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Issue #1180: The quiver is empty

Issue #1180: The quiver is empty

Mar 18, 2022
Marty's Ƀent

Issue #1180: The quiver is empty

If you had any doubts that the Fed is out of options in regards to being able to curb inflation via the manipulation of interest rate targeting then you should take a deep look at this chart and internalize what it is communicating to the market. With inflation hitting levels not seen since the late 70s and early 80s the Fed is currently being counted on to do something to combat the madness. The only problem is that the Fed's quiver is empty. They cannot, mathematically, use interest rate targeting to combat inflation effectively.

When Paul Volcker raised rates to 19% in the early 80s he had the luxury of a relatively low debt/GDP ratio that allowed him some room to make the move. Since then, interest rates have been on a consistent downtrend that has been periodically perturbed by temporary increases that have been inevitably reversed and driven toward the zero-bound at a pace that would make one believe they had an anchor attached to them. In reality, they do have an anchor attached to them and that anchor is something very few people seem to understand; a concept called "reality".

The reality is that you cannot run an economy on unbounded debt attached to no hard assets in the real world forever. At some point the chickens come home to roost and reality reveals your bullshit. This is the point the US currently finds itself in. After decades of extreme reserve currency privilege and an increasing amount of unfounded hubris that has driven our political class drunk with perceived esteem and power, the rest of the world is beginning to call our bullshit.

They are looking at the chart above and coming to the logical conclusion that there is not much more juice left in the tank. This game of unfettered debt is reaching its endgame. From a pure eyeball test of the numbers depicted on the chart above; Volcker had to make the bold move of doubling the interest rates from ~9-19% in a short amount of time to readjust opportunity costs and force people to become more frugal. The same percentage move today (a doubling of the rate) results in a fed funds rate of 0.50%.

In other words, someone in the early 80s who lived through Volckers interest rate hike had to weigh the decision of whether or not they could stomach the interest payment on a $100 loan jumping from $9 to $19. That's a material jump in interest payments that makes one seriously weigh an economic decision that helps create an environment for better and more efficient capital allocation. Today, under this regime, a person who takes out a $100 loan has to decide if their interest payment jumping from $0.25 to $0.50 will materially affect them. The answer to that question in today's environment is, "Obviously not. Who the fuck can't find an extra quarter between the couch cushions?" There is no material shift in opportunity costs with a doubling of the fed funds rate this time around. People are going to keep taking out loans to buy increasingly scarce stuff and inevitably exacerbating the doom loop of inflation we find ourselves in.

The Fed is handcuffed because if they drive rates above a certain (very low on a relative basis) level the US government will be unable to service the interest payments on all the debt it has accrued to date. It is infeasible for the US economy to grow at a pace that would make it possible to service debt payments on an interest rate just a little bit higher than where we find ourselves right now.

The quiver is empty. The whole world sees it. Things have been getting interesting and they are only going to get more interesting from here. Bitcoin was made to thrive in these types of interesting environments.

Final thought...

This has been the longest week in quite some time.


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