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Fed Hikes Won't End Well

Rarely do...

HOW CAN this end well? asks Brian Maher in The Daily Reckoning.

  • Interest rates at their highest level since 2006
  • Credit card debt set to cross $1 trillion for the first time
  • Multiple regional banks on brink of collapse
  • Regulators believe in 'system is strong'
  • One month away from US default

Here you have the reflections of economics crackerjack Adam Kobeissi – he of the eponymous Kobeissi Letter.

Indeed: How can this end well?

We are not half so convinced it can end well. Cling to the banking unpleasantness alone.

As a group, the three banks that have collapsed since March – Silicon Valley Bank, Signature Bank and First Republic Bank – boasted greater assets than all 25 banks that died the death in 2008.

The latter commanded $373 billion in assets in 2008. The former commanded $548 billion in 2023.

Yet what about inflation? Do the two figures truly represent apple-to-apple, orange-to-orange, lemon-to-lemon comparisons?

Even when adjusted for inflation the three recent collapsings exceed the 25 collapsings of 2008.

The latter's inflation-adjusted assets stood at $526 billion – substantially beneath $548 billion.

Here we have not a wobble but a good hard shake...despite all official claims otherwise.

Meantime, we are informed – by Gallup – that 48% of Americans harbor concern for the safety of their bank-housed money.

That 48% figure exceeds the 45% of Americans fearing for their money in the wake of 2008's Lehman Bros. bellying-up.

Dominoes have been set in motion. Which will next go tumbling over? And when will the topplings end?

The answers of course are on the knees of the gods. Yet we bet high the business is far from ended.

The pseudonymous Tyler Durden of ZeroHedge:

"The only thing that can stop this crash is the Fed cutting rates...which, needless to say, would be reputational suicide for the what little credibility the Fed has left as it would be the fastest reversal following a rate hike in history..."

Just last week Mr.Powell disclaimed the possibility of pending cuts to the federal funds rate.

He conceded the distinct possibility of a 'pause'. Yet not of actual decreases.

Who could possibly take the fellow sternly if he executed a sudden 180-degree turnabout? Very few take him sternly as is.

The surrender would sink him.

The foregoing of course suggests he is willing to watch additional dominoes go tumbling.

He is also willing...perhaps he is even inwardly entertain recession.

That is because he believes recession would help scotch the inflation bugaboo that hagrides him yet.

Inflation, official inflation, that is – the phrase is necessary – runs at 5%.

The fever has subsided from last June's 9.1%, it is true. 5% inflation nonetheless represents a fever, a junior fever.

The Federal Reserve's conception of a homeostatic 98.6 degrees is 2% inflation. Until it is attained the central bank will administer to the patient in his sickbed.

Recession would elevate the unemployment rate and depress the consumer spending rate. That is, recession would depress the inflationary fever.

Yet what if the patient is in the hands of a quack physician whose witch-doctoring, potions and patent medicines have lost all curative power, all oomph?

What if the Federal Reserve has lost all control of the economic and financial patients under its care?

What if the Federal Reserve is powerless?

Formerly an independent researcher and writer, Brian Maher is managing editor of The Daily Reckoning, the contrarian investment email launched in 1999 and now read by over half-a-million people worldwide each day.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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