‘Fed’ has been the buzzword of the markets at least for a couple of decades, but it has gotten much more attention since massive rounds of quantitative easing post the 2008/09 financial crisis and lately again post 2020 after the most brazen series of money printing ever pulled off.
In today’s financial media reports, fundamental performance of companies, productivity, ludicrous government spending, fiscal policy and taxation usually take a backseat to the question of ‘what will the Fed do now’. Western governments over the last 50 years and especially the last two decades have more and more slipped into the quicksand of thinking that monetary policy should be the main driver of an economy. News flash, it shouldn’t. Organic sustainable growth based on innovation, not fueled by monetization of irresponsible government spending, is what should.
Fed chairman Powell is now between a rock and a hard place. Testifying before Congress on Tuesday, Democrats will roast him on leading the country into a recession, and Republicans will hammer him with not doing enough about persistently high inflation.
It is argued that inflation is high because of global political events such as the Russian invasion of Ukraine, which is beyond our control and the people shouldn’t pay the price. As I laid out before, pandemic lockdowns and the war in eastern Europe were a temporary catalyzer in bringing up inflation – but a catalyzer only makes something else happen quicker. Reckless monetary policy all around the globe is what has enabled it in the first place, and is now keeping it up persistently. It is the tissue out of which this cancer is growing and metastasizing.
Debt cycles need to be corrected, and not more debt produced. If the Fed engineers a boom at all, they need to face the music later and allow the inevitable bust to happen. Otherwise more dire consequences, such as inflation creeping steadily up for decades, may ensue. Such a correction or bust by necessity should include temporary suppression of the tight labor market (US unemployment is at a 54 year Low), decline in overheated housing markets, reduction of consumer and business loan issuance, reining in government spending, and more.
The takeaway from the last few years of free-money policy for many economically unsavvy leaders and thinkers has been that any problems can be solved with more debt and monetization of the same. As long as you snort an even bigger line every time you come off the high, you won’t crash.
One of their beautiful ideas to save the nation is to increase the already problematic long-term annual inflation target of 2% to 3%. This sets a dangerous precedent, which might lead to more such loosening in the future on the super-highway towards higher persistent inflation, or an even worse crash landing of the economy in the attempt to finally stall it. Why not solve the problem, while it’s relatively smaller, or rather less big?
With the idea of introducing artificial liquidity into a monetary system that accelerates it more than it would by itself, the implicit concomitant is that there has to be a balancing period of austerity to balance the excess. I’m talking about starving the fire, not throwing in less gasoline. Unfortunately this is a global problem, as liquidity provision from other countries (e.g. Japan, China) spills over everywhere over time.
It’s time for our leaders, including those steering fiscal and monetary policy, to wake up and realize that it’s either/or – bite the bullet now and raise unemployment, depress economic activity based on illusionary debt-driven demand, and understand that raising the credit limit on a visa card won’t solve someone’s compulsive spending problem. Or, face the long-term downward spiral of devaluing the Eurodollar system more and more, likely increasing the popularity of other currencies and stablecoins backed by or pegged to commodities.
