J. Powell started his confirmation hearing for Head Chair at the Federal Reserve on Tuesday January 11th. During which Powell pointed out the Fed's plan's to raise interest rates as early as March in order to "fight" inflation. I have mentioned time and time again that regardless of interest rate hikes or Quantitative Tightening markets along with the economy will crash.
Quantitative Tightening, for those who are unfamiliar with the term, is the opposite of QE or quantitative easing. Instead of the Fed buying assets and increasing the size of their balance sheet. They sell assets and reduce the size of their balance sheet.
The last time the Fed attempted QT in 2019 it led the reverse repo spike, which saw overnight rates spiking up to around 7%. This caused the Fed to do an about face and completely reverse its course of QT completely.
This I just one of multiple times where the Fed attempted to do QT but had to reverse course back to QE because of how markets reacted with shrinking liquidity in the financial system. I find little doubt that this will be the case again.
When the Fed does QT they effectively pull dollar reserves out of the financial system by selling treasuries. Where with QE when they buy treasuries they add liquidity to the financial system by issuing bank reserves.
The real story is that the final year end CPI numbers where released today. We officially closed the year with a 7% year over year number. This marks the highest CPI number since 1982! Ironically, then interest rates were at 11% now they are at ZERO. Notice any difference?
Looking at the numbers above I wanted to point out how whenever the number is increasing, it as highlighted as green for good. Central banks and governments want to create inflation to help ease their fiscal and monetary policy errors, not help increase their countries prosperity. Increasing inflation is anything but good! It is easy to see how so many people can misinterpret the data with color schemes like these.
Jumping back to Powell's previous day's hearing, during witch he admitted that the U.S.'s current fiscal path is unsustainable. As ridiculously as it sounded he claim's our current debt level however is sustainable. Sustainable because inflation is running at 7%, helping to bring down Federal Debt to GDP? No one would dare say that outload..
I have pointed out before how we have gone from 135% debt to GDP in Q2 of 2020 to 122% in Q3 of 2021. 7% of this drop took place last year in 2021. Without hot inflation inflating away our debt there is no way our economy can be sustainable and produce real growth.
The Fed's understanding is that the only way to fight inflation is to tighten monetary policy. This would include ending QE, beginning the process of raising interest rates then doing QT. When rates rise an over debited economy and market will crash under the pressure it creates.
Covid response has continued to create more supply issues throughout our economy. With #BareShelvesBrandon trending on Twitter again, the impact of shortages and supply chain issues is still being felt. This has continued to add to inflationary pressures. Look at these insane price increases over the last year:
Gasoline: 49.6%; Beef: 18.6%; Pork: 15.1%; Chicken 10.4%; Fresh fish: 10.2%; Oranges: 9.9%; Furniture: 13.8%; Dresses: 8%; Jewelry: 8.8%; New cars: 12%; Used cars: 37.3%; Hotels: 27.6%; Car rental: 36%; Used Cars: +37.3%; Gas Utilities: +24.1%; Meats/Fish/Eggs: +12.5%; New Cars: +11.8%; Food at home: +6.5%; Electricity: +6.3%; Food away from home: +6.0%; Apparel: +5.8%; Transportation: +4.2%; Shelter: +4.1%
Ridiculously Insane!
Remember how the shelter increase hasn’t even caught up to the true price of rent and housing. I don't think the Fed or government has either..
Apartment rents have been reported to increase 17.8% in 2021. If those numbers catch up before the Fed changes how it calculates CPI. We would be going much higher for sure.
The issue is that even if CPI growth slows in 2022, 2021's 7% will become the new baseline. The only way I see 2021's year over year number decreasing is if we find ourselves at the bottom of a economic collapse. This collapse would force "temporary" deflation upon us until monetary and fiscal policy are altered to inject more money into the system.
2021 was an expensive year for most, especially if you are part of the middle-class. I do not expect that 2022 will be any better overall. If we see trends continue inflation could continue to move higher. At a minimum we should begin to see CPI stabilize with 5% to 7% becoming the new baseline.
Pay close attention to what the Fed says over the next few weeks and months. They will continue to procced with the tightening of monetary policy as long as markets continue to give them a green light. Politicans have no interest in controlling inflation since it is the only way to get our debt situation under control. Expect any sharp drops in the markets that happens rapidly to be met by more QE then last time. As well as additional fiscal support that will be past through congress with the illusion of support and to strengthen our economy. Neither of those things will be a result.
The more government spending takes of our GDP the more we move closer to a centrally planned economy, managed by the government. Dare I say it, socialism, communism and outright fascism.. The higher government spending goes as a percentage of our GDP the more we trend towards centralization. With economic centralization comes the rise of governmental totalitarianism and a loss of our personal freedoms and liberties. Remember these things whenever we talk about anything economical. Economics has become politics in a post 2020 world.