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A recent Zero Hedge article was written by Schiff Gold’s Michael Maharrey entitled “Fed Paper Admits Central Bank Can't Control Inflation; Finger-Points At Federal Government.” The self explanatory title critiqued a recent paper out of the Kansas City Federal Reserve. The paper was co-authored by Leonardo Melosi of the Federal Reserve Bank of Chicago and John Hopkins University economist Francesco Bianchi, which argued that central bank monetary policy alone can’t control inflation. The following passage summarizes Maharrey’s take on the paper.
“This paper admits what I’ve been saying for months. Government spending is a big problem for the Federal Reserve. Powell and Company continue to insist they will stay in this inflation fight until the end. But Uncle Sam depends on the Fed buying Treasury bonds in order to facilitate its borrowing addiction. As the central bank buys bonds, it creates artificial demand and holds interest rates down. The government needs low interest rates when it’s borrowing trillions of dollars. Without the Fed’s big fat thumb on the bond market, Treasury prices will continue to sink as supply outstrips demand, and interest rates will rise.”
Maharrey’s major flaw is that he fails to realize the Fed will not buy more treasuries because the Fed is not on the same train as Congres. Preserving credibility is the Fed’s main goal and the only way to accomplish this is by raising rates against the will of a spend-thirsty government. As rates increase, the need for treasuries will increase as foreign capital flees Europe. The dollar is strengthening from Fed policy as the Euro floats around .90 ¢ to the dollar. Not all that capital can just simply go to green backs. The way to scale dollar holdings is through treasuries. In comparison to all the world’s debt, America’s will stand to be the safest, especially as Europe defaults. The fact is, due to capital flight the Fed won’t need to purchase the treasuries themselves. The market will.
As Maharrey identifies in the paper, it’s true that Uncle Sam is the one to blame. It was Congress who passed the COVID relief act that sent checks out to individuals. It was the treasury’s stunt of beta testing MMT that caused the inflation, which itself was Davos’ attempt to undermine and discredit the Federal Reserve.
The Fed is the one who responds to said inflation because their mandate is to maintain stable pricing and employment. Neither of those can be achieved when a spontaneous pandemic causes mass layoffs and firings while the government is literally giving people money. If there’s a greater supply of money chasing fewer goods, you end up with inflation.
Golden Incentives
It’s important to consider the incentives behind Maharrey’s article. As a member of Schiff Gold, Maharrey and fellow gold bugs profit off of a high gold price, which is no wonder why one in such a position would prefer an inflationary scenario rather than a deflation one. Inflation signals a lack of trust in governments, resulting in the market’s favorability towards safe-haven assets like gold. The truth is that gold won’t be seeing all time highs any time soon.
The Fed and US banks are in charge when it comes to the gold price because of (by the Fed’s own doing) a massive shortfall in dollar liquidity. Therefore, they are suppressing the price of gold and safe haven assets to maintain confidence and trust (whatever is left of it) in the American financial institutions. Schiff and fellow gold bugs should realize that gold is not going to the moon any time soon until global powers that are causing the bifurcation in geopolitics (Russia and China) are done accumulating and they have a new, robust global financial and monetary infrastructure in place independent from the dollar.
As I’ve mentioned in past articles, a rising price of gold is not in the Fed’s best interest. It instead helps Europe because the ECB’s balance sheet is futile and needs a rising gold price to offset its losses and be solvent. Gold is their only option to combat bankruptcy. The Fed is now able to shrink its balance sheet in order to reverse the money flow into the offshore dollar markets, which will obviously pull back on gold. The only way gold and other safe haven assets moon is if there’s a complete loss of confidence in financial institutions. That loss is achieved through continual deficit spending by Congress, which is what the goldbugs would love to see because gold would have to be remonetized by that point.
When In Doubt, Blame The Fed
Like many analysts, Maharrey still believes this whole debacle the Fed faces is about inflation. As I have mentioned before, the Fed is not fighting inflation, it’s fighting for survival. The way it survives is by destroying the offshore dollar market through moving cash reserves to reverse repo facilities, further increasing demand for the dollar.
