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The Fed Is Flying America into an Economic Storm

At the annual Jackson Hole summit of world central bankers, not even the sharpest bureaucrats were able to understand the basic economic principles that have led to our current situation. They really are just making it up as they go along…

The Fed Is Flying America into an Economic Storm
Photo by Hanson Lu

From Peter Reagan at Birch Gold Group

At the Federal Reserve’s annual conference in Jackson Hole, Wyoming, participants came to a rather disturbing economic realization.

The so-called “experts” at the central banks who are trying to lead the United States out of the current economic mess marked by persistent inflation – could be doing so without understanding where things truly are, nor in what direction they are truly headed.

But let’s not get ahead of ourselves. Let’s start with a summary of Federal Reserve Chairman Powell’s opening remarks, summarized by Barron’s:

Federal Reserve Chair Jerome Powell took a hawkish tone in his speech at Jackson Hole, noting that while inflation has tumbled in recent months, it isn’t yet at an acceptable level. Officials at the central bank are prepared to do whatever it takes to bring the rate down to the 2% target, he said.

“Although inflation has moved down from its peak – a welcome development – it remains too high, Powell said Friday.

The good news is inflation has eased a bit, Fed officials have realized it is still too high, and they plan to continue the inflation fight.

Unfortunately, that’s where the good news ends.

Powell went on to add a rather cliché statement during his speech: “The burdens of high inflation fall heaviest on those who are least able to bear them.”

Well, obviously… When steak is too expensive, you buy hamburger. When hamburger’s too expensive, you buy lentils. When lentils are too expensive? You don’t eat. As always, the less money you have, the fewer choices you have.

If only he would have realized a lot earlier that inflation wasn’t transitory, but instead was beginning to trend, those burdens he mentioned would probably be much lighter! As if increasing the money supply by 45% in a single year would have no effect on prices…

In a later part of the speech, he summarized the danger that high inflation could become a “new normal”:

The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.

“Entrenched inflation expectations” is what central bankers call it when the public, you and I, finally catch on that high inflation is here to stay. When these expectations become “entrenched,” it means two things:

  1. The Fed has failed to price stability (which is really its only mandate)
  2. The Fed hasn’t managed to conceal this failure from the public

Of course, it’s patently obvious to everyone the Fed has failed. And it’s increasingly apparent that neither Chairman Powell nor the heads of the Fed’s banks have a firm grip on the situation at all…

Inflation’s root cause is simple, but Powell still can’t admit it

During his speech, Jerome Powell took aim at the Ukraine War, corporations, and even threw a light jab at consumers as conditions to blame for inflation.

While those complexities have likely enhanced an already bad economic situation, the real blame for inflation since May 2021 is much simpler, and was summarized nicely in a recent Newsmax op-ed by Lance Roberts:

It’s crucial to note the complete dismissal of the causes behind the “collision between very strong demand and pandemic-constrained supply.” I suspect this was intentional to avoid placing blame at the feet of the current or previous administrations or themselves. However, it muddies the impact of their actions that created the problem.

While the Fed, the government and the media repeatedly blame everyone but themselves for inflation, from greedy corporations to individuals, the issue is, and always has been, basic economics…

The inflation surge had much less to do with the war or giant corporations taking advantage of consumers and more about the Federal Reserve’s and the government’s actions. The cause of inflation was the economic consequence of “too much money chasing too few goods.”

Roberts then commented on one potential reason why Powell appears so reluctant to point to the real reasons inflation has been more pervasive from May 2021 to today than at any other point in the last 45 years:

While Powell most likely understands the true causes of inflation, he can’t undermine the current Administration.

So, if true, that would mean the Fed’s blame game boils down to one thing: Politics.

You thought the Federal Reserve was independent? Sorry, no – the institution that owns 20% of the federal government’s IOUs cannot, by definition, be politically independent. The Fed is complicit in multi-trillion-dollar federal budget deficits, which fuel inflation, which the Fed is supposed to fight...

Now, perhaps, you understand why Powell can’t publicly admit the real scope of the problem.

Which leaves us wondering, does he really even understand the challenge we face?

Does the Federal Reserve have a handle on things at all?

You can tell by the lack of confidence and confusion in Powell’s remarks at Jackson Hole that the answer is, “No.”

For example, the Federal Reserve Chairman has a bad habit of leaving an answer to an economic problem at the whim of “uncertainty,” to avoid committing to a solution for that problem.

In fact, a Barron’s piece captured this, and one aspect of Powell’s confusion, almost perfectly:

“We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation,” he said from the Jackson Lake Lodge. “But we cannot identify with any certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”

…In his 2018 speech from Jackson Hole, he warned that in doing so, the Fed was operating “with only a hazy view of what seem to be shifting navigational guides.”

Five years later, in a very different economy, he returned to that theme.

“As is often the case,” he said Friday, “we are navigating by the stars under cloudy skies.”

You don’t really need to understand the “neutral rate of interest” (details at the link) to understand the key takeaway: The Chairman of the Federal Reserve doesn’t know what he’s doing. He’s lacking a central data point. Imagine the CEO of a Fortune 500 company admitting he wasn’t sure what the company’s breakeven profitability is. How can you run a company like that, let alone the world’s largest economy?

Now, these things should be simple. What Powell is doing either works or it doesn’t. What he does should follow fundamentals, or something else – and if it’s something else, it should be a consistent metric.

Instead? He’s “navigating by the stars under cloudy skies.”

That means, not only is the destination uncertain, so is the distance. We’ll only know we’ve arrived when the landing gear hit the tarmac.

Now, this may or may not be a matter of competence. Because Powell wasn’t alone. Other central bankers confessed to equal confusion.

Even if you travel “across the pond,” the central bankers at the ECB like President Christine Lagarde don’t appear like they are faring any better.

Here is a quote from her latest press release:

There is no pre-existing playbook for the situation we are facing today – and so our task is to draw up a new one.

Policymaking in an age of shifts and breaks requires an open mind and a willingness to adjust our analytical frameworks in real-time to new developments. At the same time, in this era of uncertainty, it is even more important that central banks provide a nominal anchor for the economy and ensure price stability in line with their respective mandates.

This comes across as though central bankers will be making things up as they go along. They seem to hope you won’t question their purpose while they appear to be failing to maintain price stability as their mandates state.

When your destination is uncertain, pack accordingly

The big takeaway here is central bankers don’t have any real idea what they’re doing. Where we’re going, or when we’ll arrive – or what conditions on the ground will be when we get there.

That’s the kind of economic uncertainty that makes planning for the future challenging.

The good news is, we all have the opportunity to pack accordingly. Consider diversifying into inflation-resistant investments, on the off-chance Powell can’t get inflation under control. You may want to own tangible, inflation-resistant assets like physical gold and silver as well. Sooner or later, you may decide that you’re just not interested on staying on this stormy flight all the way to its destination – when that time comes, you’ll want your own “golden parachute” to ensure you, at least, enjoy a soft landing.

Learn more about the benefits of physical precious metals here.

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