Inflation Keeps Sucking

We are caught in a trap the Fed created for the entire world.

Photo by regularguy.eth on Unsplash

Headlines seem to call it both ways on inflation today, some highlighting that it is down a little, some saying it is up. It depends on what individual components you look at, what finely parsed indices of inflation, and whether you are looking at month-to-month or year-on-year. So, I’ll sum it up simply: The bottom line is that inflation is a tiny bit less significant overall than it was a month ago, but the rate at which the inflation rate has been dropping has also almost stalled. What you see in many measures is a tiny blip downward in the CPI measure of inflation that is not nearly as significant as the drops that have been happening.

I think the Fed is going to pause in its rate hikes, however, for the simple reason that this is exactly the point at which I believed the Fed would pause since the start of the year. That is because months back, the Fed telegraphed the likelihood of three more 25 basis-point hikes and then a pause, and those hikes are now all in. While the majority of financial writers did not believe the Fed would even stay the course with that plan, I was certain the Fed would because inflation would not move close enough to its target during that time for it to do otherwise. I doubted the Fed would be able to go further than that, however, before serious trouble began to surface, as it has.

Now, with banks crashing because of Fed policy and GDP resting on the threshold of a second dip into recession and Fed policy lagging by, at least, six months, I think they’ll take a breather and hope their efforts so far work. However, the big slowdown in how quickly inflation is falling away means the battle with inflation is far from over, so there is just about zero chance of the Fed starting to lower its interest target. Forget the Fed pivot — pure market fantasy by delusional investors that has endured for almost a year. It was never going to happen until the economy is destroyed to the point where lowering rates won’t help stocks anyway, which means even more banks blowing up. (And a stop in rate hikes with an eventual drop someday far down the road is not a “pivot” even when that drop comes. Not even close.)

Once the economy and banks lie in greater ruin, the Fed will face crashing the economy and banking system into utter rubble by holding rates where they are or going back to very high inflation by lowering them. Either choice is a wicked path; but that is precisely the trap the Fed began laying in for all of us with its extreme inflation policy of the past and with trying to fix a debt-based crisis during the Great Recession by doing all it could to make debt cheaper and entice as many people down into deeper caverns of debt as possible before burying them alive with inflation.

The result we see, as the Fed tries to back out of its massive mistake by raising interest to fight the inflation it fueled, is that banks are going insolvent everywhere. Sure, only three have popped like nasty pimples, with a couple more close in line; but the deeper truth — as several commentators lay out in the headlines that follow — is that thousands of US banks are technically or “potentially” insolvent, meaning the only thing saving them from deep trouble is the Fed’s determination that they do not have to mark the value of their assets or collateral down to market. Given the long lag between Fed policy changes and the effects of those changes, however, more banks will collapse, as the problem of devaluation in assets and collateral will get worse for several more months, even if the Fed stops in its tracks …

… Worse than that technical backdrop, which becomes a existential problem for those banks only if they face a run on deposits that they cannot meet, is that deposits keep fleeing from smaller banks to the top-tier banks that the Fed and feds have chosen to protect with infinite deposit insurance that is not available to banks that are generally good banks but are not in the privileged too-big-to-fail category. This Fed policy assures the too-big-to-fail banks will grow much bigger by design as they 1) scavenge depositors away from smaller banks and 2) devour those smaller banks at bargain rates when they fail because of that scavenging.

In this realm of soon-to-crash smaller banks and tottering behemoth banks that are supported by the new insurance policy of Fed & Feds, Inc., people are doing an odd thing and refinancing their homes at the Fed’s likely peak (at least, for the immediate future) in interest policy. Mortgage rates dropped a minute fraction over the previous week, but are still up almost a full percentage point over where they were a year ago; yet, refis were up 10%. Some people must have paid a lot of interest in the last few months to now want to be refinancing at a rate that is nearly 1 percentage point higher than a year ago!