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The Federal Reserve and Inflation

Economics / Inflation Jun 16, 2021 - 08:28 AM GMT

By: John_Handbury

Economics

The Federal Reserve a$$holes puckered up when the April CPI/PPI figures came in, and probably puckered up even more when the May figures came in.  These Fed nerds (who never got the girl/guy in high school), are dictating the monetary policy for the world.  They are providing immense stimulation to the economy, yet have decided that any inflation arising from it is “transitory”.  These stimuli include the following major impacts on supply and demand of goods that can lead to inflation of prices:



Increased Demand

Reduced Supply

Quantitative Easing (injecting unlimited money into the economy through bond-buying)

Increased tariffs (e.g., Canadian lumber/aluminum)

Ultra-low interest rates (money is free now)

Providing benefits so people don’t want to work

Pent-up demand from sitting in lockdown for a year

Lockdowns so people can’t work productively (or at all)

Letting M1/M2/M3 money supply go off the charts (which actually real inflation)

Choking shipping so producers can’t get their products to market

 

Restricting imports (e.g., semiconductors from China)

 

Restricting immigration of new workers

 
These are just the ones I can think of at the moment – there are many more.  We should not be surprised to see inflation rise to 5% or more.  None of these stimuli seem “transitory” to me, but what do I know?  I’m sure the Fed analysts have populated their little spreadsheets with all sorts of information, but for the life of me, I don’t know what they’re looking at.  I think they have the same data as us, don’t they?  Most of these analysts have probably never experienced inflation (having been born after 1980), and when something has never happened to you before, you expect the same in the future.  However, Dick Powell should know better, he’s old like me.

The Fed is injecting stimuli into this patient like it’s dying.  But it seems very much alive to me and could arise from the operating table to be very healthy and hungry and ready to consume.  It’s not like it’s 2008 again, very far from it.

Everyone saw the high CPI come for May, and yet bond yields dropped for the next three days.  There is something seriously wrong with this.  I can see only two reasons; 1) bond fund managers are puppets and believe whatever nonsense comes from the Fed mouths, or 2) there is a conspiracy to keep rates low, so the US government doesn’t lose $trillions on its bloated assets.  Think of all the pork that goes back in the Treasury coffers every year.  A quote from Wiki, “The Federal Reserve sent $88.5 billion in profits to the U.S. Treasury Department in 2020, a nearly two-thirds increase from the previous year as lower rates held down the central bank's interest expense”.  Lower rates are a very good friend for the Fed, and the US government.  Dick Powell knows which side his bread is buttered.

But there are smart bankers.  Jamie Dimon, chairman and CEO of JPMorgan Chase, said this week they have $500 billion waiting in cash to put into bonds when interest rates go up.  This is six times what the Fed buys in bonds with QE every month.  And this is just one bank, albeit a major one, but there are over 5,000 banking institutions in the US.  What I’m saying is the Fed can try to control the economy, but they are small potatoes when it comes to the power of the US financial industry.  And run by very smart people, who have more than little spreadsheets to tell them what to do. 

Eventually some investors have to say of their strategy, “why am I earning 1.5% on my money, but losing 5% in buying power every year?  I might as well dig a hole and put 3.5% of my money in it every year”.  This is why the Fed has to keep saying the “transitory” word.  Reassure investors that there is pain, but it is temporary and eventually everyone will profit.  You will be able to close up that hole, my friend.  I’m not such an optimist.  I could be very wrong, but we’ll see.

By John Handbury

Independent Trader

Copyright © 2021 John Handbury - All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

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