The Economy

In the traditional economies of the last 100 years or so, where a central bank was constaly slightly overstimulating things (to please politicians who exist to spend and run up debt that the central bank monetizes), yeah. ... they'd go too far, it spurs inflation (which is a monetary phenomenon) and then the idea is that you have to then pump the brakes, slow down the economy (hit employment, get people spending less. ... because the cost of money is more expensive), etc.

That is Keynsian economics in a nutshell. ... they can supposedly "manage" the economy that way.

The reality, though, has been that they constantly overstimulate and have created more and more credit. ... and they are loathe to ever hit the brakes. Politicians press themto monetize more and more debt, which allows the politicians to keep borrowing and spending and which creates an illusion of a growing economy (when you are just borrowing from the future, and actually getting very bad bang for the buck because the money gets allocated poorly).

They got away with that for a long time, because technological and productivity gains held the monetary inflation they were unleashing somewhat in check. We should have actually been living in a glorious period of declining prices and growing standards of living due to those technological gains. Instead, prices were rising and we choked off investment for the future by robbing savers (which is where investment comes from) to keep cheap debt growing exponentially, which they pass off as growth.

That has changed now.

What they have done since the financial crisis is beyond anything we have ever seen and they are utterly clueless. Especially with how much they blew up the money supply with the pandemic as an excuse.

The mechanism for that were asset purchases, NOT the overnight rate they are playing with right now. They are supposedly letting some of the bonds they bought roll off their balance sheet (which would tighten the money supply -- and that is what we REALLY need), but in reality they are doing it very slowly and have not done much of anything yet. It will crash our economy (and our markets) if they actually do it, unfortunately.

They are pissing in their pants, because they know they blew bubbles so big (on the back of all of the mispriced credit they enabled to stimulate) that if they really pump the brakes, there is going to be a devastating credit crisis (which is coming either way).

That is why they were so late to even acknowledge the price inflation that was killing people and have remained behind the curve in pretending to deal with it.

They are backed into a corner. They have been praying that the price inflation magically abates on its own, but even though elements of it may be peaking, it is not going to come down magically on its own. At the same time, even the halting, half-assed effort they have made to pretend that they are inflation hawks has been like a small pin prick to the bubbles economy they were passing off as a growing economy. And as a result, the economy has undoubtedly slowed down.

The net result is that we are getting the "in between" worst of both worlds. High inflation PLUS a moribund economy. ... stagflation.

There is no free lunch on this one. People need to understand that. We have lived a multidecade fantasy with those charlatans acting like they are geniuses steering a cruise ship in a broom closet. When all they were doing was endlessly borrowing from the future in the form of credit creation. ... much of which then was misallocated because the beneficiaries of it don't bear the consequences of not stewarding it well. ... not when a central bank exists to prevent failure and bails everyone out the minute the excesses that the central bank was responsible for in the first place start to fizzle.

We need a massive deleveraging. It's going to happen either now by choice with a lot of economic pain, or later in a disorderly way that will make the pain even worse. It will be the latter. The have pivoted too many times to count in the past decade when the payback started to come due, and in the process dug an even bigger hole for all of us, unfortunately. The difference now is that the price inflation got so out of control that they are backed against a wall. They will still choose the inflation (it inflates away the debt, imposing the tax on all of us that way) over the economic pain. Unfortunately, we're going to get some measure of economic pain because of the half-assed, cowardly way they have gone about it. They are beyond clueless and are really the biggest threat to our country (and the world).

 

BTW, after the Fed raised 75 basis points yesterday, Powell started the "wink wink" process of them pivoting once again. Which is why markets are starting to go into full lather mode again. Markets will take all bad news as good news if they are going to use it as an excuse fire up the bubble blowing machine again.

Thus, the negative GDP surprise this morning has been very positive for risk assets -- defying all reason. But they have totally distorted our markets. Earnings are falling off a cliff, all of the economic data has turned bad. ... but the only thing that matters is what a central bank will do to keep trying to inject bigger and bigger amounts credit into the economy to create distortons.

The interesting thing is the Biden administration trying to redefine what constitutes a recession (not that it matters, really, except that they don't want people using the word heading into the midterm elections). The economy is what it is. As I type this, Janet Yellen is doing a "state of the economy" address in which she's telling people to not believe their lying eyes.

Their bullshit is so transparent at this point that they realy should be ashamed of themselves.

 

The employment numbers are beyond silly.

They simply don't count a whole cohort of people who have entirely left the workforce, and on top of it their "seasonal adjustments" amount to "create a number."

But even if you took the BLS numbers at face value, 1) The number of large companies announcing layoffs and hiring freezes on a decent-sized scale over the last few months doesn't comport with a strong employment picture, and 2) initial jobless claims just hit an 8 month high. The BLS' payroll data will catch up to reality, even if they play games with the actual numbers the way they d0 -- you are going to see it in the trend soon. This happened heading into the financial crisis ... the 4-week moving average of initial jobless claims decoupled from the unemployment data. ... It was, "Don't believe what you're seeing. ... no, it's not a recession." And then by the middle of 2007 there was no denying reality, even though they tried to until 2008 when things got really bad.