Muse 001: Where to start?
Origin Story
In Greek and Roman mythology, a muse referred to each of nine goddesses, the daughters of Zeus (god of sky and thunder) and Mnemosyne (goddess of memory), who preside over the arts and sciences. The above is, of course, the definition of a muse as a noun but it can also be used as a verb. That can be defined as “ to be absorbed in thought” or “say to oneself in a thoughtful manner”. I like all of this as it relates to what I intend these writings will to be for both myself, as well as, anyone who finds value in them.
Where to start?
The last reading of inflation was 8.6%, the last reading on GDP growth was negative, and we will get updates for both of those in the next few weeks. Most of us will celebrate the declaration of independence this weekend and again, most of us will not understand that we had to fight for more than 7 years after that declaration. I see that as a parallel to the misnomer in the mainstream implying that Jerome Powell is going to “Volcker it”. In order for the Federal Reserve (“Fed”) to tame the aforementioned inflation, which is much higher than their LT target of 2%, they have been tightening monetary policy. This essentially means they are making it harder to access new capital, but the problem arises in that they are doing this while the economy is contracting. It will be interesting to see what the Fed does with this tightening rhetoric if, as some are estimating, we get another quarter of negative GDP growth. You see, the Fed would typically reduce rates and provide liquidity to markets in the event of recessionary pressures but that only works if you are seeing low or negative inflationary pressure because that easy money policy will cause inflation despite what the MMT folks will lead you to believe (see monetary policy of 2020-21). This feels like the epitome of the proverbial rock and hard place. There are two types of inflation: demand pull and supply push. They are relatively self explanatory but understand that the Fed can only affect the demand side of the equation. Demand can be further divided into elastic (if price goes up, less demand will ensue), for example luxury goods, and inelastic (regardless of price, demand persists), for example food and energy. They are doing their best to quell the fire of the demand pull variety that they lit the match to but they cannot ease the inflationary pressure for food and energy, which is acting as the gas poured on the fire *pun intended* of which we are sure to see a lot of due to the conflict in Ukraine. For example, Russia supplies Germany with half of its oil, gas, and coal, and normally the Russia/Ukraine region supplies Africa with 40% of its wheat needs. This may seem like it shouldn’t concern the US but, suffice to say, it will wreak havoc across global supply chains because people need energy and calories despite price. The elephant in the room in all of this is the debt to GDP conundrum that permeates all of the globe. Specifically, the debt to GDP of the US in 1980 was around 30% and today that number is over 120%.
Prediction Time
I expect the Fed to continue posturing until they break the back (or will) of something, that which I have no prediction about. At that time they will need to reverse course (or famously referred to as the Fed pivot, see the 2020-21 comments about “not even thinking about thinking about raising interest rates until 2024”), which will lead to a rocket ship of the usd price of stocks, bonds, gold, and bitcoin. I expect bitcoin to be the fastest horse. I also think there is an above current consensus chance that this causes hyperinflation due to the lost credibility of global central bankers but that will be for another muse.