Tag Archives: Jerome Powell

SEMI-MONTHLY FISCAL/MONETARY UPDATE – BELIEVE THE FED AT YOUR OWN PERIL!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – BELIEVE THE FED AT YOUR OWN PERIL!

IT’S NOT PHD ECONOMICS, IT’S ARITHMETIC

I was amazed by Fed Chairman Powell’s remarks last week. Predictably he reiterated the Fed’s dedication to raising the inflation rate to a “symmetrical 2%”, i.e. over 2% for a while to compensate for the last ten years when it has been running under 2%. Forgetting about the fact that the Federal Reserve was formed in 1913 to control inflation, not create it: relative to the need for higher interest rates and less stimulus, he said “There will come a time—and that time will be when the economy is back to full employment, and taxes are rolling in, and we’re in a strong economy again-when it will be appropriate to return to the issue of getting back on a sustainable fiscal path, but that time is not now.”

Do you know how many years there have been since 1971, when the US went off the gold standard, that the US debt has not increased? Take a moment….. the answer is ZERO. Even in the last three years of the Clinton administration and the first year under GW Bush, when the “surplus” in total over the four years was $972B, the debt still increased every year, because “off budget” spending eliminated the so called surplus. In the fiscal year ending 9/30/20, for example, the US “deficit” was $3.1T and the debt went up by a cool trillion dollars more. As far as Jay Powell’s remark noted above, there will never be a time, not in his administration, and possibly not in our lifetimes.

AND THE NUMBERS ARE MINDBOGGLING

“A billion here and a billion there and pretty soon you are talking about real money” is the political commentary from thirty or forty years ago. Three zeros have been added, taking the billions to trillions, but the economy is not three zeros (1,000x) larger. Here’s another way to picture the situation: The US debt went up by $4 trillion last year and will go up by $4-$5 trillion more this year, even without the Green New Deal currently under discussion. The table just below provides a decade by decade (with mid-decade 1945, the end of WWII, thrown in) picture of the debt as a percentage of GDP.

The most expensive prior single undertaking in the last hundred years was WWII, which cost $4.1 trillion in today’s dollars in total. The US government, therefore, will spend about double, over 18-24 months, the amount that it cost to conduct WWII over five years. The problem is that there is no postwar industrialization by a surplus nation on the gold standard to help us work our way out of this situation.

AND HIGHER TAXES ARE NOT GOING TO PAY FOR IT

We are hearing and reading about the Biden administration’s inclination to raise taxes to pay for the new infrastructure spending. Before you conclude that more taxes are unfortunately necessary to make the books balance, here are a few numbers.

Total spending was about $7.5 trillion, represented by the $3.1 trillion deficit (in excess of the $3.4 trillion of receipts) plus additional “off budget” spending of about $1 trillion. The $3.4 trillion of receipts  broke down this way: Personal Income Taxes were $1.6T, Social Security and Medicare Payroll Taxes were $1.3T, Corporate Taxes were $.212 T (only $212B).revenues of $3.4 trillion dollars in the fiscal year ending 9/30/20. The remaining $0.3 trillion came from excise taxes ($.087T), customs duties ($.069T), estate taxes (only $.018T = $18B), and miscellaneous sources ($.117T).

Since the Federal Reserve is financing well over half of the deficit with freshly printed money, as their balance sheet expands at an annual rate of close to $2 trillion, an increase in personal income taxes, corporate taxes, social security or medicare taxes, especially the minimal estate taxes, would be of small consequence to paying back the cost of new infrastructure.  This is why the politicians always talk about RECOUPING, say $1 trillion of RELATIVELY SHORT TERM SPENDING with $100 billon of higher taxes on this or that OVER A MUCH LONGER TERM. Obviously, with the timing mismatch,  our legislators will have found trillions more to spend, and receipts can never catch up with expenditures.  Taxes could never be raised enough to make a serious dent in the increasing debt burden. It’s actually kind of ridiculous to bother the public with a long term ax burden when it is a lot easier for the Fed to instantly create an extra trillion dollars or so.

The Fed and the politicians like to tell us that all this newly created currency will not be inflationary, because the “velocity” of the funds is at an all time low, and  the price of goods and services (by their calculation) hasn’t changed much. Let’s create am extreme example. If one hundred trillion dollars worth of colored paper was distributed, do you think  quite a bit of it would start moving around and the price of goods and services would move higher?

Don’t ever believe that it doesn’t matter how much debt the US carries, as long as interest rates remain minimal. Someone along the way once said “there is no free lunch”.

Roger Lipton

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE BEAT GOES ON!! FED CHAIR POWELL’S REMARKS ARE NOT COMFORTING!

SEMI-MONTHLY FISCAL/MONETARY UPDATE – THE BEAT GOES ON !! FED CHAIR POWELL’S REMARKS ARE NOT COMFORTING!

As a backdrop, the US deficit in February was announced at $311B, up 32% YTY. Five months into the US government’s fiscal year ending September, the deficit is $1.05 trillion, up 68.3% YTY. Of course, the big spending, to cope with Covid-19, last year started in April, running the deficit in the year ending 9/30/20 to $3.1T. The most recent Congressional Budget Office (CBO) estimate for this year was $2.3 trillion (about 11% of GDP), which is higher than ever except in WWII, but that was before the $1.9 trillion Covid-relief bill was passed. This year’s deficit is therefore going to be well in excess of last year’s $3.1T and the Biden administration says a multi-trillion, multi-year infrastructure effort is coming. All this is only possible with the help of our Federal Reserve, which is funding over half of the deficit with fresh currency created by the click of a computer. It is worth noting that foreign buyers of US debt are steadily reducing the percentage of their participation in the US debt auctions. Their holdings of US Treasuries as a percentage of their foreign exchange reserves is also coming down, so perhaps they know something?

Chairman Powell’s remarks, two days ago, were not comforting and not even logical. He doesn’t see a bubble in the capital markets but he has also said that it is very hard to spot a bubble when it is in progress. He obviously doesn’t consider that almost $200B of “blank checks” that have been written in the SPAC market in the last fifteen months, to be leveraged with relatively low cost debt to over a trillion dollars of buying power, is a bubble. He also isn’t concerned that the market value of Bitcoin is about a trillion dollars, which translates into potential purchasing power of goods and services.  Setting aside the speculative activity in Gamestop, he apparently doesn’t view the dozens of tech stocks that are a long way from profitability, each trading for tens of billions of dollars to be a source of concern.  He isn’t concerned that investor margin debt has accelerated recently to a new high, which has almost invariably signaled a recession just ahead.

Chairman Powell suggested that the trillions of dollars of newly minted dollars over the last ten years, as well as the interest rates suppressed to levels close to zero, will not spark uncontrolled inflation because “it has not happened so far”. The metaphor we suggest is snow accumulating on a mountain slope. It is unknown which “flake” will trigger the avalanche, but it is best to have an escape plan.

Chairman Powell discussed how inflation is still firmly “anchored” in a sub two percent level and the Fed objective is to stimulate a level above two percent for an indeterminate time frame, producing “symmetrical” two percent over the long term. First, the inflation rate, as measured by the Consumer Price Index, is debatable, to say the least. The CPI has been “adjusted” a number of times, always resulting in less sensitivity to true consumer spending. Powell is not living in the same world as the rest of us if he really thinks that his cost of living is rising less than 2% per year. On this score, the capital markets are signaling a coming increase, bond prices in particular moving sharply upward, and bond market investors have historically predicted economic trends far better than the Fed.

On the subject of interest rates, the Fed has, with their intervention in capital markets, destroyed current interest rates as (1) an economic indicator and (2) a controlling influence on risk and reward. Interest rates have been described by the legendary monetary historian, James Grant, as the economy’s “pituitary gland”. The pituitary is the “master” gland, secreting hormones that regulate blood pressure and reproduction, affecting vision, the brain, skin and other organs. The Fed has therefore become a doctor evaluating the patient after destroying a crucial diagnostic instrument.

Chairman Powell described how the increases in short term interest rates have been “orderly”, so should not be of concern. The implication is that the inflation to come would also be orderly, and the few current indicator upticks would be “transitory”, in any event. The objective is for inflation to be modestly (our word, not his) above 2% for a while anyway, so it’s all “okay”. We wonder: when inflation hits a 3% rate, will that be “transitory”? At what point, and for how long, does a 3%, 4%, 5% become something other than transitory, and require the Fed to move, or allow the market to move, interest rates higher. Would he be concerned, at that point, that, based on today’s $28 trillion of debt, every point of new interest expense would amount to $280 billion.

It seems to us that Powell becomes more dovish every time he speaks. The interest rate rise is “orderly”. The inflation indicators are “transitory” and “well anchored”. He continues to “not even think about thinking about” raising interest rates or reducing Fed bond purchases. There is no “taper tantrum”, cessation of the increase of the Fed balance sheet,  in the cards and says he would warn the market when that time comes. He doesn’t see any signs of bubbles in the capital markets, so the Fed is sticking with their plan.

Jerome Powell, to be fair, did not create this mess. It is a result of decades of fiscal and monetary mismanagement. There is just no graceful solution. The “Maestro”, Alan Greenspan kicked it off in response to Y2K, the deflation of the dotcom bubble, and two wars, then escaped the consequences.  Bernanke escaped, Yellin escaped, Powell may also escape the “chickens coming home to roost”. These trends take a long time to play out, but the snow keeps accumulating on the mountain. It’s just a question of time.

