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The Wall Street Journal headline says it all, “Powell Says Data Are Key to Size of Next Rate Rise.” The Federal Reserve is supposed to be the all-knowing, wise guardian “manager” of the US economy so the country could have low unemployment, low inflation, and sustainable economic growth. The Fed has failed miserably.
We have low unemployment for the time being, inflation is still well above the Fed’s 2% target, and the Fed’s policies still create the boom/bust cycle by manipulating interest rates, causing bubbles such as the dotcom and housing bubbles in recent years. Since the financial crisis of 2007-08 the “everything bubble” has inflated prices across the economy—real estate, the stock and bond markets, etc., which have been adjusting to the rise in interest rates for the past year as the Fed tries to put the inflation genie back into the bottle.
The Fed literally has a small army of PhD economists who with their econometric models are supposed to accurately forecast the economy’s trajectory. This is supposed to give the Fed guidance on where to set interest rates to achieve its macroeconomic objectives. But Chairman Powell in his congressional testimony this week said the Fed needs current data to determine its interest rate policy. In other words, the Fed is clueless.
We know that monetary operates with a “lag.” Thus, we know what the Fed did in 2020, goose the money supply by 25% (Fig. 1), would cause higher inflation, and that is exactly what has happened since 2021, as the CPI rose to its highest level in forty years (Fig. 2).
However, the M2 money supply is contracting, an ominous sign that the economy could be headed for a huge bust, because with less money in the economy, prices across the board must adjust to the new monetary reality. Stay tuned.
Fig. 1
Fig. 2
Consumer prices are still rising albeit at a slower rate than the torrid pace of last summer. However, according to ShadowStats.com, consumer prices are rising much faster than the current CPI is indicating because the Bureau of Labor Statistics has changed the way it calculates price inflation. Thus, with the fed funds—the interest rate the Federal Reserve manipulates to set interest rates—still below the rate of official inflation and well below the price inflation calculated by Shadowstats, the Fed’s policies are not yet having the intended effect Chairman Powell and his “legal counterfeiters” want, namely, to dampen price inflation to the Fed’s 2% target with a “soft landing” for the economy. But with the money supply declining, the economy should contract sharply while price inflation could remain stubbornly high.
The “sticky” price index confirms this. This index calculates prices that change infrequently, providing a snapshot of how prices are embedded in the economy. The next few months will reveal if the money supply contraction causes prices to decelerate sharply.
Fig. 3
Yesterday our clueless president released his fiscal 2024 $6.9 trillion federal budget which begins on October 1, 2023, up from the current $6.4 trillion budget. If the president has his way the budget would increase taxes on wealthy taxpayers to help keep Medicare afloat and other taxes to pay for Biden’s spending spree.
Not the president nor anyone in Congress is addressing the real issue, namely, the federal government is spending money that is not authorized by Article I, Section 8 of the Constitution, which outlines the allowable spending by Uncle Sam. In other words, we have a constitutional crisis because presidents and members of Congress of both parties are not following their sworn oath to only spend money that is explicitly allowed in the Constitution. In addition, the federal government operates two Ponzi schemes, Social Security and Medicare.
According to the Securities and Exchange Commission (SEC), the federal government’s financial markets regulator and watchdog, “A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors.” Think Bernie Madoff.
Let’s substitute a few words to see if both Social Security and Medicare are Ponzi schemes.
A Ponzi scheme is when the Social Security program pays existing beneficiaries with funds collected from current taxpayers. SS is a Ponzi scheme.
A Ponzi scheme is when Medicare pays existing beneficiaries with funds collected from current taxpayers. Medicare is a Ponzi scheme.
In other words, both SS and Medicare Ponzi schemes can continue indefinitely (maybe not at the same level of benefits) because the federal government has the power to tax and coerce all working Americans to participate in both frauds. If Madoff could have forced more Americans to “invest” with him, his Ponzi scheme could have continued.
In addition, SS is a bad deal for workers. See here and here and here.
Until the co-conspirators in the White House and the Congress (on both sides of the aisle) announce the phasing out of both programs so the longest frauds in American history are ended, they will continue to violate their oath to defend the Constitution and continue to perpetuate a fraud.
In short, presidents and members of Congress who vote to fund both SS and Medicare are criminals. Citizen’s arrest anyone?
Murray Sabrin, PhD, is emeritus professor of finance, Ramapo College of New Jersey. Dr. Sabrin is considered a “public intellectual” for writing about the economy in scholarly and popular publications. His new book, The Finance of Health Care: Wellness and Innovative Approaches to Employee Medical Insurance (Business Expert Press, Oct. 24, 2022), and his other BEP publication, Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide (October 2021), provides decision makers with tools needed to help manage their businesses during the business cycle. Sabrin’s autobiography, From Immigrant to Public Intellectual: An American Story, was published in November, 2022.
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