Yesterday I sat and listened to Jerome Powell (chairman of the Federal Reserve) give feedback on the FOMC meeting. I skipped most of the questions by the press, because by that stage I had heard enough.
I’m not sure why I always do this to myself.
I listen to briefings, briefings by those who control our money and politics, and I do so KNOWING that they are going to lie/talk nonsense/spread propaganda etc, yet I still sit there listening for meaningful information. Generally that meaningful information is drowned out by all the other rubbish they say. Powell’s little monologue yesterday was a great example of this.
Because while I sat there yesterday, all bright-eyed and bushy-tailed, listening attentively to Powell, my bright eyes soon faded to a dull glow, before extinguishing entirely. I’ll leave my bushy tail out of this, lest some people become distracted by unintentional innuendo.
What Powell did yesterday was classic politician: he SOUNDED like he was making sense – and to the layman he probably was – only he wasn’t making sense at all. To the economic analyst, listening to Powell’s speech felt like having a root canal – in your brain!
What Powell said wrong
Economics is an unforgiving mistress. Oh yes, make no mistake, markets CAN be manipulated. But even with extreme manipulation (such as we are witnessing now), there are physical limits to what can be achieved economically through manipulation alone. There are DEFINITELY limits to the duration that such practises can be sustained for!
The more Powell spoke yesterday, the more my brain ached. His speech was a string of non sequiturs, if not outright lies. As he spoke I started to jot things down. I probably missed quite a few, but what follows below are the notes I made while listening to what Powell said:
Stable prices and low unemployment
Powell spoke about aiming for stable prices AND low unemployment.
This is a joke, right?
Here is an example of classical Phillips curve:
The Phillips curve is a theoretical model. It describes the relationship between employment and inflation. The critical part of this relationship is that it is an INVERSE relationship. Phillips tells us that you can EITHER choose low inflation and high unemployment, OR high inflation and low unemployment. Obviously high inflation means that you don’t have price stability. *[See Footnote]
Immediately we can see that there is a problem with what Powell is targeting. Theoretically – at least in classical economics terms – it can’t be done.
But hang on, there’s already far more to what I’ve said here than what meets the eye.
For starters: Powell has been set up to fail, he’s been given an impossible task. I say this because those objectives – low unemployment and stable, low inflation are not Powell’s objectives, they are the very mandate of the Federal Reserve itself. One could say that Powell is merely trying to achieve the impossible task which he has been saddled with.
But does Powell he even know this?
Look, I’m not calling the man an idiot, but I am questioning his knowledge of macroeconomics! Remember, Powell is trained as a lawyer! Not a banker, not an economist, but a lawyer. ***Spoiler alert*** lawyers don’t learn about macroeconomics.
Powell did work in investment banking, and while on the surface that may sound like a good thing, here is where things actually take a turn for the worse. You see, Powell only worked as a banker from 1984 until 1990. yet amazingly, during that time he managed to rise to the position of senior vice president!
Think about that for a moment. You’re the president of a large investment bank. You hire a 31-year-old who graduated from university a few years ago. He has a degree in something other than your core business and five years of work experience in the wrong field. You hire him anyway and give him banker tasks to do. Six years later he’s the bank’s senior VP.
WHAT THE ACTUAL ****?
The next thing you know, George Bush Sr is headhunting him to come and work as Under Secretary of the Treasury – age 39.
I’ve seen too many people have careers like that. They become someone’s blue-eyed boy or some sort of political quota representative, and they simply skip their way up through the echelons of power. The result is that they rapidly end up hopelessly over-promoted and under-experienced for their position.
But fair enough: Powell is a boomer and things like this happened to many boomers. (Ever wondered why the boomers still have the lion’s share of the wealth and the rest of us are barely scraping by? Now you know…) We can’t hold his career successes against him, as dubious as they may be. What we CAN do is question his knowledge of economics, specifically economic theory. We can REALLY question those parts of it to which he has limited on no exposure, e.g economic depressions, dealing with deflation, alternatives to fiat money etc.
So I sit here today quite seriously wondering: “is Powell is even aware that low unemployment and low, stable interest rates are mutually exclusive…?”
Only they aren’t.
The Phillips curve is more a guideline than a rule. It does break down under certain circumstances.
But if it’s questionable, even doubtful, that Powell understands the Phillips Curve; then what’s the chance that he understands exceptions to the curve? I need to point this out so that you can understand that Powell isn’t some sort of financial genius who is trying to do the right things for the right reasons, he’s a blind man playing whack-a-mole and he just happens to hit a few of the moles by chance.
In all seriousness: I surmise the Powell must by now have learnt the basic relationship between inflation and unemployment, but I REALLY don’t believe that he understands the details of that relationship. I think he is going to follow the same old patterns that all central banks follow in such situations, that he is going to follow the same flawed plan and make the same mistake of focusing on short-term stability instead of long-term prosperity. He’s going to keeping building the house of cards ever higher.
The Phillips Curve can and has broken down on occasion. I’m not discussing those breakdowns here, you know where to find Google if you want more details. The important things is that we have seen that you can have high unemployment and high inflation simultaneously. This is called “Stagflation”.
Looking at the scenarios when this has happened in the past, we see that the curve breaks down during periods of major economic depression. From 1973 to 1975 the US economic went into recession for six successive quarters. During this time inflation tripled and the GDP slumped. A slump in GDP implies that production dropped and that jobs were lost.
This should be a serious concern right now. The post-Covid-19 economy is a crippled economy. According to the Federal Reserve Bank of St Louis, about 22 million Americans lost their jobs due to the government’s anti-Covid-19 actions. Less than half of those jobs have since been recovered.
