“Progressive Money” and its Aftermath

All money is a matter of belief ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ April 16, 2024 “Progressive Money” And Its Aftermath "All money is a matter of belief." - Adam Smith [Reminder: In case you missed [our announcement]( The Essential Investor has merged with legacy contributors to Agora Financial. The new, larger, more inclusive project is called The Grey Swan Investment Fraternity. If you’re interested in the scope and benefits of our new endeavor, please see what prompted us to merge [here](. If you’ve been a member of The Essential Investor, keep an eye out for your new benefits.] Dear [Reader], April 16, 2024 – Oh, the suspense. This week, three benchmarks signal either: A return to historical norms and a shift in institutional capital away from stocks into bonds and alternative assets — commodities, gold, and Bitcoin.  Or… The death throes of “progressive money” and a massive new round of stimulus and money-printing is on its way. The first benchmark is the yield spread between the 10-year Treasury and S&P 500 dividends. Bloomberg’s John Authers suggests a recent inversion is significant. Authers: Back in the 1990s, people used the so-called “Fed Model,” because the central bank’s chairman Alan Greenspan appeared to rely on it in congressional testimony. This held that higher yields on bonds would require a higher earnings yield from stocks. For old-timers, bonds paying more than stocks was a given. Not true in the 21st Century. The Fed abandoned the old Fed model for a more “progressive” strategy. Result: massive inflation. On February 5, for the first time in two decades, the yield on the 10-year treasury began to pay off better than S&P dividends. Yesterday, the spread increased. Authers: There’s nothing necessarily alarming about it. But for an entire generation that had grown accustomed to a stock market that yielded more than bonds, making asset allocation decisions much easier, this development makes life much harder. Or will it…? The second benchmark is another old-timey one known as the Dow/Gold ratio. It made a new three-and-a-half-year low yesterday. That’s usually a good sign, but not in the era of progressive money. “The Dow/Gold ratio has started to collapse five times this century – in 2000, in 2008, in 2018, in 2020, and in 2022,” writes Tom Dyson from Bonner Private Research. “Each time the Fed has doubled down with huge new incentives to speculate and other stimulus to re-inflate the stock market.” Each of the five times the Fed has “doubled down” with stimulus to reflate the stock market, the Fed was ignoring the old tried-and-true Fed model. “Will they do so again?” is the question. Especially given the handcuffs last week’s CPI inflation reading gives them. Prices for bread and gas are still running haht. The third benchmark is more of an event… what’s known to Bitcoin speculators as the “halving.” Here’s why it’s important: After the 2012 halving, the price of Bitcoin rocketed from $12 to $1,161 — a gain of 9,575%. Following the 2016 halving, Bitcoin soared again from $600 to $20,000 for a gain of 3,233%. After 2020, Bitcoin again shot up from $9,000 to $69,000, a gain of 667%. Mark Jeftovic, Bitcoin Capitalist and Grey Swan member, says he expects the halving to happen on Friday. This time the halving may be different, however. Mr. Jeftovic suspects a pullback in BTC  immediately after the halving, because cryptos and the markets have been rolling over lately. “We are in uncharted territory,” Mark says. “Bitcoin has never put in a fresh all-time high before the halving. It's done so three times before this one.” That said, “Bitcoin can reasonably be expected to 3X or 4X in the year after the halving. It could mean more this time because of the ETFs and the global financial system is increasingly coming unglued.” To recap. This week we’re investigating: 1. The return of the old-school Fed Model. 2. A collapse of the Dow/Gold ratio. 3. Bitcoin’s “halving” and impending price movement. The wild card? It’s an election year. Today, we begin with some necessary background. We nick’d the following essay from [Financial Reckoning Day]( now available in the 3rd reimagined post-pandemic edition. You can read the whole story from [Demise of the Dollar]( through [Financial Reckoning Day]( and [Empire of Debt]( all three available in their third post-pandemic editions. CONTINUED BELOW... >>ADVERTISEMENT<< 2024 – The Real Election Year Surprise In 2016, the October Election Surprise was Hillary Clinton’s email scandal… In 2020, the October Election Surprise was the suppression of all the dirty material on Hunter Biden’s “forgotten” laptop… Now, in 2024, we’re forecasting an October Election Surprise that almost no one sees coming — and this time it’ll be way more devastating than anything you’ve seen before. [Click here to learn about 2024’s real October Election Surprise »]( It’s not at all what you think. CONTINUED... Progressive Eras Of Money Printing Addison Wiggin, Financial Reckoning Day, 3rd reimagined post-pandemic edition In order to understand the “Yellen Fed” – those years when