Hi, the following the a paper is one I delivered to the 2023 Corcentric conference held at the Ritz in Orlando, FL. Amazingly, it prompted an interview by the Editor of Forbes Magazine after my presentation.
Why am I putting an economic paper in a blog for The Leroy Foundation, which raises money for animal shelters? The Foundation has nothing to do with economic outlooks or the US Treasury market. But, I'm including it here because the title of the paper bears the name of the cat after which this foundation was named, my Leroy. The paper also contains a central metaphor that focuses in detail on my care for Leroy and compares it to Federal reserve policy.
AI’s review of it, and it called the metaphor not only “clever", but “brilliant”, lol. But I simply look at it as "love." I'm pretty sure that this is the only serious economic paper of all time that focuses on the writer’s cat (or dog, for that matter) and compares their care to the actions of the Federal reserve chairman. Unusual? Not to me, because my Leroy, as well as all of my little guys were always a central theme throughout my life. Which is why the Leroy Foundation exists.
Hope you enjoy it! Thanks….jimmy
The Leroy Effect
James White - December 1, 2022
I have a cat named Leroy. He is 15 and a half years old and is a great little guy. Leroy has required more care as he has gotten older, like we all do. He has something called “Megacolon” meaning that his colon doesn’t work properly and needs help to pass waste.
Because of this, I give him medications daily. One such medication is called Lactulose, which does what you think it does from the name. Here is my problem. If I don’t give him enough Lactulose, he gets “backed up”. This is very painful for him and dangerous to his health.
When that has happened, I have had to rush him to the emergency animal hospital to get him unblocked. So I tend to overdo the Lactulose in order to prevent this problem. But then I have another problem, because a lot of Lactulose will of course give him severe diarrhea. This is a problem because it is severely dehydrating, which is also a dangerous threat to his health. Because I am between a rock and a hard place with these opposing problems, it is easy to overdo it one way or another, and either have him blocked or dehydrated. When he seems in danger of being blocked, I have overdone it with the Lactulose. This results in an enormous explosion of you know what. This is what lurching back and forth between two extremes can do. You always find yourself up to your ears in you know what.
And this makes me think of Federal Reserve Chairman Jerome Powell. How’s that for a transition? But actually, it’s an understandable connection, because this is exactly the problem confronting Chairman Powell. He was presented with an economic shutdown engineered by a bunch of clueless politicians as their response to the “pandemic” and panicked into overdoing the Lactulose, so to speak, resulting in 25% money supply growth. Dr. Powell did more than this. He deviated from the the Fed’s age old mission of being “lender of last resort” and morphed into “spender of last resort”. This is NOT the Fed’s legal mandate. Neither is purchasing private securities like corporate bonds, including junk bonds.
He also coordinated his monetary policy with the fiscal policy of the Biden administration, an embarrassing policy failure. All of this contributed mightily to the recent inflation problems we have encountered, which can be likened to an explosion of you know what from this record dose of monetary and fiscal lactulose.
Understandably upset and panicked by this outcome, he has now lurched overwhelmingly in the other direction, raising rates by an unprecedented amount in a very short period of time, shrinking money supply growth to a NEGATIVE 4% in real terms, the lowest since 1980. And we all know what happened in 1981. The second worst economic decline in US history, exceeded only by the Great Depression.
Chairman Powell has been quite adamant, no further lactulose will be administered anytime soon and the result is that the US economy is becoming more and more blocked. This may become apparent in 2023. Dr. Powell will relent, probably later rather than sooner given his sincere commitment to tightening, but nonetheless he will be forced to eventually prescribe great amounts of lactulose, in a panic trying to resuscitate his patient.
This will most likely result in another set of dramatic consequences. US Treasury bond prices will most likely explode much higher as interest rates collapse because of this tacit admission by the Fed that the economy is in deep trouble. Their initial denial will just make it that much stronger.
The Fed has vocalized quite strongly that they are committed to tightening for the longer term. Again, If they are forced to ease, it will be a dramatic admission that something has gone very wrong and the markets will most likely respond forcefully in this new direction. And the Fed will be buying every US Treasury bond on the planet, reducing the available supply of US Treasury bonds to, well, zero. That tends to raise prices. The panic could be overwhelming.
The Fed has never seemed to learn that panic is not a strategy. Alan Greenspan didn’t. Ben Bernanke sure didn’t. And that’s the only reason we’re in this mess of a situation. Panicked actions creating extremes that engender more panic. The over reaction to the pandemic, lockdowns and shutting down the economy was huge, resulting in trillions in fiscal spending and trillions more in Fed balance sheet expansion. All unnecessary.
