Is the Fed already “loosening into Inflation?”

Ryan McMaken writes for the Mises Institute (www.Mises.org) the following: The “inflationists also hope that easy money-policy will somehow reverse the current stagnating trend in employment. In recent months, both President Trump and the usual Wall Street outlets have insisted that the Fed reduce the target policy interest rate to ensure that stock prices and real estate prices continue to skyrocket ever upward.

This is the last thing ordinary Americans need right now. Yes, continually rising asset prices are good for firms and individuals who already own large amounts of assets. These people have been pushing for lower interest rates for decades now, because lower interest rates function as a subsidy for asset owners and fuel rising asset prices. Moreover, since the late 1980s, with the Greenspan put, the Fed’s commitment to manipulating interest rates ever downward has been a boon for Wall Street hedge fund managers and investment bankers.

On the other hand, ordinary people have done less well. As home prices have spiraled upward - fueled by loose monetary policy (i.e., low-interest-rate policy) housing has become increasingly unaffordable for first-time homebuyers and middle-income families.

So, with Trump and Wall Street beating the drum for even more monetary inflation, what should the Fed really be doing? The answer is: ‘nothing.’ The last thing that regular Americans need right now is a Fed loosening policy just as CPI and PPI inflation are accelerating.”

MF: I need to add one observation: central bankers are mad. Alright, goes without saying, that’s obvious but still the truth needs to be elaborated upon. The Great Financial Crisis (GFC), was largely caused by a decline in a grossly inflated property markets in some major US cities. Before the GFC central bankers had not been aware that rapidly appreciating property markets were a symptom of monetary inflation. However, following the GFC, which almost bankrupted the global financial system, just about anyone (including the academic morons at central banks), knew that the inflated housing market in the US had almost bankrupted major banks. So, what did central bankers do with their newly acquired economic wisdom? They superimposed on housing bubble one, housing bubble 2, which however, was much (not just a little) larger than housing bubble 1.

As McMaken observed above, “After more than fifteen years of ‘quantitative easing,’ and more than a decade of ultra-low-interest-rate policy, the US is in the midst of an unsustainable ‘everything bubble.’ This leaves us with two choices: keep the bubble going with more monetary inflation, which will mean more upward spiraling prices and unaffordable housing. Or, the Fed could step back, and allow the market to actually function, which will mean the bubbles will pop.

McMaken also threw cold water on the second option by writing that, “Unfortunately, the latter options will be opposed at every turn by Donald Trump, Wall Street, and the Central Bank cabal. Let’s hope that somehow, some way, they fail”.

MF: I must point out that though the ‘everything bubble’ may be unsustainable in the long term, it can nonetheless last for a very long time, and as long as the monetary expansion accelerates. Usually what then happens is the following: in nominal terms prices of assets continue to appreciate but in real terms asset prices decline, and the currency declines (in our case the US dollar), against other, strong currencies and especially against precious metals. A recent title to a report by Jessy Felder read: “Has The Stock Market Become ‘Unsinkable’? In high monetary inflation phases it is possible for stocks to hold up in nominal terms but to decline in real terms, and in the value of a solid currency such as gold.

Charles Blanchard (notesfortheperplexed@remove-this.substack.com), caught my attention because he explains the dilemma the fed is facing with unusual clarity for an economist. Blanchard writes: “To be clear, while the dollar had a great run since the pandemic in 2020, its value does fluctuate up and down over time. A drop in the dollar’s value has happened before and wouldn’t usually be surprising, and the value of the dollar still remains high compared to most of the last ten years.

What makes the current drop in value troubling, however, is that it occurred when U.S. interest rates remained high compared to the interest rates in other countries.”

MF: In my view, should US interest rates decline, it would likely weaken the US dollar provided interest rates overseas do not collapse as well. [We can see that there are many moving parts, which make reliable forecasting next to impossible.]

I hope my readers realize that investors are faced with really unappealing options: either interest rates increase, which would support the dollar but be negative for asset markets or interest rates decline, which would likely be negative for the dollar but positive for asset prices in dollar and nominal terms.

I admit that the above discussion does not provide a clear-cut answer as to whether bond yields would rise or decline except that a significant  move should likely take place in the coming months of this year.

I re-emphasize the case for owning precious metals and mining stocks, which is so overwhelmingly obvious that it arises my contrarian instincts. However, if you read once more this report, and add how few people actually own gold as an important part of their assets, and the continuous buying by central banks in emerging economies and “evil enemies” of the US neocons, and combine the fact with the ignorant money printer and debt accumulator Mr. Trump, I cannot see how the prices of precious metals and miners would not continue their upward trajectory.

Because I go out a lot when the US market closes (around 3 am in Thailand), I meet a lot of young people. What fascinates me to see is how many of them are speculating in cryptos, sports betting, futures, meme stocks, day options, etc., and how few have any interest in gold. It is, therefore, not surprising for me to observe that there were striking similarities between the price chart of NASDAQ stocks, AI stocks, and that of Bitcoins I suspect that all these grossly inflated assets will shortly collapse.

In this context let us not forget the wise words of Ludwig von Mises:

“The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market.”

Please find enclosed the essay about gold ownership by friend Jan Baltensweiler, who works at Von Greyerz AG in Zurich, Switzerland, and the research report about Jardine Matheson by my friend Michael Fritzell.

With kind regards
Yours sincerely
Marc Faber