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Fed Advocates Higher Inflation And Larger Deficits! – Ep. 187

  • The dollar was broadly weaker today with the dollar index closing down .85 to 94.78
  • At that time gold was up about $18; sliver up about .25
  • Then all of a sudden New York Fed Chairman William Dudley in an interview on Fox Business basically said that a September rate hike was still possible
  • Look, a September alien invasion is still possible, but I’m not going to waste my time preparing for it
  • What’s amazing to me is how all of the villagers still come running every time a Fed official cries “Wolf!”
  • Haven’t they noticed that they’ve cried, “Wolf!” over and over again and there’s never a wolf?
  • I think that Dudley purposely came out and mentioned a September rate increase just to keep the markets in check; to preserve the false narrative that there is actually a recovery, instead of a bubble
  • All of a sudden, gold sold off, it went from +$18 to +$2 or $3
  • Silver went negative; it lost its entire rally in a matter of minutes
  • I think Dudley was trying to undo the damage done overnight by Dudley’s counterpart at the San Francisco Fed, John Williams’ well-thought out paper
  • Williams wrote in his piece that he believes we’re in a “new era”.  He doesn’t understand that the new era that we’re in is collateral damage from central bank monetary policy
  • They think this is a random occurrence that needs a new government prescription
  • John Williams is proposing, based on this “new normal” the neutral interest rate is so low, it’s almost impossible for the central banks to get there, absent negative interest rates
  • What Williams is proposing, is more inflation
  • What he is arguing is that we should scrap this 2% inflation target and that we need a higher number
  •  I’ve been saying for years that this is going to happen
  • It’s just like the unemployment rate, where they said, “We’ll raise interest rates if it gets below 6.5% and then we let it go below 5%
  • We kept moving that goal post
  • I said the same thing was going to happen to inflation
  • In fact it is happening.  If you look at the CPI numbers that just came out today, we continue to be above the 2% level on the core; we’ve been there for many months in a row
  • Now they’re already starting to say, “Hey wait a minute, 2% isn’t high enough
  • We need more inflation because we need lower rates, and the only way to get there is to have higher inflation
  • This is what I have been expecting
  • If you read William’s piece, he says one of the ways we should get there is for the Fed to target nominal GDP
  • In other words, not GDP after you adjust for inflation
  • I’ve argued that the deflator is under the actual inflation number, therefore overestimating GDP growth
  • The Fed is saying, “Who cares about the GDP deflator?
  • All we care about is the nominal number
  • We don’t care if the growth is real or inflationary, we just want nominal GDP numbers to go up”
  • What good is that?
  • No one benefits from phony GDP growth that is simply a by-product of inflation
  • The whole point is that we want the economy to actually, grow, not for just prices to go up
  • But what the Williams is saying is no, all we care about is prices going up
  • It’s all about style over substance
  • That’s why we’re stuck in this malaise
  • Additionally, what Williams was also arguing for was more fiscal stimulus
  • He was saying that we’re at the end of our rope with interest rates at practically at zero
  • We need the government to provide more stimulus in the form of deficit spending
  • We’ve already got about a $20 trillion national debt
  • If deficit spending were stimulative, why haven’t we gotten a huge stimulus from that $20 trillion of debt?
  • That $20 trillion is an anchor weighing down the economy and Williams is calling for another anchor
  • The more the Fed stimulates the economy, the more the economy is sedated
  • Eventually the economy is a corpse and they keep trying to stimulate it anyway; they don’t even realize that they’ve killed the patient
  • That is exactly what is going on
  • Of course, if we run even bigger deficits, based on what the Fed is advocating, how will we finance them?
  • The Fed also wants to keep interest rates low, well if the government tries to borrow a lot more money; let’s say we run the budget deficit up to $1.5 – 2 trillion a year, who’s going to buy all those treasuries?
  • Obviously, it’s going to be the Fed
  • So what Williams is really advocating when he wants to sell more bonds but keep interest rates low, is more quantitative easing