Powell Has Restarted America’s Wealth Transfer Machine

  1. Rent is outrageous in many/most parts of the nation due to:
  2. The cost of food will remain high and unaffected by interest rates because:
  3. The price of energy commodities -WTI Crude Oil, RBOB Gasoline, Henry Hub Natural Gas, and Heating Oil -have soared since shortly after the start of the pandemic.
  4. In closing, let me ask you,

Well, it would be more appropriate to say that he recently initiated the second phase of a well-architected cyclical mechanism that serves a single purpose: to transfer wealth from the lower and middle classes to the ultra-wealthy. Here’s a summary of how it works:

Phase 1: Stoke the economy until it’s red-hot and fabricate an asset bubble

  • Implement Quantitative Easing (QE) programs and loose monetary policy coupled with irresponsible fiscal policy (coordinated with wealthy legislators and politicians) in order to manufacture a macroeconomic environment that creates an excess of consumers. Note, the Fed’s definition of consumers is: stupid people that have jobs that they can’t afford to lose.
  • Do nothing, for years. Despite a booming economy that’s red-hot, maintain the existing loose monetary policy, and implement other programs (asset purchases, bond purchases, etc.) that continue to accelerate growth of the economy and produce more consumers.
  • Maintain the Federal Funds Rate (FFR) at irrationally low levels compared to its long-term historical average.
  • During this time, poor people and relatively poor people (aka “middle-class”) buy homes at inflated prices (because they’ve finally saved up enough for a down payment and qualify for a mortgage), they load themselves with debt, they buy brand-new vehicles (that are, of course, financed), and acquire liabilities that they mistook for assets.
  • → The primary goal in Phase 1 is to create an asset bubble in real-estate, equities (stocks), and commodity markets.

Phase 2: Effect a precipitous decline and pop the bubble

  • The Fed does this by abruptly changing course on monetary policy and shifting from QE into tightening.
  • The goal in this phase is to slow and eventually stall the economy enough that layoffs of both blue-collar and white-collar workers occur en masse.
  • Once the layoffs happen, the poor people that are now laden with debt have to start selling their stuff. Many will go into bankruptcy. Many will be underwater on their home because they bought it late in the game when prices were ridiculously inflated.

Phase 3: Transfer wealth by acquiring distressed assets on the cheap

  • Rich people acquire all of the assets (at fire-sale prices) that the poor people are forced to liquidate due to their inability to service their monthly debt.
  • Allow the poor to lick their wounds and figure out how long it’ll take to repair their credit while the rich rent out the homes that they purchased from the poor right back to them.
  • At this stage, the economy is in the crapper, the unemployment rate is high, and a lot of lives have already been ruined. Once the lion’s share of the assets have been transferred to the wealthy, it’s time to restart the cycle with Phase 1 in order to “get the economy back on its feet, and support the labor market for the lower and middle-class.”

Rinse and repeat, over and over.

As recently as July of last year, Powell was still using the term “transitory” at FOMC press conferences and didn’t officially ditch the term until November despite inflation accelerating at an eye-watering pace. It was obvious, beyond obvious, to me and I’m sure to many others that it was anything but transitory. It was systemic, with readily identifiable fundamental root-causes; examples include: show-stopping supply chain bottlenecks worldwide, a terroristic war imposed on Ukraine that would cut off up to 40% of the world’s wheat supply and likely lead to shortages of oil and gas in Europe, an ongoing pandemic (the worst seen in over 100 years), tariffs imposed by food-exporting countries, degradation of diplomatic relationships with China, a dramatically reduced worldwide labor force (due to the pandemic), truckers unable to profitably transport goods across the U.S. due to exorbitant diesel prices, unions (longshoremen, rail, and trucking) striking for reasonable wages, skyrocketing freight rates on transcontinental container ships, severe shortages and astronomical prices of agricultural inputs (fertilizer, herbicide, pesticide, and fuel), widespread geopolitical instability, and myriad other factors. Literally, too many to list. They were all obvious. They were all fundamental, and anything but “transitory.” I’m belaboring this point, not because it was a critical phase in the plan (outlined above) but because it demonstrates the dedication that Powell and our government officials have to executing on the roadmap of the Wealth Transfer Machine.

It is inconceivable that Powell and the other Fed presidents actually believed that inflation was “transitory.” The Fed has, at its disposal, an army of analysts (thousands of them), PhDs in Data Science, PhDs in Applied Mathematics, Economists, researchers, as well as access to petabytes of economic data and analysis that the public doesn’t ever see. In short, they were lying. They had to be. There’s no level of incompetence that could possibly lead to the conclusions that they espoused. This makes sense because in order to execute on Phase 2, there must be a precipitous and rapid deterioration of the economy that results in joblessness. A “soft-landing,” which would have been quite easy to achieve had the Fed simply started increasing rates and reducing QE when the economy was healthy, would not have popped a bubble but rather let it fizzle out. That isn’t what they wanted. They want foreclosures. When do people throw their hands up and walk away from their homes? They do it when two conditions are met: 1. They’ve lost their jobs and don’t have sufficient income or savings to pay their mortgage, and 2. They’re underwater (i.e. they owe more on their home than what it’s currently worth). The reason for the second condition is that when people have equity in their home, they have options that can keep them in it, including refinancing (e.g. using an ARM with lower monthly payments in the near-term), taking out a HELOC, or selling it for a profit (or breakeven, or small loss including transaction costs).

The last cycle of the Wealth Transfer Machine resulted in (and ended with) the Global Financial Crisis (GFC), in which Phase 2 started materializing in/around the spring of 2007. There were alarm bells ringing before then, but that’s approximately when shit hit the fan, and the aristocrats started licking their lips for what was to come. It’s interesting to note that the equity markets didn’t fully evidence the import of the situation, and thus created a pretty messy top that lasted until November of 2007. The S&P registered its final Low in March of 2009, and began its relentless ascent shortly thereafter. The economy was a bit slower to bounce back than the markets were (in my opinion) and didn’t show signs of being fully healthy until May of 2009 though it generally started improving in November of 2008. Where am I going with this?

If you look at Figure 1 below, which shows the Effective Federal Funds Rate (FFR) from 1954 to present, I’ve added a little red box at the bottom right. Just before that box, you can see the Fed’s response to the GFC: they began rate-cuts in August of 2007. The important information is what’s inside the red box: despite the economy recovering, the Fed neglected to increase rates back to normal levels. The average FFR from July 1954 to July 2007 was 5.70%. The average FFR from May 2009 to August 2022 was 0.54%. So, during the latest boom cycle, the Fed maintained loose policy and the FFR at only 1/10th of what it has historically been. The result is multi-faceted. In general, it created a massive asset bubble while at the same time left the Fed with only one choice: increase rates during a semi-recession (and thus cause a full-blown recession) or face oppressive stagflation. At present, it looks like we’re facing both simultaneously.

Figure 1: Monthly Effective Federal Funds Rate (FFR) from 1954 to present. Source: FRED

The middle pane in Figure 2 below shows a Macroeconomic Health Model (MHM, Copyright 2022) for the United States from 2002 to present and compares it to the top pane, which is the FFR over the same time period (equivalent to Figure 1 though slightly expanded time window). By and large, the economy was healthy (green bars in MHM, middle pane) from 2009 (after GFC recovery) to present. Yet, as you can see, the Fed maintained the FFR near 0% the entire time. It was during this period -greater than ten years of economic prosperity -that the Fed should have been raising rates in order to fill its dual mandate of: maximum employment and stable prices. They didn’t. Why? Because they were executing on the first phase of the Wealth Transfer Machine. It started with Bernanke’s response to the GFC and was continued by Yellen when she took the helm in 2014, and has been perpetuated by Powell ever since. It’s a collaborative and conspiratorial mission that all three of them have been onboard with. I should also mention that part of the aftermath of the GFC was a heaping of bailout debt on the backs of hard-working American taxpayers. So, not only did millions of Americans lose their jobs, homes, and marriages, but the Bush/Bernanke team also decided to bail-out all of the massive banks, lenders, and insurers that created the mess rather than helping the people that needed it most. The massive pile of toxic mortgage-backed securities (MBS) that the government took over from the banks’ terrible balance sheets was also piled onto the taxpayers’ register of debt, and has taken greater than a decade to unwind and pay for.

Figure 2: Monthly FFR (top pane) compared with 1. Macroeconomic Health Model (MHM, Copyright 2022, middle pane), and 2. S&P500 ETF (SPY). Attribution: chart was created by the author using Amibroker.

The third pane in Figure 2 shows the S&P500 (SPY Exchange-Traded Fund, ticker “SPY”) monthly price over the same period. What you see is a steady ascent that can be broken into several successive regimes, each regime with an accelerated pace of price increase. This is important because it’s another mechanism by which wealth transfer occurs.

