The most powerful jaw in history
Jerome Powell has an incredible superpower. Where did he get it?
Federal Reserve chief Jerome Powell has what must be the most powerful lower mandible in human history: if it moves up and down, and tells the world that the fight against inflation is over, well, in a matter of hours, there will be millions more millionaires.
If, on the other hand, it insists that it will take the Fed’s key rate to 9.5% – 3% higher than consumer price inflation – then you would see billion-dollar businesses collapse in a heap and billionaires suddenly homeless, penniless, and friendless.
A woman may start up a coffee shop. She borrows money. She does the maths. At 5% interest, the numbers work. The shop prospers. But if the interest rate is forced up, say to 7%, then all of a sudden the expenses are greater than the income. The shop loses money. The poor woman runs through her savings and then close her doors.
The world economy is made up of millions of people like that. In small businesses and big ones. And Powell, if he chooses, can wipe them all out in a matter of minutes. Whence cometh this superpower? Is he the richest man on Earth, the smartest, was he elected? Was it an accident of birth or a product of his own genius? None of the above. Powell is just a salaried employee of a private company, granted extraordinary powers by the federal government.
The federal government changed the dollar in 1971 (when its tie to gold was severed). Thereafter it could easily be manipulated. Politicians overspend. And they typically cover their excess spending by printing extra money. Then, everyone begins to borrow and spend, all trying to stay ahead of the wilting currency. It is the kind of inflation that is endemic in a fake-money system.
The trouble with this whole fake-money shebang is that it comes with a cyanide capsule already in its mouth. As the money supply grows, so does the amount of debt in the economy. New money is borrowed into life. It dies – lowering the money supply – when the debt is retired, renounced, or inflated away. So, when the Fed lets its balance-sheet decline, as it is doing at the present time, it means that the biggest lender in the world is reducing its holdings of debt and effectively disappearing money. That is when the lower mandible closes on the upper, and the cyanide flows into the system. Money vanishes and the whole circle of fake prosperity, caused by fake money, lent out at fake rates, reverses.
Many are the subplots and nuances of this drama. But the main story is this. For the last 40 years, the Fed pumped in cash and credit. Asset prices rose. Debt increased. Now, Powell is taking away the punchbowl. He’s siphoning off the cash and making credit harder to get. There will be plenty of twists and turns in the plot. But expect more surprises on the downside than on the upside.
“The fake-money system comes with a cyanide capsule in its mouth”