Tag Archives: Jerome Powell

Jerome Powell Fails The Gold Standard Test

“You’ve assigned us the job of two direct, real-economy objectives: maximum employment, stable prices. If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate and we wouldn’t care,” Powell said from Capitol Hill. “We wouldn’t care if unemployment went up or down. That wouldn’t be our job anymore.” – Jerome Powell in response to a question about returning to the gold standard

Everything about that answer is incorrect. To begin with, the Fed apparently now has three “assigned” jobs: employment maximization, price stability and “moderate long-term interest rates” (federalreserve.gov).  How can we take anything Powell says seriously if he’s not aware of the the duties of his job?

But let’s set that issue aside.  In fact, if the dollar was backed by gold, the Fed would be irrelevant – the gold standard would take away completely any need for a Central Bank. Powell and his cohorts would not have any job at the Fed.

The function of a gold standard is not to “stablize” the price of the currency which is backed by gold.  Interest rates can be used to “stabilize” the value of currency.  Free markets, if ever allowed, would set the price of money.  The function of the gold standard, fist and foremost, is to stabilize the supply of currency in relation to the wealth output of an economic system.

A Central Bank is not necessary to any economic system which has its currency backed by gold.  If the U.S. had its monetary system tied to the value of the gold it holds in reserve,  it would automatically serve the function of price stability. Remove gold from the equation and the macro variables fall apart rather quickly.

But let’s use reality to test this.  Prior to the closure of the “gold window,” the U.S. largely was a creditor nation and never incurred unmanageable Government spending deficits except during wars.  In fact, the amount of Treasury debt issued to fund the Viet Nam war ultimately led to the removal of the last remnants of the gold standard.  This is because the U.S. Treasury did not have enough gold left to redeem debt issued to foreigners with that gold per the Bretton Woods Agreement.  In short, the U.S. ran out gold so Nixon closed the gold window.

Take a look at the economic and fiscal condition of the United States from inception to 1971 and post-1971.  Any “economist” or Central Banker (Powell is not an economist and probably never thought about gold until he was prepped to answer the possibility of a gold standard question) who opposes the gold standard is ignorant of historical facts or has ulterior motives.

Aside from his inability to respond intelligently to the gold standard question (he should have taken notes from Greenspan), Powell knows that  a zero interest rate policy and money printing are the only ways that he and his elitist cronies can keep the system from collapsing until they finish extracting the last remnants of wealth from the public.  A gold standard would stand in the way of this effort.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. – Alan Greenspan, “Gold And Economic Freedom,” 1966

The U.S. (and Global) Economy Is In Trouble

Jerome Powell will deliver the Fed’s semi-annual testimony on monetary policy (formerly known as the Humphrey-Hawkins testimony)  to Congress this week.  He’ll likely bore us to tears bloviating about “low inflation” and a “tight labor market” and a “healthy economy with some downside risks.”  Of course everyone watching will strain their ears to hear some indication of when the Fed will cut rates and by how much.

But the Fed is backed into a corner.  First, if it were to start cutting rates, it would contradict the message about a “healthy economy.”  Hard to believe someone in control of policy would lie to the public, right?  Furthermore, the Fed is well aware that it has created a dangerous financial asset bubble and that price inflation is running several multiples higher than the number reported by the Government using its heavily massaged CPI index.

Finally, the Fed needs to keep support beneath the dollar because, once the debt ceiling is lifted again, the Treasury will be highly dependent on foreign capital to fund the enormous new Treasury bond issuance that will accompany the raising, or possible removal, of the debt ceiling.  If the Fed starts slashing rates toward zero, the dollar will begin to head south and foreigners will be loathe buy dollar-based assets.

However, if the Fed does cut rates at the July FOMC meeting, it’s because Powell and his cohorts are well aware of the deteriorating economic conditions which are driving the data embedded in these charts which show that US corporate “sentiment” toward the economy and business conditions is in a free-fall:

The chart on the left is Morgan Stanley’s Business Conditions index. The index is designed to capture turning points in the economy. It fell to 13 in June from 45 in May. It was the largest one-month decline in the history of the index. It’s also the lowest reading on the index since December 2008.

The chart on the right  shows business/manufacturing executives’ business expectations (blue line) vs consumer expectations. Businesses have become quite negative in their outlook for economic conditions. You’ll note the spread between business and consumer expectations (business minus consumer) is the widest and most negative since the tech stock bubble popped in 2000.

Regardless of the nonsense you might read in the mainstream media or hear on the bubblevision cable channels, the U.S. and global economies are spiraling into a deep recession.  Aside from the progression of the business cycle, which has been hindered from its natural completion since 2008 by money printing and ZIRP from Central Banks, the world is awash in too much debt,  especially at the household level. The Central Banks can stimulate consumption if they want to subsidize negative interest rates for credit card companies.  But short of that, the economy is in big trouble.

