs of inflation, we will commence tightening. Meeting after meeting, the Committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined.
Source: The Federal Reserve Records
In this context, it is not surprising to see Fed Chair Powell now arguing that inflation is “transitory” and should be ignored. This is practically the exact policy he lionized in his 2018 speech: ignore inflation, don’t raise rates no matter how frothy the markets become, and allow a massive stock bubble to form.
From Powell’s Q&A session in early May:
“We suspect transitory factors may be at work,” Powell said, adding inflation should return to the Fed’s target over time, and then be symmetric around its objective. Powell was commenting at a news briefing, following the Fed’s two-day meeting.
“If we did see inflation running persistently below, that is something the committee would be concerned about and something we would take into account when setting policy,” he said.
So… What Does This Mean?
That both the Treasury Secretary AND the Fed Chair, the two most important figures in finance, believe inflation is NOT an issue or even worse, is a good thing. Neither policymaker believes that they need to tighten monetary conditions. If anything, Treasury Secretary Yellen believes the government should print and spend even MORE money!
So inflation is going to rage and rage, until this bubble bursts wiping out trillions in investor capital.
As I keep warning, inflation is going to ANNIHILATE investor portfolios.
However, those investors who are properly positioned for it will make literal fortunes.
Editor, Money & Crisis