Power & Market
Ivy League professor and Nobel Prize winner, Joseph Stiglitz recently spoke to CNBC providing 3 reasons why the Fed’s rate hikes will make (price) inflation worse. It begins with his analysis, in which no further details were provided, just his conclusion. According to the interview:
The first is that the overwhelming source of inflation, by Stiglitz’s analysis, is supply-side disruptions leading to higher prices in oil and food, even causing a shortage of baby formula.
We understand the existence of “supply-side” disruptions. However, we mustn’t pretend that a baby formula shortage, no matter how devastating that may be, is a leading cause of universal price increases in all goods, services, and assets. There is still a noticeable failure at diagnosing the cause of our current inflation problem.
To say that supply side disruptions just happened across the globe, or that it is due to government lockdowns occurring some time ago still doesn’t seem quite right. Contrast this to an alternative idea, that the nearly $7 trillion increase in the M2 money supply since 2020, corresponding with the Fed’s $5 trillion increase in its balance sheet, should shoulder the blame.
Supply-side disruptions can be acknowledged, but an academic like Stiglitz needs to address what effect the increase in the money supply had in causing these disruptions. Afterall, the whole point of injecting trillions of dollars in monetary and fiscal stimulus was to increase the demand for goods and services. Unfortunately, production is not instantaneous in the real-world; it should be reasonable to understand how increasing the money supply increases the demand for goods, and since production always lags, supply issues arise.
Of course, forcing an economic shutdown plus trillions of dollars in stimulus ensured certain doom from the start.
The Columbia University professor continued:
The second reason, Stiglitz said, was evidenced by the fact that margins for major corporations have been rising along with their input costs.
Without seeing his analysis, it sounds more like a talking point appealing to the masses. However, it implies that “major corporations,” are in the wrong for increasing profit margins. In his own words:
They’ve not only been passing on the cost but passing it on even more.
Even if his data supported this, it invokes an idea that increasing profit margins at this time is somehow bad, and that in the past margins were more acceptable, speaking to some notion of an ideal profit margin not occurring at this time.
It can be dangerous, as it invites the opportunity for academics or planners to suggest ways to fix this alleged problem, potentially through more intervention or higher taxation under the pretense of leveling the playing field for the poor, weak and disadvantaged.
Tying his analysis back to the Fed, he believes that raising rates “may lead to even more inflation.”
His third point suggests raising rates hurts the housing market. Given the housing asset bubble created by the Fed, and sky-high debt across all levels of personal, corporate and government, this is nothing new. Even Jerome Powell has long since warned us that raising rates will lead to “some pain.”
Stiglitz raises more questions than he answers. But it’s helpful to see how arguments supporting socialism always fail to arguments supporting capitalism. What would have been more interesting is if he spoke to the profit margins universities have been receiving, and how much the government's student debt forgiveness program and $1.7 trillion student loan account receivable constitutes a cost involuntarily passed on to the public.
Reflections on Last Friday’s Jobs Report: The News Still is Bad
Stocks reacted positively to the jobs report released Friday morning before selling off sharply that afternoon on geopolitical fears. The report, which showed non-farm payrolls increased by 315,000 for the month of August, was largely in line with the expectations of market watchers, with major surveys held in the run-up to the release of the report yielding predictions of roughly 300,000.
Of itself, the rally was somewhat unexpected since the report seemed to back the hawkish stance reiterated by Federal Reserve Chair Jerome Powell at Jackson Hole last week. At the meeting he restated the Fed’s commitment to further tightening. The implied probability of Fed futures data has shifted accordingly, with oddsmakers having raised the possibility of a further .75 point hike to 75 percent.
With various indicators suggesting inflation might be peaking or slowing, many over the summer had come to hope such data would convince the Fed to signal a readiness to ease up on tightening credit conditions. After all, the economy was slowing. For example, while the figures reported on Friday were in line with estimates, they were still well short of July’s half a million. At the same time, unemployment increased from 3.5 to 3.7 percent.
