The Peter Schiff Show Podcast

High Expectations for Jobs Numbers

This morning we got the release of the October jobs report, and it followed the hurricane-related very weak report that we got in September. This time, the reason actually was weather-related. Remember, they originally reported a decline of 33,000 in September.  No one cared, though, because it was all about the hurricane. This month everybody was very optimistic; the consensus for October was 325,000 jobs.

Numbers Fell Flat

I was watching CNBC this morning and they were all trying to guess the jobs number.  Everybody ended up being over.  Rick Santelli's estimate actually was 401,000, but most guys were somewhere between 350 - 400,00, so everyone on CNBC was more optimistic than the consensus. And then the number came out  at 261,000. Everybody went over, so they all lost by the Price is Right rules.

Lowest Unemployment Since Dot Com Bubble

But beneath the surface, this is a weak report - even weaker than the 261,000 jobs that were reported.  The unemployment fell to 4.1.  That's a new low for this cycle.  You have to go all the way back to the dot com bubble to get an unemployment rate this low.  I don't know if Trump tweeted about it yet, but I'm sure he's going to talk about it: "Oh this is great!" He's going to take credit for the drop in the unemployment rate.  But the problem is, the reason that the unemployment dropped was because so many people left the labor force

Largest Labor Force Exodus

We had 968,000 people leaving the labor force in October.  This was the third largest monthly exodus ever, causing the number of Americans currently exiled from the labor force to hit a new record high - 95,385,000.  The labor force participation rate plunged back down to 62.7% from 63%.

Obama Revisited

This is the exact same type of jobs numbers we were getting under Obama, where you'd have a falling unemployment rate because so many people were leaving the labor force and so many people were working part time. Candidate Trump was extremely critical of this:"The unemployment rate is the biggest con, the biggest fraud in history - unemployment is really 30-40-50% - the jobs are lousy, they are low paying, people are leaving the labor force!" Exactly what is going on today.  Yet now, "Everything is great, the unemployment rate is low, it's all thanks to me, and I'm doing a great job!"

Weak Number

This is a weak number.  In fact, look at average hourly earnings. They were supposed to rise by .2% and they were flat.  The only reason they were flat is because they rounded it up. Actually, average hourly earnings went down during the month of October. And this is not adjusted for inflation.  These are just the earnings.  So we know prices are going up and so earnings actually went down in October.  Now year over year, we have an increase of earnings of 2.4%.  I am sure the cost of living is up by more than 2.4%, regardless of what the CPI claims. So this is a weak report.

 

 

No Change in the Fed Swamp

The announcement of the new Fed Chair, Jerome Powell, represents a commitment to the status quo at the Fed.  President Trump has nominated the person most likely to do exactly what Janet Yellen did for President Obama. Powell has voted in lock step with Janet Yellen for the entire time she has chaired the Fed.  The only real difference between the two is that Yellen is a Democrat and Powell is a Republican, even though he was nominated to be on the Fed by President Obama.

Politics as Usual, Rather than Change

Powell does not have an economics degree.  Initially you might think that's a plus; Bernanke and  Yellen have Ph.D.'s in economics, but they know nothing about economics because they learned from Keynesians. But Powell has hung out with these folks for such a long time, I assume he has all the same failures when it comes to understanding economics. More important than that is the politics of this.  Jerome Powell embodies everything Candidate Trump criticized about the Fed and about Janet Yellen. President Trump accused Janet Yellen of being political, keeping interest rates artificially low to make Obama look better and to help Hillary get elected, and all of that was true. This is why many people voted for Trump, they voted for change.  They thought that he was going to drain the swamp.  Well the water level at the swamp is not going down at all with the nomination of Jerome Powell.  Trump interviewed John Allison, who would have represented a change; he is a free market guy, and Austrian economist, Ayn Rand fan, he would have been a market change in direction at the Fed

Cut, Cut, Cut Plan

Now let's turn to the sham that is the Tax Cuts. Donald Trump wanted to call the plan the Cut, Cut, Cut Plan. Instead, they named it the Tax Cut and Jobs Act. This plan will definitely create jobs for the accountants. I skimmed through the 450-page outline of this plan, and what I can tell you is I believe that taxes will be much more complicated if this bill passes than they are now.

Tax Savings Will Go to Accountants

For low income earners. this tax bill will not complicate already rather simple tax filings.  But if you have a small business with employees and capital investments, this bill will substantially complicate your tax filing. So to the extent that you might save any money on taxes, you will spend more on accounting fees, which by the way, are no longer deductible.