Almost 90% of the stock market is owned by the wealthiest 10% of households. Some of this wealth is held directly as positions in personal retirement portfolios, but often it is held by pension funds, hedge funds, family offices, and Investment Management companies, which are managing investments on behalf of their affluent clientele. A small portion of it is held by the poor and middle class, which haven’t benefited from the economic boom that occurred after the GFC nearly as much as the ultra-wealthy have. What’s worse is that this situation has been exacerbated by the pandemic: the rich have gotten richer, and the poor have gotten poorer. The majority of wealthy Americans are living off of passive income from the dividends and capital gains of their equities portfolios in addition to income-generating real estate investments, commodity investments, and traditional “fixed-income” investments, which is typically composed of bonds (less so when yields are low), corporate and municipal debt, and high-dividend-paying stocks.

Thus, as the equities markets go up, it disproportionately (and positively) affects the wealthy. Their wealth swells as their portfolios grow; their monthly income increases as companies can afford to pay shareholders higher dividends, and they can siphon more “salary” every month from the capital appreciation of the equities they hold. During this entire period, the lower and middle classes are simply trying to rebuild their lives: find stable employment, reestablish decent credit scores, pay off remaining debt, etc.

The staggering appreciation in the equities markets is directly attributable to, once again, the Fed (as well as the Treasury). If the Fed keeps rates low for an extended period of time, publicly-traded companies capitalize on this by using cheap/free debt to repurchase shares, which inflates their stock price. Epochs ago, conventional thinking was that if rates are low, it encourages companies to re-invest in machinery, factories for manufacturing, hiring employees, and R&D projects. That is no longer the case. Companies have wised-up to the fact that their largest shareholders (rich people) want short-term stock-price appreciation more than anything else (e.g. longevity, growth, health). The quickest way to do that is via share buybacks. So that’s what they do. Here’s a hypothetical boardroom conversation to demonstrate how it goes:

VP Engineering (professional demeanor with astute technical tone):

As you can see, based on my presentation today, I believe that it would be to our benefit to earmark $10M in capital towards this R&D initiative, which will allow us to build a stronger intellectual property moat around the company, diversify our portfolio of competencies, while strategically positioning us to maintain competitive dominance in the marketplace at a five to seven year horizon.

Director of the Board (strong southern accent oozing with greed and entitlement):

Do what?! Boy, what in the Sam hell are you talkin about?! No. No, no, no! Buy back shares goddamit! There’s a recession on the horizon, and I’ve already filed my Form 4 with the SEC… I’m unloading a million shares next month, and I need somebody providing liquidity and supporting price so that I can get my fills. I want my fills dammit! Martha and I already put a down payment on another Cape Cod estate, and we need another $400M in order to close. Get it done!

Another way that the Fed contributes to the asset bubble is by participating in “open market operations” (OMO). The Treasury issues government securities (bonds, bills, and notes) to raise money; the Fed buys and sells the same securities via OMO. In this way, the Fed directly influences the overall amount of money that is flowing into the markets. When the Fed buys bonds, it pumps cash into the markets, and that’s exactly what it’s been doing. As of early 2022, the Fed was still buying up to $120 BILLION dollars worth of Treasury securities (bonds) and MBS combined every month. That’s an unfathomable number, and it’s been happening (more or less) for the better part of a decade.

At this year’s Jackson Hole conference in August, Powell stated that the methods used to restore price stability (bring down inflation) “will also bring some pain to households and businesses.” Let me ask you, the public, the readers of this (if there are any), who do you think is going to feel this pain? Who is going to suffer? Will Jerome Powell, -a Princeton-educated former Investment Banker, Private Equity firm founder, Venture Capitalist, and lawyer -suffer? Will Joe Biden suffer? Will Donald Trump suffer? Will Chuck Schumer suffer? Will Nancy Pelosi suffer? Will Barack Obama suffer? Will Mitch McConnell suffer? Will Janet Yellen suffer? Will Mike Pence suffer? Will Ted Cruz suffer? Will Gavin Newsom suffer? Will Ben Bernanke -a Harvard and MIT-educated economist who had the audacity to publish a book of memoirs chronicling his “Courage to Act” -suffer? Will any of our current or former elected or appointed officials suffer? I don’t think so.

Powell is correct that raising rates now (far too late in the game) will cause households pain, but he is completely and utterly wrong in thinking that it will reduce inflation. Here’s why. First, the Fed likes to focus on what’s called the “Core PCE Price Index,” which is a relative measure of inflation that omits the price of food and energy. What do households spend the most on every month? Housing, food, and energy! The inflation of these goods are all due to systemic and now entrenched root-causes.

