In August 2022, Henry Kaufman (the original Dr. Doom) wrote an article and gave an interview for the Financial Times, which was published under the title: Shock the market’: Wall Street’s original ‘Dr Doom’ tells Fed to toughen up. At the time, Kaufman feared that the Fed under Jay Powell was failing to combat inflation with the resolve displayed by Paul Volcker, who aggressively raised interest rates while leading the central bank in the 1970s and 1980s. “I am still waiting for him to act boldly - ‘boldly’ means he has to shock the market,” Kaufman said of Powell. “If you want to change someone’s view, if you want to change someone’s action, you can’t slap them on the hand, you have to hit them in the face.”
The point I wanted to make is that we should prepare ourselves “to wait forever” for Mr. Powell to “act boldly” when it comes to interest rate increases. The reason for doubting the Fed’s resolution to combat inflation with monetary policies is that another increase of the Fed funds rate would crash the economy. [I think Powell will act “boldly” when it comes to fed fund rate cuts, once even he realizes that inflationary monetary policies have had a destructive impact on the majority of households and that the economy is already in recession.]
Are current Interest Rates Too High or Too Low?
John Williams of www.shadowstats.com, noted in the March 18, 2024 commentary that, “Year-to-Year Consumer Price Index (CPI) Inflation Increased by 3.2% in February 2024, up from 3.1% in January, per the Bureau of Labor Statistics (BLS).” But “Corrected for the BLS’s Inflation-Muting Gimmicks since 1982, and Consistent with Prior Historical CPI Reporting, the ShadowStats-Alternate CPI Annual Inflation Notched Higher to 11.0%, from 10.9% in February 2024.”
In The Failure of the New Economics (1959), Henry Hazlitt (1894 – 1993) wrote that “The only way government bureaucrats know of keeping prosperity going is to inflate some more - to increase the deficit or to pump more money into the system,” and that, “The consequences of inflation are malinvestment, waste, a wanton redistribution of wealth and income, the growth of speculation and gambling, immorality and corruption, disillusionment, social resentment, discontent, upheaval and riots, bankruptcy, increased government controls, and eventual collapse.” This is exactly how we should look at the present economic conditions in the US. It is for the US next to impossible to reduce the current enormous fiscal deficit, the debt, the unfunded liabilities, and to tighten monetary policies without causing near-term an economic calamity.
Treasury Secretary for President Clinton, Lawrence H. Summers recently published a chart, which showed that inflation had been and still was far higher than what the Bureau of Labor Statistics had calculated. Using the CPI as calculated before 1983, Summers estimated last year’s peak inflation at 18%, and that according to his methodology, interest rates are still too low. In other words, Bidenomics, with large fiscal deficits and negative real interest rates would still be inflationary.
When I look around the world, I notice everywhere waves of speculative activity in all asset classes. This was brought about by years of money printing by central banks. At the same time, continuous money printing has led to a culture of “get rich quick and effortless.” That this unique period in history will not end well should be clear. For this reason, I want to own as an insurance, lots of cash in the world’s safest currency, which happens to be gold. Normally, people do not think about gold as a currency but it is the only currency along with silver and platinum that has maintained its purchasing power over time. I have added to my gold exposure because there are currently numerous geopolitical developments which are unfavorable.
Lastly, remember the words of J.P. Morgan who said that, “Gold Is money. Everything else is credit,” and of Ron Paul who precisely nailed the reason why western central bankers do not like gold: “Because gold is honest money it is disliked by dishonest men.”
Please be sure to read the enclosed The Bitcoin Capitalist Letter by Mark E. Jeftovic (markjr@thebitcoincapitalist.com) in which he discusses Cryptos and the overall macro of the Bitcoin Mining Sector.
With kind regards
Yours sincerely
Marc Faber
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