Notes From Underground: A Possible Solution to the Central Bank Dilemma

It’s been. another week in which headline inflation concerns has jolted markets, particularly in the interest rate space, but not as much as many investors and traders would have expected. The yield curves in the U.S. FLATTENED as markets seem want to believe that the FED will raise rates in an effort to CURB the enthusiasm of the stickiness of recent price increases. As Peter Boockvar pointed out in his piece on Friday’s Michigan Consumer Sentiment Survey, confidence declined due to rising concerns over the “escalating inflation rate and growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.”

Consumers noted that the time to buy a car fell to the lowest level on record dating back to 1978. Those thinking it is a good time to buy a home was the lowest rate since 1982 when mortgage rates were far different than today’s very low loan rates.

The problem for the FED and the Biden White House is that political reality has met the theoretical basis of Michael Woodford/Ben Bernanke’s forward guidance and portfolio balance channel, tools utilized to combat fears of deflation (thus creating a 1930s scenario). Remember, central bankers fear deflation far more than inflation. As Paul Volcker demonstrated, inflation can be stopped but the ravages of a deflationary spiral are much more difficult to alleviate. The most recent example is Japan, although the Japanese have done a good job of ameliorating the hardships but a poor outcome for stimulating growth. The FED and its foreign followers have created inflation, which is now grabbing hold of price increases outstripping recent wage gains. This is a CONUNDRUM for the politicians as headlines are causing voters to consider alternatives to the people in office.

Recent U.S. and German elections have shown voters looking at fresh faces with some new ideas. The Biden White House believes that the growing inflation concerns have sent the president’s popularity numbers to Trumpian lows. Kamala Harris’s numbers are approaching 25%, which was where President Richard Nixon’s approval rating sat on the day he left the White House in disgrace. (Let’s call it the Nixon Line, similar to the Mendoza line in baseball.)

The problem for Biden is that fears of inflation call into question whether Fed Chair Jerome Powell has done a “GOOD JOB” as the static money managers on Wall Street espouse. The POLITICS of Inflation meeting the ECONOMICS of FED POLICY and its flexible adjusted inflation targeting are colliding. The FED has been cheered on by politicians to do more and more — Senator Chuck Schumer once called them the only game in town. Tapering asset purchases over an eight-month period is child’s play next to RAISING RATES to slow the onset of inflation.

THE GOLD/CURRENCY SPREADS DISCUSSED IN THIS BLOG HAVE BEEN A MARKET RESPONSE TO THE LOOMING CREDIBILITY GAP OF ALL CENTRAL BANKS IN A FIAT CURRENCY WORLD. Listening to the recent speeches from ECB and FED members there still seems to be a race to be the greatest liquidity provider in a QE-dominated world. The move to buy the precious metals in the face of rising short-term interest rates is a response to concerns that the CENTRAL BANKS HAVE NO ANSWERS TO THE TRAP OF FORWARD GUIDANCE AND ITS MANTRA OF LOWER FOR LONGER.

Let me offer up one immediate solution for the G-7 finance ministers and their central bankers (Yes, Jerome and Christine, I’m talking to you):  Call an immediate G-7 meeting similar to the Plaza Accord and announce a unified end to all QE programs NOW.

The asset purchase programs have not had any impact except to raise the levels of asset prices for those fortunate to own real estate, equities and various other hard assets. Powell has told us several times that RATES will not rise until QE tapering ends. The problem for the world finance system is that if the U.S. were to act UNILATERALLY the DOLLAR would rise, causing all sorts of deflationary problems as the world is so heavily FUNDED in cheap dollars because of the FED‘s decade-plus of PORTFOLIO BALANCE CHANNEL monetary distortions.

When it comes to funding, the world is in it altogether as the paroxysms of March/April 2020 showed. Dollar funding stopped moving in the face of deleveraging, which forced the FED to cut rates and announce massive DOLLAR SWAP LINES. The effort has to be in unison as the FIVE-YEAR GERMAN yield at NEGATIVE 70 BASIS POINTS is a barometer of the insanity of central bank policies. German inflation at 3% with a REAL YIELD of -3.7 % ignites concern about inflation. Again, the G-7 must act collectively in an effort to deal with the mal outcomes of rising inflation with exceptionally low real yields. The world’s workers do not have the tools like the upper 10% of earners to deal with the bad outcomes of what Irving Fisher called Monetary Illusions of Inflation.

Secretary Yellen was quoted in a Bloomberg article last week claiming that the FED won’t allow a repeat of the 1970s level of inflation. “People thought that policy makers wouldn’t bring it to an end, and inflation expectations became embedded in the American psyche. That isn’t happening now and the Federal Reserve wouldn’t permit that to happen.” Nice platitudes but not one suggestion for a policy.

