Wednesday, February 24, 2021

Powell Who?

In yesterday's testimony to the Senate Fed Chairman Jerome Powell pushed back against inflationary concerns, promising to continue the massive printing operation, ie $120 billion bond purchases per month AND zero interest rates.  His reasoning is that there are still 10 million unemployed and the economy is still not 100% healthy and growing.

I'm going to choose my words carefully here: Are we sure that he knows what he's doing?  After all, he's not  an authority on economic analysis and monetary policy.  He holds a Bachelor of Arts (Politics) and a law degree, and was an investment banker for most of his career doing M&A and merchant bank financing.  During a stint at the Treasury (1990-93) he concentrated on domestic finance.  He was deliberately appointed to the Fed Board of Governors by the Obama administration as a political "balancing" factor (he's a Republican), not because of his expertise in banking/monetary policy.

My question, therefore, is simple: does he truly understand markets and their dynamic? Does he have a gut feeling of how bubbles are created, and what destructive forces they unleash on the economy, particularly when interest rates are already at zero? The Fed is already pushing on a string with zero interest rates and the only remaining tool is the printing press.  What will he do if the bubble bursts - as it always does - and he has to salvage banks, funds, pension plans? Print even more money... and thus destroy the value of the US dollar as a reserve currency, ignite even more inflation and, most probably, throw the country into stagflation.  (Remember stagflation? Funny that no one is talking about it, eh?)

The longer a bubble is left unchecked the greater the eventual damage.  Keep in mind that we are still feeling the negative effects of the Great Credit Bubble of 2006-08.  Government debt to GDP jumped and has never come down.

Are we in a bubble? Duh... does anyone with even a bit of market experience doubt it? Would the chart below have even been possible if we weren't?  Would Bitcoin have reached $1+ trillion within just two months (+300% !!) and be touted by the various and nefarious?  Would individual retail "investor" participation have risen from 10% of daily volume last year to 25% now?


I must sadly conclude that the Fed chairman is whistling past the graveyard, ignoring every sign of the bubble madness and the looming inflation generated by the newly printed trillion$$.

The problem with monetary policy is that it must be proactive in order to be effective.  Chasing inflation after it has become established (eg in wage demands) is destructive to the real economy.  Ask Messrs. Volcker and Carter, they know a thing or two.. and it wasn't even their fault.  Better yet, look at the bond market. Oh sure, you may choose to interpret rapidly rising yields as a "vote of confidence" in the economic bounce-back - but, what if you are wrong?  Or, what if you are right and create a demand driven spike in prices?  Well, you can't have it both ways, can you?  Either way, monetary policy MUST be tightened..

Update: It’s happening again right now, Mr. Powell wake up... if you can’t understand bubbles go home. 


  1. Are we sure that he knows what he's doing?

    Ha! I had the exact same thought. I expect Trump nominated Powell as Chairman because he thought he'd be easy to push around; apparently he was right.

    1. In re Powell/Trump - I have the exact same viewpoint. Unfortunately, Biden is following the same path. A weak and pliable Fed is any President's dream.