Roger Lipton

EXTRA EDITION !! FISCAL/MONETARY UPDATE – DISINGENUOUS FED !!

EXTRA EDITION !! FISCAL/MONETARY UPDATE – DISINGENUOUS FED !!

It should be no surprise that “officials”, in this case Fed Chairman, Jerome Powell, massage the facts to provide whatever agenda they are trying to promote.

Jerome Powell, in yesterday’s news conference, was asked about how far the final stage of balance sheet shrinkage would go, before being “normalized” in late 2019. Recall that the $900 billion of assets owned by the Fed back in 2008, bought with newly printed currency, expanded to a maximum of $4.5 trillion during and after the 2008-2009  financial crisis to keep the banking system from imploding and to support the economic recovery. Most economists like to think that the possible unintended consequences of this unprecedented monetary experiment are worth the ongoing risks because the financial system was saved by the intervention. Over the last decade, fed officials have come to the conclusion that the balance sheet should be shrunk, but the normalized level would be about $2.5 trillion based on an economy that has grown over the last ten years. Of course, the economy has grown nothing like the 177% increase that the balance sheet would have grown, but that’s been the working objective until just recently.

It’s important to put the Fed’s current forecast in context. Starting in late 2017, the Fed has shrunk the balance sheet steadily by selling some securities and letting others maturing in a “run off”. It was hoped that this reduction of monetary accommodation would not hurt the economy. However, with the reduction of Fed participation as a buyer of fixed income securities, and a planned series of fed fund rate increases, market interest rates immediately started to rise in late 2017, and that has contributed to economic growth slowing from the 3% rate of 2018, now expected to be in the low 2% area in 2019. Predictably, by the fourth quarter of 2018, as the stock market was collapsing, the Fed “caved”, and said they would back off from the balance sheet reduction, as well as reducing the number of interest rate increases planned in 2019.

It is now assumed that the rate increases are over for the moment, and the Fed is watching carefully, “data dependent”, yadayada. As far as the Fed balance sheet goes, it stands, as of the last report on 3/13/19, at $3.97 trillion, down 12% from the high of $4.5. Our estimate, provided just last week, was that the balance sheet reduction would go to about $3.7T, down about 18% from the high. As we said, a quintuple in the balance sheet, from $900B to $4.5T, is necessary in hard times to avoid a financial calamity, but the “good times” only allow for an 18% reduction, not exactly a balanced situation, as John Maynard Keynes economic principles would have required.

You have to read between the lines if you are interested in the facts from which to make an informed judgement as to what the future holds. Jerome Powell, Fed Chairman, is extremely articulate, perhaps the best that we can remember in this respect. However, he has his “agenda”, and we can’t resist the temptation to clarify just a couple of of his press conference comments of yesterday. Naturally, he claims that the economy is doing just fine, everything is under control, the Fed is watching carefully and has lots of flexibility to respond to any foreseeable situation. We can’t help pointing out the similarities to the Fed’s outlook in ’07.

In yesterday afternoon’s press conference:

Chairman, Jerome Powell, was asked whether the Fed balance sheet reduction was a form of “tightening”, which could be hard for the already slowing economy to absorb. He claimed that reduction of the balance sheet is not tightening, as it is not a part of “monetary policy”, just a separate planned reduction back to an appropriate level as part of a natural process. He can call expansion of the balance sheet from $900B to $4.5T whatever he wants, but it wasn’t done for no reason. $3.6T of fresh currency was created, out of thin air, inserted into the financial markets, helped keep interest rates low and finance our operating deficit, and the higher stock and bond prices created the wealth effect that Ben Bernanke predicted. If expansion was a big help, contraction can’t be of no consequence. 

Secondly, he was asked how much further the balance sheet reduction would be taken by the termination as of 9/30/19. After a bit of “dancing”, he said “you are no doubt looking for a number, so that would be ‘a bit’ over $3.5T”. He no doubt wanted to provide the impression that the balance sheet reduction is continuing, automatic as presented originally, wouldn’t be a problem for the economy, and the $3.5T is an acceptable objective. Here’s our interpretation:  If we assume “a bit” over $3.5T would be $3.55T, that would require a reduction over the next 6.5 months  of $421B from the $3.971T at 3/13/19, or an average of $64.7B per month. That pace of reduction would be higher than any level during the peak pace of reduction. Q3 of ’18 averaged $37B per month. Q4’18 averaged $39B per month. So far in ’19 the average has been 35B/month.  If we assume $30-$35B/month over 6.5 months, that would be 195-228B, which would leave the balance sheet at $3.74-3.77T (still $70B or so above our target), and we don’t consider $250B “a bit”, though a quarter of a trillion dollars is admittedly not worth what it used to be.

It remains to be seen how the worldwide economy responds to the end of the largest  monetary experiment in the history of the planet. 

Roger Lipton