"We have the tools but are scared to use them"

Jay Powell and Janet Yellen are not fools. They know exactly what they are doing. Federal debt is at a precarious level of more than 120% of GDP. Inflation is the only viable course to restore government solvency.

Federal Debt/GDP

Default is another option, but that would be a political and economic catastrophe. Far easier to inflate GDP through massive deficits funded by Fed bond purchases — reducing the ratio to a sustainable level — while soothing the bond market with talk of "transitory" supply shortages.

"We have the tools if we need to use them"

The consumer price index (CPI) broke above the AAA corporate bond yield, warning of another "transitory" inflation spike — like the last two below.

Moody's AAA Corporate Bond Yields & CPI

Previous Fed Chairs would be reaching for the blunderbuss but Powell and Yellen are slow-walking this, talking about a response without actually doing much.

There are no free lunches

Central banks have only one tool to tame inflation. That is to raise interest rates to destroy jobs. Only by destroying jobs can the Fed take the heat out of the job market, raising unemployment to eliminate rising wages pressure. The problem is that raising interest rates is likely to plunge a still fragile economy into recession — slowing GDP growth needed to restore fiscal solvency.

That is why Fed officials are reluctant to talk about raising rates until 2023:

Boston Federal Reserve President Eric Rosengren said Monday he would be prepared to start rolling back some of the central bank's easy monetary policy this fall but isn't ready yet to start thinking about raising interest rates. (CNBC)


Interest rates are likely to remain low until late 2023.

Inflation is expected to spike higher, boosting GDP and reducing the federal Debt-to-GDP ratio to sustainable levels (below 80%).

Real long-term interest rates, in turn, are likely to remain deeply negative for several years.

Sell bonds. Buy Gold and precious metals.

Quote for the Week

.....Managing narratives has replaced actually solving pressing problems. It's now impossible in America to actually address pressing problems without stepping on the toes of one politically powerful and politically sacrosanct cartel or another, and so problems fester and multiply to the point they cannot be solved within the status quo, regardless of how many trillions are conjured and squandered.

To mask the coming collapse, narratives must be tightly controlled. Since collapse can't be forestalled without making powerful enemies, the only politically expedient option left is to eliminate any dissent that questions the officially sanctioned happy-stories.

When a society and a state give up the search for solutions because real solutions will negatively impact politically powerful cartels, collapse is only one step away...... managing narratives isn't the same as managing the real world, and the real world eventually crushes the happy-story narratives and those who actually believed them.

~ Charles Hugh Smith, Why The Wheels Are Coming Off


Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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