I publish the Short Seller’s Journal, which features economic analysis similar to the commentary above plus short selling opportunities to take advantage of stocks that are mis-priced based on fundamentals.  You can learn more about this weekly newsletter here: Short Seller’s Journal information.

The Fed Panics And Gold Soars

First it was the loudly broadcast convening of the Working Group on Financial Markets – aka “the  Plunge Protection Team” – by the PPT’s el Jefe, Steven Mnuchin.  This was followed the “mouse that roared” speech from Fed head, Jerome Powell, hinting that the Fed would moon-walk away from rate hikes.

Today was trial Hindenburg launched by the Wall St Journal suggesting that the Fed was considering curtailing the the FOMC’s balance sheet Weight Watchers program.  The terminology used to describe the Fed’s actions is Orwellian vernacular. “Reserve levels” – as in, “leaving more reserves on the Fed’s balance sheet” – sounds mundane. In plain-speak, this is simply the amount of money the Fed printed and will leave in the financial system or risk crashing the stock market.

I suggested in the January 13th issue of my Short Seller’s Journal that the Fed would likely halt QT: “The economy is headed toward a severe recession.  I’m certain the key officials at the Fed and White House are aware of this (perhaps not Trump but some of his advisors). I suspect that the Fed’s monetary policy will be reversed in 2019. They’ll first announce halting QT. That should be bad news because of the implications but the hedge fund algos and retail day-trader zombies will buy that announcement. We will sell into that spike.”

Little did I realize when I wrote that two weeks ago that the assertion would be validated just two weeks later. When this fails to re-stimulate economic activity, the Fed will eventually resume printing money.  Ultimately the market will figure out that it’s a very bad thing that the only thing holding up the stock market is the Fed.

The policy reversal by the Fed reflects panic at the Fed. Nothing reflects “Fed Panic” better than the price of gold:

Powell Is Not An Economist – And The Fed Is Not Tightening Monetary Policy

Fed Head, Jerome Powell, is not an economist. He’s a politician who made a lot of money at the Carlyle Group. He has an undergraduate degree in politics and went to law school. After working for awhile as a lawyer at a big Wall St. firm, Powell migrated to investment banking at Dillon Read. Powell must have built a relationship with Nicholas Brady at Dillon Read, because he jumped from Dillon Read to positions in Brady’s Treasury Department under George H. Bush. From there he took an ill-fated position at Bankers Trust and was somehow connected to the big derivatives scandal that eventually forced BT into the arms of Deutsche Bank. Information about Powell’s role at BT have been cleansed from the internet but he resigned from BT after Proctor & Gamble filed a lawsuit that exposed a large derivatives scandal.

The point of this is that it would be a mistake to analyze anything Powell says in his role as Fed Head as anything other than the regurgitation of previous oral flatulence emitted by Bernanke and Yellen. First and foremost, Powell’s agenda will be to protect the value of private equity investments at firms like the Carlyle Group. In this regard, Powell’s wealth preservation interests should have precluded him from assuming the role of Fed Head. Then again, he’s not an economist. The last Fed Head who was not a trained economist was G. William Miller, appointed by Jimmy Carter in 1978. How well did that work out?

While many “analysts” have looked to statements made by Powell in 2012 that expressed a somewhat “hawkish” stance on monetary policy, it’s more important to watch what the Fed does, not says. Since the balance sheet reduction process was supposed to begin starting in October, the Fed’s balance sheet has been reduced from $4.469 trillion as October 16, 2017 to $4.458 trillion as of February 21. “Qualitative tightening” of just $11 billion. This is well behind the alleged $10 billion per month pace that was established and highly promoted by the Fed, analysts and the financial media.

Powell stated to today that the Fed will continue with “gradual rate hikes.” What does this mean? Over the last two years and two months, the Fed has implemented five quarter-point rate “nudges.” Less than one-half of one percent per year. Since 1954, the Fed Funds rate has averaged around 6%. This would be a “normalized” Fed Funds rate. Based on the current rate of Fed Funds rate “hikes,” it would take six years from December 2015, when the “rate nudges” commenced, to achieve interest rate “normalization.”

But here’s why it will like take a lot longer and may never happen:

The chart above shows the dollar amount of consumer debt that is in delinquency. It was $33.3 billion as of the end of Q3 2017. It is at the same level as it was in Q2 2008. The data is lagged. I have no doubt that is likely now closer to $36 billion, which is where it was in Q3 2008. If anything, we will eventually see “faster-than-gradual” drops in the Fed Funds rate.

With Government, corporate and household debt at all time highs, and with delinquency rates and defaults escalating quickly – especially in auto and credit card debt – the only reason the Fed would continue along the path of tightening monetary policy as laid out – but not remotely adhered to – over two years ago, is if for some reason it wanted blow-up the financial system. Au contraire, hiking rates and shrinking the Fed’s balance sheet is not in the best interests of the Too Big To Fail Banks or the net worth of Jerome Powell.