Jerome Powell: Misunderstood Angel or Open Devil?

By Matthew Piepenburg

Partner

July 9, 2023

It’s time to talk about Powell…

Becoming Powell’s (and the Devil’s) Advocate?

I’ve been thinking, and re-thinking, Powell.

Hmmm.

It’s no secret that in numerous interviews and articles, Jerome Powell has been on my critical mind.

I called him a breathing weapon of mass destruction, and have openly mocked his attempt to be Volcker 2.0 in a USA facing $32T in public debt and climbing.

So, what gives?

Why and what am I re-thinking?

Some Things Can’t be “Re-Thought”

First, let me be clear that there are a lot of criticisms and dis-likes that I have not re-thought.

In fact, I keep a list of stubborn thoughts which probably can’t ever be “re-thought.”

For example, I don’t like centralized anything, be it economies, governments, media cabals, currencies or banks.

Thus, I don’t like the Fed (or ECB etc.) as a concept nor central bankers as a group.

Why?

Because they distort the hell out of natural supply and demand, crush free market price discovery and have effectively killed capitalism while simultaneously and directly creating wealth inequality at levels akin to modern day feudalism.

In fact, my last two books, Rigged to Fail and Gold Matters, spend a great deal of pages underscoring just how rigged the banking system is in general and the Fed in particular.

I’ve equally penned many essays on the open corruption I’ve seen in our so-called financial “elites” and have bluntly said “shame on you” to the entire bunch.

Furthermore, I don’t like Bernanke getting a Nobel Prize for essentially “solving” an historical debt crisis with equally historical levels of new debt, which is then paid for with historically unprecedented levels of inflationary, mouse-click money.

There’s literally nothing noble in that Nobel Prize.

And I don’t like easy money magicians like Janet Yellen who took the Bernanke play-book of ZIRP (Zero Interest Rate Policy) too far and too long in a myopic, career-saving, time-buying, fantasy-narrative to solve every fiscal or monetary addiction/crisis with more synthetic and inflationary liquidity (i.e., QE to the moon).

Nor do I like Yellen saying things like “we may never see another recession in our lifetimes.”

Similarly, I don’t like Powell, around the same time (circa 2019) declaring that there’s no reason not to believe that our bull markets could go on for longer, “perhaps even indefinitely”—when just a year later the markets tanked by greater than 35% (and would have fallen to the ocean floor but for trillions in unlimited QE to “save” the system).

Nor I am a big fan of Powell’s open declaration that inflation was transitory, when we were arguing long before him that inflation was anything but “transitory.”

In short, I don’t like the Fed, and by extension, I can’t declare myself a big “advocate” of Jerome Powell.

So, What Gives?

Why, then, do I find myself playing the devil’s advocate to my own devil, and this includes Jerome Powell?

It’s no secret that I have always seen easy money as a fantasy (criminal) solution to real economic problems.

In the end, such fairytale policies simply create debt bubbles saved by currency bubbles, which like all bubbles, just “pop.”

And when a currency bubble pops (always the last bubble to do so), nations and even reserve currencies, from the Dutch Guilder to the British Pound, equally come to a dramatic end.

And given that every central banker has been openly guilty of this “quantitative” sin since patient-zero Alan Greenspan sold his soul and hard-money graduate thesis to Wall Street in the late 1990’s, I’ve happily lumped Powell into this embarrassing crowd of politicized “data-dependers.”

In short, Powell, like his immediate predecessors, was no Paul Volcker or William Martin, in much the same way that Dan Quayle (as famously declared by Senator Bentsen) was no John Kennedy.

In fact, Martin and Volcker remain semi-iconic for being among the few and the brave Fed Chairs to actually take the punch bowl of easy money away from their spoiled nephews in the trading pits of Wall Street or the re-election seekers in DC.

But this “punch bowl thing” got me to thinking (i.e., re-thinking) about Powell.

Powell Taking Away the Punch Bowl

Yes, I still think Powell’s plan to raise rates into an historical credit bubble and debt cycle will break things, including the economy, markets and banks.

And I still think his public/optic claim of raising rates to fight inflation is an open charade, as he needs inflation to inflate away historical debt yet has the subsequent trick/ability to then mis and under-report otherwise toxic and sticky inflation levels.

But…and this is a big but…, one (or at least myself) has to admit that Powell is the first Fed Chair in a long time to make a genuine effort to, well…take away that punch bowl.

Hard-Money Powell & Needed (Constructive) Destruction?

Yes, Powell’s rate hikes and drying punch bowl are breaking things, as I’ve argued over and over.

But then again, as a follower of Austrian (rather than Keynesian) economics, I confess that some things need breaking.

In fact, it’s a von Mises/Schumpeter concept known as “constructive destruction,” and tanking credit markets can clean out over-levered and debt-soaked markets with SVB-like effect.

I must further confess that Powell, unlike Yellen (the God-Mother of Easy Money) had been a proponent of hard money since he was a junior member of FOMC.

Throughout 2018, for example, Powell had at least tried (quarter after quarter) to forward-guide a tightening of the Fed balance sheet while simultaneously raising rates.

Of course, we all know how badly that ended by year-end. What followed was a 2019 rate “pause” and then a 2020 of unlimited QE…

But I must confess, at least Powell made an attempt at hard money thinking, not easy money thinking, and it’s Powell’s hard-money thinking which has me thinking harder about Powell.

