The Fed, inequality and inflation


  • Investment grade debt ($LQD) suffering outflows. (Daily Shot),
  • every major currency has appreciated against the dollar this year. Since the nadir of Covid, the AUD has done best: a proxy for CNH, no doubt. Worst has been JPY. The NOK, SEK, NZD, MXP SKW and SAR have done pretty well, especially the 1st three (>25%). I can’t see that the USD can go down so much without some inflationary consequences. CAD is up ~13%, even though Canada has done more money printing than the US.
  • Treasurys (sic) are now, net, being sold by foreigners. There is still a big US current account deficit, but it’s now being funded with stocks, FDI, corp. debt, rather than the supposedly ultimately safe asset here.
  • Bitcoin exceeds $20K. Bubbles gonna bubble.

Why inflation and the Fed are so toxic politically

This is a well worn theme and I won’t go on about the reasons. More and more commentators are pointing out the reality of the situation. Alex Manzara wrote an outstanding post in his blog about this. This is the key passage, where he quotes Richard Fisher, himself the Dallas Fed President:

Below is a quote from Dallas Fed President Richard Fisher at that meeting.  Note, this meeting was just prior to Bernanke’s May testimony that kicked off the tantrum.
“And I would say for the nth time, for the googolplex time, as I’ve argued at this table, I just want to reiterate my mantra: Unless fiscal and regulatory policy incents business to use the cheap and abundant capital we’ve made available, it will not be used to create jobs to the degree that we desire. It will be used to set the stage, but it cannot lift the curtain and act the play.  And it has, I believe, had a wealth effect, but principally for the rich and the quick—the Buffetts, the KKRs, the Carlyles, the Goldman-Sachses, the Powells, maybe the Fishers—those who can borrow money for nothing and drive bonds and stocks and property higher in price, and profit goes to their pocket. But it has not done much, at least it seems to me, looking at the data, to put people back to work to earn a living by the sweat of their brow.”

This is not some disaffected low-level member of “The Quad.” This (Fischer) is a fully paid member of the 1%, quoted approvingly by

Taps Coogan points out the idiocy of basing monetary policy on targeting a statistic (CPI inflation) which is experienced so differently by different sections of society (as separated by wealth and income). He’s always worth reading, but this post is particularly good.

Coogan points out that the point of choosing 2% as a target is that it makes the Fed’s job easier. But in fact, it can’t hit the target (because China is manipulating its currency and suppressing global wage rates) and so it’s stuck in a vicious circle of fiscal repression.

To be fair to the Fed, it is a common misnomer [misapprehension?] that the Fed even argues that 2% inflation is optimal for the economy. Instead, they argue that having inflation in the ballpark of 2% gives them the space to provide negative real rates without having negative nominal interest rates (and likely wage deflation) during recessions. While that is true by definition, to make achieving 2% inflation the objective of monetary policy because 2% inflation makes monetary policy easier creates a self-referential loop. It leads to targeting nonsensical statistical artifacts with limited real-world relevance. It is to confuse inputs with outputs. It is to co-opt the most important price signals and capital allocation mechanisms in a free market towards these ends.

There has been a huge boost in govt. spending lately: this might, at last fix the system. To be fair to the Fed (and the ECB etc.) the failure of governments to create fiscal stimulus makes them as culpable as the central banks.


Initial jobless claims hit 885K today, which you might have thought would result in this being a risk-off day. In fact it wasa practically risk neutral. The single most important number in markets, the US T-note yield, went up slightly (by 1.5bp!) so you might even say that today was risk-on. The dollar slumped to 89.85 (DX), and BTC rocketed by 6.2% to $22.7K. If the dollar continues like this, US yields must start to go up.

Comments !