Worldwide lockdowns, more extreme over reaction, caused supply chain problems. All of this led to the result, an explosion in inflation indexes. Not the inflation of the 1970’s at all, but it has still led to outright panic. Which has resulted in another panic move the fastest, and in some ways the most severe, tightening in history. We will see what this leads to, but most leading economic indicators and a good number of current ones, like housing, do not suggest it will be good.
Panic in one direction leading to panic in the other direction. "The Leroy Effect."
Dr. Powell is at least trying to correct his mistakes of 2020-2021, and I admire him for this and his attempt to follow his idol Paul Volker, who is a worthy idol, but I’m not sure he has an appreciation of just how blocked the US economy is becoming. Or maybe he does, but he feels that “defeating inflation” is worth it. This is what he has said repeatedly. It is difficult to follow, because a few times he has seemed to soften his rhetoric which has led to dramatic stock market rallies. This defeats his tightening attempts as it leads to significant increases in “financial conditions” from the resultant wealth effect. He is trying to have it both ways, crushing inflation while still achieving a “soft landing”. This wasn’t possible for Paul Volker and it not possible now.
Having said this, I have pointed out in my prior papers this year that it is difficult to posit inflation as a serious long term problem at the current time. To those focused on headline numbers, maybe it seems to be, but this is NOT in any way the 1970’s. I am sure that Chairman Powell is well aware of this. But he may have other goals he wishes to achieve that have nothing to do with inflation, other than that “inflation” serves as an excellent, believable diversion. Like disconnecting the stock market from Fed “pivot” hopes, for instance. Like severing the equity market’s addiction to the Fed balance sheet and returning it’s historical connection to the actual economy.
These may be his actual goals. He was never an advocate of QE and other such tools. Is it any coincidence that lately every time the stock market rallies on “pivot” hopes, some Fed governor releases some hawkish rhetoric attempting to kill the rally? This strategy has been a failure so far as equities remain far above where they “ought” to be considering the reduction in the Fed’s balance sheet. This is partially defeating the Fed’s tightening hopes and will make further rate increases necessary to neutralize the wealth in stock market. This will only further obliterate the housing market, which is in deep trouble currently. The stock market doesn’t believe that Powell won’t cave. Maybe they’re right. “Fight the Fed”??!!
Obscuring this hidden battle is the Fed’s inflation rhetoric. As I noted earlier, “inflation” is a very suitable diversion to hide behind, since the people who might object to this policy really don’t understand what Powell is doing. It gives him carte blanche, so to speak.
As he has pointed out between the lines, the easing of 2020-2021 was so extreme that the economy must decline if he is to truly reverse it. He may be right about that, and something unpleasant looks like it may be coming. I don’t normally use the word “may”, but we are in completely uncharted waters.
The Fed has never tightened into an economy that is so obviously showing such severe signs of weakening. M2 money growth is in DECLINE, on a nominal basis. That is unprecedented. “Real” money growth, at negative 4% and falling, is now below the level of 1980, which led to, as noted above, the most severe economic decline since the Great Depression, the recession of 1981.
Existing Home Sales are down 11 months in a row. Leading Economic Indicators are down 10 months in a row. Industrial production, down 3 months in a row. Employment still looks OK, but it did in 2007 too until the revision by the Labor department on February 1, 2008 showing that they over stated the numbers by nearly 600,000 jobs. 2008 followed. A couple weeks after this paper was completed (so I’m taking the liberty of adding this in), the Federal Reserve Bank of Philadelphia stated that according to their analysis, the Labor Department over stated job growth in Q2, 2022, by over a MILLION jobs. Just for one quarter!
Can’t wait to see what they did in the 3rd and 4th quarters! Sound familiar? I could go on. But anyway…you get the picture.
It’s difficult to have any confidence. And yet the Fed continues to tighten. “Flying blind”, as the Wall St. Journal put it. It is said that current “Financial Conditions” are very easy. Maybe they are. And maybe that is the mitigating factor. I don’t know. Either way, we’re about to find out.
The severe tightening that has already happened still hasn’t reversed the money mountain that the Fed created in 2021, but they are getting closer. At the current rate, this will be achieved by Q2 2023 as long as the Fed sticks with it’s current plan. If the Fed does proceed and manages to destroy demand to the extent it desires, it is at that point that an enormous amount of discipline becomes required to not overdo the resultant easing in the context and interests of the restoration of long term equilibrium. Otherwise, it will just be another overreaction with even worse consequences than we already have.
Without discipline, we will enter an era of ever escalating crises. But discipline is not something politicians are known for and they will be screaming for Powell’s scalp if he tries to show any. And it will be ironic that the one screaming for Powell’s “scalp” the loudest will be the only former Cherokee impersonator in the Senate.
You can’t make this up. But anyway…. We are entering a new era. The paradigm of panic. Forget the “Taylor Rule” and the “Philips Curve”. They will be relics of bygone times. We will be inextricably in the grasp of…
“The Leroy Effect."
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