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The Federal Reserve cut interest rates and ended balance sheet reduction at its last meeting despite acknowledging persistent inflation.

This doesn't make sense in a sane world.

But we don't live in a sane world.

In this episode of the Midweek Memo podcast, Mike Maharrey tries to make sense of the insanity. He says that the key to understanding the Fed's moves is recognizing that inflation is the plan. The central bank doesn't want to tackle inflation. It just wants to keep it at a level that doesn't make you too angry. In fact, the government needs inflation to support its borrowing and spending problem. Mike argues that this isn't a policy you can vote away. You can only take steps to minimize its impact on your life.

Audio Length: 00:38:26

Mike opens the show reminiscing about D.A.R.E. presentations when he was a kid.

"Now, imagine for a moment that the D.A.R.E. guy shows up and emphatically talks to the class for an hour about resisting drugs. Then, as he’s heading out the door, he leaves a bag of heroin and some syringes on the table. That’s basically what Jerome Powell did at the Fed meeting last week. He talked all hawkish and tried to lower expectations for future rate cuts, even after the Fed cut rates and announced an end to balance sheet reduction. So, it was basically, 'We’re not cranking up the easy money party, but here ya go! Have some drugs and party down!'"

Even as it tried to lower expectations for a December rate cut, acknowledging that "inflation remains somewhat elevated," the Fed cut rates by a quarter percentage point and announced an end to balance sheet reduction beginning in December. 

"In a nutshell, Powell and Company filled up the punchbowl and cranked up the easy money party, but the Fed chair then tried to talk the giddy partygoers down by tempering expectations for a December rate cut."

Mike says we wouldn't see rate cuts right now in a sane world. 

"But we don’t live in a sane world. We live in a world with a debt black hole and a bubble economy created by decades of easy money that can’t function in a modestly higher interest rate environment. Powell knows this, so he has to at least talk like a central banker worried about inflation even as he’s cranking up the inflation machine."

Mike emphasizes that it's more important to watch what the Fed does than listen to what the central bankers say. 

"This is nothing but talk. Fed officials can say all kinds of things. It’s important to pay attention to what they do. What they did was cut rates and ease monetary policy in an inflationary environment."

Powell also tried to convince everybody that price inflation is actually close to 2 percent if you factor out tariffs. Mike says he thinks Powell and Company are laying the groundwork to abandon the 2 percent target. 

"I think Powell’s comment about being close to 2 percent is telling. I think we’re about to do away with the 2 percent goal. I mean, 3 is close to 2. Three isn’t too bad. Let’s just go with three."

Mike says that the key to understanding what the Fed is doing is to recognize that inflation is the plan. 

"Two percent, three percent. Heck, they’d go five percent if they could get away with it. Devaluing the currency is part of the process of maintaining big government. They have to monetize the debt to keep up the borrowing and spending. And they have to keep up the borrowing and spending because we want big government. This is why I always say you need to have real money. There aren’t many guarantees in economics, but I can almost guarantee that your dollar will buy less next year than it did this year. If you save in dollars, you might as well take a few and throw them in the fire every year."

Mike reminds listeners that U.S. coins used to be made of 90 percent silver. A pre-1965 quarter is worth over $8 right now, and right now, you can get junk silver for under spot price for a limited time.

Mike says he thinks the end of balance sheet reduction is setting the stage for an even more significant move. 

"What’s that, you might ask? Well, I’ll tell you. I think we’re about to go back to quantitative easing."

When the Fed buys assets – primarily U.S. Treasuries and mortgage-backed securities – it does so with money created out of thin air. Those assets go on the balance sheet, and the new money gets injected into the financial system and ultimately the broader economy.

This process is known as quantitative easing or QE.

When the Fed reverses the process and shrinks its balance sheet (QT), it pulls liquidity out of the financial system by reducing bank reserves and shifting government debt financing to the private sector. This tightens funding conditions and market debt. It is effectively deflationary.

While Powell & Company would never admit it, the central bank has no choice but to end balance sheet reduction due to the federal government’s borrowing and spending problem. 

In effect, the Fed supports the government’s borrowing by creating artificial demand for Treasuries by purchasing bonds and holding them on the balance sheet. This drives prices higher and yields lower, lowering the U.S. government's borrowing costs. 

"Simply ending balance sheet reduction might not be enough. Given falling global demand for Treasuries and persistently high yields, the central bank may well have to relaunch quantitative easing in the near future to press its thumb harder on the Treasury market. In effect, this would be a return to money printing."

Mike isn't alone in thinking QE is on the horizon. The world economy editor for The Telegraph recently made a similar argument, writing that the U.S. central bank “is preparing the ground for a rapid return to net bond purchases, deeming it necessary to ensure sufficient liquidity for the financial system.”

Mike gives an overview of the history of QE to show exactly why the Fed is going to have to return to the policy. In effect, it has to monetize the U.S. government's debt to keep the Ponzi scheme from collapsing. 

"This is debt monetization, pure and simple. Professor Tim Congdon from the Institute of International Monetary Research said the Fed is 'aiding and abetting' monetization of America’s deficits. Congdon said about two-thirds of the U.S. national debt is being monetized in one form or another. This is why prices keep going up. ... While Powell & Company would never admit it, the central bank has no choice but to end balance sheet reduction due to the federal government’s borrowing and spending problem. And for the same reason, I think QE is going to be back on the table within the next year or so. When Bernanke claimed the central bank wasn’t monetarizing the debt, he was either hopelessly naive or he was lying. They have to monetize. That’s the only way this is sustainable."

This is, by definition, inflation. 

"Remember, properly defined, what is inflation? It’s an increase in the money supply. What does all of this easing do? It increases the money supply. This is inflation. Inflation is the plan. No matter what they say, this is what they’re doing! And what happens when you have monetary inflation?  You get price inflation. This is the reality you have to live in."

Mike says he can’t blame folks for booking profits with gold and silver prices at record levels.

"But over the long haul, you want to hold on to gold and silver when inflation is the plan. If you save in dollars, your wealth is being eroded away every day. You need real money."

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