The Federal Reserve can't seem to get a handle on price inflation. It vacillates back and forth between dovish and hawkish, raising hopes for interest rate cuts one week and dashing them the next. In this episode of the Money Metals' Midweek Memo, host Mike Maharrey ponders whether the Fed's lack of success on the inflation front is due to incompetence or if it's on purpose. Or maybe both?
Most people recognize that government isn’t the most efficient or effective entity in the world. A visit to your local DMV will generally reinforce this point.
“The question is how much of the mess is government makes is sheer incompetence and how much is intentional malevolence. I tend toward incompetence, but I’m sure some of the jacked-up stuff the government does is rooted in bad intentions. When it comes to the Federal Reserve, I think it’s a little bit of both. Take inflation for instance. Inflation is an intentional policy. But their inability to keep it under control is incompetence.”
Mike points out that government officials and central bankers make it seem like inflation is a mystery.
“Here’s the key though. They are causing price inflation. When they point fingers everywhere else, they’re either unforgivably ignorant or they're lying.”
In simplest terms, inflation is on purpose!
But why would the government devalue its own currency?
“The answer is simple – it’s the only way they can keep making the government bigger without causing a revolt.”
As Mike explains, the government can’t raise taxes high enough to cover all its spending. To make up the difference, it turns to borrowing. But that isn’t sustainable either and leads to massive debt levels. To mitigate this problem, governments turn to the inflation tax.
Governments hide the impacts of the inflation tax by blaming it on everything else.
“Government people have effectively redefined inflation so they can blame rising prices on ‘the reasons.’ They now just call rising prices inflation. But inflation is really an increase in the money supply. That’s how economists used to define it. Go look at a dictionary from the 1970s and you can see for yourself. Now, all kinds of things cause prices to rise, but only Monetary inflation can cause ALL prices to generally rise in an economy. By telling you the symptom is actually the disease, Fed officials and government flunkies can make all kinds of excuses for the symptom – everything is more expensive – without admitting they caused the sickness to begin with.”
What’s the result of this policy?
“An ever-growing government at the expense of the private sector and the economic well-being of average people. In simplest terms, inflation benefits government and its cronies at our expense.”
But Mike points out the government is walking a tightrope. It needs inflation, but it can’t create so much that people notice. During the pandemic, it overplayed its hand, creating nearly $5 trillion out of thin air in quantitative easing alone.
“Here's where the incompetence comes in. Creating inflation is easy. Just print money. But controlling the rate of inflation is a different story altogether. When it comes to actually reining in price inflation that they let get out of control like they did a few years ago, they’re just winging it. Or it at least appears that way.”
Mike dives into recent Fed history, pointing out that the central bankers did a complete 180 in just six weeks. In March, they were projecting three interest rate cuts this year. Six weeks later, they were trying to take rate cuts off the table.
“Did I mention this flip-flop happened in just six weeks? This doesn’t exactly inspire confidence that these people know what they’re doing, does it? Now, you might say, “Well, Mike, monetary policy is a complex business. You can’t expect them to get it right every time.” And that might be a fair assessment. The problem is it doesn’t seem like they ever get it right. Comparing the actual trajectory of rate cuts with the projections bear this out. How bad is their track record? Fund manager David Hay analyzed past dot plots and found the FOMC only got interest rate projections right 37 percent of the time. And as Hay pointed out, they control interest rates!”
Mike points out some other Fed pronouncements that were wildly wrong, including “transitory” inflation and “subprime is contained.”
“I’m just going to throw this out there – given the track record, maybe the mainstream should stop with the knee-jerk reactions every time words fall out of Jerome Powell or some other Fed official’s mouths.”
Mike goes on to explain how gold tells the story of this government monetary malfeasance and incompetence. And given the trajectory of monetary policy, gold isn’t very expensive at all.
“That being the case, now is a great time to buy.”
About the Author
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