When referring to Fed Chair Jerome Powell’s tactics, Maharrey states:
“Jerome Powell said the Fed will ‘use our tools forcefully’ to get inflation under control and even conceded that it will cause some economic pain. But the numbers undercut Powell’s confident assertions. The Fed would have to raise rates to a level that would obliterate this bubble economy in order to cool inflation.”
Maharrey is oblivious to the Fed’s capabilities in dealing with the fiscal debacle they face. The Fed’s plan is to raise rates to kill the offshore dollar market, the economy be damned. Doing so requires raising rates to as high as 6%, a figure that is quite probable by the end of 2022, according to Danielle DiMartino Booth. It won’t be until October that the real effects of QT start rolling in because contracts can take up to 3 months to settle.
“In one sense, I think the Fed is setting the stage for its own failure. It’s already making excuses. And it’s a little pathetic. The central bank put quantitative easing on steroids during the pandemic, injecting nearly $5 trillion into the economy. That is the very definition of inflation. If you want to know who to blame for this inflation mess, the Fed stands at the front of the line.”
The irony here is that gold bugs make their own excuses for why gold isn’t moving. Similarly to how he thinks the Fed is blaming Congress, Maharrey and fellow gold bugs blame the Fed for a low gold price. Truthfully, it wasn’t the Fed that spent all the money, that was Congress, and Powell had to go along with the stimulus because he was seeking reappointment as Fed chairman. Saying no to CovId bailouts would have been political suicide. Simply put, the government (Davos) keeps spending in order to make the Fed’s job of establishing monetary independence more difficult.
Conclusion
Many gold bugs (along with numerous notable macro-gurus of today), have this idea that the Fed is filled with idiots that don’t know what they’re doing and that they have pinned themselves into a corner where the only choice is to print themselves out of an economic crisis. As it’s been addressed multiple times, the Fed does not “print” the money. Congress passes stimulus bills which undermines the Fed’s power (most notably via the offshore dollar markets) to control the monetary transmission mechanism.
Although Schiff and kin do a fine job of identifying problems of monetary and fiscal policy, they fail to put forward any solutions as far as an alternative route. That’s the goal. They don’t want an alternative course. Goldbugs (especially those who work in the gold industry), want the Fed to hyper inflate the economy so they would be forced to monetize gold. As Ron Paul put it, they want to “End the Fed.” This is not reality. The alternative is in fact a remonetization of gold only after severe global economic pain and a repricing of all assets occurs from higher interest rates and capital flight has made its way into the dollar as sovereigns default.
The Schiff crowd must be delusional to believe that the bubble of all bubbles can be deflated without serious pain rippling throughout the economy. The truth is that the Fed is choosing deflation over inflation to preserve its credibility, reminding the markets that the Fed is to be taken seriously. QE infinity is antithetical to this goal.
It is Congress who we can blame for all the “money printing” we experienced during the (as George Gammon calls it) the Cerveza Sickness. That is the difference between monetary and fiscal policy. The Fed simply reacts to the fiscal actions of Congress borrowing from the future, which is a direct tax on the American people (or any government/people for that matter). They are reacting by tightening and raising rates in order to destroy the offshore dollar market. That is the Fed’s plan. They are not concerned about weakening the economy, markets be damned. For the Fed, it is simply about survival and nothing else.
Check out Phil’s thread on this subject here:
<blockquote class="twitter-tweet"><p lang="en" dir="ltr">1) THREAD: GOLDBUGS ARE WRONG ABOUT THE FED 🧵: A recent ZH article by <a href="
7, 2022</a></blockquote> <script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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Well, the Fed pivoted in 2018. bc of the treasury market. Same problem, only bigger debt. Tax receipts are about to go to h... Interest on debt at higher rates can’t happen for long.The Fed will have to relent. This is not the debt levels of the 1970’s. Inflating the debt away through financial repression is path of least resistance for a relative default.