And, frankly, there are reasons to look askance at these numbers. For one thing, they are likely to be revised, with like reports over the past two decades seeing an eventual average adjustment of plus or minus 55,000. If the report was “just right,” not too hot to stoke inflation, not too cold to stall the economy, such a regular adjustment would be problematic. In addition, there are large discrepancies between federally withheld taxes and purported hiring, and between the Labor Department’s household survey and the Census Bureau’s employer survey used in headline unemployment numbers – both of which suggest the labor market is actually much weaker than the headline numbers make out.
For example, the Census Bureau’s unemployment figure does not include those who after becoming unemployed eventually give up looking for work and drop out of the labor market.
As the above figure illustrates, the Great Financial Crisis and pandemic-era have led to serious declines in overall labor force participation rates. Millions of workers never returned following the shuttering of the economy in response to COVID, amplifying what was already predestined to be a period of demographically induced labor market tightness. As the legions of America’s baby boomers retired, economists had predicted much of the current labor market predicament decades ago.
A shortage of workers, continuing supply chain disruptions, and epic monetary mismanagement having coincided, it is little wonder retail sales and housing are slowing; critical commodities, such as copper and oil, are trading down; and consumer confidence is just up from its lowest level in 70 years of measurement.
With signs pointing increasingly negative, talk of a “soft landing” is going the way of “transitory” inflation. Seemingly determined not to back down, to regain price stability, a “growth recession” is now the target. Far from backing off rate-hikes for fear of impending recession, as it did in 1974, Fed officials now openly admit that tightening may continue into 2023, with rates being held at that level for some time after.
With the chances of a decrease in the size of September’s rate hike, from .75 bps to .50 bps, getting smaller, and stocks still expensive by historical standards, as measured by the price to earnings ratio, a sell-off on the jobs report Friday would have seemed more in line with the broader macroeconomic conditions.
But whereas job numbers can be massaged or spun, the response of markets to word that gas supplies to Germany from Russia were going to be suspended for an indefinite period just hours after the G7 announced their price capping strategy, was a reminder that some news is just unambiguously bad.
As the war in Ukraine grinds on and the global economy weakens, we can expect more such news.
Current State and Federal Schemes to Bribe Voters are Totally out of Hand
Men are not infallible; they err very often. It is not true that the masses are always right and know the means for attaining the ends aimed at. “Belief in the common man” is no better founded than was belief in the supernatural gifts of kings, priests, and noblemen. Democracy guarantees a system of government in accordance with the wishes and plans of the majority. But it cannot prevent majorities from falling victim to erroneous ideas and from adopting inappropriate policies which not only fail to realize the ends aimed at but result in disaster. Majorities too may err and destroy our civilization.
-Ludwig von Mises, Human Action (1949)
Forbes recently published a list of 17 states that are implementing direct-to-consumer stimulus in order to provide ‘inflation relief’ to struggling residents. These include CA Governor Gavin Newson’s ‘gas rebates’ of $1050 for families earning less than $150k annually and even larger proposals like in Pennsylvania, where Governor Tom Wolf has proposed $2,000 stimulus checks for households earning less than $80,000 (estimated to reach a total of 250k households). Because that’s not enough, Wolf is also proposing small business grants of up to $50,000 in which “firms owned by women and minorities, as well as rural companies, would get priority.” Hey… at least ‘rural’ is now a protected class too!
It’s no surprise that nearly all of these proposals were signed or proposed just ahead of midterms, a strategy that is becoming alarmingly bipartisan. As an early adopter, NY Senator Chuck Schumer has mastered this technique. You may recall in early 2021, the stakes were high ahead of the Georgia run-off elections as this race would determine whether the Democrats would secure a majority in the senate. Polls slightly favored Republican candidate Perdue leading up to the start of the new year. Then, late in the evening on Dec 27 2020, Schumer announced his plan to raise the scheduled $600 stimulus checks to $2,000, emphasizing that “No Democrats will object. Will Senate Republicans?”. To the exact day, you can see how the polling results shifted, knocking Perdue’s +10 basis point lead down to -170 (note this is pre-Jan 6):
In response to Biden’s $10-20k student loan forgiveness executive order (also strangely enacted right before midterms), Schumer and MA Senator Elizabeth Warren released a joint statement which read “the work - our work - will continue as we pursue every available path to address the student debt crisis.” In other words, we’ll be forgiving more debt ahead of the 2024 presidential elections.
