| | | America on the Verge?
Could a housing collapse drag the economy from recession into... something far worse?
Last week, investors were surprised by the forthright and clear-headed tone of Jerome Powell’s remarks from Jackson Hole. It almost seemed as though the Fed jefe had come to his senses:
The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now..
Powell is telling us – loud and clear – that he intends to ‘pull a Volcker.’
That is what we expected him to say. And we still don’t believe it.
Buckle Down
When push comes to shove, we predict, the Fed will buckle under demands to ‘pivot’ towards a looser monetary policy. But that is still somewhere in the future; today, we look at where ‘shove’ might be.
Remember, it’s ‘inflate or die.’ Since the 1990s, the markets – and the economy – have been under the spell of the Fed’s voodoo economics. It inflated everything – with its ultra-low interest rates for ultra-long periods. Now, with consumer prices rising uncomfortably, the Fed is forced to position itself as a steadfast, almost heroic, inflation fighter.
That is a fairly easy role for Powell et al; for now, they can fight inflation without taking casualties. Employment is still high. Stocks are still high. Interest rates are still low, with the 10-year Treasury bond yielding only 3.2% (more than 5% below the CPI). And houses are still selling near their peak prices.
So far… so good.
But there’s $90 trillion in debt to reckon with. Raise the average carrying cost (interest rate) by a single percentage point and the cost to debtors is an extra $900 billion a year.
As we mentioned on Monday, while the Fed’s balance sheet is coming down (the Fed is buying fewer bonds… aka QT, quantitative tightening), it is still lending to member banks at rates far below consumer price inflation. This is essentially ‘inflationary,’ since it encourages people to borrow. It is only by getting lending rates above the level of consumer price hikes that the Fed can control inflation.
At today’s 8.5% CPI that would mean interest rates around 10%. And if applied to all the debt outstanding that would cost the economy $9 trillion per year – or more than a third of total GDP. Not going to happen.
But what can happen is that the Fed’s gradually increasing interest rates will put the economy into a deeper recession. Then, people stop buying; businesses fail; jobs are lost; and prices fall.
Most likely, we’ll see the two converge – rising rates from the Fed coming up to meet falling consumer prices – leaving us with positive (above zero after inflation) interest rates.
bonnerprivateresearch.substack.com |
|
