Rate Hikes: The Beatings Will Continue Until Morale Declines
Stagflationary crisis events are relatively rare in modern history, and the average mainstream economist will have very little input to give on why they happen and how they can be solved. Their knowledge is limited on the issue and their experience is non-existent.
It has been argued by alternative analysts for several years now that the majority of banking executives, investors and economists entering the field in the past decade have never worked within a financial environment without direct monetary intervention by central banks. They can't even comprehend a world where the Federal Reserve does not artificially support equities, bonds and other elements of the system. They have no concept of consequences.
This dynamic is finally being acknowledged by those in the mainstream. Alison Harding-Jones, vice chair of corporate and investment and head of M&A in EMEA at Citigroup, recently noted that the majority of junior bankers had never worked in an investment world without the existence of cheap money. These people are about to experience a rude awakening beyond anything they can imagine.
It was the long term existence of central bank support that conditioned many economists into assuming the easy money party would never end. The Fed will step in, they say, because the Fed has always stepped in and nothing will ever change. But things always change, and the notion that the Fed cares about the longevity of the markets is naive. The past year alone has debunked that little theory, with rates continuing to climb.
A cycle of cope has formed with a predictable set of reactions – The Fed suggests hikes will continue, the mainstream freaks out. The Fed then suggests that “one day” the hikes might stop, maybe sooner maybe later. The mainstream rejoices and interprets the comments to mean that the Fed is about to pivot, markets rocket higher. Then, the Fed does not pivot, and they freak out again.
No one is asking the question that really matters here: Why is it so important what the Fed says about rate hikes? Why is the entire system dependent on their whims? This is not how it should be.
The US economy is addicted to cheap money like that money is heroin, and many elements of the system just can't let it go. People thought that the central bankers, our resident drug dealers, would never stop providing the fix. They thought that there was incentive for the Fed to continue dealing that delicious fiat. But the easy money drug has diminishing returns and the addict is acclimated. The negative health effects are starting to set in, the addict is beginning to die, and the dealer wants to distance himself from the corpse.
Stagflation has arrived and now there is no reason for the central bank to continue providing easy money because there is nothing to be gained.
The circumstances surrounding stagflation are chaotic. Certain sectors of the economy will go into steep decline while others will appear to remain resilient. For example, US jobs numbers came in far hotter than expected this month (some might suggest a little too hot for reality), inspiring the Biden White House to claim a victory in the midst of fiscal defeat. At the same time, the US is facing an unprecedented manufacturing slowdown, a housing market sales implosion, a GDP sinking back into contraction, a rising poverty rate, an explosion in homelessness, etc.
It might be confusing – Why is there better than expected employment numbers and in some cases retail numbers while there is also a major contraction across the board in multiple other areas of the economy? That's what happens when a central bank pumps over $8 trillion into the veins of the system in only two years, on top of tens of trillions of dollars over the past decade. That money is circulating rapidly and wearing down the gears of the machine, some parts break while others still function.
These are the effects of stagflation, as well as the effects of a central bank which is now abandoning the inflation game and actively seeking to create a deflationary event. Without the endless trillions in free money which kept the system on life support since 2008/2009, they will get what they want eventually, but it will take time.
Meaning, the Fed is going to continue with rate hikes well into next year until there is a hard landing; there will be no “soft landing” and Jerome Powell knows this. He openly warned about it back in the October Fed meeting of 2012, stating that the economy would not know how to function without stimulus measures because those measures had been active for so long. That was 10 years ago; imagine how bad things are today.
Powell is all too aware of the effects of rate hikes into economic weakness and stagflationary crisis. He knows what is about to happen, and Joe Biden's economic advisers likely know as well.
In the meantime, an important issue that the Fed and many mainstream economists don't want to discuss is that prices continue to remain painful on most necessities no matter how high interest rates go. Rent is high, food is high, energy prices fell due to Biden's market manipulation but are still high, home prices are high, vehicle prices are high, everything is incessantly expensive for the average consumer. This is not going to stop anytime soon.
Once stagflation takes hold it hangs on like a bad rash. When jobs numbers finally hit a wall (and they will, probably by the second quarter of next year), costs will still be suffocating the public's savings. If the goal is truly an engineered deflation event that reduces money velocity and drags down prices, we have to ask ourselves how long will that take to accomplish? Two years? Five years? How high will rates have to go? Maybe only 5%, maybe 10%, maybe more. How much damage will be done to the middle class and the poor as this process unfolds?
The Fed does not care. Those hoping for an immediate pivot should understand that the rate hike beatings will continue until morale declines. The quantitative tightening will stop when the contraction has fully pummeled the jobs market and the populace in general.
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