Posted September 23, 2021
By Sean Ring
Transitory, Like Tectonic Plates
Happy Friday!
Were finally here, thank heavens.
My class ends today, and I can just concentrate on writing for the next few weeks. I always send my invoice on the morning of my last day of class to give me an extra boost.
Well, it looks like I was right about the Fed - as you indeed were, too.
Theyre not genuinely in control, if they ever were.
Rumble in the Jungle
Not long ago, I was lying in bed in the early hours of the morning when I felt the bed moving.
I thought to myself, Gee, Mrs. Ring, its been a while
As I awoke from this dreamy state, I looked up.
Alas, Mrs. Ring wasnt on the bouncy castle. The whole house was shaking. It was an earthquake.
The quakes epicenter was over 100 miles away, but we felt it.
The funny thing about tectonic plates is that they move all the time. All day, every day.
But every once in a while, they move so violently that the earth shakes beneath ones feet, and its time to take cover.
Im not saying that time is right now.
But its coming, as surely as night follows the day.
Why? Because Jay Powell is following the script that always leads to collapse.
They Called It Decades Ago
Ludwig von Mises, in his Theory of Money and Credit, wrote this:
The people of all countries agree that the present state of monetary affairs is unsatisfactory and that a change is highly desirable The destruction of the monetary order was the result of deliberate actions on the part of various governments. The government-controlled central banks and, in the United States, the government-controlled Federal Reserve System were the instruments applied in this process of disorganization and demolition. Yet without exception, all drafts for an improvement of currency systems assign to the governments unrestricted supremacy in matters of currency and design fantastic images of superprivileged superbanks The inanity of all these plans is not accidental. It is the logical outcome of the social philosophy of their authors.
Sounds recent, doesnt it? Mises wrote that in his 1952 edition.
There are two kinds of forecasters: those who dont know, and those who dont know they dont know.
? John Kenneth Galbraith
My goodness, do these bureaucrats ever get anything right?
You may remember when I wrote earlier this year the Fed's call that inflation is transitory was complete nonsense.
I didn't buy it for a second.
One of the things that many brilliant economists before me have said is that central banks lose control of interest rates eventually.
Of course, the Fed was wrong. Inflation is not transitory.
I had a good chuckle as I thumbed through my Wall Street Journal yesterday, reading about it.
In his article, Greg Ip, the ubiquitous Fed watcher, wrote that six of 18 Fed governors on the FOMC believe that core inflation will run hotter than 2.5% for the next year.
This is not good for the consumer. Stuff has been getting more expensive and will continue to get more expensive.
Murray Rothbard masterfully wrote in his magnum opus, Man, Economy, and State:
Credit expansion always generates the business cycle process, even when other tendencies cloak its workings. Thus, many people believe that all is well if prices do not rise or if the actually recorded interest rate does not fall. But prices may well not rise because of some counteracting forcesuch as an increase in the supply of goods or a rise in the demand for money. But this does not mean that the boom-depression cycle fails to occur.
The essential processes of the boomdistorted interest rates, malinvestments, bankruptcies, etc.continue unchecked. This is one of the reasons why those who approach business cycles from a statistical point of view and try in that way to arrive at a theory are in hopeless error. Any historical-statistical fact is a complex resultant of many causal influences and cannot be used as a simple element with which to construct a causal theory.
The point is that credit expansion raises prices beyond what they would have been in the free market and thereby creates the business cycle. Similarly, credit expansion does not necessarily lower the interest rate below the rate previously recorded; it lowers the rate below what it would have been in the free market and thus creates distortion and malinvestment. Recorded interest rates in the boom will generally rise, in fact, because of the purchasing-power component in the market interest rate.
An increase in prices, as we have seen, generates a positive purchasing-power component in the natural interest rate, i.e., the rate of return earned by businessmen on the market. In the free market, this would quickly be reflected in the loan rate, which, as we have seen above, is completely dependent on the natural rate. But a continual influx of circulating credit prevents the loan rate from catching up with the natural rate, and thereby generates the business-cycle process.
John Maynard Keynes wrote about animal spirits, and I think hes right, too. But only after a load of free money is printed.And let's face it, the world is full of animals right now.So what's happening is this. We are seeing an excess of loanable funds around the world that are driving up asset prices. And this does not look set to end anytime soon, couple that with our supply chain problems, and you've got a massive plate set for a price increase.