How to Front-Run the Fed

Week nine of the quarantine

SAN MARTIN, ARGENTINA — Today, comes news that the Democrats are pushing for more fake money. Here’s

‘…Democrats are pushing hard to include direct assistance to Americans, including recurring payments of up to $2,000 a month during the crisis.

And here’s Bloomberg this morning:

House Democrats proposed a $3 trillion virus relief bill Tuesday, combining aid to state and local governments with direct cash payments, expanded unemployment insurance and food stamp spending as well as a list of progressive priorities like funds for voting by mail and the troubled U.S. Postal Service.

Good golly, Miss Molly!

Discover five ASX-listed firms that have been beaten down during the crisis…with the potential to rally strongly as the market recovers. Click here to learn more.

Sh*thole finance

Already, the federal deficit is expected to reach over $4 trillion this year. That’s four times last year’s deficit…and about three times the worst deficit of the 2008­–2009 crisis.

Add $3 trillion more? Heck, why not!

When this new stimulus debt bomb is dropped, it will blow up the deficit to more than 30% of GDP.

This is sh*thole finance, for sure.

Of course, we doubt that Nancy Pelosi et al will succeed in adding another $3 trillion. A few Republicans — some long-atrophied instinct suddenly stirring, like dull roots suddenly brought back to life by warm spring rain — will grouse and grumble.

But, most likely, Mr Trump — one of the biggest spenders ever to inhabit the White House — will bring them around.

Inflation on the march

Meanwhile, comes this ominous headline from CNBC:

US grocery costs jump the most in 46 years…

Is consumer price inflation already on the march? Let’s take a closer look.

One thing we know for sure: All this extra money must come from the Federal Reserve. There is no other source. And since the Fed has no real money, it must ‘print’ fake money.

We know, too, where that will lead…just as it does in every other sh*thole country.


You got it, Dear Reader.

But wait. It’s not that simple.

Recall that the Fed ‘printed’ beaucoup money after the crisis of 2008­–2009, too. And we don’t remember consumer prices rising then. So, what gives?

Back then, the Fed was pumping up Wall Street. Stocks rose as the extra money inflated the whole financial sector. Main Street got little of the Fed’s money.

But now? Won’t the Fed’s reckless money printing drive stocks up again? Won’t the Dow hit 50,000? Shouldn’t we front-run the Fed by going ‘all in’ on the stock market?

Government-induced nightmare

Maybe. But, this is not the same money-printing as we had during the last 10 years.

In the first place, the Fed has less room to manoeuvre, entering the crisis with, effectively, no rates to cut. Real rates (adjusted for inflation) were already below zero when this crisis began.

This time, it’s federal spending — not interest rate cuts — that will have to boost the economy.

In the second place, the system is more fragile than it was before, simply because the Fed has encouraged more borrowing and less saving. Total debt in the US rose some $21 trillion over the last 10 years, while GDP rose only $7 trillion.

In the third place, today’s economic damage is much more severe. Total unemployment in 2009 reached 10%. Today, it is racing to 25%.

In the fourth place…and this is the one that will count the most…this is not just a bubble-busting financial crisis…this is a government-induced economic nightmare. And combating it, the feds are not just feeding money to their friends on Wall Street. This time, trillions in fake money is going to Main Street.

This means that a lot of the new money will go into the hands of ordinary people…and thus, into consumer prices. Eventually, we’ll see much higher levels of ‘inflation’.

Three components

But wait. We are still in a deflationary downdraft. One poll showed that half of all US small businesses expected to have to close up shop within six months. Two of our favourite restaurants in Baltimore have already closed; they say they won’t reopen.

Surviving businesses — especially in the hospitality trade — will only re-open slowly…if at all. They’ve taken huge losses. They won’t be eager to lose more.

Consumers, too, will be reluctant to spend. They’ll worry about a ‘double dip’ recession…or another big wave of coronavirus deaths.

There are three components to inflation. In addition to the volume of money itself, there is the velocity of money, v. This is the rate at which money changes hands. And there’s m — the ‘money multiplier’ — the rate at which the base money supply is magnified by lending.

When people are wary, they neither spend nor borrow. So the base money just sits there. And while the Federal Reserve can control its own balance sheet (the monetary base), it can’t control v or m. And the consumer price inflation we expect won’t really start to bedazzle us until v and/or m start to move.

Under these circumstances, consumer price inflation will have to wait. We just don’t know how long.

But here at the Diary, we have faith that, as former Fed chief Ben Bernanke put it, ‘a determined central bank can always create positive consumer price inflation’.

Front-run the Fed

So what should you do? The big money over the last 10 years was made by front-running the Fed — buying stocks and bonds, knowing that the Fed would pump them higher. How can we do that today?

Once again, we know what the Fed will do. It will ‘print’ money on a scale never before seen in the US. And the result will almost surely be higher rates of consumer price inflation — but only after the deflationary impulse has been overcome by the determination of the central bank.

In this setting, there’s only one good choice. When prices are falling (deflation), you want to be in ‘cash’…but in the kind of cash that won’t disappear when inflation picks up.

Instead, you want to be in the kind of ‘cash’ that will go up when v and m start to move. That’s when consumer prices rise sharply…and this ‘cash’ goes wild.


Bill Bonner,
For The Rum Rebellion

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

The Rum Rebellion