Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Inflation by Fiat

Economics / Inflation Sep 10, 2020 - 02:09 PM GMT

By: Michael_Pento

Economics The Fed has now officially changed its inflation target from 2%, to one that averages above 2% in order to compensate for the years where inflation was below its target. First off, the Fed has a horrific track record with meeting its first and primary mandate of stable prices. Then, in the wake of the Great Recession, it redefined stable prices as 2% inflation—even though that means the dollar’s purchasing power gets cut in half in 36 years. Now, following his latest Jackson Hole speech, Chair Powell has adopted a new definition of stable prices; one where its new mandate will be to bring inflation above 2% with the same degree and duration in which it has fallen short of its 2% target.

Just to be clear, the Fed has no idea what causes inflation. It also deliberately goes way out of its way to under measure it. Is it any wonder then that the Fed's historical record proves it has little ability to meet its own inflation target? As I explained in a commentary written a couple of month ago, the Fed has a tremendous amount of difficulty controlling inflation in either direction. In 7 out of the last 12 years, the Fed has been unable to achieve average annualized CPI of at least 2%. Therefore, 58% of the time the Fed has failed to reach its minimum inflation goal.  Conversely, inflation spiked to double digits by 1975 and, after a brief pause in ’76-’77, eventually soared to 14.6% by early 1980. During this process, our central bank found it necessary to raise rates from 3.75% in February 1971, all the way to 20% by the middle of 1980. That doesn’t sound like inflation is easily managed does it? But the Fed is fond of trying to convince investors that is the case.



Since the Fed has no idea what causes inflation and how to really measure its rate, how can it then ensure a genuine inflation target—one that represents economic reality—is achieved? It cannot, it is impossible.

For example, the Fed has currently created massive inflation in real estate, fixed income and equity prices. But it deliberately avoids putting asset prices in its inflation calculation and uses the absurd owners’ equivalent rent figure for home price appreciation. Also, inflation is already running well over 2% in the commodity space. The CRB Index is up 30% in the past 4 months.

Hence, although the Fed has raised its inflation target there is no reason to believe it can reach it. After all, if it has clearly demonstrated that is cannot readily obtain a 2% target--using the Fed's preferred core PCE metric--why would anyone think it can now magically boost inflation north of 2% by decree?

So, here is a lesson for the Fed about how overall consumer inflation is actually engendered: a rising rate of U.S. inflation comes from a market that is persistently losing faith in the purchasing power of the dollar. This comes about from a sustained rate of increase in dollar supply that has diffused throughout the economy due to a Fed that is monetizing an ever-increasing amount of Treasury debt. The Fed is forced to do this in order to keep rates low enough to maintain Government solvency.

Why So Much Trouble Creating Inflation?

Since the U.S. is a debt-disabled economy, the normal transmission of monetary creation is broken. As you recall, coming out of the Great Recession consumers and banks were saturated in debt. Therefore, they could not readily borrow a significant amount of new money into existence. As a result, the overwhelming gravitational forces of deflation prevailed--with the exception of the certain asset prices (primarily stocks and bonds) that private banks were purchasing using new credit from our central bank. In other words, Wall Street was the recipient of the Fed’s largess and consumers were, for the most part, left behind. Therefore, broader aggregate money supply growth was muted; whereas reserves in the banking system soared from $800 billion, to $4.5 trillion from 2008 thru 2014.

What is necessary for consumer price inflation to rise in tandem with asset price inflation is the combination of both fiscal and monetary cooperation in USD debauchery. In order to combat the economic fallout from the Wuhan virus, the Treasury and the Fed joined forces to send direct payments to consumers and businesses. This was the reason there was a condition of stagflation earlier this year. The government borrowed $3 trillion of new money into existence, which was monetized by the Fed and doled out directly to consumers. This raised the money supply circulating around all sectors of the economy. The entire stock of M2 money supply surged by 18% from February to June of this year and the Fed’s balance soared above a record setting $7 trillion in a matter of a few unprecedented months.

So, here’s a news flash to Mr. Powell: Core PCE Inflation won't rise above 2% just because you say you want it to get there. He can squawk all he wants about now wanting to exceed a consumer inflation target that has been unachievable for many years. In sharp contrast, with trillions of dollars in stimulus running off just as forbearance measures are ending, the consumer will be in a desperate search for cash to pay in arrears their mortgages, credit card bills., student loans and car loans instead of taking on new debt and expanding the money supply. It's the same story for businesses that have exhausted their PPP grants/loans and are now saturated in debt.

It will take the unholy cooperation of a Treasury that is increasing debt and has it all purchased by the Fed with its fiat money. That is what is needed if Mr. Powell wants to greatly reduce the dollar’s purchasing power from here.

However, what the Fed did accomplish by raising its inflation target was to ensure (at a minimum) a protracted period of economic malaise; with the vast majority of its new money showing up in asset prices. To what degree consumer inflation does end up rising above Mr. Powell’s new target all depends on how much new debt the Treasury is willing to take on in order to satisfy Washington’s new Universal Basic Income mandate—all of which will need to be monetized by the Fed.

Unfortunately, what this also virtually guarantees is that if the Fed is ever able to reach its asinine 2%+ level on core PCE inflation--and keeps it there for multiple years--the Fed will then eventually have to slam on the brakes with QE and begin raising interest rates sharply; just as it did 40 years ago. Otherwise, Treasury yields will skyrocket and crash the economy and stocks regardless. The only difference being that the value of equities was just 40% of GDP back in 1980, while today it is an incredible and unprecedented 185% of GDP. The result will be the absolute and unprecedented carnage of asset prices, as they fall from the thermosphere once long-term rates begin to spike inexorably. In order to get some perspective on what should occur, just think about what happened to the stock market during the October Black Tuesday 1929 crash, the October Black Monday 1987 crash, the Great Recession calamity of 2008 and the 2020 Wuhan virus Depression; all rolled up into one.

To sum it up, the current condition of economic stagflation should morph back into deflation and recession if D.C. doesn’t assent to another massive multi-trillion-dollar fiscal spending package very soon. The Fed will fight the next round of deflation with its usual “tools”; expanding its balance sheet with another multi-trillion-dollar QE program, which will push equities valuations further into the twilight zone and an even greater distance away from economic reality. And, as mentioned, God help us if the Fed is ever able to achieve its new inflation mandate!

This is why identifying the cycles of deflation and inflation are essential to your retirement success. A diversified portfolio that holds stocks and bonds will not protect you because both are concurrently in a massive bubble. Investors will need to have their portfolios actively managed to stand a chance of increasing their purchasing power and standard of living in this new pernicious paradigm.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1

(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2019 Copyright Michael Pento - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in