Guest post by MN Gordon from his blog at economicprism.com:
“The Lord sends poverty and wealth; humbles and exalts”. – 1 Samuel 2:7
Holy Roll
An enterprising entrepreneur made a comic graphic of Federal Reserve Chairman Jerome Powell with the caption: “JPOW WE TRUST.”
You may have seen it.
The image shows Powell wearing a flamboyant preacher’s robe and making an esoteric gesture with his right hand. His face grimaces as if he’s passing a kidney stone.
His left hand holds what appears to be a bible facing outwards. The writings are scarce and difficult to read. But if you zoom in, you can see important prophecies like: “STOCKS ONLY GO UP”, “RECESSION CANCELLED”, “MONEY PRINTER GOES BRRRRRRRR”.
An American dialect of French is also used in various cases to express what happens to bearers in the market and those who short stocks. It’s the kind of thing best reserved for locker room talk.
The designer, who goes by nobiggydiggy, must have created it in the no-risk days before March of this year. When the federal funds rate was pushed firmly to zero, as it had been for two years.
It was when Powell preached from the New Testament. He was making a monetary policy of compassion and forgiveness.
Since then, driven by the wrath of inflation, Powell has turned to the Old Testament. He has raised the federal funds rate and pursued a fire-and-brimstone monetary policy. Writings like: “CRASH THE MARKET”, “PRODUCE DEPRESSION”, “BORROWERS MUST PAY”, is more like this.
In the dance between life and art, the strange spectacle of a central banker using a sacred and enthusiastic religion to make monetary policy announcements is not far from reality. This week, for example, millions of old men and women tuned in to hear Powell preach the sacred truth.
Primal cry
Trillions of dollars were at stake when the two-day FOMC meeting adjourned on Wednesday. The balance was poised to swing one way or the other, on the pull of how many basis points Powell commanded.
As expected, the Fed raised the federal funds rate 75 basis points, to a range of 3.00 to 3.25 percent. The Fed also telegraphed that it would rise above 4.25 percent by the end of the year.
For perspective, the federal funds rate hasn’t been above 3.25 percent since January 2008. That’s more than 14 years. Or about 6 months after the first iPhone hit the market.
After the FOMC statement, Wall Street let out a collective primary cry. The Dow Jones Industrial Average (DJIA) moved with an initial downward and upward bipolar response. After that, it crashed at the closing bell for a loss of 522 points.
The most beautiful moment came after the JPOW press conference. That’s when Senator Elizabeth Warren, the shrew with a plan for everything, started twitter:
“Chairman Powell just announced another extreme hike in interest rates while forecasting higher unemployment
“I have been warning that President Powell’s Fed would put millions of Americans out of work, and I fear that it is already on track to do so.”
The outlook is much, much worse than Warren is letting on. She knows that decades of government spending programs are coming to an end. She wants Powell and the Fed to take the fall when it all blows up later this year.
Inflation Deflation
To clarify, the economy and financial markets are currently ravaged by the nasty combination of inflating consumer prices and deflating asset prices. Both are the stuff of central planners, including both Warren and Powell.
Consumer prices, as measured by the Consumer Price Index (CPI), are officially inflating at an annualized rate of 8.3 percent. Consumer prices are actually inflating at around twice the CPI rate.
Stocks, on the other hand, are deflating. The DJIA is down more than 17% year-to-date. The NASDAQ is down more than 30 percent.
Bonds are also deflating. The iShares 7-10 Year Treasury Bond ETF (IEF) is down 15 percent since the start of the year. The yield on the 10-year Treasury note, which moves inversely to price, now stands at 3.71 percent. The yield on 10-year Treasuries has not been this high in more than a decade.
As interest rates rise, in a desperate effort to contain rampant consumer price inflation, borrowing becomes more expensive. The interest rate on the 30-year mortgage is now 6.29 percent. A year ago, it was just 2.88 percent. In other words, the cost of borrowing to buy a home has more than doubled.
As mortgage rates rise, home prices have nowhere to go but down. Homes all over the country priced at what would have sold 6 months ago are sitting on the market…unsold after two or three months. Several rounds of price cuts aren’t cutting it. It will take a lot more to clean up the market.
In fact, asset prices are deflating while consumer prices are inflating.
This is the exact opposite of the world that everyone has come to know and love for the past 40 years. Where consumer prices for imported goods moderated and prices for stocks, bonds and real estate rose. Where homeowners could refinance every several years at lower and lower rates.
However, inflation was always there.
Services that could not be imported, such as medical care and college tuition, swelled beyond comprehension. The CPI masked this rise in prices due to the flood of low-cost, cheaply manufactured imported goods.
Facing a wrath of biblical proportions
The frenzy of creating money to combat the scourge of government-enforced lockdowns has proven too much to handle. Between February 2020 and April 2022, the Fed’s balance sheet doubled from $4.15 trillion to $8.96 trillion. It’s no mystery why consumer price inflation has soared.
Now the Fed is tightening. And the financial markets can’t handle it.
In addition to the rate hikes, the Fed has shrunk its balance sheet slightly to $8.32 trillion. There is still a long way to go to reduce the balance to the realm of normality, whatever that may be.
Meanwhile, there is a lot of inflation to contend with. David Haggith, Publisher and Editor-in-Chief of The Great Recession Blog We recently clarified what we are up against:
“Those of us who lived through the 1970s battle with inflation, remember that it is not easy to bring down inflation! It’s like playing a mole. So we know that no one should have been surprised, if at all, to find out that inflation fever was holding strong at the top of the mercury, despite all the cold flurries of interest rate hikes and QT of the Fed. It took several years to get the fever fully under control with extreme interest rates then. There won’t be as much interest rate freeze needed now because the economy will completely disintegrate if we even cut rates in half; but here’s the point: economic disintegration is what the Fed is aiming for without realizing it.”
What to do with it?
The American economy is already in recession. However, consumer price inflation has barely abated. Even if the CPI were cut in half, it would still be double the Fed’s preferred rate.
So the Fed will raise rates in a desperate attempt to clean up the remnants of the past. And the economy will disintegrate.
Meanwhile, Warren and other political populists will do silly things to deflect responsibility for the disaster they have created.
The depth and duration of the destruction is unknown. Still, we’re pretty sure this is more than just your garden variety slump…
This is the big one we all face. An anger of biblical proportions.
Guest post by MN Gordon from his blog at economicprism.com.