No Reduction in Size of Government

This bill is not the biggest tax cut in history, and it is not a tax cut for everybody. Many people will see a tax increase. Overall, the government will collect less revenue as a result of this bill, even though some people will be paying more. I watched Republicans claiming that this bill will provide relief from high taxes - there is no real relief because government doesn't get any smaller. The reason tax payers have such a heavy burden to bear is because government is so big.  Since there is no reduction in the size of government, in fact, government is getting bigger, and will be bigger next year taxes should be going up on everybody! But Republicans are saying, " No we're not going to make government any cheaper, in fact we're going to provide even more government, we're going to make government bigger and more expensive, but we're just going to relieve you of the burden of paying for it, which is impossible, because there are not free lunches. There are no free lunches from Democrats and there are no free lunches from Republicans.

 

 

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No Change in the Fed Swamp

The announcement of the new Fed Chair, Jerome Powell, represents a commitment to the status quo at the Fed.  President Trump has nominated the person most likely to do exactly what Janet Yellen did for President Obama. Powell has voted in lock step with Janet Yellen for the entire time she has chaired the Fed.  The only real difference between the two is that Yellen is a Democrat and Powell is a Republican, even though he was nominated to be on the Fed by President Obama.

Politics as Usual, Rather than Change

Powell does not have an economics degree.  Initially you might think that's a plus; Bernanke and  Yellen have Ph.D.'s in economics, but they know nothing about economics because they learned from Keynesians. But Powell has hung out with these folks for such a long time, I assume he has all the same failures when it comes to understanding economics. More important than that is the politics of this.  Jerome Powell embodies everything Candidate Trump criticized about the Fed and about Janet Yellen. President Trump accused Janet Yellen of being political, keeping interest rates artificially low to make Obama look better and to help Hillary get elected, and all of that was true. This is why many people voted for Trump, they voted for change.  They thought that he was going to drain the swamp.  Well the water level at the swamp is not going down at all with the nomination of Jerome Powell.  Trump interviewed John Allison, who would have represented a change; he is a free market guy, and Austrian economist, Ayn Rand fan, he would have been a market change in direction at the Fed

Cut, Cut, Cut Plan

Now let's turn to the sham that is the Tax Cuts. Donald Trump wanted to call the plan the Cut, Cut, Cut Plan. Instead, they named it the Tax Cut and Jobs Act. This plan will definitely create jobs for the accountants. I skimmed through the 450-page outline of this plan, and what I can tell you is I believe that taxes will be much more complicated if this bill passes than they are now.

Tax Savings Will Go to Accountants

For low income earners. this tax bill will not complicate already rather simple tax filings.  But if you have a small business with employees and capital investments, this bill will substantially complicate your tax filing. So to the extent that you might save any money on taxes, you will spend more on accounting fees, which by the way, are no longer deductible.

No Reduction in Size of Government

This bill is not the biggest tax cut in history, and it is not a tax cut for everybody. Many people will see a tax increase. Overall, the government will collect less revenue as a result of this bill, even though some people will be paying more. I watched Republicans claiming that this bill will provide relief from high taxes - there is no real relief because government doesn't get any smaller. The reason tax payers have such a heavy burden to bear is because government is so big.  Since there is no reduction in the size of government, in fact, government is getting bigger, and will be bigger next year taxes should be going up on everybody! But Republicans are saying, " No we're not going to make government any cheaper, in fact we're going to provide even more government, we're going to make government bigger and more expensive, but we're just going to relieve you of the burden of paying for it, which is impossible, because there are not free lunches. There are no free lunches from Democrats and there are no free lunches from Republicans.

 

 

Trial Balloon #1: Backpedaling on State and Local Tax Deductions

All this talk about tax cuts is all a fraud, because government is getting more expensive and the taxpayers are going to be stuck paying the bill one way or another.  They keep on launching these "trial balloons. I was reading over the weekend that they are backpedaling, talking about the idea of eliminating the deduction for state and local taxes, but not for property taxes. So everybody can deduct their property taxes because everybody pays property taxes, whether you're in a red state or a blue state, whether you have state income tax or not. In fact, some states without state income tax have higher property taxes to compensate. So they still are going to allow the property tax deduction. That's the latest trial balloon that I have heard about.

