Albert Edwards: Everything bubble about to burst

Albert Edwards of Society General returns to slam the Fed. I will only add that, for much of the world, pandemic inflation has proven temporary and is about to implode spectacularly. What has embedded inflation now is the Ukraine war… 


Let us imagine for a moment the US and global economy slides into recession for all the well-versed reasons. Let us imagine too that the “Everything Bubble” in financial and property assets that the Fed and other central banks have created with their ultra-loose policies, bursts with unpredictable and dislocative results. What then?

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The collapse in US small business NFIB confidence (chart above) is a truly shocking chart and recession affirming (confirming?). It is wholly consistent with slumping Conference Board measures of CEO confidence and consumer sentiment. The optimists would dismiss these data as survey indicators and point out that the real economy data is doing better – including US consumer spending holding up because savings are being run down.

Yet when commentators note that US retail sales are buoyant, it is the nominal data they focus on. But they also release a real retail sales series – and this doesn’t get much attention as it is published with a one-month lag and is not easily accessible. In contrast to the buoyant nominal retail sales data, real retail sales, after a post-pandemic jump (courtesy of the handout cheques) are in deep recession (see charts below showing levels and yoy).

So let’s entertain the notion that the US economy is heading into recession, which could plausibly be another deep one, especially if the overheated property market slumps. Most commentators have taken the Fed at its (current) word that it realises it has made a major mistake and will plough on with its tightening cycle to bring inflation back to target as soon as possible.

But what was the mistake the Fed made? Does it think it was just too slow in tightening rates last year as inflation picked up? Or does it now comprehend that its monetary incontinence is the primary cause of run-away inflation? Has it worked it out yet?

The problem is and always has been that neither the Fed nor anyone else for that matter really knows what causes inflation. We all have our ‘theological’ beliefs as to what might be the cause, but economic models have singularly failed to predict it, particularly those being cranked out in the bowels of central banks (in the early 1980s I used to work in the BoE basement on their model, turning that dusty handle – but I believe they have things called computers now…).

We on these pages (and in particular my former colleague, Dylan Grice) have always railed about central bank hubris – that they actually believe they know what they’re doing and most especially in the reliance they place on their precious economic models, all built by economists with the same PhDs from the same small group of Ivy League colleges. Groupthink is writ so large that it hangs like a fog over these institutions, and no-one can see through it.

Even a major outsider like former Fed Vice-Chair Alan Blinder was effectively sidelined when, as the Huffington Post reported back in 2009, he challenged the Fed’s groupthink – which disturbingly was to support whatever Fed Chair Greenspan told them – you can read this shocking indictment here. And it wasn’t just the Fed. Other central banks were just as bad. The Financial Times wrote an excellent (yet depressing) exposé of the BoE’s poor decision-making under Mervyn King in the run-up to the 2009 GFC – here.

In the wake of the GFC, Reuters wrote that Danielle DiMartino Booth’s book “Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America,” lays out an insider’s critique of the Fed in an intelligent, entertaining style – read article here.

One key suggestion from Danielle was, “to limit the number of academic PhDs on the staff in favour of businesspeople and other practitioners.” So what actually happened? Did the Fed take that suggestion on board? Errr …

– 2009 “The Federal Reserve’s Board of Governors employs 220 PhD economists”
– 2022 “The Federal Reserve Board of Governors employs just over 400 PhD economists”

I feel like John McEnroe, screaming at the top of my voice “YOU CANNOT BE SERIOUS!” Why in heavens name do they need over 400 PhD economists? Does groupthink become ever more comfortable the bigger the group hug is? This is runaway inflation in its truest sense.

Despite almost doubling the number of PhD economists since the global financial crisis, the Fed still failed to forecast the current inflation surge – and blaming its forecasting error on the war in Ukraine won’t wash. Thus the Fed made its second massive forecasting error since Bernanke
famously denied in 2005 that US national house prices could decline and then subsequently failed to predict that the sub-prime sector would collapse the economy and financial markets (Business Insider usefully compiled back in 2010, “30 Bernanke Quotes that are So Absurd You Won’t Know Whether to Laugh or Cry” – link. Personally, I cried with laughter!

With the Fed having let the inflation cat out of the bag this year, how about showing some contrition Mr Powell? Well at the end of last month at the ECB Forum in Sintra, Portugal, Powell actually said, “We now understand better how little we understand about inflation” – link.

What? Is that it? But why did you get it so wrong? Might it have anything to do with your money printing? Might it have anything to do with the Fed’s total disregard for the money supply?

Incredibly just over a year ago Powell said, “When you and I studied economics a million years ago, M2 and monetary aggregates seemed to have a relationship to economic growth. Right now … M2 … does not really have important implications. It is something we have to unlearn I guess.”
link. Can’t you just feel the hubris hanging in the air – awaiting its nemesis….

Well Powell guessed wrong. World renowned monetarists John Greenwood and Steve Hanke wrote in the WSJ this month, “M2 has increased an incredible 41% in only 2½ years – an average annual growth rate of 16.3%. No wonder the US is suffering from its highest average annual inflation rate in 40 years (calculated with a one-year lag) … It’s all about money, not fiscal policy, supply chains or energy prices… Powell and other central bankers must “unlearn” their disdain for monetary analysis before they make another egregious error – link.

Now I wouldn’t call myself a monetarist in that I don’t fully subscribe to Friedman’s mantra that “inflation is always and everywhere a monetary phenomenon”. Inflation can also be a fiscal phenomenon and it can be unpredictable – in a modelling sense. What I do know is, as prior to the GFC, the Fed does arrogantly dismiss dissenting voices. Those who warned about excessively rapid M2 growth were dismissed as quacks (unbelievably when I started out in the business in the early 1980s the weekly US M2 money supply numbers were the most important economic release). It’s now time for the Fed to climb off its high horse and re-engage with monetarism.

For starters the Fed should read the excellent Q2 Hoisington letter. I end this note with the first paragraph of that letter (the Fed should print out 400 copies for each one of its PhD economists).

“The Federal Reserve Acts were created to make the central bank of the United States a lender of last resort, not spender of last resort, a role Chair Powell confirmed in announcing the Pandemic response program April 9, 2020. Constructed to prevent the central bank of the United States from acting like a banana republic central bank, the logic of the Federal Reserve Act’s writers was impeccable.

Converting Fed liabilities into a medium of exchange was well understood to be highly inflationary.

Paying the U.S. government’s fiscal obligations with Fed liabilities sends demand for goods and services higher without an increase in the supply of goods and services to consume, the very definition of inflation.”


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