One HAS to realise that a damaged economy fails like dominoes falling over: people lose jobs -> household income drops -> spending drops and people default on loans -> stores place fewer orders with suppliers and financial services run into trouble -> the tax base shrinks -> government spending SHOULD shrink, but debt is incurred instead. etc etc. That’s just a look at a small section of the toppling dominoes, there are many others such as reduced social grants and the upheaval that causes (socialists once again running out of other people’s money – who knew?) or the bearish divergence between hard assets and the ethereal assets of derivatives markets.
What I’m saying is that the economy is in extreme danger. Production has fallen and will fall further. Powell & Co are happily bailing out the big names in industry – completely ignoring the fact that this in no way boosts production figures or the GDP! All it does it drive the wealth gap ever wider: the wealthy are subsidised for being rich, and the rest get nothing. If you want a real scare, then take a look at the velocity of M2 money at the moment… https://fred.stlouisfed.org/series/M2V
WITHOUT THE ACTUAL PRODUCTION OF GOODS AND SERVICES CLIMBING, THE ECONOMY WILL CONTINUE TO FALL – NO MATTER WHAT ECONOMIC INDICATORS SAY TO THE CONTRARY!
We have seen bailout money FLYING out of the Fed this year. (Not that they would tell us who got what…) That’s Powell’s attempt at keeping businesses alive. But it’s a fallacy, it doesn’t work. As stated above, all it does is make the rich even wealthier. Have you SEEN the stock markets lately? Stocks are at or near All Time Highs! Every 20-something with a trading account thinks that they’re a financial investment genius and the likes of Bezos and Musk are making money faster than they can spend it (or in the case of Bezos: faster than his ex-wife can take it away!). Little (if any) of that money makes it down to the average American. The money boosting those stock is the money the rich are being fed in the form of bailouts. The rest of it is stupid investor money – investors who think that companies can really be “too big to fail” because the government will always bail them out. That system works well – right until it suddenly doesn’t!
Yesterday we saw Powell commit to more QE, he spoke of $120 BILLION in securities purchases per month (never mind the trillions he’s already spent!), an amount which he said was flexible. This does not help the economy! It does not help Average Joe and his over-burdened middle-class paycheck!
Luckily Powell does have a plan for Average Joe and his family: CREDIT!
Because EVERYONE knows that the best move one can make is to get yourself further into debt. Why buy $1000 worth of groceries a month when you can get them on credit and pay an extra $50 for them? Makes sense, right?
Just what the average struggling American needs – more debt!
THANKS FOR NOTHING POWELL!
Credit is not free money. Credit needs to be repaid. With interest.
Speaking of free money…
Yup, he mentioned that too.
Under “Stable prices and low unemployment” I spoke about “reduced social grants” and “the upheaval that causes”. Remember the helicopter money for the poorer members of society. Where is that now?
While I am strongly against socialism in general (because you FORCIBLY ROB one person to give their money to another), an even worse crime is giving money to a person – making them dependent on you – and then suddenly stopping the handouts. That kind of thing has the nasty effect of causing people to take to the streets and riot violently. Not that we ever see that kind of behaviour in the good ol’ US of A…
Like most modern politicians and bankers, Powell is pro-socialism. He knows that if you want full control of the population, you have to give them their socialist handouts, JUST enough to survive on. So in his feedback yesterday you may have heard the term “Direct Fiscal Support”. What that was was Powell reserving the opportunity to give more taxpayer money away in a socialist fashion – JUST enough to keep the elitist house of cards economy standing a little longer when the mobs start to get really angry.
The Free Market – Inflation and Deflation
Ha ha ha, ah Ha ha Haa, Ha ha ha HAAAAA!
By it’s very definition, a Capitalist Economy is a Free Market Economy. It should therefore go without saying that the USA has anything but a Capitalist Economic Structure! It doesn’t even have the vague semblance of a Free Market – apart from the propaganda which keeps falsely labelling it as such!
Powell just told us that The Fed is “committed to using our full range of tools”.
Translation: “We can and will meddle with the economy as we please!”
Take a look at this link I posted on Twitter a day ago. Don’t bother reading the article, it’s irrelevant – play the video clip and hear what Powell has to say about his willingness to meddle with the natural order of the economy. I would like to call it “shocking”, but nothing these tyrants do shocks me anymore.
If you want to read more about Inflation vs Deflation and why meddling with that balance is very bad thing to do, then read this article of mine from earlier this year (strongly recommended): Deflation / Inflation: Musings
Oh, and when your socialist friend turns to you and says that Capitalism has failed the people and is responsible for the wealth gap – please point out to him that what he is seeing is actually SOCIALISM and ask him where he has EVER witnessed a Capitalist Free Market Economy – outside of the cryptocurrency space of course.
Which brings me to…
My solution (as always): buy Bitcoin! – and other good cryptos – like NEO 😉
Yours in crypto
*Footnote: it is interesting that in the wake of World War II, the central banks of the major allied countries met up to discuss future monetary policy and to decide the way forward for the global economy. At the time, most of the countries were heavily financially indebted to the US, a consequence the war. Much debate was entered into on how to balance economies so as to create low unemployment and low inflation. It was the general feeling that zero unemployment should be striven for, with Australia in particular pushing for a model in which unemployment is kept at a minimum, allowing for maximum economic production and allowing money to be made as a consequence of that. Significantly, the US was opposed to this system – it wasn’t suffering the pain of bombed out industrial areas and high unemployment which many other countries were suffering at the time. The meetings ended in fractured and non-committal polices, which ultimately didn’t really achieve anything.
“The secret to success: find out where people are going and get there first”
~ Mark Twain
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