POWELL’S ABRACADABRA INFLATION TARGETING

By Egon von Greyerz

Founder and Chairman

August 13, 2023

The Fed has two mandates – Maximum Employment and Price Stability

If we look at price stability, the Fed has failed miserably. 

The Fed employs 3,000 people in Washington DC of which 300 have a Ph.D. degree.

Their mission is “to provide our nation with a safer and more flexible and more stable monetary and financial system” with the overall mandate being price stability. 

In addition to discussing the Fed’s total failure in controlling inflation, in this article I will also stick my neck out in the climate debate before I go on to the likely disastrous effects of debts, deficits and inflation will have on investment markets. 

POWELL’S ABRACADABRA INFLATION TARGETING

Last week the Fed chairman explained, in the Senate, the method the 300 Fed PhDs and many of the 3,000 Fed staff apply for inflation targeting.

Senator Cortez asked Powell:

Cortez: 

“Why 2% inflation?”

Powell: 

“The 2% is globally agreed between all major central banks as a target.”

EvG question: So for this Lemming system 300 PhDs are required?

Cortez: 

“How does it help people?”

EvG: The contorted Fed Speak reply which Powell utters summarises the entire wisdom of the Fed.

Powell: 

“I will tell you how it does, I guess it is obviously not obvious how that is.”

EvG: Hmmmm… Powell obviously doesn’t have a clue – “OBVIOUSLY NOT OBVIOUS!” 

Powell continues:

“To have people believe that it will go back to 2% anchors inflation there. 

Evidence is that the modern belief is that people’s expectation has an effect on inflation. If we expect inflation to go up to 5%, then it will because businesses and households expect it.”

So there we have the inner secrets of the Fed’s inflation policy and targeting. 

Firstly, the 2% target is just a Lemming system. Every other central bank does it, so we the Fed must follow the system of mediocrity.

Secondly, it is only a matter of making people believe that inflation goes to 2% and it will. What about if the people believe inflation will go to 20%?

This is where Powell the magician comes in to hypnotise businesses and household into believing in 2% inflation:

I agree with senator Cortez’ question: Why 2%?  There is nothing desirable about the 2% at all. With 2% inflation, prices double every 36 years. The aim should really be to have no inflation.

The problem with an arbitrary Lemming system targeting 2% is that it doesn’t work. Neither the Fed nor any other central bank have managed to hold it at that level except for accidentally on the way to higher or lower inflation.  

INFLATION WILL TURN BACK UP

Between 2015 and 2021 inflation in most industrialised countries was between 0% and 3%. 

When inflation in 2021 shot up significantly, Powell and Lagarde (ECB) proclaimed that that was only “transitory”. Still inflation went up to around 10% before it started to retreat in 2022. 

As I have explained in previous articles, the world is gradually moving from a financial and debt based economy to a one based on real assets and commodities. 

This will lead to a shift from a financially and morally bankrupt Western system to the East and South based on commodities and manufacturing.  

An upmove in commodity prices normally lead inflation by 6-9 months. So when commodity prices turned up in late 2019, inflation followed in most countries in early to mid 2020. 

After a correction, commodity prices bottomed in March-May 2023 so we could see inflation in the US and Europe turning during the autumn 2023. 

So sadly for Powell and Lagarde, their 2% inflation targeting is going to fail again, however much they hypnotise the people to believe it!

Instead high inflation and high interest rates will prevail for decades. But it will most certainly involve a very high level of volatility with fast up moves and violent corrections. 

Before I move on to the dire effects that inflation deficits and debts will have for the US and global economy, I will stick my neck out in the heated climate debate.    

CLIMATE EMERGENCY – HYSTERIA OR REALITY

The climate debate is totally polarised and dominated by powerful interest groups. 

Since Al Gore politicised this issue at a heightened level at the Copenhagen Climate conference in 2009, the trend has been clear. 

Just like with Covid, it has suited Western governments to use the climate debate as a means of controlling the people and protecting special interests. 

The official climate debate is totally one sided. Any money for research is only granted to scientists who support the notion of man-made global warming caused mainly by fossil fuels. 

The fact that fossil fuels account for 83% of all energy and most probably cannot be reduced more than marginally for the next several decades is totally ignored in the debate.

A further problem is that the world has reached peak energy by way of fossil fuels and there is no serious alternative in sight for decades. 

In addition, the energy cost of producing energy is increasing fast. The consequence will be falling standards of living for a foreseeable future. (SEEDS – Surplus Energy Economics)

The fact that the Holocene period which started 11,700 years ago has been the coldest in geological history is totally ignored. All the climate activists are just looking at figures for the last couple of hundred years. 

Also, the fact that CO2 has been declining for 1 billion years is totally ignored. Without CO2 there would be no life on earth. Total CO2 in the atmosphere is today 0.04%. If that percentage declines below 0.02% there would be no life on earth.

