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The Great Monetary Pivot of 2024

Published 07/10/2024, 02:00 AM
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In the wake of the 2008 financial crisis, the Fed brought interest rates to roughly 0% and held them there for years.

Then, in late 2015, they started a rate-hiking cycle that lasted until the repo market turmoil in late 2019.

After the outbreak of the Covid hysteria in early 2020, the Fed brought interest rates back down to around 0%.

Inflation subsequently hit 40-year highs in 2022, forcing the Fed into another rate-hiking cycle, one of the steepest in history. In just 18 months, the Fed hiked rates from around 0% to over 5%, where they remain today.

The chart below illustrates these last 18 years of monetary policy.

Fed Funds Effective Rate

With the soaring interest expense on the federal debt set to become the largest item in the budget, I do not expect the Fed to raise interest rates much more.

For context, the last time inflation was raging, Paul Volcker needed to raise interest rates above 17%. However, that was in the early 1980s, when the US debt-to-GDP ratio was around 30%. Today, it’s north of 120% and rising rapidly.

Today’s higher debt load and accompanying interest expense are why the Volcker option is not on the table; the growing interest expense could lead to the US government’s bankruptcy.

So, I do not expect the Fed to raise interest rates much more, if at all.

In fact, the Fed paused the rate hikes about a year ago (July 2023) and has recently signaled a pivot to easing again.

That means the Fed has effectively given up on bringing price inflation down even though the year-over-year change in the CPI remains around 3.3%, significantly higher than the Fed’s target of 2%.

In other words, even with their own crooked statistics and rigged game, the Fed has failed even to come close to their inflation target. It’s a massive failure.

Bloomberg is already hailing it "The Great Monetary Pivot of 2024."

Gold Calls the Fed’s Bluff

During the current rate hike cycle, something strange happened with the gold price.

Historically, gold has been negatively correlated with real interest rates.

When real interest rates rise, the gold price tends to fall, and vice versa. This is because investors may prefer to hold US Treasuries over gold when real interest rates are high.

That historical relationship broke in 2022.

Real interest rates increased substantially as the Fed started its steep rate hike cycle, yet the gold price went UP.Gold vs Rates

Not only did the price of gold go up, it skyrocketed to a new all-time high something few analysts would have expected in an environment of steeply rising real rates.Gold Price Per Ounce

The fact that gold broke its historical inverse relationship with real rates and shot to record highs signals something strange is afoot.

It’s Like the Market is Waving a Big Red Flag.

The last time something like this happened was in the 1970s, as inflation spiraled out of control.

At the time, investors rushed to gold because they did not believe the Fed could control inflation, even as real interest rates rose.

There’s an excellent chance the market is telling us something similar today.

I think this is a strong market signal that the Fed is trapped. The US government’s spiraling debt will force the Fed to abandon its fight against inflation and engage in more currency debasement.

In other words, the Fed is trying to claim that it CAN taper a Ponzi scheme, and the gold market is calling the Fed’s bluff.

It’s crucial to understand that by surrendering to inflation, the Fed is returning to the same policies that caused prices to rise in the first place.

Quantitative Easing (QE) is a euphemism for rampant currency debasement used by central bankers. It’s sure to return soon and be larger than previous programs.

(Although the Fed may concoct some other confusing name and call it something other than QE, I’m sure the effect will be the same—currency debasement.)

During the Covid hysteria, the Fed was creating $120 billion out of thin air each month, which was significantly larger than the $40 billion/month during QE3, which was significantly larger than the monthly amount during QE1 and QE2.

That’s why I expect the coming QE—or whatever they call it—will be significantly larger than the $120 billion/month of fake money they injected into the economy during the Covid scam, which caused this ongoing bout of inflation.

If the gold price is already hitting record highs amid rising real rates, imagine what could happen when the Fed flips back to easing with even more currency debasement than the previous rounds of stimulus.

Let’s put the pieces together to see the big picture.

  1. One of the steepest rate hike cycles in history couldn’t stop inflation.
  2. The Fed can’t raise rates much further without bankrupting the US government because of the soaring interest expense on the skyrocketing federal debt.
  3. QE is likely to return and be bigger than ever.

If the above three points are valid—and I believe they are—they raise an important question: How will the Fed EVER escape the trap of increasing currency debasement (QE Infinity)?

I don’t think it will be possible.

The implications of that are enormous.

Here’s the bottom line.

This could be the last rate hike cycle before QE Infinity, which would presage the dollar’s collapse, or as Ludwig von Mises—the godfather of free-market Austrian economics—put it, the "final and total catastrophe of the currency system involved."

Unfortunately, most people have no idea how bad things can get when a currency collapses, let alone how to prepare.

We will likely see incredible volatility in the financial markets that could decimate many ordinary people’s life savings and retirement assets.

But I’m not just talking about a run-of-the-mill stock market crash or a currency crisis

It’s something much bigger with the potential to alter the fabric of society forever.

It’s created an economic situation unlike we’ve ever seen before, and it’s all building up to a severe crisis on multiple fronts.

It could all go down soon and it won’t be pretty.

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