New York state has taken things considerably further. Last year, the state passed a measure allowing for stimulus checks of up to $15,600 to be given to undocumented workers. The $2.1 billion in funds quickly depleted, yet to this day, the Excluded Worker Fund receives hundreds of calls per month inquiring about further stimulus. The self-described “nonpartisan” think tank Economic Policy Institute praised the initiative and recommended all other states follow suit.
NY based immigration advocacy groups are now calling for another $3 billion in stimulus for the undocumented and $800 million to provide them with monthly unemployment checks of $1,200. While Governor Kathy Hochul has not weighed in, this year’s state budget includes subsidized medical care for undocumented seniors and mothers with newborns, estimated to cost $220 million. Ordinarily such measures would not qualify as constituent bribery, however, New York City passed a law earlier this year granting noncitizens suffrage.
In June, this law was shot down by the New York State Supreme Court. Still, the law is an omen for things to come, and during a time when senators and district attorneys consider the federal Supreme Court to be 'illegitimate’, it will be interesting to see how long this ruling holds up.
Masked-profile-picture MA Senator Ed Markey and NYC District Attorney Eliza Orlins call the Supreme Court 'illegitimate’.
All of this brings up this question: Should the recipients of outright bribes be permitted to participate in elections? Is the conflict of interest not too great? I’ve written in the past about implementing a ballot test to curb some of the less desirable symptoms of pure Democracy. But perhaps the solution is as simple as: if you receive direct payments from the government (federal, state, or local), then you cannot vote. Another solution is a poll tax, which, in addition to being a voluntary tax, ensures one’s vote is not influenced by the prospect of financial gain.
I realize these suggestions are literal “assaults on Democracy”, but I fear the path we’re on eventually leads to hyperinflation, capital controls, and a deterioration of personal autonomy over one’s property. I see no reason why the bribing-of-the-constituency trend reverses without decreasing the size of the US voting base, which is instead rapidly increasing as, in addition to adding noncitizens, Democratic congressmen are advocating to reduce the voting age to 16. Lastly, I don’t expect anyone in office to take up a position of reducing voter rolls as it’s too easy to be branded an “enemy of Democracy”.
I truthfully believe the US is beyond saving, although someone like Ron DeSantis could help to delay the inevitable for a while. That doesn’t mean the rest of the world is destined to our fate. Small government, anti-authoritarian, freedom-oriented, Libertarian ideals are more likely to take hold in countries where government has failed its people time and time again - countries in Africa, South America, and parts of Asia.
It’s a long shot, but if you’re a person with means who would like to attempt to fix big government, reach out through my Substack and let’s see if we can get a group and some capital together. Then use it to either back pro-freedom candidates in a developing nation or educate the local population in these concepts (a foreign Mises Institute). Just a thought I’ve had for some time but never acted on. It certainly feels like the authoritarians are winning these days, why not try to counter them?
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3 Months of QT Down
Three months have passed since quantitative easing officially began. Per the official plan the Fed was to reduce US Treasuries by a maximum of $30 billion and Mortgage-Backed Securities by $17.5 billion per month. So far they’ve been reducing their assets by around half of the total limit of $47.5 billion a month. This was noted for the month of June (1 month of QT) and then July. Continuing from the August 3 data release until August 31, the changes are as follows.
- On August 3 the US Treasury (UST) balance was $5,719,119,000,000. The balance on August 31 now stands at $5,694,997,000,000 for a reduction of roughly $24 billion.
- On August 3 the Mortgage-Backed Security (MBS) balance was $2,717,552,000,000. The balance on August 31 now stands at $2,709,288,000,000 for reduction of roughly $8 billion.
