Powell Power

The mightiest mandible in human history moves markets at a mere muttering...

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

The process which started in 2022 cannot — and should not — be reversed.

~ Vincent Deluard

Jerome Powell has what must be the most powerful lower mandible in human history… if it moves up and down, and tells the world that the fight against inflation is over…well, in a matter of hours, there will be millions more millionaires.

…if, on the other hand, it insists that it will take the Fed’s key rate to 9.5% – 3% higher than consumer price inflation – OMG…you would see billion-dollar businesses collapse in a heap…and billionaires suddenly homeless, penniless, and friendless.

A woman may start up a coffee shop. She borrows money. She does the math. At 5% interest, the numbers work. The shop prospers. But if the interest rate is forced up…say to 7%...all of sudden, the expenses are greater than the income. The shop loses money. The poor woman runs through her savings…and then has to close her doors.

The world economy is made up of millions of people like that. In small businesses…and big ones. And Mr. Powell, if he chooses…can wipe them all out in a matter of minutes. (We shudder to think that we sat so close to greatness …though we didn’t know it…when we both attended Georgetown Law Center in the late ‘70s.)  

Extraordinary Jawbone

Whence cometh this superpower? A special gift…is he the richest man on earth…the smartest…was he elected? Was it an accident of birth or a product of his own genius? Apparently…none of the above.

Instead, Powell is just a salaried employee of a private company, granted extraordinary powers by the federal government.

And here’s the latest from Reuters:

Powell: A "couple of years" before Fed nears end of balance sheet decline

Federal Reserve Chairman Jerome Powell said Tuesday the U.S. central bank has some distance left to run in terms of shrinking its balance sheet.

"We haven’t put a specific target on it” when it comes to where the balance sheet run down stops, Powell said at an appearance.

"It will be a couple of years" before reaching the right level of banking sector reserves, Powell said…

A couple more years with a shrinking money supply? What will that do to stocks? To shop owners….and business titans?

We don’t know. But investors don’t appear to be too worried about it. Perhaps they should be. And with those shoes, Mr. Volcker kicked inflation out of the way.  

Fake Money Shebang

The federal government changed the dollar in 1971. Thereafter it could be easily manipulated. Politicians overspend. And they typically cover their excess spending by printing extra money. Then, everyone begins to borrow and spend, all trying to stay ahead of the wilting currency. It is the kind of inflation that is endemic in a fake money system.

Volcker’s solution was simple. He raised the Fed’s key lending rate to the point where no one was lending and weak credits couldn’t be refinanced. The result was a recession – the worst one since the Great Depression. But it did the trick. With the bad debt and bad investments out of the way, interest rates could decline, lending could pick up, shopkeepers could get back to work and asset prices could rise.

That is, roughly, the happy situation we had from 1982 to 2022. And now, Mr. Jerome Powell aims to step into Volcker’s outsized shoes.

By the way, the money supply grows not only when the Fed ‘prints’ money to lend to the Federal government and member banks, but also when it pushes down interest rates. The lower they go the more incentive people have to borrow – especially when you can borrow below the rate of consumer price increases. When they borrow, the banking system ‘creates’ new money to give them.

More Surprises

The trouble with this whole fake-money shebang is that it comes with a cyanide capsule already in its mouth. As the money supply grows…so does the amount of debt in the economy. New money is borrowed into life. It dies – lowering the money supply – when the debt is retired, renounced, or inflated away. So, when the Fed lets its balance sheet decline, it means that the biggest lender in the world is reducing its holdings of debt and effectively disappearing money. That is when the lower mandible closes on the upward one….and the cyanide flows into the system. Money vanishes…and the whole circle of fake prosperity, caused by fake money, lent out at fake rates, reverses.

Many are the subplots and nuances of this drama. But the main story is this:

For the last forty years, the Fed pumped in cash and credit. Asset prices rose. Debt increased. Now, Paul Volcker re-incarnated as Jerome Powell is finally taking away the punchbowl. He’s siphoning off the cash and making credit harder to get.  

That is the gist of our analysis here at Bonner Private Research. Of course, there will be plenty of surprises….and plenty of twists and turns as the play lurches forward. But as long as it continues, we can expect more surprises on the downside than on the upside.

Regards,

Bill Bonner