Dr. Doom Looms

Uncontrolled inflation? Or a hard landing? Why not both?!

(Source: Getty Images)

Bill Bonner, reckoning today from Baltimore, Maryland...

In this morning’s Bloomberg news is this:

‘Dr. Doom’ Roubini Sees Either US Hard Landing or Uncontrolled Inflation

“The fed funds rate should be going well above 4% – 4.5%-5% in my view – to really push inflation towards 2%,” the chairman and chief executive officer of Roubini Macro Associates said in an interview on Bloomberg Television.

That’s it. Those are the choices. Inflate the bubble. Or let it die.  

Roubini says he thinks hopes for a Fed “pivot” – from tightening to loosening – is “delusional.”

In the near term, he is certainly right. Fed governors are not stupid… at least, not in a conventional way. It took many years of study to become the simpletons they are.  

And they are still human! Let’s not forget; they don’t like people laughing at them behind their backs any more than anyone else. And now, everyone can see that they made a huge mistake by not raising interest rates sooner. Then, they made another huge mistake by not recognizing the threat of inflation sooner… and still another big mistake by believing it would go away like a summer shower.

Instead, inflation has settled in… and has been drenching consumers for more than a year.

Up to Their Necks

And now, Fed governors must atone… they must make good… they must prove that they are not hopeless morons.

How?

By getting control of the situation. That is how they will “regain credibility.” And that means – as Mr. Roubini tells us – getting the fed funds rate up above the inflation rate. (Point of reference: The Fed, in 1982, put the key rate about 600 basis points… 6%... ABOVE the CPI to get control of inflation. Currently, the rate is 600 bps BELOW inflation.)

The trouble is, the higher the funds rate goes, the more people have trouble paying their debts. The Fed’s ultra-low rates encouraged people to borrow. Now, they’re up to their necks in debt. And most, but not all, debt needs to be refinanced from time to time… which means, people have to pay a lot more in interest. Already, from June ’21 to June ’22, the typical mortgage payment rose by $700.  

All central bankers learn the theory of Keynesian central banking, by heart. It is very simple, based on the Bible story; Joseph interpreted Pharaoh's dream… in which the latter saw seven skinny cows and seven thin ones… which he took to mean that there were 7 years of famine coming.

Pharaoh then began a ‘counter-cyclical policy’ of stocking grain during the fat years in order to have something to eat in the lean ones. 

In the Fed’s version, interest rates are raised during the fat years and lowered when the famine threatens. At least, that is the idea.

In practice, the Fed really has no idea what is going on… and, being human, Fed governors prefer fat to lean and don’t mind a little legerdemain to keep the pastries coming. That is, they lower rates – even when the economy is strong. You’ll recall that the economy in 2019 couldn’t have been stronger. It was Donald Trump’s turn to play Pharaoh. He said it was the “greatest economy ever.” 

Enter Mother Nature

The Fed had been trying to ‘normalize’ interest rates, after leaving the fed funds rate ‘near zero’ for far too long. By the time it got up to 2.4%... in 2019… the stock market turned down… and the Fed panicked, dropping the rate down to zero again.

But it was not Mother Nature who determined the lean years or the fat ones in the US economy; it was Fed policy blunders themselves. Everybody likes the fat years, especially the elite, whose stocks and bonds go up. And the Fed, an arm of the Wall Street elite, did what it could to make it happen.

In other words, the people implementing the counter-cyclical policies were the same people who were tricking up the cycles. It was as if the umpire had run around the bases, slid into home plate, and pronounced himself “SAFE!” The Fed could not counterbalance the boom, 2009-2021, because it was the cause of it.

By 2021, it had been force feeding the economy with cash, credit, and fat-inducing calories for more than a decade. And then, in 2021-2022, inflation shot up, the stock market fell and the economy entered a recession. But the Fed couldn’t provide any counter-cyclical policy to offset the bust; its storerooms were empty! It had already dropped the key rate to zero. And now, contradicting the rules set forth in the Central Bankers’ Handbook, it has to raise rates in order to stop inflation and recover a little of its dignity.

And what now? Uncontrolled inflation? Or a hard landing? Which will it be?

Our guess: both. A hard landing… and then, uncontrolled inflation.

But we’ll wait to see what happens, along with everyone else.

Regards,

Bill Bonner

Joel’s Note: Meanwhile, over on the continent, European energy prices are going through the roof, with the benchmark power price doubling in the past couple of months alone…

So-called “next-year electricity rates” in Germany shot up by 3.7% to 477.50 euros ($487) a megawatt-hour on the European Energy Exchange AG yesterday, up sixfold from a year ago.

In Holland, benchmark gas futures have doubled since June. And in the UK, the wholesale price for October energy is up sevenfold since the same month last year.

Of course, none of this comes as a shock to Bonner Private Research members, who first tuned in to our Winter Catastrophe summit… back in 2021. Energy experts, Rick Rule and Byron King, joined Bill for an in-depth analysis of the markets after Byron had penned an eerily prescient essay, “German’s Energy Stalingrad.”

Given how those predictions have played out, and the urgency of the situation unfolding now in Europe, we decided to make that private briefing available for ALL readers over the weekend. (Listen here. Read here.)

For our latest briefing, Bill convened a round table of his most trusted financial analysts, professional money managers and investors and asked them two simple questions:

What’s going on in the markets now… and what are you doing with your OWN money?

Once more, Rick and Byron generously contributed their insights, as did Doug Casey, Porter Stansberry, Alex Green, Jim Rickards, Chris Mayer and Bonner Private Research’s own Dan Denning and Tom Dyson. Members can access the full, hour-long video presentation, right here…

Private Briefing for Bill Bonner and BPR subscribers only

If you’re not already a member, but want to stay ahead of the curve with the latest research from Bill’s private network, a network he spent four decades building, you can access ALL our work by joining Bonner Private Research today.