
Zeitgeist: Tightening Into A Slowdown
A consensus is forming around the notion that the Fed is on the brink of tightening the US economy into a slowdown.
The thesis isn't complicated. The fiscal impulse is on the wane, consumers are anxious about inflation, a new virus variant threatens to bring about another winter COVID wave and Fed officials are almost uniformly in favor of an accelerated taper in order to make rate hikes possible as early as Q1 2022.
The combination of those factors argues for slower growth. The Fed is caught
I guess we will find out what kind of Man JPowell truly is. He didn’t hold up so well in December 2018.
Shouldn’t Modern Monetary Theory have the answer for the abundance of dollars it creates?
The answer is to raise taxes so as to pull dollars back out of the economy.
That would only be appropriate if the economy was at full resource utilization, which it is not. Inflation is not a monetary issue. It is always a supply issue. An economy with slack will increase supply to meet demand. If there was no slack, then taxing back demand would be appropriate. Taxing now or cutting spending (same thing) would remove support and start a recession.
So what’s the fuss all about if it’s so easy…just tax away the inflation right?
The Fed operates monetary policy which does not have as much of a punch as fiscal policy (spending currency into existence). QE is NOT “printing money”. It is swapping already existing assets (Treasuries and MBS) for free “green dollars”. Treasury spending into the economy creates new dollars that very quickly end up in corporate profits or in private savings. That money creation that is not taxed back, remains as private sector surplus. The physical is what really matters, and that is not going to tighten.
It just occurred to me, isn’t QE money laundering? Isn’t that illegal?
While Powell may pivot back to a dovish stance it is not going to happen until their is broad base evidence in soft and hard data, so months away at a minimum. Once central bankers make a shift, they are unlikely to quickly throw that change under the bus, barring at 1987 crash scenario. One other thing that reading this article made me think about is the Apple and other long duration stocks are touted as candidates for a “bond replacement strategy.” This reminds me of the time into the lead up to the GFC how Wall Street was full of powerpoints proving commodities were a diversifying asset because the correlation to equities and credit was low. If you look back to 2008 or even 2014-2015, it is clear that that Apple as a bond replacement is one of the silliest ideas ever.