One can see the peak and slow decline of the treasury holding balance when looking at the one-year chart below:
In the case of MBS, the balance hasn’t moved as much… Unlike the UST chart above, mortgage debt held by the Fed looks to have flat-lined.
If the Fed really did save the housing market in the 2007-09 crash, why haven’t they exited from mortgage debt purchases?
When looking at the entire life of the MBS balance, started in January 2009, we see a few peaks and troughs of asset purchases, but the trajectory has always been, and will continue to be, upwards and onwards:
Pay close attention to the decline in MBS that bottomed during the March 2020 COVID crash. Notice how it also corresponds with the (gray bar) COVID recession. By now it should be clear that it’s only a matter of time until the next crisis and official recession is announced, even if policy makers and statisticians are doing their best to avoid this at the present time.
Watching the Fed shrink its balance sheet and waiting for the next stock market crash can be like watching paint dry. You know it’s happening. Sometimes you’ll swear you see traces of it. But it is slow and can be a tedious process. However, September and the months ahead should be more exciting.
Beginning this month, the Fed promised to increase the rate of QT. They have now doubled the maximum cap on its reduction, so UST can decline from $30 to $60 billion, and MBS can decline from $17.5 to $35 billion.
Of course, considering the Fed has only achieved around $25 billion a month in asset reduction, it's nearly impossible to think they’d suddenly move to $95 billion a month. Therefore, it remains in the realm of possibility, but seems highly certain this will not happen anytime soon, especially since the bi-partisan Fed may not want to sway the midterm elections by bringing on a stock market crash quite yet. Still, they should try to do a little bit more, since the optics will look worse if they don’t.
And like paint drying, once the coat is laid it's only a matter of time until the job is done. The same can be said with this next bust cycle; it’s only a matter of time, but it’s coming.
Biden Declares "MAGA Republicans" Enemies of the State
Last night Joe Biden was propped up behind the presidential seal in front of historic Independence Hall and gave the most provocative and divisive speech in modern American history. With the site of the signing of the Declaration of Independence cloaked in an ominous blood red, Biden sputtered his way through an attack on “insurrectionists” he labeled as threatening American democracy, political norms, and the rule of law.
The optics of the event were likely the idea of a proud Biden staffer, fresh off receiving a $10,000 subsidy to their student loan debt, leaning into the “Dark Brandon” aesthetic that has become popular among regime loyalists on Twitter. To Americans outside of this Very Online echo chamber, the imagery drew connotations of sinister authoritarian regimes ranging as Nazi Germany, the Empire of Star Wars, or the fascist regime of V for Vendetta.
The substance of the speech supported these comparisons. It was the display of a weak regime projecting strength at a time of mass unpopularity and rising polling numbers of political opponents in pivotal midterm elections.
None of this is a surprise.
As I noted after the chaotic 2020 election, the federal government faced a threat it has not seen in over a hundred years. Concerns over the integrity of the 2020 election struck at the core of the institution’s democratic legitimacy. The result was a Biden inauguration fortified with thousands of national guard members that the Democrat Party didn’t trust with ammunition.
The path the Biden administration took could have gone one of two ways. The regime could have fallen back on the power of moderation, restoring the isolated Washington uniparty by staffing the executive branch with prominent Republicans who always preferred the Clintons and Bidens over Trump—even if the smart ones refused to say so explicitly—while pursuing a standard policy agenda of foreign intervention, reckless spending, and fortifying the supremacy of the federal government over state control. These policies would have continued American decline but could have served to lull Americans to pre-Trump apathy by reminding them that federal elections have no real consequences for Washington.
Instead, the Biden regime doubled down on the excesses of the Obama era, attacking hot-button issues such as gun rights, tying state funding to public school promotion of child mutilation and sterilization, and leveraging their control over large corporations to censor political opponents and mandate covid vaccinations of employees. Along the way, they secured funding to increase, arm, and expand the scope of federal agencies—an Imperial Guard for Washington elites to remind red states who is truly in charge.
