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The Federal Reserve’s Blunder Has Arrived

Federal Reserve Chairman Jerome Powell’s press conference was this afternoon and without a doubt it had more tap dancing than a Rockettes’ reunion tour. The Federal Reserve’s statement today offered very little meat except a maybe on tapering unless inflation runs hot longer which means it becomes a strong maybe to only print a little bit less.

Thus without going through dozens of charts, reciting Professor Danny Blanchflower who hit an absolute home run on Bloomberg Radio this afternoon, below I shall offer my take that others may or may not cover.

The two charts that do interest me are related only in the sentiment that Professor Blanchflower discussed today on the radio where the prior six declines were confirmed indicators of prior recessions. His statement today does not mean that the United States is heading into a recessionary period now or early next year, but it does indicate the risk is there.

First up, an overlay of the Labor Participation Rate with the annualized percentage rate of change of total wages and salaries since 2005:

I decided to see if there was a pattern emerging but was shocked to see an annualized decline in the rate of change of wages and salaries before the 2020 Covid-19 pandemic hit our shores. This would seem to be a warning that as the prime working group begins to further reduce their participation in the economy, well below 2005 levels, compensation rates are not changing fast enough to entice those individuals back into the work force.

The second chart overlays the 25-54 year old participation rate with consumer confidence from the University of Michigan sentiment survey since 2005:

It would appear that the drops in consumer confidence are following the decline in participation rates for prime age employees.

Thus what is the blunder that the Federal Reserve is now engaging in?

In this writer’s opinion, it would appear that the Federal Reserve and other international central bankers believe that their own forecasts, which have been consistently wrong before every recession, are hoping, not planning, for an exit from Q.E. sometime next year while projecting a decline in the higher rate of change in monthly inflation.

This blunder is worthy of the Weimar banking system and probably will result in a disaster for the US and its consumers. The idea of thinking that by maintaining a bloated balance sheet while continuing to expand the monetary supply without viable credit creation now means that the circumstances are being established for the dangerous types of historical hyper inflationary periods which have destroyed financial systems and governments throughout history.

Since this type of monetary expansion, which is not being checked via the taper, will continue unencumbered and the misallocation of financial resources plus malinvestment will only expand and until a total collapse of the system occurs. What is even more laughable is the Fed’s wistful thinking that the Federal Government and the Executive Branch will properly allocate the excess monies in a responsible manner due to political pressure from an angry electorate.

That begs a question; is this by design or desperation?

My fear is that the Federal Reserve’s failure to clean up the entire financial system since the 2007-2009 crash has allowed the system not only to refinance and maneuver zombie investments back into the system’s balance sheets, but to create new problems by creating a new fintech industry without the strict banking oversight required of traditional institutions. The speculative frenzy from scamcoins to ETFs for anything anywhere, and real estate adventurism (again) is concerning as there still is no proper systems from preventing catastrophic losses for individuals nor corporations that could impair or destroy the financial system as we know it.

Once the rapid expansion of inflation deteriorates to an almost hyperinflationary pace, demand will collapse resulting in a destruction of financial assets unseen in this nation since 1837. When people can no longer afford the staples of life, investments in real estate or necessities, then the last domino will fall crushing anyone who failed to take profits and hedge properly when the economic system collapses. Wages and salaries are already failing to keep pace with the true rates of inflation so now it is a waiting game with the race between hyperinflation and central bank action; the big question is which central bank blinks first and actually decides to become the adult in the room?

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