It’s a bit too little and too late for the Federal Reserve. Do they really believe that a 3% year-end Fed Funds rate will tame 8% “official” inflation? Maybe inflation will “naturally” drift back down (though there’s no empirical data to support that view). The Fed can hope, though. They can try a little prayer if that’s still ok. Maybe a stock market crash will do it, who knows. But powerful inflationary forces are just beginning to warm on their way to a boil.
The Fed has been horribly wrong about almost everything for at least a decade now. They locked the forever money printing presses in the on-position. They thought they could grow the money supply to the moon, right out of the modern monetary theory textbook, without any adverse consequences. “Targeting” two percent inflation, for years these smarter-than-us helmsmen were puzzled that money printing just wasn’t producing inflation. They “tamed” it. Their mantra was inflation is no risk. And they slept on. But then the lion roared, and they seemed shocked that massive asset price inflation was followed by massive every other type of inflation.
What, a Bubble?
Want a simple wealth “bubble” indicator? Before the current stock and bond market decline, household net worth in the United State as a percentage of nominal GDP averaged 400% over the last 70 years. The relationship between the two was fairly steady through 2002, then jumped to 480% at the top of the housing bubble. By 2010 it was back near the historical average. Over the ensuing money printing decade, the ratio exploded to 625% by the beginning of 2022. 1 Do you sense a little hot air in the balloon of U.S. net worth? And where did it come from?
The Money-Printing Game
The pencil-sharpening economists at the Fed must believe that inflation is a simple mathematical phenomenon. In the Bernanke-Yellen-Powell playbook, inflation is easily manipulated by the turn of a few monetary dials. If you want a bit of inflation, just turn the dial up a bit. See there, isn’t that easy?
A side-note. Money printing is also a game of choosing society’s winners and losers. The social response to money printing can’t be accurately anticipated. And in the final analysis, the human response to money printing is the key to how inflation begins, how far it runs, and how long it lasts. That’s no simple mathematical calculation.
Too Little Too Late – More Inflation
There’s a whole lot more inflation coming, Mr. Powell. Why? I’ll skip fertilizer shortages, food shortages, copper shortages, supply-side stuff, de-globalization effects, geopolitical issues, and so much more. Why more inflation? If only because of energy prices and where they are going (unless, for the shorter term at least, the Ukrainian war ends real soon – I’m taking odds). Ah, you say, but energy prices aren’t part of the “core” – they just see-saw up and down, so not to worry. Better to just call that stuff “transitory” and go back to sleep.
But our friends in Europe have a Bear pounding on their door. They were best buds for 20 years and he brought them all the oil and natural gas they needed. But he’s a crafty one, the nasty, slithering vermin that he really is.
Now the EU might actually – really – do something about this menace. They plan to self-embargo all of the Bear’s oil. And if they do, they’ll need a substitute for the 3.4 million barrels of oil the Bear provides them each day. Can they pull this off?
They can turn to the old reliable OPEC nations. Those guys have enough excess capacity to fill up Europe’s tanks. But these days the Saudi’s are a little bit ticked off by President Biden. And the nasty Bear is part of OPEC+. This might not be so easy.
The United States could have enough excess capacity. But where there’s weakness there’s no wisdom, and the shuffling American leader rests in mortal fear that a ramp in U.S. oil production will once and for all destroy the entire planet. Or infuriate his party’s base heading into the coming elections. But, sure, oil rigs respond to higher oil prices with a six month lag and the U.S. could reasonably soon enough bridge the gap if only it just tried.
Should we bet on OPEC? On the U.S.? It’s not much of a stretch to see oil at $160 or more if our European friends actually self-embargo the Bear. Give me a few “transitories,” please.
A seismic shift in energy production is upon us. Note to politicians: fossil fuels account for 82% of energy consumption; renewables just 5.7%. World-wide energy demands are headed in only one direction – up-up-and away as billions more seek the comforts of the well-off. Meanwhile, fossil fuel producers (love ‘em or hate ‘em) remain padlocked by their political wardens in dungeons under giant fields of oil and natural gas. And we suffer daily the sermons of mankind’s imminent destruction by the pastors of existential threats, who preach our only hope as an immediate conversion to the clean and the pastoral. None of which, mind you, is realistic or doable.
We could fix this over a couple of brews and nachos. A smidgeon of wisdom here, a drop of common sense there, and we’d have a nice and easy transition plan in place – one that’s actually achievable while keeping the air conditioning running and our feet warm.
None of that is going to help the Fed. Too little and too late with interest rates. There are lots of reasons why. But it’s time to get serious.
Footnotes
- GDP and asset values measure different things, but when a stable relationship becomes unhinged, the unhinging becomes noteworthy.
