The Fed Can’t Stop What’s Coming
Saturday, July 21, 2018 15:17
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“The Fed Can’t Stop What’s Coming”
by Bill Bonner
YOUGHAL, IRELAND – “The show is Donald Trump. And it plays to sold-out audiences, 24/7. Meanwhile, in the back of the crowd, the Deep State goes about its work – picking pockets. The political world thus unchanged… we move back to the financial world.
King of Debt: But wait… here comes politics again, sticking its big nose in. From CNBC: “Stocks fell on Thursday amid criticism of the Federal Reserve by President Donald Trump. The Dow lost 134 points. In a stinging and historically rare criticism, Donald Trump expressed frustration with the Federal Reserve and said the central bank could disrupt the economic recovery.
Fed officials, including Chairman Jerome Powell, have raised interest rates twice this year and have pointed to two more before the end of 2018. Trump, in an interview with CNBC, said he does not approve, even though he said he “put a very good man in” at the Fed in Powell. “I’m not thrilled…” said the man who once described himself as “the king of debt” and a “low interest” guy.”
Donald Trump is the last person who wants to see interest rates go up. Not only does his personal business empire depend on low rates… so does his political empire.
Per The Wall Street Journal: “The Trump administration expects the annual budget deficits to rise nearly $100 billion more than previously forecast in each of the next three years, pushing the federal deficit above $1 trillion starting next year.”
Just Numbers: Well, well… Who saw that coming? Larry Kudlow, Trump’s top economic advisor, said the tax cuts were going to light a fire under the U.S. economy. It would be a “supply-side” boost, he said. This would decrease the size of deficits, he forecast. Don’t worry about the debt, he assured us.
But you can do the calculation yourself: Lower tax receipts (because of the tax cuts) + rising spending (budget increases) + more borrowing (to cover the larger deficit) + higher interest rate expenses (more debt at higher rates) = $1 trillion deficits.
Over the next decade, the federal debt is already on track to rise from $21 trillion to $37 trillion.
It’s just numbers. More people retiring. More people drawing Social Security and medical benefits. More spending on the Warfare and Police States. But these numbers assume that nothing bad happens. And yet we know from experience that something bad always this way comes. More specifically, it will be almost impossible not to have a market crash/recession sometime over the next 10 years.
And then, all the calm and cooperative numbers lined up so carefully on the U.S. chart of anticipated accounts go into a pandemonium of panic and despair. The 5’s head for the exits. The 6’s collapse and cower in corners. The 7’s look for sharp objects or open windows.
And that’s when Mr. Trump (or whoever is in the White House at the time) might lean heavily on the Fed to come to the rescue. But, as we have maintained for years, there will be no need. Already, the Fed is preparing to intervene… in the only way it knows how.
As you’ll recall, Fed policy consists of the same three mistakes… The Fed is now making Mistake #2: It is raising rates to try normalizing the financial markets. Inflation is running at 2.9%. Its current fed funds target rate is between 1.75% and 2%. So it is still lending money at very un-normal, negative real rates. It claims it will make two more hikes this year to cut off the supply of EZ money and get ahead of inflation. But already, it is preparing for its Mistake #3 – cutting rates in a panic when Mistake #2 causes stocks to fall.
Here’s a report from Bloomberg: “Federal Reserve Chairman Jerome Powell said the central bank will continue to gradually raise interest rates “for now’’ to keep inflation near target amid a strong U.S. labor market. Officials in June signaled they plan to continue to raise rates at a gradual pace, penciling in two more quarter-point hikes for 2018. Powell’s emphasis that gradual increases are the right path “for now’’ may suggest the committee’s debate about pausing those hikes once the rate gets closer to a level they consider neutral – neither adding stimulus nor hurting growth – is likely to intensify.”
Yes, Jerome Powell is only admitting what we already knew… The Fed will never willingly revert to normal (market-discovered) interest rates. Instead, normalization will be forced upon it by a financial disaster – numbers that run amok. “Stay tuned.