The Death of LIBOR & Now Powell the Savior?

In fact, an equally bemused Libertarian, Tom Luongo, just gave a rather telling interview on KITCO which goes even deeper (see minute 14:20) down this rabbit hole, suggesting that Powell may indeed be trying to make America, well better…

Hmmm…

Luongo, for example, reminds us that the June 30^th sunsetting of the London-based LIBOR debt indexing standard for domestically produced USD-denominated debts (think credit cards, mortgages etc.) in favor of the new SOFR index (nod to John Williams) is a major, as well as deliberate, attempt by Powell to save, liquify and repatriate the USD.

Huh?

What does that mean in plain English?

Stated simply, by replacing LIBOR (global-bank-based) with the SOFR (US repo-based) system, this means the USD and US credit markets will be less vulnerable to European bank and credit market failures, which Powell, apparently, foresees.

Thus, if a French or German bank, were to implode under the old LIBOR system, the shock waves of that implosion won’t hit the US system as hard under this brand new SOFR index.

Powell the Anti-Globalist?

In addition, Luongo argues that Powell is quietly at war with the technocrat “one-world-government” types behind the otherwise well-telegraphed “great-reset.”

Luongo bluntly/refreshingly describes this “re-set” as a policy in which globalists (he says communists) in the European Union, IMF, UN and, of course Davos, are effectively aiming to crash the markets (and USD) in order to centralize and “re-set” the entire global system with a clean slate.

Toward that end, my own concerns about Davos, CBDC and more centralization are shared.

Seen in such a light, Powell’s hard money/rate hike policies could thus be interpreted as a direct threat to this globalist agenda, an agenda which, according to Luongo, requires low rates to feed an otherwise bogus/false “green agenda” to justify more global debt.

Fair enough.

Powell, De-Dollarization and the Milkshake Theory

Finally, a valid argument can be made (and Luongo makes it) that by raising rates by over 500 bps since Q1 of 2022, Powell is deliberately trying to crush the leverage (and hence tangled/illiquidity) in USDs held offshore (i.e., the “Euro dollars”).

That is, by raising rates at record speed and at a record slope, it’s much harder for offshore derivative markets to keep levering (and hence tangling up) off-shore USDs on the cheap.

This decline in leverage, complimented by what many believe can lead to a tanking of European sovereign bonds (and spiking yields) can in turn lead to an off shore/European banking and credit crisis.

Such a banking crisis would then create a flow of off-shore money back into USTs as the best horse (or sovereign bond) in the global glue factory, which is yet another nod to Brent Johnson and the milkshake theory.

Thus, and despite all the very real, all too real signs/threats of open de-dollarization, Luongo argues that Powell’s rate hikes are a valid plan to save the USD by soaking up all those off-shore dollars and re-patriate the same back into the UST market.

Summing Up the Devil’s Advocacy

Based on the foregoing, there is at least a case to be made that Powell’s openly hard-money stance since last March is potentially seeking to accomplish three very important goals:

1) Protecting US debtors from cracking and formerly LIBOR-based foreign banking risk;

2) fighting the “good fight” against the globalist technocrats from the IMF to Davos; and…

3) stemming the tide of open de-dollarization by letting EU banks, and hence bonds, implode, which would in turn create a tidal wave of money flows back into the “safe” (safer?) haven of the UST market.

Constructive or Non-Constructive, It’s Still Gonna be Destructive

Whether or not Powell has a method to his madness, and that his own allegedly choregraphed rate-hikes of “constructive destruction” lead to a pro-USD, pro-UST flow of global funds back into the US remains to be seen.

Like Luongo, I do feel that the real test, and signal, for such a flow of capital will come when Japan finally throws in the towel on its insane QE policy (and hence Yield Curve Control).

Once JGB’s lose central bank support, they’ll tank and their yields will spike.

Such a sovereign bond crisis in Japan would spread to a terribly fragile Europe, and the bond spreads between Italian bonds and German bunds would then rip beyond the control of Lagarde’s teetering ECB.

That will be destruction, for sure, but not very “constructive” to the millions of citizens from Berlin to Barcelona who will then suffer for the sins of their central bankers, which include, sorry to say: Jerome Powell.

Gold Favors Man-Made Destruction

Most importantly, and whatever one thinks of Powell (devil or patriot) in particular or central bankers in general, there’s simply no easy answer or solution today for a world already on a fatal debt path which these bankers forged with drunken abandon/policies.

In other words: There’s No Way Out. Or more to the point, the USA is screwed.

Even if Powell’s hawkish “plan” leads to a straw-sucking flow of capital into the USA’s better “milkshake,” the levels of destruction in credit, currency, equity and financial markets which would precede/necessitate such a “flow event” will be catastrophic.

Thus, whether we see a deflationary depression of “constructive destruction,” a globalist “re-set” conveniently blamed on COVID and Putin, or a massive pivot to unprecedented QE (my opinion), the global system will be on its knees and no fiat currency will emerge victorious.

A few investors already know this. An increasing number of BRICS + leaders and Russian finance ministers know this, and an increasing number of central bankers (especially out East) know this.

Which is why they are all buying physical gold at record levels.

They see history and math with clarity, and although history can never be timed with precision, patient preparation for its turning points is all one needs to know.

Got gold?