It’s not very often that I side with a politician on any side of the aisle, particularly Elizabeth Warren, the overeager senator from Massachusetts whose so gung-ho on consumer protections that it often seems to cloud her judgement.
Yet I am all in on her recent commentary about the Federal Reserve pulling a Thelma & Louise and leading everyday Americans over a cliff.
On the off chance that you missed Friday’s Big News: El Jefe de Fed, Jerome Powell, spoke at a Jackson Hole, Wyoming, shindig and pretty much laid out a totally wrong path forward. He’s so hellbent on tackling inflation that he insists he and his minions will not stop until they achieve their goal—damn those hurt along the way.
In fact, Powell realizes there will be blood.
Per El Jefe:
The Federal Open Market Committee’s overarching focus right now is to bring inflation back down to our 2 percent goal … Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.
Yes, how very unfortunate that American businesses and consumers must bear the brunt of the Fed’s ineptitude.
Systemic inflation was blindingly obvious in early 2021, when the Fed was insistent that inflation was “transitory.” Now, the Fed is willfully body-slamming us consumers to make up for its short-sightedness.
Which is where we come to Sen. Warren…
Over the weekend, she spoke on CNN’s State of the Union and said this:
I just want to translate what Jerome Powell just said. What he calls ‘some pain’ means putting people out of work, shutting down small businesses, because the cost of money goes up, because the interest rates go up … Do you know what’s worse than high prices and a strong economy? High prices and millions of people out of work. I’m very worried that the Fed is going to tip this economy into recession
Ms. Warren is not wrong.
I am not sure what data points the Fed is paying attention to, but a lot of the trends I see are troubling.
Housing prices are tumbling already, and there are growing worries that the worst looms on the horizon, since higher interest rates will push up already painfully rising mortgage rates, which will crush already declining mortgage demand and drive home prices down even more.
Job losses are now hitting the housing and mortgage industries (a headline this week noted that, “U.S. mortgage lenders are already starting to go bankrupt”) and homeowner equity is evaporating…which has negative psychological effects that serve to perpetuate a belief that all is not right with the economy…which will exacerbate the recession we are sliding into.
Meanwhile, the Census Bureau expects 3.8 million families will be evicted from their homes in the next two months. It doesn’t help that for the first time ever, the median rent in America has topped $2,000 a month, and the average new-car payment is now nearly $700 monthly.
That requires $43,200 in pre-tax income, assuming a 25% tax rate…which is 61% of the median family income in America, according Census Bureau stats. That’s painfully out of whack.
America, by way of the Fed, is on the verge of creating a zombie population of low- to middle-income families that cannot afford to live. They will increasingly take on debt to pay the bare minimum bills…which will only serve to pull them further into a financial abyss.
Powell acknowledged as much in Jackson Hole, when he said, “The burdens of high inflation fall heaviest on those who are least able to bear them.”
Alas, his quote was actually used to bolster his point that “price stability” (the idea that the Fed must muscle inflation down to 2%) is paramount in bringing supply and demand back into balance.
Translation: So what if the consumer is killed!
A dead consumer does not spend, so inflation will tumble.
Of course, the economy will be dead too, as Sen. Warren rightly notes, which will present the Fed with a whole new set of problems to screw up.
The Fed under-reacted when it was apparent inflation was in our future…and now the Fed is over-reacting by purposefully destroying American families and small businesses.
I’ve said it before. I’ll say it again.
This is not going to end well.
Prepare as best you can. Stock up on cash. Stock up on gold. Add a bit of bitcoin to the mix. And buy or hold onto stocks the benefit from basic-spending demand, since the basics are pretty much all that a large portion of the American consumer class will be able to afford.
It’s darkest before the dawn…and sunset hasn’t even arrived yet.
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