Cool Under Pressure: Florida Man Saves Day (A Lesson for the Fed)

When it comes to headlines containing the phrase “Florida Man,” they’re usually about said man being arrested for swinging an alligator around by its tail while sporting a blood alcohol level that would kill most people. Or something along those lines.

But this week something different happened…

“I’ve got a serious situation here,” the Cessna Caravan passenger was reportedly heard telling air traffic control about 70 miles north of his final destination. “My pilot has gone incoherent. I have no idea how to fly the airplane.”

“Roger. What’s your position?” a dispatcher responded, according to the outlet.

“I have no idea,” the passenger reportedly said. “I can see the coast of Florida in front of me. And I have no idea.”

Miracle of miracles, this “Florida Man” turned out to be a hero. With exactly zero flying experience he was able to safely land the plane, talked down by an air traffic controller / flight instructor. 

Facing imminent disaster, stories like that give you hope. 

Stories like the one Fed Chairman Jay Powell told last week after the FOMC meeting don’t.

Because Powell and the rest of his FOMC copilots basically revealed they have no idea how to pull this economy out of its vertical price climb and land it safely. It might be better if they, like the Florida Man, would just admit they have no idea how to fly the plane. 

Let’s do a quick run through of what the Fed said…

Pearls From this Month’s FOMC Meeting

This month, Chairman Powell opened with a plea directly to the American people (all emphases are mine):

I’d like to take this opportunity to speak directly to the American people. Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.

I’ll come back to this one in a second…

Q: You talked about using 50 basis point rate hikes or the possibility of them in coming meetings. Might there be something larger than 50? Is 75 or a percentage point possible?

JP: So 75 basis point increase is not something the committee is actively considering. What we are doing is we raised 50 basis points today. And we said that, again, assuming that economic and financial conditions evolve in ways that are consistent with our expectations, there’s a broad sense on the committee that additional 50 basis increases should be on, 50 basis points should be on the table for the next couple of meetings.

There are so many things that can happen in the economy and around the world. So, you know, we’re leaving ourselves room to look at the data and make a decision as we get there.

So 75 bps is not on the table… until it’s on the table. On the subject of raising rates to “neutral”…

Q: Given the expectation that inflation will remain well above the Fed’s target at year end, what constitutes a neutral policy setting in terms of the fed funds rate?

JP: So, neutral. When we talk about the neutral rate, we’re really talking about the rate that neither pushes economic activity higher, nor slows it down. So it’s a concept really. It’s not something we can identify with any precision. So we estimate it within broad bands of uncertainty.

In other words, they have no idea. Powell did, however, suggest that 2-3% is considered neutral — in an economy with full employment and 2% inflation. You can draw your own conclusions from that.

Q: You mentioned in the statement, both the upside risks to inflation from Russia and China. Obviously, those are very much supply shocks rather than demand side. And I wonder what you meant to convey by adding them.

JP: Well. So we — our tools don’t really work on supply shocks. Our tools work on demand. And to the extent we can affect really oil prices, or other commodity prices, or food prices and things like that, so we can’t affect those. But there’s a job to do on demand.

Our tools don’t really work on supply shocks? What happened to having the tools and resolve to restore price stability? 

So, bottom line, what is the Fed’s lame-ass response to soaring inflation?

They’ve raised the fed funds rate 50 basis points to a 1% target to try and cool inflation that’s running over 8% a year and is caused by a supply crisis which they admit they can’t impact and have no idea how high they’ll have to raise rates. 

That’s roughly the equivalent of taking a squirt gun to a 5-alarm fire. 

But the reality is they don’t care because…

The Government Needs Inflation

The only way for the government to deal with the massive debt they’ve piled up over the past twenty-plus years is by inflating it away. I’ve written about this before. But here’s a recap…

Debt by itself is neither good nor bad. And the answer to “how much debt is too much debt?” can only be determined by measuring it as a percentage of your overall wealth. Where sovereign countries go, this calculation is known as Debt/GDP — it’s a measure of a country’s economic health. 

In 1946, just after WWII, the US national debt was $269 billion and represented 119% of GDP.  We were in deep.

By 1966, 20 years later, the country’s debt-to-GDP ratio had shrunk to only 40%.

How on earth did we pay down all that debt?  We didn’t.

Our national debt had actually grown to $320 billion — 19% higher than it was in 1946. But over the same period, GDP had increased 252%.

This is grade school math: Increase the divisor of any ratio and the resulting number goes down.

During the pandemic, the Fed’s debt monetization programs (QE) sent our national debt soaring to levels higher than those in 1946 — nearly 137% of GDP.

And yet throughout late 2020 and most of 2021, debt-to-GDP was reduced fairly substantially…

US Debt-to-GDP

Source: Macrotrends.net

Rigorous financial discipline and solid economic growth on the heels of rampant stimulus?

Hell no.

Soaring Inflation to the Rescue

Take a look at these two charts:

US GDP

Source: TradingEconomics.com

US Inflation

Source: TradingEconomics.com

In the third quarter of 2020, GDP spiked, thanks to government stimulus checks and skewed spending patterns (panic buying) due to the lockdowns.

Once that cooled, however, inflation took over. 

GDP is the monetary value of all goods and services produced by a country — a dollar value of everything that’s bought/sold. For the record, they use “current dollar” amounts — meaning not adjusted for inflation — in the calculation. 

For the better part of a year, the Fed had been leading us on about inflation being transitory. In reality it was pretty much raging — raising the prices of everything. You can see in the charts that the robust economic “growth” (6-7%) aligns almost perfectly with the surges in inflation.

That means in an economy that is being ravaged by inflation, prices will soar. And GDP, the divisor in your Debt/GDP calculation, will increase as well.

Not because of stellar economic growth, but because of the out-of-control inflation that makes everything cost more. 

Raising Rates in a (Not So) Booming Economy

Inflation isn’t something the Fed is really looking to fight, because it’s a huge asset for the government.  It (ostensibly) allows Congress to deficit spend at crazy levels, piling up debt, without actually facing the costs of their actions. (Until they have to raise the debt ceiling again!) 

But the Fed can only let inflation go so far…  At levels not seen in 40-plus years, they’ve got to do something (or at least look like they are). 

So they’re embarking on a tightening cycle —  a rate raising extravaganza — to cool inflation by squeezing demand. (Because that’s admittedly all they can do.)

Only problem is, they’re killing demand in an incredibly weak economy. Most of the “growth” the past year and a half has been all smoke and mirrors:

  • Job growth has been a function of a market recovering from an artificial shut down…
  • Wage growth has been a result of the same  — employers were forced to offer higher pay not because their businesses are growing at record pace but because they were unable to attract workers back (workers who were lured away from the job market by things like the federal unemployment supplements and other freebies)…
  • Wage gains which, by the way, are still lagging inflation. (So in real terms, you’re still getting poorer)…

But they’re going to squeeze demand anyway. (A recipe for crashing the economy into a recession.)

We’ve already seen one quarter of negative growth. According to the economic powers-that-be, two quarters of contracting GDP means the economy has entered a recession.

By the time we get that report, who knows where inflation may be…

And a recession combined with soaring inflation means stagflation

Like the Florida Man from earlier this week, the Fed doesn’t know how to fly the plane either.  But this landing won’t be pretty. 

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential