Rabobank: Whatever Powell Does From Here Is Going To End Very, Very Badly

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by Tyler Durden
Tuesday, Nov 23, 2021 - 06:27 PM

By Michael Every of Rabobank

'The Powell of the Powerless'?!

Jerome Powell got the renomination for a second stint as Fed Chair despite an ethics scandal and criticism from some Progressives that he is too pro-bank and not pro-environment enough. There was no “Let’s go Brainard”, but the candidate associated with MMT and a digital Dollar is nominated for the powerful Vice-Chair.

Our Fed Watcher Philip Marey notes the decision was for continuity but adds: “The choice between Powell and Brainard was a choice between two Fed insiders who share the Fed’s groupthink. Biden’s advisors should realize that while the President is pursuing expansive left-wing fiscal policies to redistribute income and wealth from the rich to the poor, they have advised him to maintain a monetary policy approach that is increasing wealth inequality. Instead of spending trillions through fiscal policy, Biden could have started the reversal of monetary policies that have led to a rapid increase in wealth inequality since the global financial crisis spurred the Fed into quantitative easing, which is boosting the assets of the rich. A missed opportunity for the ‘social justice warriors’, another victory for the stock markets. Happy Thanksgiving!” However, it was the US Dollar, especially versus the struggling Euro, and not US stocks that was immediately lifted by the Powell news.

Indeed, while Powell retained his job, he has also been given a poisoned chalice. Inflation is a serious problem; rent, food, and energy are all rising; the White House solutions being offered are not helping (oil prices went up despite the US saying it will sell some of its strategic reserves); and whatever Powell does from here is going to end very, very badly. Given he and Brainard both zeroed in on inflation in their thankyou speeches, perhaps sooner than markets think: US 2-and 10-year yields both jumped 8bp on the day.

Allow me to expound a little beyond saying ‘Higher yields, higher dollar’. A few weeks ago I mentioned the 1978 essay “The Power of the Powerless” by then dissident and future Czech President Vaclav Havel. It begins mockingly that “A SPECTRE is haunting Eastern Europe: the spectre of what in the West is called ‘dissent.’ This spectre has not appeared out of thin air. It is a natural and inevitable consequence of the present historical phase of the system it is haunting.” Well, today the West has polarisation, mass protests, riots, talk of obligatory vaccinations in Europe, and Yanis Varoufakis arguing capitalism is *already* dead and techno-feudalism looms.

Havel also argues ideology disengages itself from reality without private power to keep it in check. Consider the army of economists who sung the praises of ‘no banks or money’ models and the Fed in the pre-GFC Ponzi scheme; then the socialism-for-the-rich of Fed QE; and who now purr the Fed is fighting inequality(!) Professionally-corralled academics, analysts, and central bankers all believing what they are doing works and is good – as dissent soars around them.

Private markets exist to allow price discovery in order to tell the Emperor his clothes are worth less than he thinks, or the blue-collar worker their labor is worth more. They protect us from the follies of ideology. But central banks now ensure stock and bond prices have little relation to ‘truth’. You don’t need to make profits to see stocks rise - you don’t need to produce anything in fact; and functionally bankrupt governments have the lowest borrowing costs in their history. The financial economy and the real economy are divorced. And when the former wobbles, it gets bailed out by those fighting for social justice. Every. Single. Time.

Yet “transitory” inflation shows us an Emperor who wears no clothes. Yes, it is still on the supply, not demand side, but there is no clear indication how long the supply side will remain a problem - and the longer it is, the greater the likelihood something structural shifts. A recent survey shows 58% of food industry C-suite leaders believe the crisis will last more than a year, and 33% fear three years – is that “transitory?” Wheat prices are at Arab Spring levels again already.

As I keep repeating, supply chains are a reality check to central bank --and central government-- power. The Fed can create as much liquidity as they want via QE. We already know they cannot make it flow anywhere productive, just into socially destabilising asset and commodity prices. Even if they join hands with governments via fiscal policy, they still cannot do any good if there are no products to buy. If that weren’t the case, any frontier market with zero resources could tell its central bank to print $10 trillion Thingies and import everything needed to leap up the development ladder. Why doesn’t this happen?

A different way to present the same issue, as @ektrit notes, is that while Milton Friedman argued “Inflation is always and everywhere a monetary phenomenon,” what is actually true is that “Inflation is always and everywhere a goods phenomenon”. If you produce enough to match money supply growth, fine. It’s like Wittgenstein’s logic that if you use a ruler to measure a table, you may also be using the table to measure the ruler. Central bank reality-defying ideology looks at the money side of things and assumes goods just flow: now they don’t. Or only some have the power to say if/when/where they do. Some rulers get that --the mercantilist net exporters-- and some others are now trying to turn the tables - the net importers saying “resilience,” and “trade is about values, not price.” Or “Peppa Pig World,” for some strange reason.

To reiterate, central banks, led by the Fed, are being slapped in the face by a reality they can no longer deny – but this also exposes that their ideological omnipotence, which is true for financial assets, means nothing for physical goods: they have no power there, because they have spent decades letting capital flow into assets and not productive investment! As such, if they raise rates, we know where that leads a financialized, indebted economy driven by crypto/NFT/property and stock bubbles, and where it leaves EM FX and external debt (and EUR?) vs. the US Dollar. Yet if they don’t raise rates, while proclaiming to be ‘The Powell of the Powerless’, then they, and some rulers, should start getting nervous. Expect higher prices, and louder dissent.

Meanwhile, the Fed may soon have other issues to grapple with. CNN reports the US is considering sending extra weaponry to Ukraine as fears mount over potential Russian invasion; and Russia is accusing the West of building up forces near its borders, which it has long stressed is a casus belli. One can see how this can easily go wrong: and by arming Ukraine, but with nowhere near enough to stop a determined Russian invasion(?), the West can be seen as incentivizing such action. Pray tell, what is the correct monetary-policy response if the worst happens, and energy and food prices soar further, while the US finds itself dragged into an expensive conflict? While Europe of course won’t fight in its own backyard (the very thought of it!), one hopes they have enough thick jumpers and blankets to get through a winter with no Russian gas while locked down.

Don’t worry: the ECB will keep you warm.