From the golf courses of Mar-a-Lago, the specter of Donald Trump continues to animate Capitol Hill. C-SPAN hearings over January 6 have been coordinated for prime-time viewing, while his supporters have been subjected to federal prosecution, solitary confinement, and financial ruin.
These concerns may be justified. Outside of Washington, “MAGA Republicans” have found success, particularly in the high-profile senate and governor races.
In Arizona, Blake Masters and Kari Lake conquered John McCain’s former state running on a platform against the 2020 election and the anarcho-tyranny of Biden-era policies while being viciously attacked by both the corporate press and establishment Republicans. In Ohio, Peter Theil–backed J.D. Vance leaned into opposition to American financing of the Ukrainian government while overcoming two more traditional Republican candidates. In Florida, Governor Ron DeSantis has secured the position as the only Republican with the popularity that rivals Trump by translating Trump-style rhetoric into aggressive state policy, with a particular focus on attacking the public health tyranny of the soon-to-debate Dr. Fauci.
A common theme of this new class of Republicans has been their explicit calls to stand against the “regime,” railing against Washington’s “administrative state,” and their interest in the intellectual works of “dissident right-wing thinkers.” They have been supported by a vocal group of MAGA House members, such as Marjorie Taylor Green, Matt Gaetz, Thomas Massie, and Lauren Boebert, who have seized on the overzealousness of the Biden administration to normalize calls to defund the FBI and other cherished Washington institutions.
The primary success of a potential new class of MAGA Senators has created new pressures for Mitch McConnell. Long established as the kingpin of beltway Republican politics, his criticism of the “quality” of candidates has earned him strong public rebukes from Florida Senator Rick Scott—a political figure with both the ambition and financial resources to threaten McConnell.
All of this is creating a unique moment in American history.
The overreach of the Biden administration has led to the dropping of the executive mask. No longer is there any pretense of governing all Americans—the notion of liberal persuasion is dead. Brute force and the abolishment of governing norms—such as the facade of a politically independent Supreme Court, state control of elections, or the role of the filibuster in the Senate—are now accepted by mainstream Democrats as necessary to usher in a modern version of reconstruction on the parts of America that still fly Trump flags.
Meanwhile, the most vocal anti-Trump Republicans have faced brutal defeats electorally but still have a home in the comfortable confines of Washington. While Liz Cheney’s blowout primary defeat means she will be giving up the pretense of representing Wyoming, she has been welcomed to the friendly confines of AEI. The View or CBS News are willing to welcome various former Trump administration figures so long as they engage in the public ritual of condemning their previous boss. The impact of these decisions, however, is declining interest in traditional conservative think tanks, respect for corporate media, and the legacy of formerly prominent Republican legislators and dynasties.
The regime’s most powerful tool—a federal uniparty that fights on Sunday News Shows but works together and socializes in the real world—is fraying fast.
Republican Congressional offices are being flooded with calls and emails attacking once noncontroversial issues such as foreign aid, the FBI, and the security of elections. While the wiliest of Washington creatures know how to pretend to sympathize with these concerns, the more mediocre ones flounder—with numerous Republican incumbents now forced to move their office from Capitol Hill to K Street.
The real question will be what comes after 2022. While the sulfur and brimstone tones spewing from Joe Biden may spark news cycles, economic distress continues to dominate the concerns of voting Americans. At the same time, Hispanic Americans, many of which are alarmed about the cultural radicalism of the modern Democratic Party, are undermining the assumptions of the “demographics are destiny” framework that has dictated so much of the Left’s political strategy in the recent decades.
Attempts to smear new-Republican Hispanics as the new “white nationalists” is surprisingly having little impact.
While Joe Biden mocks “brave, right-wing Americans” that cling to the notion that their AR-15 can protect them from the F-15s he controls, the mentally declining commander-in-chief should pay more attention to his government’s failures in Afghanistan. The Afghan military surrendered billions of dollars in high-tech military supplies to Taliban forces not because they were out-armed but because the incompetent and kleptomaniac “liberal” regime America installed lacked the true support of the people and was not a cause many saw dying for.
