The Fed Doesn't Know It, but It's Printing Money Right Now

The Fed Doesn't Know It, but It's Printing Money Right Now

By Mike Norman

Mar 16, 2017 | 12:00 PM EDT


Gold up, dollar down. That wasn't supposed to happen, at least not if you listened to the mainstream economists out there and the pundits. Gold was supposed to fall and the dollar was supposed to scream higher.

There has only been one person who has been consistently telling you that the way it works was the opposite of the way everyone believed. That person was me. I've explained it. Modern Monetary Theory explains it. Rate hikes are price adjustments higher. In fact, I've said, don't even call them rate hikes or rate cuts. Call them price hikes and price cuts.

Rate hikes are inflationary. They don't quash inflation, they fuel it. And being inflationary, they are not good for a currency. Inflation is not good for a currency. I'm even surprised I have to explain that to people. Inflation literally means your currency is worth less. Why would anyone think that the currency should be valued higher when it has lost purchasing power? If that were true, then Zimbabwe would have the strongest currency in the world.

I've also said that a dollar is the same as a Treasury of zero maturity. Everyone understands that when the Fed is raising rates, Treasury prices go down. Same with the dollar. You raise rates and the "price" of the dollar goes down. It doesn't go up. It may go up for a day or two or maybe a little while because all the misinformed people believe that's what's supposed to happen so they buy it, but that's not how it works. Eventually it falls back down. Rates up, dollar down. Rates up, inflation up, not down.

Same with gold. It's an inflation hedge. The interesting thing is, everyone seems to know that. They even go around telling you that, but then do the wrong thing. They sell gold when the central bank raises prices. (Hikes rates.)

By the way, raising prices (hiking rates) in the absence of higher output -- which is exactly what rate hikes do -- is the most corrosive form of inflation. It's pure "money printing."

People don't get this. The Fed doesn't even get it. The Fed is creating its own inflation cycle and it will only end when inflation outpaces the growth in incomes. That's when demand destruction occurs. And let me tell you, we're getting there.

Personal income is rising at 4.0% year over year and consumer prices are rising at 2.8% year-over-year. Last January, personal income was rising at 3.9% and consumer prices were rising at 1.3% and the January before that (January 2015) personal income was rising at 5.2% and inflation was actually falling, down 0.2% year over year. So the gap is narrowing.

You know that fiscal flows (government spending) are my big thing. I look at government spending all the time because it drives everything. The growth (or lack of growth) of the fiscal flows correlates pretty closely to the growth (or lack of growth) in GDP. Why shouldn't it? Government spending equates to income of the private sector, to the penny. The spending that the government does flows to someone or some firm(s), right?

Having said that, I will tell you that so far this quarter, the average year-over-year growth rate of government spending has been 0.73%. So, that is my GDP forecast for the first quarter: 0.73%. And I ask: this is what everyone is getting all bullish about?

Granted, we don't have the official number yet and it won't be out for another month and a half, but that is my forecast. Remember it. I'm sure I'll have everyone beat.

Here's the outlook: Inflation higher. Gold, commodities higher. Treasuries, dollar, lower. Stocks, lower.

http://realmoney.thestreet.com/articles/03/16/2017/fed-doesnt-know-it-its-printing-money-right-now

Another wanna be know it all ....