See no Evil, hear no Evil.

June 10-16, 2023

Big news. Of course, this is a meeting of the US Federal Reserve System, at which no decision was made to raise the rate and the subsequent press conference of the head of the Fed, Powell. And not even so much a decision as Powell’s recognition that he does not understand something in the current economic processes. However, more on that below.

Not so long ago we already discussed this issue, but its importance is extremely high for the entire world economy, if it functions within the framework of the Bretton Woods system. In addition, the inadequacy of the perception of reality in this particular place, recognized by the leaders of the US monetary authorities themselves, makes it fundamentally important.

After the successful resolution of a fairly virtual “default” crisis, we wrote that the picture may have cleared up, but not yet completely. Today it becomes clear that everything is much more complicated, primarily because the US inflation data, which was released on Tuesday, on the eve of the announcement of the rate and Powell’s press conference, again turned out to be unexpected for the Fed leadership.

Formally, inflation in the US has slowed down, but this is only due to the high base effect a year ago (I remind you that inflation peaked exactly a year ago). But the growth of the “net” CPI (that is, the consumer price index minus the highly volatile components of food and fuel) has been at +0.4% per month for six months now. And these are clearly not the numbers that the Fed wants to see after the “stabilization” of price dynamics:

Pic. 1

Since this situation is not the first time (see, for example, ), it should be analyzed very carefully from an objective point of view vision. And the details of Powell’s own reasoning are in the final part of the Review.

Powell’s problem (and the US monetary authorities in general) is that for many decades they have been adjusting the macroeconomic models that they use to predict the situation to the liberal theory in which there is only one type of crises, cyclical ones. In reality, today there is a completely different crisis, a fall in the efficiency of capital, the PEK-crisis described by Mikhail Khazin in the book “Memories of the Future. Ideas of Modern Economy”, English translation: khazin%2Caps%2C198&sr=8-1 )&

As a result, statistics simply do not see many processes. And even if they manifest themselves in one way or another, their interpretation by experts does not correspond to reality. In particular, they do not see a systemic overestimation of GDP, including through underestimation of inflation. At the same time, deflationary processes also take place, but prices rise in some sectors of the economy (products of the IT industry, food, transport), and deflation occurs in others (industrial products of intermediate use). And many industrial enterprises either close or operate at a loss for some time. Because they believe that the situation will improve and you can suffer small losses due to increased costs in order to preserve the markets.

If core consumer inflation in the US is 0.4%, that means about 5% per year, according to official figures. This is a lot, especially in reality, which is always worse than the official figures. And if we also take into account that industrial inflation is in the stage of deep deflation, the data for May is -7.1% yoy, then the picture becomes even more complicated:

Pic. 2

Such a drop is a sign of a deep industrial crisis and we see it in the data of recent weeks, but why then the rise in prices in the consumer sector, even without taking into account fuel and food? Theoretically, these are signs of a structural crisis and a consequence of higher rates (financial costs have increased). At the same time, the growing profit from sales does not go to manufacturers; most likely, it remains in trade and the financial sector.

By the way, the question arises of who will then be able to use the industrial infrastructure that is being created (see the previous Review), it may turn out that it will not play its role in attempts to restore the United States. However, this is a more complex issue and goes beyond macroeconomic reviews. In any case, we see that the picture of inflation desired by the leadership of the US monetary authorities is not manifesting itself, and this makes them nervous. In part, perhaps because they promised the American elite that tightening monetary policy would work. And he is not.

Macroeconomics. Chinese data continue to disappoint: retail slowed down more than expected:

China Retail Sales YoY
Pic. 3

as well as industrial production:

China Industrial Production
Pic. 4

And investments in fixed assets have set an anti-record for 27 years of observation (not counting the failure of 2020):

China Fixed Asset Investment
Pic. 5

In general, the answer to the question we posed a few weeks ago has been received: a rather serious crisis is beginning in China.

New Zealand GDP -0.1% qoq after -0.7% earlier – the country joined the “recession acknowledging club”:

New Zealand GDP Growth Rate
Pic. 6

Industrial production in Britain -1.9% per year – the 19th consecutive minus:

United Kingdom Industrial Production
Pic. 7

US manufacturing output -0.3% y/y – 4th straight minus:

United States Manufacturing Production
Pic. 8

Machine-building orders in Japan -22.2% per year – the worst dynamics since the summer of 2020:

Japan Machine Tool Orders
Pic. 9

The index of economic sentiment in the eurozone (ZEW review) is the weakest in six months:

Euro Area ZEW Economic Sentiment Index
Pic. 10

CPI Argentina +114.2% per year – 32-year high:

Argentina Inflation Rate
Pic. 11

Annual (May to May) inflation in the US is +4.0%, compared to 4.9% in April, but this, as we noted in the previous section, is the base effect.