Likewise, the collapse of military enlistment in the American military reflects the sincere and growing disillusionment with Washington itself. While state propaganda may be trying to make the military appeal to America’s growing transgender population, they don’t seem up to the task of replacing young, white working-class men the modern class of generals dismisses as privileged.
As Murray Rothbard noted in Anatomy of the State, the state needs more than guns and bureaucrats to thrive. It needs the implicit consent of the people.
Thanks to Joe Biden, and his friends in both political parties, instead tens of millions of Americans are growing increasingly comfortable considering themselves enemies of the state.
The Fed’s Tough Year
Alex Pollock explains that something is wrong with the Fed, big time. And it really shows in 2022. Pollock writes::
The powerful and prestigious Federal Reserve is having a tough year in 2022 in at least three ways:
- It has failed with inflation forecasting and performance;
- It has giant mark-to-market losses in its own investments and looming operating losses;
- It is under political pressure to do things it should not be doing and that should not be done at all.
As everybody knows, the Fed’s overoptimistic inflation forecasts for the runaway inflation year of 2021 were deeply embarrassing. Then the Fed did it again for 2022, with another wide miss. In December 2021, it projected 2022 Personal Consumption Expenditures inflation at 2.6%, while the reality through June was 6.8%, with Consumer Price Index inflation much higher than that. It would be hard to give the Fed anything other than a failing grade in its supposed area of expertise.
The Fed’s interest rate forecast for 2022 was three federal funds target rate increases of 0.25%, so that its target rate would reach 0.9% by the end of 2022. It forecast the rate at 2% by the end of 2024. Instead, by July 2022, it already reached 2.5%.
In short, the Federal Reserve cannot reliably forecast economic outcomes, or what the results of its own actions will be, or even what its own actions will be. Of course, neither can anybody else.
It is essential to understand that we cannot expect any special economic or financial insight from the Federal Reserve. This is not because of any lack of intelligence or diligence, or not having enough computers or PhDs on the payroll, but of the fundamental and inevitable uncertainty of the economic and financial future. Like everybody else, the Fed has to make decisions in spite of this, so it will unavoidably make mistakes.
Social Diversity to Tackle Inflation
This is an actual news headline from the Associated Press, published over the weekend:
Fed tackles inflation with its most diverse leadership ever
It’s true that when forming a board of directors, an organization can greatly benefit from a variety of competencies. But when “they” in the media or Federal Reserve discuss diversity, they aren’t referring to a diversity of opinions nor schools of economic thought such as Austrians and Neoclassical.
By “diversity,” they mean skin deep, literally skin color, or in the most private of matters, the sexual partner someone chooses. As the article explains:
There are more female, Black and openly gay officials contributing to the central bank’s interest-rate decisions than at any time in its 109-year history.
William English, a former member of the Fed who now teaches at Yale said:
There’s evidence that diverse groups make better decisions.
Agreed. Having a diverse background in economics would help the decision-making process; but again, this is not the diversity they seek. History shows becoming a high-ranking member of the Fed requires a total commitment to accepting economic fallacies and false narratives.
Judy Shelton is a woman, but asked too many questions about concepts such as a stable currency, currency manipulation, and even mentioned the gold standard. Her thoughts were clearly “too diverse” both within the Fed and for members of Congress who greatly benefit from easy money policies. Based off of how poorly Judy was received, it’s likely these new hires, no matter how diverse or who their bedfellows may be, will never ask questions about the nature of the Fed or the existence of deposit insurance, nor strive to advance economic thought or educate the public in any meaningful way. It’s apparent that thinking outside of the proverbial box is not tolerated.
Diversity at the Fed is merely superficial, hence why they look at physical instead of mental attributes. We’ve seen more than enough to know the only thing that matters is that they keep the system grinding for as long as possible. This can only be done by hiring Yes-Men (or women, or other).
On Sunday, under their article post, I asked the Associated Press on Twitter:
So I kindly ask again, what does sexual orientation and race have to do with any of this?
