“Transitory” My Eye

Here’s a good one. Sleepy Joe said something sensible on fiscal matters yesterday, thereby causing the left-progressives swarming around the White House to get their panties in a real bunch.

While suggesting that he might compromise at 25% rather than his proposed 28% on the corporate tax rate, Biden apparently had a relapse of long dormant brain synapses, insisting that he would draw a red line on any more red ink:

I’m open to compromising, yes. It doesn’t have to be exactly what I say,” Biden said about a 25 percent rate. “I’m not willing to deficit spend … They already have us two trillion in the hole.”

But as Politico noted this AM, that didn’t go over well with the with progressives, who demanded that Biden damn the torpedoes full speed ahead on spending and deficits and simply blow through all GOP opposition.

Nor did the supposed quasi-centrist, Jason Furman, who was the Obama CEA Chair and is now unsurprisingly nestled in a berth in the Harvard economics department, cotton to these antediluvian comments, either.

“If the President is not willing to deficit spend, maybe he would still be open to deficit investing?,”  Furman tweeted. “There are a lot of great investments in the Families Plan and the Jobs Plan and lot of investors willing to lend money to finance them.

Well, yes, bury future generations even deeper in public debt in order to—

  • Build electric charging stations for the convenience of Tesla owners?
  • Relieve Warren Buffett of the need to finance his own CapEx on the Burlington Northern?
  • Build more white elephant mass transit lines?
  • Invest in airports to relieve affluent travelers of the cost via user fees?
  • Replace thousands of one-horse rural bridges that nobody uses and local taxpayers don’t wish to finance?
  • Fund corporate R&D so the C-suites can allocate even more cashflow to buybacks?
  • Finance a $100 billion upgrade of the electrical grid so that utilities can pay fatter dividends?
  • Dump more billions down the rathole known as Amtrak?
  • Provide more subsidies for small business because the $1 trillion PPP bacchanalia was not enough?
  • Subsidize childcare so that working families have more to spend on goods made in China?
  • Cancel student loans so that the suckers who have already repaid hundreds of billions have something to bitch about?
  • Boost the child tax credit to $3,600 so that fewer and fewer Dem voters will have to pay any income tax at all?

There’s much more, of course, but you get the idea. Washington has lost every semblance of fiscal sanity because the mad money-printers at the Fed have abolished the interest rate penalty the historically accompanied abject fiscal profligacy.

In fact, the Fed’s massive, persistent monetization of the public debt has become so much a way of life in the Imperial City that lifers like Jason Furman can aver with an apparent straight face that there are a “lot of investors willing to lend money to finance them”.

This presumably is attested to by the lowest interest rates in history. Thank you, $7.3 trillion of Fed balance sheet growth since the turn of the century!

The worst thing, however, is that these Keynesian clowns don’t even get the joke. When the central bank drains $120 billion of UST and GSE debt out of the bond pits each and every month, does it occur to these monetary geniuses that they are sending a message to politicians that is akin to telling kindergardeners there’s free candy for all at the corner drugstore?

Actually, you can read every Fed post-meeting statement for the last umpteen years and you will not find even a clause about the impact on their policies on government finances.

That’s because by career-path or osmosis, as the case may be, these folks have become statists through and through. They have become so immersed in the groupthink claim that their inflation and full-employment goals are the be all and end all of economic life that they are completely blind to the impact of falsified interest rates and grossly inflated financial asset prices on economic actors, public and private alike.

It was not always that way or, more accurately, until the early 1990s it was rather the opposite. Your editor recalls well that upon his appointment as Reagan’s OMB director in December 1980 that the calls came fast and furious.

First, there was a hours long private grilling by former Fed Chairman Arthur Burns, who by then was deeply chastened by the Nixon spending boom he had financed in 1971-1972. Burns couldn’t stop repeating in his grave professorial tone the need to rein-in our wild tax-cutting and defense spending plans in order to cap the then soaring $1 trillion public debt.

Next came the then current Fed Chairman, Paul Volcker, warning in no uncertain terms that the Fed had no intention of “accommodating” the giant budget deficits implied by the Reagan campaign promises.

