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Bill Bonner, reckoning today from Baltimore, Maryland...
You already know our major hypothesis.
It’s “inflate or die.”
Once an economy has gotten used to big doses of cheap money (artificially low interest rates… deficits… quantitative easing, etc)… trying to go back to normal monetary policies is painful. It’s like a man who has gotten immensely fat by eating 10 cream pies a day. Cut down on the pies and he’ll need a new pair of pants.
So too will an economy. Yesterday came more news that the US economy is shrinking. The Wall Street Journal reports:
U.S. Economy Shrank Last Quarter
The U.S. economy shrank for a second quarter in a row—a common definition of recession—as businesses trimmed their inventories, the housing market buckled under rising interest rates, and high inflation took steam out of consumer spending.
High Calorie Fiat Diet
There is some immutable law of the universe that tells us that over-doing it brings unhappy consequences. Cream pies cause problems – diabetes, high blood pressure… and of course, obesity itself. So, too, did the Fed’s high-calorie credit diet inevitably lead to the doctor’s office.
“Too much,” came the diagnosis. “Cut back,” came the prescription.
And so it came to pass, after creating the problem itself, denying there was a problem… and then insisting that it would pass on its own, that the Fed began a campaign to moderate its intake of cream pies. On Wednesday, it took another 0.75% slice off the table.
It’s either more or less. Fat or slim. Inflate or die.
But what we are wondering about today is the space in between. Does the Bubble Epoch have to die completely? Couldn’t it be just a little dead?
Suppose the economy were to shilly-shally around… neither expanding nor contracting… indefinitely? And couldn’t stocks resume the course they have taken for the last 40 years – dipping now and then, but then recovering upward momentum? Why can’t Apple become a $5 trillion corporation?
Since the Fed began its diet program, stocks lost as much as 20% of their weight. Bonds slimmed down. Mortgage refinancers cinched up their belts. Recently, commodities and energy fell too.
Maybe that’s enough?
Investors were jubilant this week. They think inflation may have ‘peaked.’ After all, didn’t the inflation come from Putin’s war… from supply chain disruptions… and stimmie checks? And aren’t those things all, well, transitory? And isn’t the inflation they caused working its way through the system? Like a bad meal, it will soon be gone.
And then the Fed will not need anymore 0.75% rate hikes. Instead, it can begin to ease off. The damage from higher mortgage rates… and higher lending rates, generally… will be contained.
We are just reciting what we believe to be the main line of talk on Wall Street. We don’t believe it ourselves. Because, the creampie-eating fatso analogy quickly breaks down. A man may slim down a little, or a lot. If he does, he doesn’t have to remodel his bathroom, get remarried or order a new dining room chair. Life goes on, much as it did before.
But when the Fed decides to ‘slim down’ the economy… the pie store goes belly up! Debtors can’t repay their loans… so their creditors go broke. Businesses can’t afford to pay so many employees – so unemployment goes up. Stocks, bonds, and cryptos – that looked like big winners just 6 months ago – are suddenly revealed as ponzi schemes, doomed from the very get-go.
Near Zero Interest
In a healthy economy, people barely notice the Fed. Its manipulations are slight. Its errors are small. It stays out of the way.
That’s the way it was until the 1990s, when Alan Greenspan began backstopping Wall Street. Later, after the mortgage crisis of 2008, the Fed intervened on a scale never before seen in the US. Interest rates were pushed down to near-zero… and left there for more than 10 years. In a single month in 2020, the Fed added more new money than had been ‘printed’ in the preceding 100 years. And now, the whole economy has an almost insatiable appetite for more credit from the Fed.
It’s a monster. Either inflate it. Or kill it.
But why does it have to die? Couldn’t it be just a little more normal? A little less obese? Couldn’t it die just a little bit? And then, come back to life?
Hmmm… we’ll have to think about that over the weekend…
Joel’s Note: By the by, did you happen to listen in on Part II of our Fatal Conceits podcast with Byron King, released yesterday? (If you missed Part I from last week, you can catch up here.)
After discussing a decade-plus of underinvestment in critical industry (including oil and gas), the financialization of western economies and how the mess in the Ukraine is impacting international energy markets, we pick up the action where the rubber meets the road…
… which is to say, with the geopolitical consequences of an energy-backed ruble, how the other BRICS nations are positioning themselves vis-à-vis the widening divide and what all that means for the long-enjoyed petrodollar hegemony. We also ask Byron where he sees markets headed for the back half of the year and what he’s doing with his own money.
Listen to Part II of our discussion with Byron King, for free, right here:
Not sure which economy BPR is following, but surely not the US. Numbers and data are way off. Who are your sources, CNN? 😂
Inflation is like global warming, a total hoax, but the hoax creates enormous windfall profits.
People will find ways to beat the illusion called inflation, especially the poor, they will adapt and overcome. Spoken like a true champ! Hahaha, all the data and history in the world is useless, you can quote and talk about how xyz and zyx did this, said that, the data shows this and that, percentages, averages, numbers, all useless. 😂
No crash, no armageddon on the horizon, just another glorious day in paradise.
It is interesting to me that the FED raises rates but the market sent them down. Powell also said it would take 2-2.5 years to unwind some of the balance sheet that the FED has accumulated. Will this unwinding raise the 10 yr.?