Biz Builder Mike

You can't sail Today's boat on Yesterdays wind - Michael Noel

The Fed Demands Higher Inflation

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For a while now, it’s been clear that the Fed wants higher inflation.

Now it’s finally starting to admit it. Here’s an excerpt from CNBC’s article this week titled “The Fed is expected to make a major commitment to ramping up inflation soon:”

“In the next few months, the Federal Reserve will be solidifying a policy outline that would commit it to low rates for years as it pursues an agenda of higher inflation and a return to the full employment picture that vanished as the coronavirus pandemic hit.

Recent statements from Fed officials and analysis from market veterans and economists point to a move to “average inflation” targeting in which inflation above the central bank’s usual 2% target would be tolerated and even desired.”

In essence, the Fed is arguing that because inflation has been so low over the past decade or so, they can “make up” for those lost price increases going forward.

The Fed’s justification for higher inflation is shaky at best. Here’s how CNBC explains it.

“The Fed and other global central banks have been trying to gin up inflation for years under the reasoning that a low level of price appreciation is healthy for a growing economy.” 

So the “official” explanation is that higher inflation is good for the economy. Seems strange, doesn’t it? Higher prices are horrible for the average person. It’s an invisible tax that erodes savings and hampers financial performance.

But inflation does have one very specific “benefit” for the economy. Inflation will help wipe away the huge amounts of debt we’ve built up over the last few decades. It will help corporations, governments, and individuals who borrowed too much deal with their debt problems. 

I think that’s the real reason they want more inflation.

Will They Succeed?

The big question is this: can the Fed achieve the level of inflation it desires? Many investors are skeptical that they can. Just one year ago, the cover story for Bloomberg Businessweek was “Is Inflation Dead?”

Bloomberg Businessweek "Is Inflation Dead?" Cover

The Economist ran a similar article last year — subtitled “The end of inflation?” — which seemed to argue that inflation used to be a problem, but is no longer relevant today.

The problem is that analyses like these rely on official inflation data. But many of us believe that inflation today is much higher than official Bureau of Labor Statistics numbers say. John Williams, an econ PhD who operates ShadowStats.com, offers an alternative measure of inflation. He simply uses the same methodologies that the U.S. government did in 1980 and 1990. His 1980-based measure shows inflation could be as high as 8% today. And the 1990-based version shows around 4% annual inflation.

The measuring stick the government uses for inflation has changed a lot over the past decades. And every change seems to only result in lower numbers.   In my view, it’s likely that inflation is already far too high. Just take a look at the long-term rise in healthcare costs, education and housing. Inflation is all around us.

Another thing we have to account for is the current trade war with China. Cheap imports from China have helped keep prices down significantly. If the trade spat continues to escalate, consumer prices will likely rise.

So yes, I believe the Fed has already succeeded in creating significant inflation. And it’s now openly discussing plans to make it even higher.

The investment world is slowly reacting to these trends. That’s why gold just hit an all-time high over $2,000 and silver is up 58% this year. It’s almost certainly why bitcoin is breaking out and is currently trading at close to $11,900. 

A Sustainable Trend

Loose monetary policy by the Fed and other central banks is what’s driving these assets higher. I believe it will continue for 10 years — maybe longer. This is why I’ve been pounding the table on precious metals and other alternatives. There are no other investments in the world with such a strong fundamental bull case.

I expect these assets will continue to outperform for years to come. This is not some quick trade for me. It’s a 5-to-10 year plan. I don’t think the Fed will be able to raise rates — or stop printing money — for at least that long.

So while precious metals and bitcoin have done quite well over the last year, I think we’re just getting started. Needless to say, there will be dips (buying opportunities) along the way. But I’m betting that the trend remains higher for years to come.

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US Federal Reserve Is Focused on Launching FedNow for Real-Time Digital Payments and Settlements

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The US Federal Reserve, which is the central banking system of the country, has reportedly been working on a new real-time payment and settlement system, called FedNow.

Governor Lael Brainard claims that the Fed plans to have FedNow fully operational as soon as possible. Brainard notes that the COVID-19 outbreak and resulting challenges have proven or shown that it’s vital that US residents have immediate and convenient access to funds.

She remarked:

“The COVID-19 pandemic is taking a tremendous toll on communities across America, especially households and small businesses with the least liquid resources to weather the storm. Emergency relief payments authorized in the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, provided a vital lifeline for many households. The rapid expenditure of the COVID emergency relief payments highlights the critical urgency of immediate access to funds for the many households and businesses managing cash-flow constraints.”

It’s been around a year since FedNow was proposed, which will basically serve as a new and improved payment system. The US has reportedly not made major updates to its payments networks since the past four decades.

Brainard reveals that the Fed has made “substantial strides” towards developing the FedNow system. There are more than 100 people actively working on the initiative.

Although the official launch date might not be until a few years from now, the Fed is taking a phased or step-by-step approach to developing the network. This will ensure that important features are properly developed, and make it to the market “expeditiously” with extra capabilities being incorporated after the foundation has been established.

Brainard stated that there would be updates made to the US’ core interbank clearing and settlement capabilities. She added that FedNow would incorporate other important features such as tools to detect potentially fraudulent transactions or activity.

The FedNow service will also adhere to the ISO 20022 message standard, in order to ensure  interoperability with the Clearing House’s RTP network, which is a private sector alternative to the payments network.

There will also be features that allow people to use their email addresses and phone numbers to conduct digital payments. These add-ons will be made at a later time, due to certain legal and security issues.

Brainard said that the Coronavirus crisis shows how important it is to be able to make instant payments. The Federal Reserve led processing of payments to US households was quite slow, because it relied mostly on using traditional methods such as issuing cheques, direct debits, and prepaid cards.

Brainard noted:

“By contrast, the ability to disburse funds via instant payments could have helped reduce the strain for those who needed the funds quickly in order to meet financial obligations.”

She emphasized the importance of the role that the Fed can play in supporting innovations in the payments sector, which may include the responsible adoption of appropriate Fintech solutions.

However, the governor expressed doubts or reservations about the controversial, Facebook-led  Libra project. She said that Libra gives rise to “fundamental questions about legal and regulatory safeguards, financial stability, and the appropriate role of private money.”

Brainard added:

“The promise of the FedNow Service is that it will provide a modern payment infrastructure for the future, bringing the benefits of instant payments to communities across America and improving the way households, businesses, and government agencies make payments for many years to come.”

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