And that was followed all in the same week, as if choreographed, by Reagan supporters in the financial community demanding that we make an emergency trip to Wall Street to assure the bond vigilantes that we weren’t fiscal wild-men after all.

Indeed, in making the rounds at Goldman, Morgan Stanley, Salomon brothers and the rest your editor heard a uniform chorus in behalf of fiscal rectitude.

And that was most especially during our final stop at Bear Stearns. There not only did we get the gospel loud and clear from its top executives (who nevertheless blew up the joint on leveraged speculation 27 years later), but we also got a chart talk from its chief economist insisting that the Reagan program would be a failure unless it balanced the budget by 1984, as the Gipper had promised on the campaign trail.

Alas, the Bear’s smooth-talking economist with the snazzy charts and long pointer stick was so persuasive that we hired him on the spot to become chief economist at OMB. To this day, of course, we deeply regret inflicting Larry Kudlow on the nation.

Still, back then even power-hungry opportunists like Kudlow respected the process of honest price discovery in the financial markets. Nor would they have dreamed that the law of supply and demand in the bond pits could be obviated by the simple expedient of massive and persistent monetization of the public debt by the central bank.

Financially literate people, even liberal Keynesian economists from Harvard, knew that massive monetization of the debt amounted to financial fraud and that its spawn would be erroneous price signals to public and private borrowers alike. And they also knew that massive Treasury borrowing absent Fed monetization would result in severe crowding out of private borrowers and growth-killing increases in market-clearing interest rates.

At the end of the day, in fact, the difference between then and now is that market-based interest rates were not only respected on both ends of the Acela Corridor, but were understood to be a crucial motor force of capitalist prosperity.

No more. Today interest rates are simply the Fed’s control dial, Wall Street’s excuse for buying Stonks at virtually any price and political Washington’s long-forgotten menace when its fiscal guard was permitted to lapse.

Thus, we have the incredible preaching yesterday of Chicago Fed president, Charles Evans, a government lifer if there ever was one. When asked when it could be time to start talking about reducing the Fed’s current $120 billion monthly pace of bond buying, he said:

I’m not in a hurry in any way to have that discussion.

Continuing the Fed’s bond purchases demonstrates the Fed is “in it to win it and we are going to keep going and we are by golly going to be achieving, in this case, our 2% on average inflation objective,” he said.

“I see our current approach as being a very patient one,” he said, adding that he does not see in place the building blocks for sustained, year-after-year 2.5% or 3% inflation.

Call him the Lt. Calley of central bankers: We are destroying interest rates and honest price discovery to save the economy.

That is to say, Evans and his fellow Fed heads have become so obsessed with their own dubious policy targets—in this case 2.00% inflation averaged over time—that they are wholly oblivious to the immense economic harm that results from near zero interest rates and reckless levels of sustained bond-buying.

In the first place, we don’t even have an inflation shortfall unless you pick the red bar rather than the blue ones in the chart below. The latter represent the 16% trimmed mean CPI and are a very plausible measure of trend consumer inflation because they take out the high and low outliers each month, which are always different, thereby removing the “transitory” noise from the inflation report.

As it happened, during the eight full years after inflation targeting was officially adopted by the Bernanke Fed in January 2012, the 16% trimmed mean CPI rose at a compound rate of 1.98% per annum. We’d say that’s more than close enough for government work.

On the other hand, the Fed prefers the shortest inflation ruler around, the PCE deflator. Never mind that the latter is not even a fixed basket measure of inflation, but a device for deflating the consumption portion of GDP by the changing weights of items in the price basket every month, which, in turn, reflect the ebb and flow of goods and service purchases among everything that consumers buy; and it also drastically underweights housing and medical costs, to boot.

The fact is, the GDP deflator has risen at a 1.37% per annum rate since January 2012, so the questions recurs. Where is it written that a 60 basis point difference between two arbitrary measures of the general price level is so significant for main street prosperity that interest rates need to be suppressed and falsified indefinitely, and that the massive fraud of $120 billion of public debt monetization can be perpetuated at will?

