Appearance of U.S. Government Solvency

Growing fear of financial fragility in the markets and rising fears of inflation are keeping the Fed suppressing the long end of the yield curve and proclaiming anti-inflation rhetoric. It reminds me very much of my early adult years, of the inflationary 1970s, when my first mortgage rate was 17.5%.

Only this time, we are infinitely worse off because we can’t take long-term rates much above 2% or the whole dollar-based system will implode. Money has to be created out of thin air, with the money supply growing infinitely. That’s necessary not only to keep the U.S. government appearing to be solvent but also to paper over growing evidence of insolvent hedge funds and to keep stock prices elevated, lest we have pension funds all over America biting the dust. 

Almost every day, Chairman Powell has to make a statement declaring rising inflation rates are most certainly temporary. If you wonder why, you only need to look at the Producer Price Chart on your left or my IDW chart below, which is at another monthly high at 182.67. The latest Year-over-Year Pro­ducer Inflation registered Friday was 4.2% compared to an expected 0.4%. It would be extremely foolish to believe the long Treasury rate would not have risen this week in light of those numbers. But that’s what a flat TLT from last week suggests.

I have the sneaking suspicion that we are on the cusp of some dramatic fireworks in the markets. If we have a 4.2% PPI and if it moves into the CPI, how is the Fed going to hold 10-year rates below 2% to 2.5%, which is widely believed to be the breaking point of stocks? Over one-fourth of the March increase in the index for final demand goods can be traced to an 8.8% jump in gasoline prices. Over 40% of the March increase in prices for final demand services can be traced to margins for machinery and vehicle wholesaling, which jumped 6.7 %. Supply chain shortages certainly are part of the story, as are workers choosing not to work, given money that President Biden has stolen from us and sent to them. Again, it reminds me so much of the G. William Miller and Arthur Burns anti-inflation of the 1970s.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.