The 'Stealth Pivot'

Is this the moment we've been waiting for?

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

What a week! Another exciting mix of the absurd, the ominous and the sublimely ridiculous.

The most important thing that happened was that the Fed revealed more of its  ‘stealth pivot.’ It came out with a program to bail out the big depositors of failing banks. Already, the FDIC insures the deposits of small account holders (under $250,000). Now the new alphabet group – BFTB, or something like that – is going to look after large account holders. In other words, the whole banking system is being nationalized.

Well, not exactly. The losses are being nationalized. The profits will remain with the bankers.

What’s behind it? We recall our old friend Richard Russell:  

‘The feds can control the banks to a large extent. They can control the bond market, to some extent. They can control the stock market, also to some extent.  They can cause booms and trigger busts. But they can’t do those things and also control the value of the currency. The dollar is the pressure value. It suddenly pops open when the system needs a reset.’

The Gates of Hell

Ultimately, when you spend more than you can afford, something’s gotta give. Either you go broke. Or, if you are a sovereign country with debts denominated in your own currency, you ‘print’ more money to pay the bills. It’s either deflation (when prices fall), or inflation (when the dollar falls). Either you protect the currency (and the people who depend on it) and let the chips fall where they may. Or you print and spend…and let the dollar go to Hell.

Last week, we saw the gates of Hell open a little wider.  

Big depositors, faced with big losses, turned to the big Fed for relief.  

The Fed could have said: ‘you called the tune; you dance to it.’

Or it could have used a less-festive metaphor: ‘you made your bed; you sleep in it.’

The real world is full of simple truths like that – a penny saved is a penny earned! – observations…recommendations…illuminations that help us avoid mistakes.  

But the feds live in a fake world…a planet of wishful thinking and self-serving illusions. For more than 12 years, they encouraged people not to save, but to spend.

The Fix Is In

Naturally, some of them go broke. But rather than acknowledge their mistake, they said, ‘Okay…We’ll get a new band…and change the bed. You’ve got too much debt.  We’ll give you more of it…so we can keep the scam going.’

That is how the Fed handled every crisis since 1987. It backed the markets with more and more credit…leading to more and more debt…to the point where the debts cannot be serviced at normal interest rates.

But now, for the first time in 40 years, the Fed is not merely adding debt, goosing up the economy and making the rich richer, it is fighting inflation.  

Yes, the wheel has turned. Jerome Powell is no Paul Volcker. 2023 is not 1979. And the Fed will not follow through on its inflation fight. It has gone too far down the road to perdition. It can’t turn back. So, when the going gets rough, then it will take a dive.

But the fix has been in for a long time.     

First, the federal government is not even pretending to protect the dollar. It is spending money wily-nily on every cockamamie scheme that comes its way. The deficit this year is anticipated to be $1.7 trillion – that is more than the entire federal budget in 2002. And the interest on the debt is already reaching almost $800 billion. Soon will hit $1 trillion.

All of this spending, far in excess of receipts, is inflationary.  

Under Pressure

And the Fed, too, is already well advanced with its ‘stealth pivot.’ A month ago, it quietly changed the way it handles its QE bond portfolio. Instead of letting the bonds run off – as had been the program (to reduce the money supply) – the Fed began quietly rolling them over…effectively increasing the supply of debt in the Fed’s balance sheet.

Dan reported last week:

This has been burning up the Twitter wires all night. Quantitative Tightening reduced the Fed's balance sheet by $625 billion when it started on April 13th of last year. Since March 1st, it's up $299 billion. So 47% of QT was wiped out when the first hint of crisis came.

And even now, a year after the campaign of rate hikes began, the Fed’s key rate is still well below the level of consumer price increases. The 2-year “stacked” CPI is around 7%. The Fed Funds rate is below 5%. You can do the math. Speculators and borrowers still earn a net 2%.  

That is why the debt level is still going up. Household, government, corporate – all major categories of debt are increasing…adding to the pressure in the system.

Most likely, the Fed will publicly announce another rate increase this week…and continue with its inflation agenda, without mentioning it.

Regards,

Bill Bonner