Minyan Mailbag: What the Fed Could Do
I guess I was a touch "touchy" about the way the Fed was characterized in the message you received. NOT your response or point of view. I have no bones to pick with you.
What spurned my response was the culmination of a broad spectrum of reports seemingly taking Fed jawboning at face value.
I'm not going to take a long time to articulate it right now, but there is a lot of nonsense emanating from the Fed about how they are going to "fight inflation" and they are not going to allow monetizing the debt.
However, they are just "consoling the market." They are talking the talk as if it's just another cycle in which being perceived as "vigilant" keeps inflation expectations in check.
In reality, this cycle is VERY unique to past cycles. Interest rates won't provide an easy or even just moderately difficult inflation fix.
The Govm't cutting a little fat or raising taxes won't fix it. The US economy has been gutted of export industries. Inflation's persistence will not be a domestic supply/demand problem. It will be a US specific, currency-induced problem. This cycle will be far more painful than what their jawboning would have us believe because of the historically unprecedented magnitude of global imbalance. Eventually the Fed WILL BE FORCED TO CHOOSE between deflation and inflation because of the massive imbalances the US has developed, (and is still building). I'm guessing the chances the Fed won't monetize the problem are less than 1 in 5.
Although the Fed's track record appears to be one of creating new larger risks in the process of curing the last problem they nurtured, my working thesis going forward from here is still that the Federal Reserve will attempt to engineer a soft recession. (Perhaps under the guise of "inflation fighting?") I think that they are hoping that reduced US demand will reduce energy prices and thus assist in their soft landing attempt. I believe it will be in conjunction with targeting a weaker dollar and that they also hope that weaker US demand for foreign goods will cause a global goods glut, and therefore price reductions in the goods' own currencies to help offset imported,(dollar-induced), inflation.
Minyan Jeff Wachtman
My thesis in conjunction with yours is that the Fed will not be able to manage a "soft" recession because of the inherent instability in the system as a result of huge amounts of debt, a consequence of the credit bubble engineered by the Fed itself.
Leverage by definition creates the potential for volatility: it makes good times better and bad times worse. It is likely that the Fed will not be able to elegantly slow the velocity of money without creating a cascading collapse.
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