This is a transcribed excerpt from the “Bitcoin Magazine Podcast”, hosted by P and Q. In this episode, they are joined by the Bitcoin Magazine Pro team to talk about Federal Reserve policy decisions.
Listen to the episode here:
Dylan Leclair: Obviously everyone’s favorite question and no one has the answer is, “When will Pivot?” Luke Groman said August , which I think is – I really respect Luke and his opinions on things – but I think it’s a little early. It’s aggressive; it’s very aggressive.
I think the train goes off the tracks very fast here. Sat [Rule] and I’m kidding. We send economic charts to each other every day and we haven’t sent yet, to see a nice chart over the last month with all this deteriorating data and public sentiment.
What do you think of the rest of 2022 and possibly 2023?
TXMC: This liquidation of government debt paper. It’s really interesting because it describes the playbook, which makes inflation work hot. Remove the yields so that they are lower than inflation and over time the debt sort of dissolves.
But the problem they [the Federal Reserve] you alluded to in Dylan is that inflation has gotten too high. Right? It can’t stay at 8%, 9% year over year and part of the reason it’s so high is that things are beyond the Fed’s control at this point: supply chain constraints. procurement, China’s zero-COVID policy and Russia’s invasion of Ukraine. It all got worse. What really started in 2020, obviously the fiscal stimulus created a lot of demand, and then after the economy reopened, that didn’t help either. Inflation has gotten out of hand for them, so I think the playbook of “Oh, let it steam a little bit,” as Janet Yellen has even said in the past. We were open to the idea before she was Treasury Secretary.
I think back to when she ran the Fed, she said something to the extent that: it’s even okay for us to let inflation overshoot the target for a while. As long as the economy seems to be doing well. You would think that maybe they do to some extent here. Maybe they don’t want inflation to suddenly go back down to 1% because that helps reduce debt, as you mentioned.
If you look at it by quarter it goes up to 136, but my chart was a yearly average. You can see it’s going up to around 130 or so, and it’s down to around 124, 120 (5% debt to GDP). So it worked to some extent. But because it’s so high, and there are serious structural problems in the economy that could make the high costs tenacious, it leads to a lot of social unrest, which simmers below the surface. It’s a real revolt in some countries, but here in the United States, it’s still simmering below the surface. This is obviously the number one topic for voters in a midterm election year. You and Sam are like looking at all this data and it’s only getting worse and you’re absolutely right.
Looks like in some ways they’re just trying to keep the wheels off the bus until we’re done with the election. Because afterwards they can all relax and we can just let the economy deteriorate because they don’t want to have to talk about stimulating the economy or helping to cover the costs of working class citizens who are losing their jobs because they caused so much economic stress before we even got to the election.
They are in a very difficult position here. There are plenty of signs that perhaps inflation is persisting. It may not go down, it may be down to 2% or 2.5% anytime soon. Maybe it stays high at 4%, 5% or 6% or worse.
If so, what does it look like when the Fed has to do an about-face in this environment? When people are forced to spend far more on non-discretionary things than they did in the past: housing, food, and gas to get to work. What does this look like for the economy?
If they can’t spend freely and drive expansion and speculate and do all the things that really produce an exciting bull market for market participants, how do we create? In an environment where costs are stubbornly high for things people have to pay for, I don’t know if we have a good answer to that.
There is certainly no recent model for this exact environment and certainly not in the era of quantitative easing and every time in the past. When will the Fed pivot? When they pivoted in 2020, which produced this hilarious, absurd, straightforward market for so long, the CPI was at 1.5% and the market fell 35% in a single day.
So the environment was quite different. It was much more panicked. The future was even less certain than it is now and inflation was considerably lower, but we are not there today. I don’t think any of the outcomes available to them are particularly attractive at this point.
Check out the entire episode to hear the rest of the conversation!