Rent is outrageous in many/most parts of the nation due to:

  1. High home prices. Landlords increase rent concomitantly with the opportunity cost of renting out their properties rather than selling them. Note: you may think that higher mortgage rates will push down home prices; they won’t, at least not materially. I will elaborate on why this is the case in a future article.
  2. Increased property taxes.
  3. Increased cost of property/hazard insurance premiums (partially influenced by the increased probability of natural disasters due to climate change).

None of these factors will be reduced due to a higher FFR; thus, rent will continue increasing at a rapid pace.

The cost of food will remain high and unaffected by interest rates because:

  1. Consumer Packaged Goods (CPG) companies have already repackaged their products into smaller portions that can be sold at the same price; i.e. consumers get less product in every purchase even though they’re paying the same amount (or more) for it than they were in the past. It costs CPGs money to refactor their packaging facilities. Once they do, and once they’ve learned that they increase margin by reducing the amount sold (price held constant), they are not going to invest in reverting to their former package quantities.
  2. Inclement weather (due to climate change, La Nina, etc.) negatively impacted crop yields for staple commodities such as corn, soybeans, and wheat.
  3. Increased cost of fuel used by planting and harvesting equipment for agricultural crops.
  4. Increased competition for corn and soybeans to be converted into ethanol and renewable diesel, respectively, rather than used to produce foodstuffs. This is highly impacted by the price of energy commodities.
  5. Increased cost of agricultural crop inputs such as fertilizer, herbicide, pesticide, and seed.
  6. Shortage of fresh water that can be used for irrigation of crops and drinking water for cattle, hogs, and poultry. This is region-specific due to the influence of La Nina (for past two years) but has caused drought in the San Jose valley of California as well as in the southern Midwest (Texas and Oklahoma) where thousands of cattle had to be slaughtered due to the cost of hay and other feedstock.
  7. Supply-chain bottlenecks that persist in addition to Russia’s continued assault on Ukraine and consequent reduction of wheat exports to the rest of the world.

I could go on and on. Food prices aren’t going to come down. They are far more likely to continue increasing in the foreseeable future.

The price of energy commodities -WTI Crude Oil, RBOB Gasoline, Henry Hub Natural Gas, and Heating Oil -have soared since shortly after the start of the pandemic.

The world’s largest oil and gas companies, and refiners/distillate producers have been reporting eye-popping and record-breaking quarterly earnings. They have used the increase in prices of energy commodities to gouge and fleece the consumer. This money is being taken directly from our wallets every time we fill up at the pump and put into the hands of the ultra-wealthy shareholders of these companies. They’ll do all that they can to keep margins high; after all, they have a fiduciary responsibility to their shareholders to do so. Moreover, all of Europe is currently scrambling to ensure supply of fuel for the winter and implementing price-response policies in order to cope with the cut off of natural gas from Russia. Meanwhile, Russia is digging their heels in on their tyrannical assault of Ukraine. None of this is likely to resolve itself in the near-term, and absolutely none of it is impacted by the Federal Funds Rate.

One final point regarding corporate share buybacks (on the mandate of wealthy preferred shareholders), which hit an all-time record high this year… In the past, when companies utilized retained earnings for reinvestment into R&D projects, and were provident with debt-financing, they had a buffer that helped to stave off layoffs in tough times. Namely, they could reduce spending on R&D initiatives, or fully wind them down, in order to reallocate that money to cover operating expense and debt service. Instead, they have now acquired mountains of debt in order to artificially inflate their share prices, which they will have to refinance and rollover at significantly higher rates. This is going to be impactful and will jeopardize the viability of a large number of public and private companies across many sectors. It’s already happening, and it’s a double-whammy because: 1. There’s a much smaller buffer to prevent laying off employees that are critical to the core products and services of the business, and 2. The same companies will have to make hard decisions about how to reduce overhead costs (i.e. layoffs) in order to service their debt at a higher interest rate.

In closing, let me ask you, Jerome Powell:

Who exactly do you expect to suffer so that you can become richer? Are you planning on giving anything up in order to absorb some of the pain that you have caused? Will you relinquish the free health care that you receive at the taxpayers’ expense? Will you stop collecting your salary of $200,000 per year (also paid by the taxpayers)? Will you distribute some of your $50M worth of wealth to hard-working Americans that lose their jobs and homes?

I think I know the answer.