Export prices in South Korea -11.2% per year – the strongest drop in 13 years:

South Korea Export Prices YoY
Pic. 12

U.S. initial jobless claims at 20-month peak:

United States Initial Jobless Claims
Pic. 13

Wholesales in Canada -1.4% per month – 3rd negative in a row and 5th in the last 6 months:

Canada Wholesale Sales MoM
Pic. 14

Retail sales in South Africa -1.6% per year – the 5th negative in a row:

South Africa Retail Sales YoY
Pic. 15

The Central Bank of China unexpectedly cut interest on the weekly reverse repo (by 0.1% to a record low of 1.9%) amid weak economy:

The rate on annual loans also followed there (-0.10% to 2.65%):

The Central Bank of Argentina did not change the rate (97%), which is already at its peak for 32.5 years, the Bank of Japan kept the percentage the same, i.е. record low (-0.1%).

The US Federal Reserve left rates in place, but raised their forecast – another +0.5% is expected by the end of the year. The ECB raised the interest rate by 0.25% to 4.00%.

The rate on deposits in the euro area is the highest in 22 years (3.5%).

Main conclusions.

In this situation, the main question arises: what does the leadership of the Fed and specifically its head Powell think and what will they do? To start, as an addendum to the August 2021 Review to which I quoted in the first section, two quotes: “I think we now have a better understanding of how little we understand inflation,” Jerome Powell (June 29, 2022 ) and Paull today: I admit that the Fed’s forecasts for inflation over the past 2 years have been wrong. Actually, we already noted at the beginning of the Review that the leadership of the FRS (unlike the experts of the Khazin Foundation who prepare these reviews) does not understand the essence of current economic processes.

In the accompanying letter to the rate announcement, the Fed notes:

Fed rate ceiling expected at 5.5%-5.75% by the end of 2023;

moderate rates of economic growth;

maintaining rates at the same level allows assessing the impact of monetary policy (time lag);

an additional rate increase is possible;

rate cuts expected in 2024;

the Fed’s balance sheet will continue to shrink as part of the previously announced plan.

That is, monetary policy will be tightened, but the leadership of the Fed wants to see when inflation will react to the measures already taken. So far, there is clearly no reaction, but Powell still hopes for a positive result for him. Our opinion is that it will not wait (as in 2021).

Additionally, at a press conference, he said (and, in part, repeated):

“firmly committed to the 2% inflation target;

almost all politicians consider it expedient to further increase the rate;

the labor market is still very tight. Demand greatly exceeds supply;

we have moved far in terms of rates – we decided to pause;

we will make decisions on rates from meeting to meeting.

reducing inflation may require some weakening of the labor market.”

In response to questions, Powell said:

“Maybe the Fed needs to raise rates less aggressively;

while there is no decision on the rate for July;

the main issue is the size of the additional rate increase;

inflation will decrease gradually;

supply chains – things are getting better;

there are first signs of lower inflation in the service sector;

the key to reducing inflation in the US service sector is the labor market;

The US Federal Reserve may raise the rate 2 more times – up to 5.6%;

today’s pause in the increase should not be called a “pass”;

in July we will make a decision based on macro data for 3 months;

we are close to the ceiling on the rate;

inflationary risks still remain;

current rates – limit the growth of the economy in the US;

when we see a steady decline in inflation, then there will be confidence that the tightening works.

we do not yet see a steady decline in inflation in the PCE.”

Well, we repeat: “I admit that the Fed’s forecasts for inflation over the past 2 years were wrong”!

If this is not panic, then what is panic? In general, Powell has no answer to the question of what to do to reduce inflation. And we have it, and it consists in the fact that inflation is just a tool for falling private demand. And if inflation is reduced, then demand will fall in a different way. But avoiding a structural crisis is simply impossible. Since all attempts to support demand will not end well, as can be seen from the debt schedule:

Pic. 16

However, Powell has a problem, but our readers do not, they understand the situation absolutely adequately. In this connection, they can safely spend the weekend and prepare for the work week!


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