Here’s the thing: Once you’ve read just a little bit of Austrian economics, it allows you to start thinking about sound economic reasoning. You’d quickly be able to do things like define inflation and may even take an interest into economic history pre-Keynes. Eventually you’ll start reading about long forgotten ideas, such as the socialist calculation debate or the pretense of knowledge.
Ultimately, those in the liberty crowd, especially those who understand how a central bank impoverishes societies, causes recessions, and are the primary reason behind inflation problems, will conclude that all this talk on diversity at the Fed is nothing more than a distraction tactic. Clearly, the best way to keep the masses ignorant of economics is to not teach economics. One of the best ways to distract the crowd is through division among lines of race, gender, and sexual preference, while adding a social (conditioning) message in everything.
The silver lining will be a hard one. Some time in the not-to-distant future, when everything the Fed is doing today ends up failing, when the US debt and money supply are at even more unfathomable levels, when the stock market crashes and the next round of Quantitative Easing begins, just remember: This was not caused through lack of physical or sexual diversity, but the willful ignorance of basic economic concepts centered around human action and the societal benefit of a having a free and unhampered market.
Three Lessons From Jackson Hole
One of the most anticipated events on the Central Banking calendar commenced this week: Jackson Hole, where “policymakers, academics and economists from around the world” gathered to discuss plans for the future. Powell gave his much-anticipated speech on Friday, quickly getting to the tough talk:
The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal.
Sticking to script, he promised to maintain restrictive monetary policies while warning of another “unusually large increase” to interest rates next month.
The Oh No moment occurred when he cited lessons learned from over half- a century ago:
Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s…
Of course, we know this to be false and that they learned little to nothing since 1970. If they had, the pursuit of currency debasement as monetary policy would have ceased several generations ago.
The critical knowledge Powell claims to have learned:
The first lesson is that central banks can and should take responsibility for delivering low and stable inflation… Today, we regard these questions as settled. Our responsibility to deliver price stability is unconditional.
True, the Fed should take responsibility for easy money policies, monetary inflation, interest rate suppression, the boom/bust cycle and relentless dollar depreciation. Congress could also abolish the Fed entirely, or at least stop their ability to intervene in the market, leaving the Fed with no more than an oversight role over the banking system. Unfortunately, while entirely possible, the odds of this happening at this time are still slim to none. This does not mean it will always be this way, alternative options exist, even if unlikely at the present moment.
The second lesson is that the public's expectations about future inflation can play an important role in setting the path of inflation over time.
We can give him this. Keeping the masses calm and complacent will always be a goal of central planners. The last thing the bankers want is a public panic potentially leading to a bank run, or the widespread realization that high (price) inflation is here to stay.
Powell acknowledges that their window of opportunity closes ever so slightly with each passing day:
The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.
It would require a combination of the passage of time, media persuasion, Fedspeak, and some rejigging of statistical data in order to change public perception again.
Lastly, and certainly the most detrimental, he proclaims:
That brings me to the third lesson, which is that we must keep at it until the job is done.
If the only viable solution is to ask that the Fed does nothing, clearly not on the agenda, then we accept that the interventions and new schemes will only increase with time. He cites more comparisons to the Volcker era; but as written before, it’s not 1970 nor the 1980’s. They can only compare to this period for so long and it’s well overused as is.
For all the hoopla surrounding this Jackson Hole Symposium, the three lessons learned by Powell are nothing we haven’t heard before. If there is anything to learn from Jackson Hole, it’s that the best time to end the Fed was a little over 100 years ago; the second-best time is now.
Why Aren’t People Working?
Federal Reserve Governor Michelle W. Bowman gave a speech entitled Working Women in the Pandemic Era, where she talked about the challenges women face in the labor market. The surprising parts occurred when she deviated away from this subject and instead focused on outlining ways in which government intervention can harm the labor market. She begins with her own experiences working as a community banker in Kansas in 2009 when:
At that time, many in the community received benefits from well-intended programs created to provide assistance, which often made it very difficult for small employers to find employees. This was often because, as I learned when trying to hire employees at our local chamber of commerce, the benefit from taking a job was much less than the benefit one could receive from the government at that time while not working.
