Despite the hotter-than-expected CPI report, the mainstream still seems convinced that the Federal Reserve can get inflation under control and bring the economy to a soft landing. But Peter Schiff argues that the central bank can’t win this fight – at least not without crashing the economy. Since the Fed isn’t willing to do that, it won’t go all-in. In effect, the Fed brought a knife to an inflation gunfight.
Even with CPI numbers coming in higher than anticipated, the stock market held up pretty well last week. Some of the tech stocks and risk assets such as bitcoin had a really good week. The Cathie Wood Ark Invest group was up about 7% on the week. Peter said investors are covering their shorts in the stocks and assets that fell the most in 2022.
Meanwhile, gold sold off after the CPI report and a much stronger-than-expected retail sales report. It finished down about $20 an ounce on the week.
It makes sense that gold and bitcoin would be going in opposite directions because they represent very different asset classes. Gold is a safe haven, store of value, inflation hedge, and bitcoin is a highly speculative digital token. That’s what investors were buying on the week – extremely expensive or overpriced speculative assets like bitcoin.”
Peter noted that gold stocks also got beat up. One of the issues facing gold mining companies is rising costs.
And why are their costs going up?
Rising price inflation.
And why isn’t the price of gold going up in proportion or more than those costs?
Because investors are still not worried about inflation. They still have confidence that the Fed is going to rein inflation in. So, the price of gold is not rising as much as the cost of mining it because investors still don’t realize that inflation is here to stay, and they’re not pricing that future inflation into today’s gold price. Because, if they were, the price of gold would be much higher than it is right now, and it wouldn’t matter that the mining costs were going up because the price of the gold that was being mined would be rising even faster.”
Other industries are facing similar cost pressures. The Producer Price Index (PPI) rose by 0.7% in January. Meanwhile, Nestle announced it plans to raise prices further in 2023 to help cover those rising costs.
“Our gross margin is down about 260 basis points – that is massive. That is after all the pricing we have done in 2022,” the company CEO said.
Peter said the people who think we’ve seen the worst of inflation are wrong.
All we’ve seen is a small down payment on what’s coming. We’re going to see much higher prices in the months and years ahead.”
And he noted that the Federal Reserve has barely made any progress in its “war” against inflation. In fact, Peter said the Fed may have even gone backward.
Yes, we’ve had some temporary relief due to the initial pullback in commodity prices. But once commodity prices bottom out, they’re going to be headed for new highs and we’re going to see just how much ground we’ve actually lost. Because the Fed hasn’t even come close to raising interest rates high enough to restore inflation to 2%, nor have we gotten the required cooperation from the US government.”
Keep in mind, the Fed has conceded that it can’t tame inflation with monetary policy alone. US government fiscal policy feeds inflation, and the central bank needs the federal government to quit borrowing and spending so much money. That’s not happening.
Instead of reducing government spending and adopting a contractionary fiscal policy to help bring down inflation, deficit spending is rising. Despite Biden’s lies to the contrary that he’s reducing deficits, deficits are rising and that is an expansionary fiscal policy that is adding fuel to the inflation fire.”
Peter said the rapid rise in consumer debt also shows that the Fed is losing the war against inflation. Inflation defined isn’t just the expansion of the money supply. It is also an expansion in credit. Borrowing money increases purchasing power. So, if credit is expanding, it is inflationary.
If the Fed was really making headway in fighting inflation, consumers would be borrowing less. Credit card debt would be going down. But it’s not happening. And that’s because even though rates have gone up, they haven’t gone up nearly enough to discourage people from borrowing. That’s what has to happen.”
Peter said the solution is more substantial rate hikes and perhaps requiring banks to keep more of their deposits in reserve so there is less money available to lend.
That’s what the Fed would need to be doing if it was truly serious about fighting inflation. But it’s not serious, because it knows if it got serious on fighting inflation, it would crash the economy. In fact, it would probably cause a financial crisis. That’s why it’s not serious. But it can never admit that. So, it’s got to pretend that it’s trying to fight inflation even though it’s still pursuing policies that are fueling the fire.”
The mainstream still thinks that getting the Fed funds rate to around 5% will slay inflation. Then they assume the central bank will be able to quickly lower rates. Peter said they are ignoring history.
If you look back at the 1970s experience, it shows that putting the inflation genie back in the bottle is a lot more difficult than people believe.”
Peter noted that inflation was below 2% for seven straight years from 1959 through the early 60s before it began creeping up in the late 60s. Then, for the next decade, inflation was above the 2% target. Paul Volker went on his war against inflation in 1980 when he raised rates to 20%. Inflation didn’t return to 2% until 1986. At that point, the average Fed funds rate was 14.35%. Even with that, the CPI spiked back up for several years. in the late 80s and early 90s.
Meanwhile, Jerome Powell thinks he can quickly get CPI back to 2% with 5% interest rates.
That rate isn’t even close to being high enough to rein in inflation. … It’s pretty clear; if you look at how high interest rates had to rise and how long they had to stay there during the 1980s to eventually bring inflation back down to 2%, we’ve barely started. As 4.6% Fed funds rate is nothing. We need to see a Fed funds rate double or triple where we are right now. The problem is the economy can’t handle it the way it was able to handle it back then because we didn’t have anywhere near the debt.”
A serious, effective inflation fight would kill this bubble economy.
At some point, the markets are going to come to terms with economic reality. And that reality is that unless interest rates go much higher from here and that produces a high decline in stocks, real estate — a massive recession or financial crisis — we either have to suffer from all of that, or inflation is here to stay. We can’t live in this dream world where the Fed only raises interest rates to about 5% or slightly higher, and that’s all it takes to bring inflation back down to 2%, and everything is great, and the Fed could lower interest rates back down to a number that a highly indebted economy has been used to over the last decade or so. That can’t happen. It’s one or the other. Either everything comes collapsing down because the Fed actually fights inflation, or the Fed stops fighting inflation to try to keep everything propped up and we have to live with high inflation indefinitely.”
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