Janet Yellen served as the Chairman of The Federal Reserve – we have to step back in time over a hundred years to the Progressive Era. The Progressive Era refers to a period in American history that spanned, roughly speaking, from the 1890s to the 1920s. As in our own, the history of that time is pockmarked with widespread social justice and political movements. During the Progressive Era of the turn of the 20th Century, there were significant changes in monetary policy as well. Foremost is a shift in the United States from the classical gold standard, known also as the Victorian gold standard, to a “more flexible” and interventionist approach to managing the nation’s money. Under the classical gold standard, which had been in place for much of the 19th century, the value of a country's currency tied to a fixed amount of gold. The limitations of the gold standard became increasingly apparent as the economy grew… and Europe prepared for war. You can’t fight a war on the gold standard. War is expensive, and since the production of armaments and other tools of war are destined to be destroyed, the amount of money the government will need is unknown. Throughout history we hear those entering the war think it will be over in a few short weeks. Famously, the strategists of the North during the American Civil War thought the conflict would be quick and relatively nonviolent. “Shock and Awe’ in Iraq morphed into two decades and over $8 trillion fighting terror. The Russians, apparently, thought invading Ukraine would be a walk in the park, too. Who knows the cost of a war at the outset? A more flexible credit-based system is necessary to achieve victory. The legendary financier and banker JP Morgan had bailed out the US government in financial panics of 1893 and more recently 1907. Tired of using his own checkbook to keep the free market open for his businesses, Morgan sided with a group of more progressive bankers and supported the establishment of the Federal Reserve in 1913.The Federal Reserve was created to serve as the central bank of the United States and to provide a more flexible and stable monetary system. It was given the authority to regulate the money supply, set interest rates, and act as a lender of last resort to banks in times of financial crisis.      From the outset, the Federal Reserve had a dual mandate: defend the dollar thereby keeping prices in check and ensure full employment among citizens. The “flexible” part of the equation required the introduction of fiat money. “Fiat money,” to be clear, is currency that is not backed by a physical commodity like gold but derives its value from the “full faith and credit” – the trust – earned by the federal government. A fiat currency must have the confidence of the people using it. The nation’s new fiat money allowed for greater “flexibility” in managing the money supply and responding to economic conditions, whether they be favorable to business or not. In her tenure as Chairman of the Federal Reserve between 2014-18, Janet Yellen introduced a few new mandates to the Fed’s agenda. She wanted banking to conform to the neo-progressive era chimera of “diversity, equity and inclusion” (DEI). She asserted that Fed decisions would be “data-driven” and its inflation target a fixed 2%, as had been first established during Bernanke’s tenure. And believed monetary policy could be used to buoy the stock market. Yellen kept the Greenspan Put in her back pocket. On February 27, 2018, Bernanke and Yellen appeared together before an audience at the Brookings Institute in Washington, DC. The subject was monetary policy as practiced by the Federal Open Market Committee (FOMC) during the 12 years they collectively served as chairman. Bernanke served from 2006 through the panic years 2008-09 and on until 2014. Yellen picked up where Bernanke left off and served from 2014-2018, Historically these years will go down as the years Bernanke and Yellen presided over an aggressively experimental monetary policy scheme. The conversation was easy-going, lighthearted even. And why not? The duo had served their time. They were comfortable letting bygones be bygones. Still, the conversation revealed a few key insights to Yellen’s belief in an “activist” – pushing for equity in the banking system and using Fed policy to prop up the stock market. “Tobin was my teacher,” Yellen replied when asked about her mentor professor James Tobin whom she’d studied under at Yale. “But I will have to say he was more than my teacher. He was actually an inspiration to me. I think what impressed me was not only his analytic skills and his knowledge of macroeconomics and the work that he did, but also his very strong commitment to social justice and to the view that economics is magical and it’s about making the world a better place.” James Tobin, a self-described “neo-Keynsian” economist won the Nobel Memorial Prize in Economic Sciences in 1981 for “creative and extensive work on the analysis of financial markets and their relations to expenditure decisions, employment, production and prices.” Tobin believed adopting an accurate monetary policy was