Yes, Evans & Co. may not be “in a hurry in any way” to stop the fraud, but we’d bet these fools will be once again “shocked, shocked” to discover that there has been massive, combustible inflationary boom in the financial casino they have fostered and fueled.

Eight Years Of 2.00% Inflation Targeting: PCE Deflator Versus 16% Trimmed Mean CPI

In any event, our always behind the curve central bankers may end up getting the inflationary catch-up that they so foolishly seek. Compliments of the always alert Gary Kaltbaum, here is just a partial list of the inflationary pressures building up in the supply chain.

One-Year Price Change %

Lumber: +347%
WTI Crude: +148%
Gasoline: +139%
Corn: +124%
Heating Oil: +123%
Brent Crude +121%
Copper: +94%
Soybeans: +84%
Silver: +76%
Palladium: +70%
Cotton: +63%
Sugar: +63%
Platinum: +57%
Wheat: +43%
Natural Gas: +38

By the lights of the Fed heads and their Wall Street fanboys, this is just a temporary bulge in commodity land that will soon disappear like a watermelon running through a Boa Constrictor. Of course, that implies that downstream profit margins will be crushed in the interim if these surging production costs can’t be passed through to end consumers.

Then again, why sweat a margin squeeze we are told by the Wall Street strategists because that’s “transitory” too, meaning that any commodity cost based diminution of earnings next year should be ignored—just like any and all other bad stuff is to be ignored or adjusted out of reported profits.

But what neither the Fed heads or Wall Street is reckoning with is the fiscal feedback effect of all these years of interest rate repression by the Fed. In a word, Washington has become fiscally incontinent.

The debt ceiling needs to be raised at the end of July because the temporary suspension passed last year to accommodate the Donald’s borrowing bacchanalia expires. Yet we can’t see why any Republicans—save for a stray RINO or two—will help Sleepy Joe get the job done.

So he will need a 100% vote from his razor thin Dem majorities in both houses, and you can be sure that 2022 election-focused House Dems especially are not about to let the $300 per month UI topper and other stimmy benefits expire in the run-up to next November.

That is to say, there is another round of free stuff coming down the legislative pike, and that’s the straw that will break the camel’s back.

On the one hand, it will keep the millions of workers who are now being paid to stay home out of the labor market even longer. And as a Wall Street Journal survey suggested this AM, the resulting wage escalation is the next wave coming down the inflation pipeline.

That’s because the overwhelming share of jobs lost during the pandemic and now being attempted to be filled as the re-opening proceeds, actually pay less than $30,000 on an annualized rate of pay basis. By contrast, the average state UI benefit plus topper is $32,000 nationwide, and often above $40,000 in states paying $500 per week of basic UI plus the $300 Federal topper.

Here’s an example of a gentleman who had worked in the entertainment industry and is now receiving the equivalent of $39,000 per year in state and Federal benefit—plus stimmies from three rounds gone by.

Needless to say, he’s not much interested in burger-flipping or taking a delivery job:

Lorne Zaman lost his jobs as a concert promoter in Los Angeles more than a year ago. He hasn’t worked since, supporting himself on savings, stimulus checks and unemployment benefits, which have been about $750 a week in recent months. The benefits cover his rent and other bills, he said, but don’t leave any extra money at the end of the month.

Mr. Zaman, 45, said he’s had no interest in taking available jobs at warehouses or restaurants, but he’s eager to return to the entertainment industry. His former employer told him the company is likely to start recalling workers within the next few months.

“I really enjoyed what I did,” he said. “If the government is going to pay you to stay home, you’re going to do that unless that job you really want comes along.”

That’s right. The Fed has actually lit a fiscal match. And when it belatedly discovers its folly and has to pivot hard, it will be Katie-bar-the-door time in the casino.

As even one of JPM’s permabulls noted recently,

……. after over a decade of only deflationary (long duration) trades working, many of today’s “investment managers” which is a polite name for 30-year-old money managers who were still in college when Lehman blew up “have never experienced a rise in yields, commodities, value stocks, or inflation in any meaningful way.

One thing is for sure. When that finally happens, the resulting carnage on Wall Street will be anything but “transitory”.