January 8, 2023

The Federal Reserve has determined that our private economy should be placed into a recession.  The decision is revealed not only by the increase in short-term interest rates, but also by the extreme rapidity with which rates have increased.  

‘); googletag.cmd.push(function () { googletag.display(‘div-gpt-ad-1609268089992-0’); }); }

These comments are meant to disabuse the reader of the fallacy that the Fed is reacting to economic situations; the article seeks to demonstrate that the Fed’s Federal Open Market Committee drives recessions.

The Federal Reserve administers Monetary Policy with two tools: interest rates and money supply.  As the saying goes: “Don’t bet against the Fed — even when they are wrong.”   

Both the magnitude and the slope of rates has meaning.  The magnitude of rate increases costs businesses and consumers greater interest expense, thus depleting earnings.  The slope, or rate of increase, causes great uncertainty and makes it difficult for private citizens and business to adapt.  These conspire to effectively shut down economic growth by handcuffing the private economy.

‘); googletag.cmd.push(function () { googletag.display(‘div-gpt-ad-1609270365559-0’); }); }

One of the best predictors of pending recession is the slope of the Yield Curve.  This diagram charts interest rates on bonds of varying maturities, from overnight (Fed) funds to the 30-year Treasury.  The normal slope of the Yield Curve is positive: low rates on the short end and higher on the long end.  Financial institutions use this slope to borrow at the short end and lend or invest at the long, thus creating an interest spread or margin.

Today, the Yield Curve is inverted: the short end, controlled by Monetary Policy and the Federal Reserve, is higher than the longer end, controlled by money managers.  In other words, one can’t make a spread on the curve.  This is an unnatural curve and will eventually revert.  Since the Federal Reserve makes all decisions on the short end of the curve, the people there are responsible for the pending recession.

The Fed Reserve tells us that this inverted curve, with increasing Fed Fund rates, is the way to fight inflation — that by shutting down business activity and thereby causing job losses, the Fed can fight inflation.

Well, here is the greatest irony.  The cause of inflation is Federal Reserve action since 2008.  Remember the other tool the Fed uses: money supply.  

The Federal Reserve unilaterally implemented a disproven theory for monetary policy, called Modern Monetary Theory or MMT.  Under this delusional theory, the Federal Reserve printed trillions of U.S. dollars, thereby ballooning the supply of money by $9 trillion.  Their balance sheet ballooned from less than $1 trillion to $10 trillion.  This printing is called quantitative easing, or Q.E.

There is a strict rule in the law of money supply: every dollar printed in excess of that needed to keep the economy liquid devalues every other dollar in circulation.  Dollar devaluation is the cause of inflation; the increase in supply side costs is the effect, not the cause.