In Debt They Trust: The Fed’s Crippling Addiction to Cheap Money

Let’s see if we’ve got this right: 

• The U.S. economy is roaring ahead…yet it’s too weak to stand on its own, so the Federal Reserve needs to pump $80 billion a month into the economy through bond purchases to help an economy that needs no help. 

• The U.S. housing market has gone full “Charlie Sheen on a bender”…yet it still needs Fed support to the tune of $40 billion a month in mortgage-bond purchases to ensure that an already overly stimulated housing market doesn’t collapse. 

• U.S. inflation has exceeded 5%, higher than the Fed ever expected and, absent food and energy prices, the highest reading in nearly 20 years…yet the Fed maintains a near-zero interest rate policy because the economy needs help staying afloat. 

• The jobs market has added nearly 3.3 million jobs so far this year, including a far-better than expected 850,000 jobs in June…yet Fed Chair Jerome Powell said last week, “I would want to see some strong job numbers” before scaling back the morphine drip of free money that the Fed is mainlining into the economy. 

It’s almost like an old Far Side cartoon I remember from years ago, in which two pilots break through cloud cover and notice a goat right in front of the cockpit window, and the co-pilot turns to the captain and says, “What’s a mountain goat doing way up here in a cloud bank?” 

I have a sneaking suspicion the market as a whole is starting to sense the same thing—the Fed has lost the plot and doesn’t realize where it is relative to the economy. 

I regularly pay attention to where the U.S. dollar is trading per the U.S. Dollar Index.  

Boring, boring stuff, really, unless you’re a currency trader. But because the dollar is the Kim Kardashian of currencies—it gets a whole lot of attention just because of who it is—its movements say a lot about what the world is thinking. 

In theory, a strong economy, robust housing market, rising inflation, and a hardy jobs market would create strength in the dollar. There would be a global expectation that the Fed would soon raise interest rates, and in the currency world that’s cause for happiness (higher rates in one currency relative to another brings investors into the higher-rate currency, pushing the value of that currency higher). 

And, indeed, the buck was rising with the tide between late-May and late-July. It had gained about 3%, which is not insignificant in currency terms. 

But suddenly the greenback has about-faced and started marching lower, even though all those signs of supposed goodness abound. 

Maybe it’s just a respite—a breather—before the dollar sprints a bit higher. 

Or, maybe, it’s a sign the global market isn’t terribly convinced that the Fed understands the rules of the game it’s playing.  

I mean, it says something when investors send the dollar down on a day the Fed offers an upbeat assessment of a post-pandemic economy.  

It says something when the dollar falls as the Delta variant races around the world, causing a spike in new cases and new deaths (in theory, that should be a strong-dollar moment since fear pushes international investors toward the dollar). 

What it says is that there’s a goat on the side of a mountain and the chaps piloting this craft can’t figure out how this goat got way up here in the clouds… 

Longer term, the dollar is still dead-man walking. Nothing fundamentally has changed, nor will it change until a dollar/debt crisis later this decade. America’s debt will grow every single year until it’s too heavy for the economy to bear. That’s a given. There’s no political will to alter that path because the alteration causes too much pain on the populace that votes to keep the politicos in their cushy jobs. 

It’s the buck’s short-term trajectory, however, that will be of interest. 

If we continue to see the dollar struggle for traction…well, it might just be game over. That’s probably why gold has been marching higher again over the last month. The preppers are prepping. 

But, that’s a topic for another day…