Dr John Clauser, the 2022 physics Noble Prize winner, criticises the climate models as unreliable and not accounting for the dramatic temperature-stabilising feedback of clouds. Clauser says that clouds are more than 50X as powerful as the radiative effect of CO2. In summary he says that there is no climate crisis and that increasing CO2 concentrations will benefit the world. 

A leading nuclear physicist Dr. Wallace Manheimer warned that Net Zero would end modern civilisation. He observed that the new wind and solar infrastructure would fail, cost trillions, trash large portions of the environment “and be entirely unnecessary”.

I am not a Covid expert. But in the case of Covid, the debate was totally skewed by the hundreds of billions of dollars spent on propaganda and corruption by the pharmaceutical companies. A small censored scientific minority were totally against an untested gene-manipulating vaccine and warned about its severe dangers. Three years later the fears of this minority have been vindicated. 

I am obviously not a Climate expert either. But having studied economic cycles for many years, I am a great believer in understanding history and very long trends rather than basing my opinion on short term opportunism. 

Thus studying very long climate cycles, it is clear to me that they are much more powerful than whatever effect that mankind has had on climate in the last 150 years. 

To take an example, just look at the 11,000 year climate cycle graph above. It shows a Roman Climate Optimum 2,000 years ago. At that time Rome had a tropical climate. As far as I am aware, there were no cars or other manmade CO2 producing matters at that time. 

Of course we all want a world with less pollution in the air and in the oceans and should strive for that globally. 

But to believe that we can achieve Net Zero CO2 Emissions by 2050 is as unrealistic as believing that mankind can limit the temperature increase by 1.5 degrees by 2050.

Let me just take some examples. Many Western countries are legislating that only electric vehicles (EVs) can be produced after 2030 or 2035. 

What the climate activists ignore is that EVs are costlier to produce than ordinary cars and have a major CO2 effect.

To produce ONE battery takes 250 tons of rock and minerals. The effect is 10-20 tons of CO2 from mining and manufacturing even before has been driven 1 meter. 

Also, car batteries cannot be recycled but go to landfill which has major implications. 

But that’s not the only problem. For the first 60-70,000 miles an EV produces more CO2 than an ordinary vehicle. 

Hopefully the CO2 and cost efficiency of EVs will be improved but so far progress is very slow.

US DEFICITS ARE SURGING

The borrowing requirements of the US treasury is reflecting the total lack of fiscal discipline which is typical for a Banana Republic. 

From January to the end of December 2023, the Treasury expects to borrow $3.3 trillion. With some extra bad news, including higher interest rates, the $3.3 trillion could easily rise to $4 – 4.5 trillion. This deficit plus the ongoing QT (quantitative tightening) is likely to put upward pressure on rates. 

Except for the Fed, there will be no buyer of an ever increasing amount of US debt. 
And so the vicious circle of higher debts, higher inflation, higher deficits starts to spin ever faster. 

Sadly, such a dire scenario can never have a happy ending.

For the banks, higher rates mean much higher defaults and a constant squeeze to reduce lending, also mandated by the Fed. 

With massively increasing borrowing requirements from the US Government and the Fed as well from the banking sector with dwindling sources of funding, the likelihood of drastic measures are obvious. 

After the subprime crises 2006-9, governments agreed that bailouts would be replaced by bail-ins at the next crisis. So far this didn’t happen in mid-March when 4 US banks and Credit Suisse collapsed. 

But the coming pressures on both public and private funding are likely to lead to draconian actions by governments next time around. This will probably involve forced savings in government debt for most Western countries, including US, Europe and Japan. 

It could involve compulsory purchases by bank depositors of say 10 year bonds with interest rolled up for 25-50% of customer liquidity in the bank.

My old forecast of future US debt made in 2016 is so far looking on target. Whether the debt will be my original $40 trillion forecast or the revised $50 trillion, time will tell. 

Major bank and derivatives defaults could easily push it up to $50t.

HOLD TANGIBLE ASSETS  

The main beneficiaries of the Western debt and deficit problems are of course: 

• Precious Metals – especially gold and silver 

• Commodities – especially oil and uranium

Stocks might benefit short term from higher inflation but over the medium and long term they will collapse. 

Buffett’s favourite indicator, Stocks to GDP is massively overvalued. To decline to the mean would involve a 50% fall. But overbought markets always overshoot. So a 70-90% decline would not be unrealistic. In such  scenario, it won’t only be stock prices that decline but GDP could easily fall 10-20% in real terms.  

Bonds, especially issued by governments, should be avoided like the plague. Inflation and potential defaults or moratoria will make them the worst investment ever. In addition the debasement of currencies will lead to the value of bonds in real terms reaching ZERO very quickly.

So is my forecast too pessimistic. Maybe but I doubt it. No one can of course predict the exact timing. 

But what we can evaluate is the risk. 

And with global risk being more elevated than at any point in history (and I haven’t even discussed political or geopolitical risks), why not protect your assets today from potentially the biggest wealth destruction ever.