A while back, on our https://peoplenomics.com site, we suggested that America’s decline into a second depression might not be recognized as such, at least for the first half-dozen years.
The key is properly orchestrating a media-fooling blend of actual deflation, the never spoken of Modern Monetary Theory, and backed up with high print rates of fiat money.
Since the Fed meeting starts tomorrow – with the rate announcement Wednesday afternoon – let’s see if we can figure out what’s going on behind the curtain.
On the money-creation side, it’s clear to us how gingerly the Fed is treating this economy. According to the latest H.6 money stocks report, M1 (cash and equivalents) has increased 6.7 percent in the last year.
Importantly, the broader measures of money, like M2, are going up at a 4% rate.
On the other hand, the US GDP figures out last week shows a Q1 2017 to Q1 2018 increase of 4.76%.
One of the real underlying problems (and why the Fed is “gingerly” about things) is that they are trying to inflate their way out of a depression without going whole-hog into hyperinflation.
You can see it in the data on the Velocity of Money at M2.
Essentially, what happened is velocity (or turnover) of money began to slow dramatically as investors rediscovered bonds, which by 2000 were gaining quickly because of declining interest rates.
As fixed incomes appreciated (concurrently with falling rates) there was a natural inclination of money to seek safe bonds which are slow-motion investments.
The result, at least so it appears, is that velocity of money has started the tiniest of upturns. If the Fed raises rate too quickly, it will jam up the cost of borrowing the federal deficit…oh, and ruin the bond market – which is globally almost twice the size of stock markets.
What makes this week’s Fed meeting so interesting is that we have something of a discontinuity.
Normally, if higher inflation is foreseen, we would see gold beginning to take off. So would silver, oil, and precious metals like palladium.
In fact, if you flip over to www.finviz.com and pick oil for example, you can see an Elliott count from last July’s lows of five waves up (a 1-2,1-2, 3,4, and 5) which may be the peak for a while. We’ll have to wait and watch.
Even palladium could be headed down to $850, or thereabouts.
This is not to be overly pessimistic. But, we are mindful that there are plenty of extremes in the economy and with the latest move by Ford, we get this queasiness thinking “What if the tax break doesn’t really buy us a sustainable increase?”
I’ve warned before on this, and the much vaunted Reagan Tax cuts were gone in a year or two.
This is not a “raving” by a nutter in the woods. Writing for the Brookings Institution, David Wessel presents a very similar view. Like me, Wessel looks at tax cuts and comes to this:
As projections for the deficit worsened, it became clear that the 1981 tax cut was too big. So with Reagan’s signature, Congress undid a good chunk of the 1981 tax cut by raising taxes a lot in 1982, 1983, 1984 and 1987. George H.W. Bush signed another tax increase in 1990 and Bill Clinton did the same in 1993. One lesson from that history: When tax cuts are really too big to be sustainable, they’re often followed by tax increases.”
And that tendency to swell deficits will likely be a contributor (in a year to three) for a major tax re-hike because we are already seeing some acceleration upward in the growth of the Federal deficit. Those who tout things like Reaganus Maximus or whatever have done a tremendous disservice to people.
There’s no free lunch – anywhere.
Just like an increase in welfare and food stamp issuance is a free lunch for the under and unemployed, so too, the free lunch for the middle class is a tax reduction.
The commodity price charts are suggesting there is no (or little) further upward movement like in the traditional energy/precious metals complex.
With that, although the futures are pointing to a 100 point pop at the open, if you fire up your trading platforms you’ll see that “opening pops” have been commonplace, with disappointing day-endings.
Don’t be surprised to see the pattern repeat this week, too.
A decline – which in essence would be lobbying the Fed to go slower on rate hikes – is my guess for the end of today (and tomorrow’s) trading. As always, not financial advice. Just some outback common sense.
Poddy Mouth “Comic”
The headline about the correspondent’s dinner in DC run like this: “Trump scolds ‘filthy’ comedian. Head of correspondents group regrets monologue.”
Sometimes in our work, we are struck by a sudden rise in a word’s use. Take this BBC story, for example: Caravans making a comeback. Has nothing to do with borders…it’s Brit for travel trailer, near as we can figure.
But when words cluster like that, it is interesting.
What Are They Thinking Dept.
I love to point out press releases from the State Department. I gives you an odd sense of how your tax money is really being spent.
Take this, for example: State Department Announces 22nd Experience America Visit to Indianapolis, Indiana.
We apologize for failing to mention the 21st Experience. But a visit to Indianapolis….really?
“Yessir, ya’ll leave your high life in Singapore…let’s all go visit Indianapolis! ”
Millennials Wise Up
Losing faith in the latter-day Bolsheviks, we notice, as the socialists of the left aren’t playing well as Millennials grow up and (hopefully) come to their senses.
On that note, off to see the market mash-up.. moron the ‘morrow, as it were…