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July 15, 2021 | What’s the Aftermath of Ultra-Loose Monetary Policy?

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

YOUGHAL, IRELAND – As we saw yesterday, inflation has not gotten on the bus yet.

At a 5.4% annual running rate, consumer prices are now rising about as fast as they did in the mid-1970s. Producer prices are rising at an even faster pace – 7.3% year-on-year.

Here’s Federal Reserve Chairman Jerome Powell, speaking to the House Financial Services Committee yesterday:

Right now of course inflation is not moderately above 2%, it is well above 2%. It’s nothing like “moderately.”

What’s ahead, reporters wanted to know? Here’s Powell again…

It will depend on the path of the economy, it really will.

It’s just a perfect storm of high demand and low supply. And it should pass. Unless we think there’s going to be a multi-year shortage of used cars in the United States, we should look at [high inflation] as temporary.

Used cars… used tractors (as we saw yesterday)… and used houses are all rising in price.

New cars are scarce on dealer lots; used cars are especially in demand, trading for 10.5% more in June than the previous month.


But Powell did not mention where all that demand comes from… or why it might not go away anytime soon.

Say’s Law – named after French economist Jean-Baptiste Say – tells us that real demand comes from real people who produce real goods and services. They sell their output for money, which they can then use to buy other peoples’ goods and services.

This demand does not increase prices, because it only arises as the quantity of goods and services available also rises.

Powell must know that his money-printing creates a whole different kind of demand – one that brings forth no corresponding goods or services… and thereby, causes prices to rise.

He has created a bubble economy, in other words – inflated by fake money.

He knows, too, that the Fed has put itself in the Inflate and Die trap. It has to keep the fake money flowing… or the fake boom will collapse.

But if it keeps the money flowing, consumer prices will continue to rise… and Powell may be forced (at least, according to the mainstream narrative) to restrain them.

No Escape

Which leaves inquiring minds with a giant question mark. This from Mohamed El-Erian, writing in the Financial Times:

What is clear to me is that we are moving irresistibly closer to a critical question for the economy and markets, and not just in the US: is there still the possibility of an orderly exit from what has been a remarkably long period of uber-loose monetary policies?

You already know the answer to that, don’t you, Dear Reader?

The elite control the government. The government controls the money. The whole economy – notably the wealth, power, and status of the elite themselves – now depends on more and more money-printing.

Ergo, there will be no exit – orderly or otherwise – from the Fed’s uber-loose monetary policies.

But staying the course will not be orderly, either. Bubbles blow up and burst… in a disorderly way.

And then, central bankers… presidents… members of Congress… economists… investors… and columnists panic, causing more disorder and chaos.

Subsidized Gambling

But let us look at what Powell et al. have wrought. Then, we will see what an exit from their uber-loose policies would mean.

Currently, house buyers can get a mortgage at a negative real interest rate. A cursory Google search turns up rates under 4%, while consumer prices rise at least 100 basis points faster.

At these interest rates, it is no wonder house prices are going up so fast.

Wall Street speculators are also able to get super-cheap money. They can now borrow money at zero real cost.

In an honest economy, speculators have to pay to play. Interest rates serve as a kind of ticket price for gamblers entering the casino.

But today, the doors are wide open. The “cost of carry” – the charge speculators pay to gamble with someone else’s money – is less than zero. In other words, it is as if they were being paid to make reckless bets.

Major Shock

Getting back to normal would be a major shock to the marketplace.

Let’s see, if the “cost of carry” suddenly went up to 5%… or 8%… the rank speculation would quickly come to an end.

Investors would toss aside the riskiest stocks as if they were used face masks. Zombie businesses, that can only pay the interest on their debt by borrowing more, would collapse.

Asset prices, generally, would drop, and probably come to rest at only half of today’s levels.

Mortgage rates are usually 2.5% to 3% above inflation. Today’s rates would have to double to get there. What would that do to house prices?

As for the Fed’s key funds rate – now at 0.25% – it would have to go up by more than 500 basis points, just to pull even with consumer price increases.

Jobs lost, businesses failed, households bankrupted, investments wiped out – welcome to the end of the uber-loose monetary policies.

Inflate and Die Trap

And here, we see clearly how the Inflate and Die trap works:

The higher inflation rates go, the bigger the shock to the economy needed to bring them under control.

And this shock wouldn’t be limited to home buyers and stockholders.

The biggest borrower in the world is the federal government. And the biggest lender in the world is the Fed.

Thanks to Fed buying, a 10-year Treasury note – the building block of all federal debt – now trades at a yield of about 1.4%. At last month’s CPI reading (5.4% year-on-year), that yield is negative by 400 basis points (4%).

“The trouble with trouble is that it starts as fun,” a dear reader reminded us.

And if bond buyers demanded a real return (above inflation)… the interest charged on new bond issues would quadruple. The fun would be over.

All of a sudden, more stimulus would be out of the question. The big, new “infrastructure bill” (at $3.5 trillion), too.

And those unemployment “toppers,” that pay people more for not working than they earned on the job? History!

Exiting in an orderly way?

Nah… Prepare for le deluge.



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July 15th, 2021

Posted In: Bill Bonner's Diary

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