Housing Lobby Against Tax Reform

But we still a lot of Republicans from high-tax states to allow the deduction for all taxes, including income taxes. The housing industry is still pushing back because they want people to deduct property taxes because that reduces the cost of owning property and makes it easier to sell at a higher price because one of the features of the property is a tax deduction. They also want to preserve the home mortgage deduction.  I was reading that the housing lobby is trying to get something in there.  Because if you double the standard deduction, that means far fewer people will itemize and they won't need the tax break associated with home ownership and that is a problem for the housing industry, that is really selling tax shelters. They are lobbying to get Congress to put back in a "homeowner's credit".  Even if you don't itemize, you could still get some kind of tax benefit for being a home owner, which, if we were really reforming the tax code we would not want to do.

Trial Balloon#2: 20% Corporate Tax Rate "Phased In Over 4 Years"

Another trial balloon that came out over the weekend, obviously the market is not liking it, is that corporate tax cuts, where the plan is to lower the corporate tax rate to 20% from 35% - now they are saying that this would be phased in over a number of years so we wouldn't actually get to a 20% corporate tax rate until the year 2022.  Now, why would they be doing this?  Well, obviously, to the extent that they can delay the phase-in of the lower rate, then the effect on the deficit, at least during the initial years is not as great because they don't have to immediately calculate the reduction in tax revenue.

Failing to Attract Business to the U.S.

A lot of people are saying, "Well this will still be okay, because at least it's a permanent tax cut, and American businesses with still know that they can look forward to these lower tax rates..." And really what these lower tax rates are designed to do is to make the U.S. a more competitive place to do business.  My feeling would be, if they delay the implication of these tax cuts until 2022, they ain't happening!

Getting a Bad Rap

A lot of stuff is going to happen in the economy between now and 2022, including another presidential election in 2020, and I'm already on record as saying that Trump will be a one termer, a placeholder between 2 democratic administrations.  All the economic problems that built up during the Obama administration will blow up under Trump.  If we get a Bernie Sanders-type as President in 2020, what are the odds that the 2022 corporate tax cuts are ever going to see the light of day?

No Such Thing as Permanent Tax Relief

All these people talking about permanent tax relief, what are these guys smoking? There is no permanent tax relief, especially when you don't have any relief from increased government spending.  You know how much bigger the national debt will be by 2022?  They will have to raise taxes on somebody, and obviously, corporations will be an easy target, especially if they are vilified.

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Trial Balloon #1: Backpedaling on State and Local Tax Deductions

All this talk about tax cuts is all a fraud, because government is getting more expensive and the taxpayers are going to be stuck paying the bill one way or another.  They keep on launching these "trial balloons. I was reading over the weekend that they are backpedaling, talking about the idea of eliminating the deduction for state and local taxes, but not for property taxes. So everybody can deduct their property taxes because everybody pays property taxes, whether you're in a red state or a blue state, whether you have state income tax or not. In fact, some states without state income tax have higher property taxes to compensate. So they still are going to allow the property tax deduction. That's the latest trial balloon that I have heard about.

Housing Lobby Against Tax Reform

But we still a lot of Republicans from high-tax states to allow the deduction for all taxes, including income taxes. The housing industry is still pushing back because they want people to deduct property taxes because that reduces the cost of owning property and makes it easier to sell at a higher price because one of the features of the property is a tax deduction. They also want to preserve the home mortgage deduction.  I was reading that the housing lobby is trying to get something in there.  Because if you double the standard deduction, that means far fewer people will itemize and they won't need the tax break associated with home ownership and that is a problem for the housing industry, that is really selling tax shelters. They are lobbying to get Congress to put back in a "homeowner's credit".  Even if you don't itemize, you could still get some kind of tax benefit for being a home owner, which, if we were really reforming the tax code we would not want to do.

Trial Balloon#2: 20% Corporate Tax Rate "Phased In Over 4 Years"

Another trial balloon that came out over the weekend, obviously the market is not liking it, is that corporate tax cuts, where the plan is to lower the corporate tax rate to 20% from 35% - now they are saying that this would be phased in over a number of years so we wouldn't actually get to a 20% corporate tax rate until the year 2022.  Now, why would they be doing this?  Well, obviously, to the extent that they can delay the phase-in of the lower rate, then the effect on the deficit, at least during the initial years is not as great because they don't have to immediately calculate the reduction in tax revenue.

Failing to Attract Business to the U.S.

A lot of people are saying, "Well this will still be okay, because at least it's a permanent tax cut, and American businesses with still know that they can look forward to these lower tax rates..." And really what these lower tax rates are designed to do is to make the U.S. a more competitive place to do business.  My feeling would be, if they delay the implication of these tax cuts until 2022, they ain't happening!

