How Much Longer Can Keynesian Voodoo Defy Economic Reality?

Mainstream market propaganda based on the religion of John Maynard Keynes holds that the Fed, being financially omniscient, is well on its way to controlling the rate of inflation and that interest rates are on their way down. That faith in the Fed along with massive liquidity it has supplied into the market has enabled stocks to keep on rising despite the Fed reducing its balance sheet a bit. And so, this week when the producer price index of 0.6% was twice the consensus 0.3% rise, the stock market party was somewhat interrupted because investor faith regarding inflation was challenged a bit.

Bloomberg’s Simon White explained that the economy and equity markets have been able to continue partying despite higher rates and the Fed reducing the size of its balance sheet, because on the other hand the Fed has been pumping liquidity into the market through the Reverse Repo facility (RRP). However, the RRP is rapidly winding down, so unless the Fed continues creating money out of thin air to give to banks and replenish the RRP, that source of liquidity may soon come to an end. Also, tax receipts will soon deplete liquidity from the system as well.

Of course, the Keynesian faithful believe that the Fed, which is 100% led by Keynesian economists, is essentially God. After all, the Fed is occupied by over 100 Keynesian-indoctrinated PhD economists. So, the assumption is that it can defy the laws of Nature and Nature’s markets. Based on their Keynesian faith and coupled with the ability of the Fed to seemingly pull rabbits out of hats in the past, the assumption is that the Fed will be successful in keeping the bull market alive in perpetuity.

However, the chart below that was tweeted out by Dr. E.J. Antoni has me thinking that even Keynesians who believe in their supernatural abilities to imagine things into being, might one day be forced to recognize rational human action and mathematical laws.

The Fed used to be profitable and sent those profits to the U.S. Treasury to the tune of billions of dollars per year. Now the Fed spends $600+ million PER DAY to keep the system afloat, paying commercial banks for reserves and reverse repos. The Fed has lost over $156 billion so far, and won’t pay the U.S. Treasury again until it earns enough profits in the future to cover that hole if it ever again earns a profit. In any event it will be a long time. Now if you have faith in the supernatural abilities of mere mortals, then you might believe real economic growth will be restored and the Fed can go back to the days when they were minimally involved in manipulating the economy. Thus far intervention has created problems that have led the need for exponentially more. But if you believe as I do that aside from the supernatural powers of Creator God, mere mortals, Keynesians, Democrats and Republicans included are still subjected to Nature’s laws, which of course eventually dictate economic and market outcomes.

If the Fed is going to have to gift the banking system with trillions of more dollars created out of thin air, just to keep the system afloat and it will generate higher and higher & higher prices that begets higher and higher interest rates. I wonder how much longer this can kicking down the road can take place before Americans face hyperinflation and we indeed do get some kind of currency reset?

In an excellent article titled “The Interest Rate Dilemma,” written by Alasdair Macleod on Substack, it seems it should become obvious even to Keynesians if they dare remove their rose-colored glasses that the U.S. and the Fed have been plunged deep into a cave with no way out. Like someone who is trapped in quicksand, the more they try to climb out, the deeper they sink. Here are some of the thoughts from Alasdair’s March 13, 2024 article.

“Yesterday, US CPI figures came in a little hotter than the market had discounted. I take the view that this is the sort of debate theologians are said to have had about how many angels could dance on a pinhead — a distraction from the real issues. Gold was marked down by nearly $30, and silver by 40 cents or so. But then gold had been rising spectacularly, and speculators were in for the ride. As you can see from the chart, after its recent performance a reaction in the price was hardly surprising.

“The other side of the hedge fund trade is the dollar. And after recent falls, that had a minor bounce to test what has become overhead supply starting at 103 on the trade weighted index.

“Furthermore, the yield on the 10-year US Treasury note saw a bit of a bounce.

“We are having to work through some important misconceptions here. Nearly everyone, it seems, is waiting for the Fed to lower interest rates, so the charts above reflect disappointment. But the mainstream players’ dream of the return to falling interest rates rescuing everything financial is misguided. It is based on some very flaky Keynesian arguments, bolstered by monetarist concerns over stagnating money supply. But they overlook some simple facts:

“With a US budget deficit this fiscal year likely to top 12% of GDP, there is substantial currency debasement in the pipeline. This is the origin of inflation, which is not over. It means that interest rates must remain nominally high until the US Government gets its financial house in order — if it ever does. And a number of other major welfare-driven nations have the same problem. ·     

“The US is now adding a trillion dollars to its debt every 100 days. Actually, it’s worse than that because the pace is increasing. That has to be funded, as well as maturing debt of $7.5 trillion this year. Question: who is going to buy it, and what will they expect in return?

“Lastly, and this is the inconvenient truth. When something is demanded and there is insufficient supply, the price rises. This is true of everything, including the relationship between debt and its interest rate cost. With the US Government simply rolling up its interest costs into new debt and spending regardless of cost, we can be certain that interest rates along the yield curve will rise on a one-year view, almost certainly substantially and for as long as the dollar exists.

“This is where those believing inflation is licked and interest rates will fall have got it totally wrong. The gold price is not driven by an easier interest rate outlook as commonly stated by market ingenues but by a growing realization that the US Government is bust and that will be reflected in the faith in the dollar, particularly from the Asian nations throwing off US influence.

“That is why the dollar-based financial system has been caught with its pants down, capital markets cleaned out of physical bullion by Asian demand and becoming an empty shell devoid of credibility.

“Play with the punters, and you lose sight of the real issue. Sink with the dollar, or swim with gold.”