Bums at the Fed

Bums at the Fed

In the airport…we were shocked to see dozens of Chinese people in full hazmat gear. White suits with hoods and booties…double masks…face screens. All young people.

What were they so afraid of? Do they intend to go through their whole lives like that…?

Didn’t they get the message? COVID is only a danger to sick or old people. To everyone else, it is just a nuisance. And trying to stop it completely is a losing proposition.

But who knows? The Chinese are entitled to their fantasies and claptrap. Just as we are.

So…let’s turn to ours.

Like stealing from the cash register…or taking antidepressants…

…once you begin inflating the money supply to cover your expenses, it’s hard to stop.

Over a 10-year period, after the crisis of 2008–09, the Fed juiced the economy with ultra-low interest rates. People got used to living in a fantasy world…where they could refinance their homes and take a little cash out each time. Businesses could borrow — often below the rate of consumer price inflation — and use the money to buy back their own stocks…make acquisitions…and pay dividends and bonuses.

And enlightened economists urged the government to ‘take advantage of the low rates’ to borrow trillions of dollars for projects Americans couldn’t afford and (mostly) didn’t want.

And then it got worse…

The new abnormal

Michael Burry points out that in the last 18 months, The Fed has given out some US$850 billion in gimmie/stimmy cheques…more than US$1 trillion in non-repayable loans (of which as much as half was fraudulent)…and another US$4 trillion in indirect support. And households were also able to walk away with US$400 billion in cash-out refinancing, thanks to the Fed’s super-low rates.

It was the ‘new normal’ — with trillions of dollars that didn’t exist before…that nobody ever earned or saved. It was this new money that consumers spent when they went to the grocery store or bought a new big-screen TV. It was the money that businesses used to pay salaries…and investors used to bid up the stock market.

All of that money is what made the economy the pathetic credit junkie it is. Funny money. And once you go down that road…it’s very hard to go back. Fantasy land can be hard to leave.

But now what? The Fed is no longer adding money to the system. It’s letting its portfolio of bonds expire…at the rate of nearly US$1 trillion per year. It’s not buying more. This is QT…quantitative tightening…not QE, quantitative easing.

Shouldn’t you expect the ‘tightening’ to have an equal and opposite effect as the ‘easing’?

And the Fed is threatening to raise interest rates, too…and keep raising them…until the inflation rate goes back to 2%, which, by some voodoo, it believes is the perfect rate of price increases.

Add money to an economy and you give it a temporary, and illusory, boost. Take it away, and what happens? Doesn’t it go back whence it came? Don’t stocks retreat? Don’t consumers feel the pinch of inflation and lower income? And doesn’t the federal government have to retrench too?

What the Fed giveth, the Fed taketh away.

Bums at the Fed

And now the old timer’s expression — ‘Don’t fight the Fed’ — takes on new meaning. It’s when you rediscover nature’s magisterial symmetry. When there is hell to pay. And when you are better off as a seller than as a buyer.

Consumers have less to spend. Businesses make fewer sales. People earn less…stocks fall with earnings and expectations.

In short, once you replace (or even just augment) real earnings with inflationary money printing, it puts you in a better mood. But now you’re hooked. Any attempt to get clean will slow the economy and push it towards a recession.

One of the first things to go is consumer confidence. When the mood-enhancing drugs stop coming…and people realise that they have less money to spend or that the money they have is losing value, they become sour and surly…threatening to ‘throw the bums out’ in the next election.


U.S. consumer confidence unexpectedly fell in April as views on current conditions turned a bit grimmer amid signs that inflation continues to surge.

Alas…when consumers become less confident, they spend less money. So the downswing of the economic cycle intensifies.

And the bums who control the Fed? Maybe they don’t want to get thrown out. What do they do?

Stay tuned…,

Dan Denning Signature

Bill Bonner,
For The Daily Reckoning Australia