Wednesday while listening to listened to Janet Yellen give her post-Fed meeting press conference I came away with the distinct impression that the Fed is scared. They are afraid of both the fragile nature of the minor economic growth occurring in the United States and they are now on notice that inflation is starting to rear its head. If that's so, this scenario is a upon us much faster than I thought it would be.
A period where the economy grows slowly or not at all, but still has inflation is called "stagflation" - as coined in late 1960's England. While I believe we are in a "slow growth forever" economic world, I didn't believe inflation would be a problem until after the next major deflationary event and another massive round of devaluations. However, with the world is already so awash in devalued cash and now facing rising energy and food costs, it is possible that we are much closer than I expected. "Stagflation" for those who weren't around in the 1970s is bad news.
As is sometimes the case, I begin writing an article and am called away. If the first few paragraphs are a good lead in, I will publish that. The chart and above are what I wrote a full week ago. What is below is what I have been thinking about for a week. I wish I could say I simply got caught up in March Madness and am just now recovering. That's unfortunately not the case. I am truly disturbed by the actions of the central banks of the world, including the Fed's last week.
Here is an article that appeared today in The Financial Times: Central banks prove Einstein’s theory. Please read it before continuing. I largely agree with it. By reading that article first you will understand more about what I am about to write.
When trying to figure out expected actions of an actor, I like to try to figure out what the real goals of that actor are. In the case of the Fed that is not so easy.
It is widely presumed that the Fed acts within its mandate and that is fairly transparent. I don't think that's really true though. As I've discussed in other articles, including this one on MarketWatch - The Fed Has 3 Motives for Raising Rates - I believe that remaining the reserve currency is their most important unspoken goal.
Being the reserve currency is extremely important. It was important in a growing world, but it is even more important in a slow growth world. Ultimately, to maintain social order, the standard of living for the broad population cannot fall. We have already seen what 35 years of stagnating living standards for 80-90% of the population has done to social structure.
If the dollar weakens significantly in a time when most of the benefits of America fall to fewer than 20% of the population, then we will very likely see massive social unrest. A weaker currency would make the cost of living very high for over half of the population that barely makes ends meet. Try telling them to "suck it up" when they worry about finances month to month already. Try telling them to "get a better job" when there aren't enough out there.
The Fed needs to keep the dollar strong without stunting the growth we do have. It's a trick to keep the porridge just right.
More coming this weekend.