Getting a Bad Rap

A lot of stuff is going to happen in the economy between now and 2022, including another presidential election in 2020, and I'm already on record as saying that Trump will be a one termer, a placeholder between 2 democratic administrations.  All the economic problems that built up during the Obama administration will blow up under Trump.  If we get a Bernie Sanders-type as President in 2020, what are the odds that the 2022 corporate tax cuts are ever going to see the light of day?

No Such Thing as Permanent Tax Relief

All these people talking about permanent tax relief, what are these guys smoking? There is no permanent tax relief, especially when you don't have any relief from increased government spending.  You know how much bigger the national debt will be by 2022?  They will have to raise taxes on somebody, and obviously, corporations will be an easy target, especially if they are vilified.

We're getting a tax cut!

There is one thing now that that has the potential to cause a short-term decline of more than 3% in the stock market, and that would be: no tax cut.  If the Republicans announce that they're at a deadlock, and we're not going to have any tax reform or tax cuts, it seems to me the stock market will get hit.  Washington and Wall Street both agree that if we don't get this tax cut, the market's going down.  So what does that mean?  We're getting a tax cut!

Making the Stock Market Great Again

After all, the market is now the barometer of the success of the Trump Presidency, and by extension, the Republicans in the House and Senate.  If House Republicans want to get elected in 2018, the Dow Jones had better be higher than when Trump was elected. This is not about making America Great Again, it's about Making the Stock Market Great Again. Not that it wasn't great before Trump was elected, but now the greatness of the stock market goes hand in hand with the greatness of America.

Accelerating the Growth of the Budget Deficit

So we are going to get a tax cut, but that pretty much assures that we are going to get an increase in deficits and the National Debt.  They've already cleared the way now in the Senate and the House is about to rubber stamp it someway that the Republicans are allowed to reduce revenue to the Federal government by $1.5 trillion in the tax cut bill - over 10 years.  So it's not $1.5 trillion a year, it's only $150 billion a year, over 10 years. Remember, government spending is going to rise substantially over those 10 years, so the government actually needs a lot more revenue in order to cover all its spending. So when you reduce the revenue you just further accelerate the growth of the budget deficit and the resulting National debt.

Republicans Don't Care About the Deficit

We've got a number of Republicans who were very hawkish about the debt and when Obama was President, "We're going to shut down the government…" "We're not going to raise the debt ceiling…" They demanded fiscal discipline.  In fact, there was some modicum of discipline imposed on the budget, but all that is now being unraveled under Trump.  Now the Republicans can throw out whatever discipline that they forced into the system when Obama was President.  I've said this before, that when Republicans are in the minority, they can at least try to exert some pressure on government spending. The minute they have both houses of Congress and the White House, precedence shows that they don't care about the deficit.

Consequences of Tax Cuts: Higher Inflation and Higher Interest Rates

The deficits are only a problem when the Republicans are in the minority. But when they have the power, they don't care about it because they want a tax cut, and deficits be damned. Especially when the market now depends on it.  Nobody wants to stand in the way of the market. Even Rand Paul, who was the one Republican who voted against the Senate budget resolution, has already said that he will vote for the tax cuts.  He just did not want to vote for the budget bill to enable the tax cuts.  Somehow now that the budget bill has been enacted, he is going to vote for the tax cuts. He'd rather people pay lower tax than deal with the consequences, which are: higher inflation, higher interest rates.  There is not free lunch.  That is the problem with these tax cuts.

 

 

 

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We're getting a tax cut!

There is one thing now that that has the potential to cause a short-term decline of more than 3% in the stock market, and that would be: no tax cut.  If the Republicans announce that they're at a deadlock, and we're not going to have any tax reform or tax cuts, it seems to me the stock market will get hit.  Washington and Wall Street both agree that if we don't get this tax cut, the market's going down.  So what does that mean?  We're getting a tax cut!

Making the Stock Market Great Again

After all, the market is now the barometer of the success of the Trump Presidency, and by extension, the Republicans in the House and Senate.  If House Republicans want to get elected in 2018, the Dow Jones had better be higher than when Trump was elected. This is not about making America Great Again, it's about Making the Stock Market Great Again. Not that it wasn't great before Trump was elected, but now the greatness of the stock market goes hand in hand with the greatness of America.