inherently a science, not unlike chemistry or ornithology. He also believed policy could, and should, be used to support the stock market during bear markets and goose them during bulls. Reducing economics to a mathematical equation also helped both Bernanke and Yellen claim their policies were data-driven. “I was on record then [1996] as saying that I thought we should adopt a numerical inflation target,” Yellen told Bernanke, “and that I thought it should be 2 percent.” Yellen went on to explain: “I articulated the reasons about the zero lower bound and nominal wage rigidity that later became central to our decisions. Alan [Greenspan’s] view was that we should not adopt an inflation target at all. And, of course, he was successful in stopping that from happening until you [Ben Bernanke] and I worked together. I think it had long been your desire to see this happen as it had been mine, and I think you especially should feel proud that you were able to put in place what I think has been a successful framework.” The concept of an “inflation target” was first posited by the Stanford economist John Taylor in 1993. While Taylor did not go as far as to pinpoint 2% as the desirable rate of inflation, he did concede it was a “concept.” He tried to reduce to an algebraic formula the strategy policymakers should use to aim for maximum sustainable growth and achieve the economy's productive potential. We include the formula here for entertainment purposes only: The Taylor Rule r = p + 0.5y + 0.5(p - 2) + 2 Where: - r = nominal fed funds rate - p = the rate of inflation - y = the percent deviation between current real GDP and the long-term linear trend in GDP Following Taylor’s rule, Bernanke and Yellen arrived at the 2% inflation target even current Fed Chair Jerome Powell alludes to during his post FOMC announcement press conferences. Alas, economics is not an exact science. It’s made up of millions of instantaneous decisions deliberated over by millions of people every second. To paraphrase the economist Fredrick Hayek, our knowledge is a priori imperfect. We cannot have enough knowledge at any given time to make accurate to-the-minute decisions. Hayek asserted it’s better to let the market, which is itself a measure of all these decisions, decide by establishing natural “equilibrium” through prices. Rather than the market deciding, the Fed presided over an immense money printing scheme the effects of which we’re bearing the brunt today. So it goes, Addison Wiggin, The Wiggin Sessions P.S. Yellen, in her own way, acknowledged the conundrum any Fed chair faces. Her solution? Wait for the data to pour in after the Fed begins lowering or raising interest rates then adjust accordingly. The Fed is always behind the curve on inflation or deflation because it collects data for six weeks at a time before each FOMC meeting. Further, in the conversation with Bernanke, Yellen likened arriving at a policy decision to trying to select a color of paint a designer might paint a room.  You have 19 people around the table, and you want to come up with a decision we can all live with on what color to paint the room. And we’d go around the table. Ben, what would you like? You think baby blue is just absolutely ideal. David, what do you think? Chartreuse you think is a lovely color. And we go around the room like that. And the question is, are we ever going to converge? I would feel my job is to get everybody to see that off-white is not a bad alternative. Once the color of paint has been agreed upon, then the policy needs to be put into action. Having inherited the post financial-crisis economy from Bernanke, Yellen continued to manhandle the tools bestowed upon her by her predecessors: interest rates and quantitative easing (QE). The results in our view lead directly to the historic inflation the global economy experienced during and after the pandemic lockdowns. During the better part of her tenure, Yellen presided over lower bound interest rates at near zero, so-called “zero interest rate policy” (ZIRP). Eventually, free money is worth less than its sticker price. Every dollar printed buys you less stuff. At the grocery store and gas pump, everyday Americans call that “inflation.” What happens when interest rates and the markets revert to the mean? We’re about to find out. Stay tuned… Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com. The Daily Missive from The Wiggin Sessions is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to The Wiggn Sessions delivering daily email issues and advertisements. To end your The Daily Missive from The Wiggin Sessions e-mail subscription and associated external offers sent from The Daily Missive from The Wiggin Sessions, feel free to [click here.]( Please read our [Privacy Statement.]( For any further comments or concerns please email us at feedback@wigginsessions.com. If you are having trouble receiving your The Wiggin Sessions subscription, you can ensure its arrival in your mailbox by [whitelisting The Wiggin Sessions.]( © 2024 The Wiggin Sessions 1001 Cathedral Street, Baltimore MD 21201. 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