To Dream The Impossible Dream
Like Don Quixote Yellen & Powell Will Not Get A Soft Landing
Don Quixote, the "Man of La Mancha," is a classic written by Spanish author Miguel de Cervantes. The novel follows the adventures of a middle-aged man named Alonso Quixano, who becomes obsessed with the idea of becoming a knight and sets out on a quest to revive chivalry and bring justice to the world. He loses touch with reality and believes he is a knight himself. After transforming Rocinante, his trusty old steed into a mighty warhorse he selects a local peasant girl, Aldonza Lorenzo, then renames her Dulcinea del Toboso who sees him for what he is, as a delusional madman.
Despite his many defeats and setbacks, Don Quixote remains determined to fulfill his knightly duties. His chivalrous nature and idealistic worldview inspire those around him, including some who humor him and others who genuinely believe in his noble cause. However, his actions also lead to chaos and confusion, and he is often a source of ridicule and mockery.
"Man of La Mancha" refers to a stage musical adaptation of Don Quixote's story with the iconic song "The Impossible Dream." Powell isn’t delusional quite yet and Yellen is certainly not a Dulcinea, maybe Rocinante, but either believing a “soft landing” is possible is indeed delusional. The UK’s inflation rate unexpectedly rose; its rates are heading higher. In the U.S. commercial bank lending came to an abrupt halt falling by more than 1.5%. Three previous times, in 1975, 2002 and 2008, metrics of this nature emerged. Each time the S&P 500 lost about 50% of its value. A soft land seems to be more like an “Impossible Dream” than anything else. It’s impossible to create such a scenario and stagflation is one of the reasons why and we haven’t even made it there yet. We need unemployment to rise before we meet that definition.
Do We Have Stagflation Yet
Stagflation is an economic phenomenon characterized by stagnant economic growth, high unemployment rates, and high inflation. Inflation and unemployment typically have an inverse relationship as exhibited in today’s world. With stagflation both high inflation and high unemployment occur simultaneously. Powell is doing his best to increase unemployment, maybe data to be released on July 7th will show progress. In a stagflationary environment, the economy faces stagnant or slow economic growth, leading to high levels of unemployment or underemployment. Ask yourself, what are we really hoping for and what happens when we get there?
Stagflation is a challenging situation for policymakers as the conventional tools used to combat inflation, raising interest rates, exacerbates the problem of unemployment. Again, in Powell’s eyes we can only hope. Let’s assume he is right and increases in the unemployment rate are on the way and the true “definition of stagflation” arises. No real reason to worry, if it higher unemployment doesn’t appear soon the Fed will just resort to raising rates. Imagine that, our monetary policy makers are taking actions to create stagflation. Interesting, why would they want to do that? Let’s investigate.
Addressing stagflation requires a careful policy balancing act between inflation and economic growth. Here are some potential solutions that policymakers may consider:
Monetary Policy Adjustments: Central banks can employ a tight monetary policy to control inflation by increasing interest rates. Higher interest rates discourage borrowing and spending, which helps reduce aggregate demand and inflationary pressures. Policymakers must not tighten monetary policy excessively, as it could further exacerbate unemployment and economic stagnation. Doesn’t appear as if they’re too concerned, does it? That’s what Powell is doing but people just keep on spending, mostly with credit. When are they going to begin invading their IRA and other retirement accounts?
Fiscal Policy Measures: Governments implement expansionary fiscal policies, like increased government spending or tax cuts, to stimulate economic growth. These measures boost aggregate demand and reduce unemployment. However, policymakers need to legislate fiscal policies that are sustainable. If not they will contribute to further inflationary pressures. Been there, done that. It’s good that the printing press is out of ink but from what I understand it’s been ordered. With an unbridled debt ceiling we’re going to need it. The administration is “hell bent” on raising taxes. They’ll never stop spending. It seems that we’re locked in a cycle where embedded inflation rules the landscape and as Volcker would tell you, that is not good.
Supply-Side Reforms: Stagflation often arises from supply-side shocks, such as increased production costs or disruptions in key industries. Governments can address these issues by implementing structural reforms to improve productivity, enhance competitiveness, and reduce barriers to business growth. Deregulation, investment in infrastructure, education, training programs, and innovation help but again, in this administration “regulation” is the watchword. Structural reform in the U.S. today raised everyday consumer prices. So in reality, to deal with the problems we created ask yourself, what comes first, the “chicken or the egg”?
Wage and Price Controls: Policymakers may consider implementing temporary wage and price controls to curb inflation. These measures limit the increase in wages and prices. Distortive controls have unintended consequences, such as creating supply shortages or reducing incentives for investment and productivity improvements. Besides, this administration created higher wages and forced us to import versus exporting oil. What will they do next?
Long-Term Planning & Rebalancing: Stagflation’s a symptom of deep structural imbalances within an economy. Policymakers need to take a long-term planning approach to address these imbalances and promote sustainable growth. The only long term plan on the books for this administration creates additional imbalances promoting climate control and making the military woke.
There is no one-size-fits-all solution to stagflation, as each situation requires tailored approaches based on specific economic conditions and underlying causes. Currently it is apparent that before we actually handle “stagflation” we need to create it. Seems a little convoluted to me but so did keeping interest rates at zero for as long as we did. So once again, what came first? We’re dealing with a real “nightmare” here versus a “dream”. Maybe “Trouble” a song from “The Music Man” is more appropriate but for now the “Impossible Dream” fits just fine.
Bank lending is the real creator of “money supply”. The commercial banks have raised their credit criteria and pretty much stopped lending. The economy is teetering on the abyss. In the 1970s, supply-shock triggers created stagflation. Together with the Fed and the commercial banks I’ve got a feeling unemployment is going to soar over the next three to six months. Soft landing don’t occur when these conditions are in place. Recessions and worse do. Let’s hope I’m wrong.
I’m just a “young” 68 years old looking to help you become the best damn investor or trader you can possibly be. Everyone learns at their own pace. If you pick everything up the first time through, great but if not email me at david@thetickeredu.com so we can further help. Again, let me know what you want to learn, I’m all ears.
I bet you were expecting a Broadway performance but I ran into “Gomer Pyle” and couldn’t resist. Jim Nabors really had talent and “golly”, it brings back some good memories.