Accelerating the Growth of the Budget Deficit

So we are going to get a tax cut, but that pretty much assures that we are going to get an increase in deficits and the National Debt.  They've already cleared the way now in the Senate and the House is about to rubber stamp it someway that the Republicans are allowed to reduce revenue to the Federal government by $1.5 trillion in the tax cut bill - over 10 years.  So it's not $1.5 trillion a year, it's only $150 billion a year, over 10 years. Remember, government spending is going to rise substantially over those 10 years, so the government actually needs a lot more revenue in order to cover all its spending. So when you reduce the revenue you just further accelerate the growth of the budget deficit and the resulting National debt.

Republicans Don't Care About the Deficit

We've got a number of Republicans who were very hawkish about the debt and when Obama was President, "We're going to shut down the government…" "We're not going to raise the debt ceiling…" They demanded fiscal discipline.  In fact, there was some modicum of discipline imposed on the budget, but all that is now being unraveled under Trump.  Now the Republicans can throw out whatever discipline that they forced into the system when Obama was President.  I've said this before, that when Republicans are in the minority, they can at least try to exert some pressure on government spending. The minute they have both houses of Congress and the White House, precedence shows that they don't care about the deficit.

Consequences of Tax Cuts: Higher Inflation and Higher Interest Rates

The deficits are only a problem when the Republicans are in the minority. But when they have the power, they don't care about it because they want a tax cut, and deficits be damned. Especially when the market now depends on it.  Nobody wants to stand in the way of the market. Even Rand Paul, who was the one Republican who voted against the Senate budget resolution, has already said that he will vote for the tax cuts.  He just did not want to vote for the budget bill to enable the tax cuts.  Somehow now that the budget bill has been enacted, he is going to vote for the tax cuts. He'd rather people pay lower tax than deal with the consequences, which are: higher inflation, higher interest rates.  There is not free lunch.  That is the problem with these tax cuts.

 

 

 

Black Monday 1987

Today marks the 30th anniversary of the 1987 stock market crash.  It's hard to believe that it's been 30 years.  I still remember where I was when the crash happened and my reaction to it. It happened just after I had graduated from the University of California at Berkeley. By the time the crash happened, I had already accepted a job in Newport Beach, California.  I was going to be working in the commodity options market, but I hadn't started yet.

Lesson:  The Market Goes Up

The crash began a few weeks before I was on the job, but I do remember when I first got there, I met a guy who had a lot of S&P 500 puts for clients and for him, anyway the crash was a great thing because he was able to make a lot of money on those puts.  Of course the S&P was a fraction of its current value.  The market is up dramatically since the 1987, which is the lesson that everybody hope that you learn: "Hey don't worry about the market.  If it ever goes down, it's going to come back up."

Trade Deficit Tiny Compared to Now

I remember some of the catalysts that were weighing heavily on the stock market leading up to the crash of '87 was the fact that the dollar was weakening as a result of a increase in the trade deficit - trade deficits that are tiny in comparison to the enormous one that we run today. Yet nonetheless, people were rightly worried about it back then.  They couldn't care less about the trade deficits now.

Interest Rates at 9%

Also interest rates were rising. The yields on the 30-year bond (nobody really talked about the 10-year back then) were 9% and they were going up.  So you had 9% interest rate, interest rates rising, the dollar falling, the trade deficits getting bigger and the stock market had pretty much ignored what everybody agreed was bad news at the time.  The stock market kept going up anyway, despite all of that.  Eventually it all came crashing down in 1 day.

Good Company

One of the things I remember about that was how Alan Greenspan reacted.  I mentioned this on a prior podcast. Greenspan had not been the Fed chair that long when the market crashed. He took over from Paul Volker.  I knew Greenspan, and was familiar with him because he was a libertarian and an Austrian economist.  He had written an essay on Gold and Economic Freedom, which I had read, in addition to Ayn Rand's Capitalization: the Unknown Ideal.

 

 

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Black Monday 1987

Today marks the 30th anniversary of the 1987 stock market crash.  It's hard to believe that it's been 30 years.  I still remember where I was when the crash happened and my reaction to it. It happened just after I had graduated from the University of California at Berkeley. By the time the crash happened, I had already accepted a job in Newport Beach, California.  I was going to be working in the commodity options market, but I hadn't started yet.

Lesson:  The Market Goes Up

The crash began a few weeks before I was on the job, but I do remember when I first got there, I met a guy who had a lot of S&P 500 puts for clients and for him, anyway the crash was a great thing because he was able to make a lot of money on those puts.  Of course the S&P was a fraction of its current value.  The market is up dramatically since the 1987, which is the lesson that everybody hope that you learn: "Hey don't worry about the market.  If it ever goes down, it's going to come back up."

