Janet Yellen’s at It Again

Ms. Janet Yellen is talking again. From comments Sunday:

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.”

A higher interest rate environment would likely arise from a higher inflation environment.

Inflation is presently on the jump.

Is it “transient” as the Federal Reserve insists? Or is it a mere foretaste of inflation to come?

Expert opinion divides. Yet we would like to ask Ms. Yellen this question:

Precisely how does higher inflation benefit society?

Gradually falling prices — a lovely deflation — are the telltales of economic progress.

Falling prices stretch the dollar in a fellow’s wallet. His dollar fetches him more goods each year that passes… taking the average.

Should we sob over the declining prices of computers, Madame Treasury Secretary?

An Inferior, $500,000 Computer

A Hewlett Packard 3000 fetched $95,000 in 1972. Or over $500,000 in 2021’s money.

Today’s computers run laps and laps around the 1972 computer — and at the price of only several hundred dollars.

Are the inflationists yelling blue murder? Why not?

Come forward a bit…

An Apple Macintosh PowerBook went for $2,299 in 1991. In today’s money, $4,247.

This particular model is no longer on offer. But you can take home today’s version — a far more formidable version — for under $1,000 (deluxe versions cost greater).

Yet should it go for even less money than it does?

$1 in 1991 is the rough approximate of $2.04 in 2021.

Inflation has chewed its way through the dollar at an average 2.33% each year — yielding a cumulative 105% price increase.

Reduced to essentials: 2021’s dollar packs half the oomph of 1991’s dollar. That is:

We are the collective victims of a camouflaged swindle, a slow but steady pocket-picking, a creeping larceny.

Assume 2021’s dollar equaled 1991’s dollar. Today’s computer might go for $500 — rather than $1,000.

Which version would you prefer? Did you answer the $500 version?

Then off you go to the Ivy Leagues for remedial economic instruction. You must come to appreciate inflation’s blessings — and deflation’s curses.

Both Right and Wrong

Yet let us scrutinize Ms. Yellen’s claim that “a slightly higher interest rate environment would actually be a plus for society’s point of view.”

Is it possible to be both right… and wrong… at once? It is, yes.

Higher interest rates may well count plus from society’s viewpoint. As Jim Rickards explained recently:

Yellen’s first mistake is the belief that higher interest rates are the way to cool inflation. Interest rates are not a leading indicator; they are a lagging indicator. Higher interest rates do not signal coming inflation. They signal that inflation is already here…

Higher rates are not generally bad. Higher rates are usually associated with stronger growth. They mean that growing businesses are competing for funds and willing to pay more to get them. Banks can pick and choose from among borrowers and charge higher rates as a result. In short, higher rates can signal a strong economy.

What is more, higher interest rates attract savings. And economic growth rises from a bedrock foundation of savings.

Savings form the granite core of all investment, all consumption.

But today’s “economy” does not rest upon the bedrock of savings. It rests rather upon the sand of artificially low rates.

Any substantial increase in interest rates could knock it down.

No Room for Rising Rates

Total United States debt — public and private — exceeds $85 trillion. Rising interest rates elevate the burden of that debt.

Consider the impact of rising rates on the public finances alone. As we have explained before…

Since 2007, total United States debt… public and private… has ballooned an impossible $30 trillion.

Meantime, the gross domestic product has expanded merely $7 trillion.

Today’s rates fall substantially beneath 2007’s rates. Yet, due to today’s dizzyingly greater debt volume… each incremental rate increase weighs further upon the shoulders.

How much heavier? Mr. Larry McDonald, publisher of the Bear Traps Report:

A 50 basis point move today in yields relative to 10 years ago wipes out literally the entire budget of the marines, the navy and the army. In other words, because there’s so much debt today relative to 10, 15 years ago… a small move in yields, 50 basis points in yields today is equivalent to 2% 15 years ago.

For emphasis: A 50-basis point jump in yields today equals a 2% jump in 2006.

That is, a jump from 1% to 1.50% today… equals a jump from 1% to 3% in 2006.

What happens if yields rise 100 basis points — 1%? Mr.McDonald:

You just have… a ton of wealth that a… 1% move up in yields, number one, it bankrupts the U.S. in terms of your budget right now…. 70% of the budget in the United States is entitlements and interest, so you just can’t afford a big move up in yields.

The Fed Has Killed the Bond Market

The bond market gives the master signal to the stock market and the overall economy.

The monetary and fiscal authorities cannot sit upon their doofus hands if rates climb notably.

They will reach deeper yet into their trick bag to magic them down — through “yield curve control,” for example.

If inflation menaces, the bond market has traditionally shouted a warning.

But today’s bond market is not the reliable inflation detector it once was.

That is because the Federal Reserve has distorted, garbled, jammed and censored its signals.

The Federal Reserve has the bond market transmitting static.

Investors who depend upon its clear telegraphing fumble about, lost.

Macroeconomic analyst Peter Schiff:

The bond market is not working the way it has in the past because the Fed is artificially manipulating interest rates. The biggest buyer (of Treasuries) is the Federal Reserve…

The Fed is… trying to influence the economy, stimulate the economy, prop up the stock market. That is the purpose of the Fed buying Treasury bonds…  And so when you have the Fed in the market, the whole thing is distorted… The bond market is broken. You can’t look at the bond market.

Today the 10-year Treasury note yields 1.52%. Is it a true signal? Or is it static?

We do not know.

“I Don’t Believe They’re Going to Screw It Up”

Yet this we do know:

As Treasury Secretary, Ms. Yellen is fixing to accommodate the president’s behemoth spending bonanza.

“We think that most countries have fiscal space,” she states. “Most countries” — we presume — include the United States.

But what if inflation proves not transient, but permanent? What if interest rates break through the Federal Reserve’s cordon?

The lady sloughs off all concerns, all, worries, all fears:

“I don’t believe they’re going to screw it up.”

But as the wags at Zero Hedge remind us:

“This is the same clueless hack who in 2017 said she doesn’t expect another financial crisis in “our lifetimes.””


Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning