Inflation By Any Other Name, Part 1

Let’s cut to the chase. The Fed is at once an engine of virulent inflation and also the cause of a massive shift of wealth to the tippy-top of the economic ladder.

Taken together, those two toxic spawn of reckless money-printing pose a mortal threat to both capitalist prosperity and limited government. That’s because the Fed’s polices guarantee an eventual collapse of the inflationary bubble, which will hit the middle and lower ranks of main street hardest; and because its perverse redistribution to the top is eliciting a populist revulsion against the rich, which, in turn, threatens punitive taxation of the very producers and risk-takers who make capitalist prosperity possible.

Yes, Sleepy Joe and his court retainers may be the agents of utterly stupid and destructive populist spending and taxing policies, but they have gained power and public support because JayPoo & Co. have rev’d-up the Fed’s printing presses to absolutely lunatic levels, while ceaselessly complaining that there is too little inflation and that they have nothing whatsoever to do with the massive wealth windfall that has been bestowed on the top 1% and 10% of households.

The blatant mendacity of the Fed’s current whacko catechism was laid low in an interview this weekend by one of the greatest investors of modern times, Stanley Druckenmiller. Pulling absolutely no punches, Druckenmiller’s thoughts merit quotation in full:

I don’t think there has been a greater engine of inequality than the Federal Reserve Bank of the United States… so hearing the Chairman [Powell] talking about visiting homeless shelters is very rich indeed…”

The outspoken fund manager went on to note that “everyone wealthy that I know is making fortunes” because “this guy [Powell] is printing money like there’s no tomorrow” adding that the kids is Harlem are not benefiting from money-printing but….…for the life of me I can’t understand why the left is so excited about money-printing when all the data shows that the people who benefit from money-printing are rich people.”

“The odds-on bet is that we’re going to have inflation,” he continues: and inflation is going to hurt poor people, again, a lot more than rich people.”

“The asset bubble which [Powell] is blowing up into unbelievable proportions will bust before the inflation ever really manifests itself. That’s what happened in the housing bubble in 08/09. We never really got to the inflation because the asset bubble burst… not dis-similar to what happened in 1929.”

And Druck reminds us all, “there is no one, no group, that will be hurt more by a bust than the poor…they will be first in line to get screwed.”

He got that dead right, but the reason it comes as a shock to the mainstream narrative is because the unspeakably lazy and servile financial press has allowed the Fed to falsely define its sins out of existence. For example, there is currently roaring inflation in stocks, bonds, housing, art, antique cars, baseball cards, NFTs, cryptos and practically any other collectible that can be traded.

Yet none of this counts because the Fed heads, their Keynesian economist acolytes and the Wall Street shills alike all accept the Fed’s groundless claim that 2.00% inflation is necessary for optimizing economic growth and jobs; and that because its sawed-off and inherently deficient measuring stick, the PCE deflator, keeps falling short of target, the central bank purportedly has no choice except to print money at warp speed.

For want of doubt, the chart below dramatically displays the rampant monetary inflation fostered by the Fed since the pre-crisis peak in Q4 2007. That is to say, they have been printing money (expanding their balance sheet) at an annualized rate nearly 6X faster than the growth of nominal GDP.

 Q4 2007 Through Q1 2021:

  • Nominal GDP: $14.68 trillion vs. $22.05 trillion=3.12% per annum growth;
  • Fed Balance Sheet: $890 billion vs. $7.83 trillion=17.83% per annum growth;

No matter how you slice it, that’s not only far, far off the deep-end relative to every canon of sound money and fact of prior history, but it’s also powerfully inflationary. Even Uncle Milton Friedman, who got Nixon and therefore the world on the wrong track of un-anchored central bank money back in 1971, insisted that the Fed’s balance sheet (high powered money) should not grow faster than nominal GDP. Tops.

The reason why is obvious: Massive Fed balance sheet expansion monetizes the public debt, thereby injecting huge dollops of something-for-nothing into the financial system. This creates in the first instance a central bank demand for existing financial assets that simply drives their prices higher.

The first order effect, therefore, is higher bond prices and lower yields. And in the ultimate instance, the Fed’s money-pumping leads to CPI inflation as governments are induced to borrow at will to fund transfer payments which are not matched with an equivalent increase in the supply of goods and services.

Needless to say, we are now deep into the first phase of the Fed’s monetary inflation and rapidly entering into the second phase, as measured by the two-year stacked CPI, which is rising at 2.3% per annum or the fastest rate in decades.

The above chart makes the Fed’s monetary inflation blatantly obvious, yet the mainstream press does not notice in the slightest. Sadly, the reason for this obliviousness is that MSM  journalists do what they are told by the authorities without ever bothering to inquire about the giant elephants in the room—huge aberrations that were scarcely visible as recently as 15-years ago and most certainly not there at all 30-years ago.



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