Trade Deficit Tiny Compared to Now

I remember some of the catalysts that were weighing heavily on the stock market leading up to the crash of '87 was the fact that the dollar was weakening as a result of a increase in the trade deficit - trade deficits that are tiny in comparison to the enormous one that we run today. Yet nonetheless, people were rightly worried about it back then.  They couldn't care less about the trade deficits now.

Interest Rates at 9%

Also interest rates were rising. The yields on the 30-year bond (nobody really talked about the 10-year back then) were 9% and they were going up.  So you had 9% interest rate, interest rates rising, the dollar falling, the trade deficits getting bigger and the stock market had pretty much ignored what everybody agreed was bad news at the time.  The stock market kept going up anyway, despite all of that.  Eventually it all came crashing down in 1 day.

Good Company

One of the things I remember about that was how Alan Greenspan reacted.  I mentioned this on a prior podcast. Greenspan had not been the Fed chair that long when the market crashed. He took over from Paul Volker.  I knew Greenspan, and was familiar with him because he was a libertarian and an Austrian economist.  He had written an essay on Gold and Economic Freedom, which I had read, in addition to Ayn Rand's Capitalization: the Unknown Ideal.

 

 

Inflation Higher Than Expected

Today we got the hotter than expected news on prices - on inflation.  We got the import/export prices.  Import prices were supposed to be up 0.5%, which in and of itself is a pretty big jump, but they were up 0.7. Export were also up; (we would want export prices to go up, because that means we are getting more for what we export) they were expected to rise 0,4%, and instead they rose by 0.8.  Double the expectation.

Import/Export Index Methodology More Accurate

Year over year, import prices are up 2.7%.  As of last month, the year over rise was just 2.1%, so that's a pretty big jump in the year over year gain.  Export prices were up 2.9% year over year.  Averaging these out, you get 2.8% as the average increase in 1 year of the price of the stuff we import and export.  That's a broad based increase - well above the supposed 2% level the Fed is looking for.  They are looking for consumer prices, measured by the CPI, but the Import/Export index represents things the consumers consume, and I would think these numbers are going to be more accurate than the CPI because there is less subjectivity in there.  I think the methodology is more accurate than the methodology on the CPI.  I think soon we're going to see year-over-year increases import and export prices with a 3 handle.

Markets Working Counter-Intuitively

When this news came out, the immediate reaction was to buy the dollar and sell gold.  Why?  Why is higher inflation bad for gold?  The main reason to buy gold is as an inflation hedge. If you think there is going to be more inflation, then you buy gold.  Perversely, the way the markets work now, you sell gold if you think there's going to be more inflation, in fact, you buy the currency of the country that is experiencing more inflation, which is counter-intuitive. Inflation by definition, is the currency losing value.  If the currency is losing its purchasing power, why would you want to buy more of it?  You would want to get rid of it to avoid that loss.

Will Higher Inflation Produce a Tighter Fed?

But the thinking is, if there is more inflation, as measured by these price indexes, that the Federal Reserve is now going to have to fight the inflation, that they are going to be more likely to raise interest rates, to raise them sooner, to raise them more, in the face of higher inflation. So it is the expectation that these higher numbers will produce a tighter Fed - that is what rallies the dollar,  That is what hurts gold - the anticipation of higher rates to fight off the inflation.

Fighting Inflation vs. The Bubbles

Reality is that the Fed will ignore the higher inflation numbers and do nothing.  Whatever it is going to do with rates, it will do it regardless of these numbers.  Ultimately, if the Fed has to make a choice between fighting inflation and unemployment (because the Fed believes in the Phillips Curve trade-off between employment and inflation), the Fed will always choose to fight unemployment.  It will prop up the labor market and sacrifice its inflation goal. It is more concerned with maintaining asset bubbles, propping up the U.S. government so it does not have to default on its debt.

Letting Inflation Burn

The reality is, higher inflation is not going to produce a tighter monetary policy.  The Fed is going to have to ignore higher inflation, which means the inflation is going to get even worse.  It is almost like the Fed has to ignore a fire, and because it ignores the fire, it is just going to get bigger, it's not going going to try to put it out because it is afraid that putting it out is actually worse than letting it burn.  If traders understood this, then they would be dumping the dollar and buying gold.

Real Inflation vs. Nominal Inflation

Even if the Fed ultimately raises rates, they're not going to get out in front of the inflation curve.

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