September 28, 2022

MAHARREY: Fed Paper Admits This Can’t Control Inflation, Blames Federal Government

New document contains bombshell admissions.

It appears someone at the Federal Reserve has figured out that the central financial institution can’t tame inflation, therefore it is setting up a scapegoat – The government.

A paper   co-authored by Leonardo Melosi of the Federal Reserve Financial institution of Chicago and John Hopkins University economist Francesco Bianchi and published with the Kansas City Federal Book argues that central financial institution monetary policy alone still cannot control inflation.

The paper’s abstract asserts, “ This increase in inflation could not have been averted simply by tightening monetary policy. ”

In a nutshell, Melosi and Bianchi argue that the particular Fed can’t control inflation alone. US government fiscal policy contributes to inflationary stress and makes it impossible for the Fed to do its work.

“ Trend inflation is completely controlled by the monetary power only when public debt could be successfully stabilized by reputable future fiscal plans. Once the fiscal authority is not regarded as fully responsible for covering the existing fiscal imbalances, the private sector expects that pumpiing will rise to ensure sustainability of national debt. Consequently, a large fiscal imbalance combined with a weakening fiscal reliability may lead trend pumpiing to drift away from the long-run target chosen with the monetary authority. ”

There are a few startling admissions in this single paragraph.

First, the authors acknowledge how the federal government uses inflation being a tool to handle its debt. In other words, it acknowledges that we’re all paying an pumpiing tax.

Peter Schiff talked about this inflation tax   in an interview on  Rob Schmitt Tonight.

“ Inflation is a tax. It’s the way government finances debt spending. Government spends cash. It doesn’t collect enough taxes, so it has to run deficits. The Federal Reserve monetizes those defiticts – prints money. They call it quantitative easing, but that’s inflation. Government is getting bigger and bigger, and families throughout America are going to have to bear that will burden through higher prices. ”

Second, the paper concedes that merely tinkering with rates of interest won’t slay inflation when the government continues to spend far beyond its means.

And make no mistake, the US government is investing far beyond its indicates. Although the budget deficit is certainly shrinking as emergency pandemic spending programs wind down,   the Biden administration continues to spend   about half-a-trillion dollars every single month, piling on to the ever-ballooning deficit.

This paper confesses what I’ve been saying for months. Government spending is a big problem for the Federal Reserve.   Powell plus Company continue to insist   they will stay in this particular inflation fight until the end. But Uncle Sam depends on the Fed buying Treasury bonds in order to facilitate its borrowing dependancy. As the central bank purchases bonds, it creates artificial requirement and holds interest rates straight down. The government needs low interest rates if it’s borrowing trillions of dollars. Without the Fed’s big body fat thumb on the bond market, Treasury prices will continue to sink as supply outstrips demand, and interest rates will certainly rise.

Melosi and Bianchi also tacitly admit that the Fed isn’t going to win this inflation fight and warns we’re able to be heading toward stagflation.

“ When fiscal imbalances are large and fiscal reliability wanes, it may become significantly harder for the monetary authority to stabilize inflation about its desired target. If the monetary authority increases prices in response to high inflation, the economy enters a recession, which increases the debt-to-GDP percentage. If the monetary tightening is not supported by the expectation associated with appropriate fiscal adjustments, the deterioration of fiscal unbalances leads to even higher inflationary pressure. As a result, a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise. ”

This is exactly what is occurring.

Melosi plus Bianchi call this a “ pathological situation. ”

“ Monetary tightening would really spur higher inflation plus would spark a pernicious fiscal stagflation, with the pumpiing rate drifting away from the particular monetary authority’s target and with GDP growth slowing down significantly. ”

Well hello there, Fed! Welcome to reality.

The Federal Reserve has elevated rates to 2 . 5%. Despite  mainstream assertions to the contrary , it seems the economy has already dropped into a recession.   Private sector economic activity has dropped   to the lowest levels since early in the COVID lockdowns, the  housing market is definitely tanking , and the economic climate has charted two straight months of negative GDP growth.

During his Jackson Hole presentation, Jerome Powell said the Fed will “ use our tools forcefully” to obtain inflation under control and even conceded that  it will result in some economic pain . But  the quantities undercut Powell’s confident statements . The Fed would need to raise rates to a level that would obliterate this bubble economy in order to cool pumpiing.

I think the central bankers know this. This paper, co-authored by a Fed official, makes that will pretty clear. I think the particular central bankers are setting the stage to hand point and pass the buck when this whole inflation-fighting scheme blows upward in their faces.

The paper states,   that the central bank may control inflation “ only when public debt can be successfully stabilized by credible upcoming fiscal plans. ”

Do you think that is going to take place?

I do either.

In fact , the only workable plan is for the Federal Reserve in order to monetize more debt by purchasing more Treasuries with more money created out of thin air. This is one reason I’ve been stating for months that  the Fed won’t win this inflation fight .

In one sense, I think the Fed is environment the stage for its personal failure. It’s already producing excuses. And it’s a little horrible. The central bank put  quantitative easing   on steroids during the outbreak, injecting nearly $5 trillion into the economy. That is  the very definition of inflation . If you want to know that to blame for this inflation mess, the Fed stands in front of the line.

That said, this paper isn’t completely disingenuous. As I have already explained, the federal government plays a role in the inflation game too. As the saying goes, it will take two to tango. Federal government spending is out of control, and the spending spree necessitates inflation. (It’s not just Biden’s problem — the Trump management was running massive loss prior to the pandemic. )

So , even if Melosi and Bianchi are trying to stage the finger in an additional direction, they aren’t incorrect when they write, “[Stagflation] is caused by the progressive deterioration of the fiscal authority’s credibility to stabilize its large debt as well as the realization that the reputation of the particular monetary authority is incompatible with the expected behavior of the fiscal authority. ”

In plain The english language, the central bank still cannot stop inflation when the federal government needs inflation to survive.

This paper will not get much attention. In fact , it comes with a disclaimer — “ The views in this document are solely those of the particular authors and should not be construed as reflecting the views of the Federal Reserve Bank of Chicago or any individual associated with the Federal Reserve Program. ”

Regardless, they’ve swerved into the reality and we’d do well to pay for attention.

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