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The Fed's Money Machine(March 17th, 2023)

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Last week I spoke to you about how the federal reserve's quantitative tightening, which is the reduction of their balance sheet and with it the money supply, was flashing warning signs of a possible deflationary depression. We spoke about the previous 4 times the money supply had been reduced by at least 2% and how each time double digit unemployment and severe recession/depression and deflation followed.

This past week represented, from a dollar standpoint, the worst bank run in US history. The combined deposits of SVB, who filed Chapter 11 bankruptcy today, and Bawey Fwank's Signature Bank, was $263 Billion. As a matter of perspective just those two banks had more depository exposure than all the failed banks in 2008.  

Well, this week the federal reserve has very quietly, and in my opinion recklessly, printed $300 billion to bail out banks. Make no mistake, this is an expansion of the money supply and it will be inflationary, and it is a reversal of the quantitative tightening that was becoming an economic time bomb. The fed is in an awful spot entirely of their and the Biden's administration's making. 

The fed for allowing quantitative easing and zero percent rates to run too long, then reducing the money supply too quickly, ignoring the inverted yield curve which severely limits banks' ability to raise capital and lend. The Biden administration for foolish energy policy, reckless deficit spending of trillions of dollars while raising taxes and regulations, and the Treasury Dept's emphasis on ESG while de-emphasizing sound management practices and fiduciary responsibility.  

The fed had better explain the pivot in the money supply policy just as clearly and as forcefully as they explain further interest rate policy and clearly communicate a market calming strategy in their statement and press conference next week. Just saying we are data dependent ain't enough.

The treasury bond market has experienced a massive influx of capital this week as investors worldwide flee to safe financial vehicles. Yields on the shorter term treasury bonds had dropped almost a whole percent this week before recovering somewhat yesterday and today after the bailouts. The drop in yield from last Thursday to Wednesday was bigger than Black Friday in 1987, 9/11, or the Lehman Brothers crash in 2008. Yikes.

So where does the fed go from here? Do they aggressively raise rates to fight inflation and go back to shrinking the money supply, further steepening yield curve inversion, choking off lending, and risking further bank instability, massive unemployment, and perhaps a depression? Or do they print more money and pivot on rate policy, fueling further inflation which may turn into runaway inflation, but adding capital to stimulate lending and stabilize at risk banks? Neither is good. 

President Biden and Treasury Secretary Janet Yellen are so feckless, so in over their head, so devoid of credibility, and so ideologically rigid that they are not capable of being a good partner with the Federal Reserve in navigating these very dangerous times. In other words, completely useless. 

Jerome Powell, the stage is yours while we turn our lonely eyes to President Trump, as the lies of the media and politicians, unconstitutional election law changes, and unprosecuted election fraud have wrought very real and very serious consequences.  Let's hope Powell comes through in the clutch, because Biden and Yellen never will and Trump coming to the rescue in 2025 is too far away. It didn't have to be this way.... Chris.

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