Finding that hiring was difficult because when faced with the choice of getting paid by the government not to work, or accepting employment at a paying job, many people choose the former option. She continued:
This is one major similarity between the current experience and the last recession, except that in this episode, the benefits many received were far in excess of what they could earn from working.
The thing about central bankers is that every time they say something agreeable, they have a way of following it up with something which is most definitely not agreeable. Being incentivized to refrain from seeking employment is bad enough, but instead of critiquing market intervention or the effects of increasing money supply, they’ve turned the narrative upside down by considering the government largesse as an increase to personal savings. As explained:
So much so that the benefits provided to a large number of Americans resulted in a significant increase in savings, which is only recently beginning to decline and likely leading many who had not yet decided to re-enter the workforce to find work.
With a national debt at $30.7 trillion and interest rates only recently on the rise, it’s difficult to believe that America has become a nation of savers, or that these higher rates won’t cause a systematic problem soon enough.
This concept of increase in savings is always troublesome, since the cost of living is still on the rise and asset prices remain elevated, so even if people were saving more, given that their money buys less and less each passing day, is anyone really saving?
The article does contain some good takeaways however, such as:
One study conducted before the pandemic found that when both parents work, women spend 50 percent more time on childcare than men.
But in the conclusion, the mystery behind labor force participation returned:
There is no magic wand that will draw workers back into the labor force, especially when generous government benefits programs are provided for those who are capable of working.
The article then looks to investigate the issue further to determine how more people can enter the labor force.
…there are some lessons to draw from experience and research regarding approaches that encourage people to work.
As much as they may not like to admit it, the reality is that when given the opportunity to get paid not to work, many will take it. There are other countless reasons for people to avoid seeking gainful employment, including government shutdowns and the corresponding push to keep people indoors, government spending programs, and the increased cost of living which can further discourage and disenfranchise people from seeking work. Time will tell, but the higher the rate of currency debasement, the more people will become desperate and in turn look for alternative ways to obtain money that may keep them out of the labor metrics.
California’s Unemployment Fund is Insolvent, Far Surpassing Other States
I recently dug into our government’s convoluted unemployment insurance system. As is typically true with most government policy, any stone one decides to unturn is ripe with waste, fraud, and mismanagement.
In 1935, FDR (of course) created the first federal unemployment insurance program via the Social Security Act. The program created a national lending pool for states with insolvent unemployment relief accounts. It began by ‘incentivizing’ states to join the program and of course is now a required federal tax on all employers.
Called the FUTA tax, it’s levied on business owners directly for each employee they have. The IRS makes clear on its website, “Only the employer pays FUTA tax; it is not deducted from the employee's wages.” Leaving aside the naive assumption that employees and customers will not share the burden of this tax, I can’t help but laugh at the rationale here: Private employers are, by definition, the greatest force combating unemployment. So, let’s punish them with a tax - reducing their ability to hire - and use it to incentivize not working!
During COVID, with unprecedented levels of layoffs amid government lockdowns and commensurate increases in unemployment stimulus, many state unemployment relief funds became deeply indebted to the national fund. Though none come close to California’s negative $19 billion balance.
In a world where trillion-dollar spending packages are commonplace and each week another billion is sent to Ukraine, it’s hard to grasp what is actually a big number. To put it into perspective, the second most indebted state is New York at negative $9 billion. Look at how CA compares to its peers:
Yet another example of how your federal taxes are being used to bail out California.
According to the Congressional Research Service, if these debts are not repaid “states may face interest charges and the states’ employers may face increased net FUTA rates until the loans are repaid.” In other words, California business owners (who are already fleeing the state en mass) will soon face even higher taxes. The reality is, however, that CA will never be able to pay back this debt. It will likely come down to higher taxes for ALL business owners and some help from the Federal Reserve.
California has seen a substantially slower jobs recovery than most of the country (see LA below).
Maybe… just maybe… massive welfare programs that encourage people not to work and excessive taxes and regulatory headaches for business owners do not actually solve the problem.
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