In an Financial Times oped by Professor Ken Rogoff from July of this year (“Don’t Panic: A Little Inflation Is No Bad Thing”), Rogoff maintained that “after a decade of below-target inflation, a few years of it being mildly above target, say 3 per cent, might be positively a good thing.” The problem for Rogoff is that his THEORIES DON’T RUN FOR OFFICE. He also fails to understand the work of Dostoyevsky, which relies on the notion that 2+2=5 is also a beautiful thing. See? It ain’t rocket science, but human behavior. Finding investments in this difficult milieu is our challenge. Being patient in trying to discern the underlying fundamentals is the key to sustained profit.

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15 Responses to “Notes From Underground: A Possible Solution to the Central Bank Dilemma”

  1. icm63 Says:

    Check out Treasury report:


    Concerning the current QE, FED balance sheet program.
    1) Do nothing, maintain status quo
    2) Fake taper, do the above but just change the names and tools
    3) Taper for real.

    They selected 2.

  2. Asherz Says:

    Yra, You wrote “call an immediate G-7 meeting similar to the Plaza Accord and announce a unified end to all QE programs NOW.”
    Ok, now WHat is the immediate reaction of the stock market? The bond market?
    QE is the greatest contributor to the mother of all bubbles. Will Going cold turkey be the catalyst to puncture
    the bubbles ?
    It will happen sooner or later. You want it now?
    The central banks are between a rock and etc. Continue QE and a wild fiscal policy and we head for hyperinflation. Discontinue QE and reduce the spending with debt/gdp at over 300% and you get deflation.
    Pick your poison.
    A Kafkaesque situation.

  3. Blacklisted Says:

    How good are fundamentals when stocks replace govt bonds as a safe-haven?

    Consumers don’t view deflation as a bad thing. Only overly indebted nations, who are looking to pay off debt with cheaper dollars, want inflation. While the Branden administration, and the other govt’s captured by the WEF, Gates and Soros, will try to constrain supply to get their inflation, the vote of the invisible hand cannot be rigged … and I’m sure you know what that means.

  4. ShockedToFindGambling Says:

    Very Good Article.

    IMO, Gold/Silver are starting to rally because they sense Deflation around the corner……I know, everyone else is talking Inflation…..went to Trader Joes yesterday…..even the prices there are going up sharply…….paid $46 for a smallish Turkey.

  5. Bob Zimmerman Says:

    Yra isn’t it time for the savers to revolt? Let the cream rise and the weak sink. For over 50 years I worked to fed my family now at my expense i’m living in a Rod Serling production. I’ve had it. Do away with the Fed.

    • Yra Says:

      Robert Z—as Keynes stressed –euthanize the rentiers and read the work of Carmen Reinhart on the financial repression of savers–think about Germany and the pain being done to the conservative investors domiciled in the land of austerity—economic theory has no time for political realities.John Maynard was well aware of the political outcomes which is why he is head and shoulders above those that labor in the ivory towers

      • Bob Zimmerman Says:

        Yra, what would happen to theTreaury Bills I own if Congress does not exdend the debt-ceiling.

  6. ARTHUR Says:

    Nov 16 China won’t repeat Japan’s Plaza Accord mistake. Cui Tiankai, former Chinese ambassador to the US

  7. Arthur Says:

    Yra’s lessons, must watch, thanks!

    • Yra Says:

      Arthur–thanks for linking this as usual you are one who brings so much to this BLOG over the last decade–thanks for your efforts and support—Yra

  8. The Bigman Says:


    Strong letter to follow……

  9. Recoba Bacci Says:

    Long Bonds holding support and Curve Flattening. Dollar Strengthening and Gold Rising. It would appear that the consequences of a Taper are a return to the Pre-Covid paradigm…

  10. Chicken Says:

    Perhaps it would be more palatable if real wages weren’t stuck at 1960’s levels for decades?
    I have some thoughts on how we got to where we are today, given all our best thinkers have “working” on this for decades….

  11. What I see coming in 2022 – Bob Livingston Letter Says:

    […] and silver will break out again. As Notes From Underground pointed out recently, “The gold/currency spreads … have been a market response to the looming credibility gap of […]

  12. Mike Ferrier Says:

    Gold (or Silver) seems one of the few traditionally tested hedges against inflation. But beware – so much of it is held by central banks who can manipulate the price at any time by calculated sales or purchases to pursue economic or political warfare. Ditto the major banks. Just note how illogical Gold movement has been in the last 20 years. And how volatile. I have no idea what the best inflation hedge now is – but relying on Precious Metals unilaterally is not it.
    Happy New year to you all.

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