The Federal Reserve continues to hike interest rates. As a result, I think they just delivered a death blow to the economy. I'm gonna explain this to you in one simple fast step. Let's start by going over Jerome Powell's huge mistake.

Jerome Powell's Huge Mistake

Below is a 1981 annual chart of the Federal Funds Effective Rate, going from January to December.

Fed funds rate 1981
Fed funds rate 1981

The charts I've drawn below include the 1981 Fed funds and M2 money supply (top chart) and CPI (bottom chart in red) for the exact same time frame.

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Fed funds 1981 with CPI
Fed funds rate in 1981 with month-over-month CPI (red)

First, we're going to focus on the Fed funds rate. On the left, we go from 12% interest up to 20% interest.

1981 annual chart of Federal Funds Effect Rate
1981 annual chart of Federal Funds Effect Rate

Back in January of 1981, the Fed Funds Rate was at 19%. It then dips and hits a local bottom in March before moving back up to 19% in June. Then around late July-August-September, rates start to drift down again. In December, the Fed pivots. We're waiting for Jerome Powell to make a similar pivot in 2023.

Now, just to be very clear, when you go into 1982, interest rates did go back up slightly (not shown), but they never went back up to where they were at the high point like in July of 1981.

July 1981 Paul Volker officially pivoted
In July 1981 Paul Volker officially made his first pivot and rates started to fall.

Again, the summer of 1981 is when we can officially say that Paul Volcker pivoted.

Now let's go ahead and move on to this green line, I think you're going to find this fascinating.

1981 M2 money supply in green.
1981 M2 money supply in green.

The green line represents M2 money supply during the exact same period. In January of 1981, M2 money supply was right around $1.6 trillion.

You would expect that if Paul Volcker “broke the back of inflation”, in the summer of 1981, this would have been a result of the money supply going down, or at least flattening out. We can see, that this was not the case.

M2 Money supply did not decrease with Volker's mid summer pivot
M2 Money supply did not decrease with Paul Volker's mid-summer pivot

In fact, M2 money supply during the span of 1981, went from $1.6 billion, up to roughly $1.76 billion. So an increase of $160 billion. Which at the time was a very high percentage, a significant percentage of the overall M2 money supply.

m2 money supply increased through out 1981
Despite a mid-summer pivot, M2 money supply increased throughout 1981.

As Paul Volcker was pivoting, for good,  M2 money supply was still going up a substantial amount.

Now, you may be asking yourself, “Okay, George, well, why does that really matter? I'm not an economist.” That's a very good question. We're gonna get into that in just a moment. But before we do, let's look at month-over-month CPI.

1981 month-over-month CPI
1981 month-over-month CPI

This is the same time period in 1981, but it represents month-over-month CPI.

In January 1981, the CPI was about 0.8%.

January 1981 - month-over-month CPI was 0.8%
January 1981 – month-over-month CPI was 0.8%

What I want to point out, is right around August-September, when Paul Volcker pivoted for good, there was a massive drop in month-over-month CPI, from roughly 0.9%, all the way down to 0.2%. Then there were some fluctuations going into 1982. But it stayed at this lower baseline.

1981 drop in month-over-month CPI
1981 drop in month-over-month CPI.

Before we move on to more recent data in 2022 and 2023, that shows this huge mistake that Jerome Powell is making, which I think will lead to a death blow for the US economy, I want to emphasize that as a result of Paul Volcker's actions in 1981, the US went into a massive recession.

Recession of 1981-1982
The recession of 1981-1982.

Just to review, Paul Volcker jacked rates while M2 money supply was still going up, and he pivoted roughly around the same time CPI plummeted.

Let's remember, there's a lag effect with the Federal Reserve raising interest rates, meaning if the Fed raises interest rates, the economy most likely feels the impact of those interest rate hikes six or nine months into the future.

If Jerome Powell is raising rates right now, taking them up to 4.5% or higher into the future, then those interest rate increases are going to work their way through the economy over the next six to nine months. Then we're going to see the true full impact. It doesn't happen in real-time.

If Paul Volcker had not pivoted around the summer of 1981, then the recession that he created, would have been much, much worse.

1981 recession could have been far worse
The 1981-82 recession could have been far worse had Volker not pivoted when he did.

In my opinion, this is the catastrophic mistake that Jerome Powell is making right now. That is, he is delivering and will continue to deliver a death blow to the economy.

Powell's Interest Rate Hikes

Let's see what Powell is doing today, and what he did throughout 2022, then compare that to Paul Volcker in 1981 so we can start to draw some conclusions for 2023. We may see a severe economic downturn, and I'm putting that lightly.

2022 annual charts including Fed Funds Rates M2 Money Supply and month over month CPI
2022 annual charts – Fed Funds Rates, M2 Money Supply, and month-over-month CPI.

We're using the same charts, and the same data points as we did in 1981, but this time January through December 2022.

On the left, we go from 0%, up to 5%.

Fed Funds Interest Rate Hikes

We'll start with Fed funds. And this is fresh in everyone's memory, I'm sure. In April 2022, Powell started to raise rates. He then continued to raise rates at the fastest pace we have ever seen.

From April to December of 2022, interest rates basically go from, let's say, 0-25 basis points, all the way up to 4.25%.

Fed funds rates in 2022
Fed funds rates in 2022

And I know a lot of you right about now are saying, “Well, George, it's still only 4.25%. And historically, I mean, that's on the low side of average.” And you've got a great point.

Speed Matters

What you have to realize is the rate of change is incredibly important.

My good buddy, Adam Taggart has a good analogy for this. He says, If you drink a gallon of water over the span of a week, well, that's actually good for you. But if you drink that gallon of water within the span of a minute, it'll basically kill you. And that's what we're dealing with right now.

I'd also like to point out that just taking interest rates, let's say from 25 basis points all the way up to 425 basis points, is roughly a 15x increase. That is absolutely unprecedented.

Now let's go ahead and look at M2 money supply, just like we did with the previous charts in 1981, with Paul Volcker.

M2 Money Supply Today

m2 money supply 2022
2022 M2 money supply

We start off with M2 money supply represented by the green line at $21.5 trillion. It goes up and peaks at a little over $21.7 trillion. But then notice what happens. Right about the time Jerome Powell starts increasing interest rates like a madman. M2 money supply actually goes down. It plummets from $21.7 trillion down to $21.2 trillion.

And if we look at the charts, we can see that M1 money supply is also declining.

2022 M1 money supply
2022 M1 money supply

So as you guys know, just by using some good old-fashioned common sense, the number of currency units that are outstanding, chasing goods and services has a significant impact on Consumer Price Inflation. Let's go ahead and think this through.

During Paul Volcker's time, he pivoted around the middle of 1981 and the CPI came all the way down to a level that stayed very, very low into 1982.

1981 CPI Inflation Rate For The United States
1981 CPI Inflation Rate For The United States

Then as we all know, throughout the rest of the 1980s, and 1990s, we experienced decades of disinflation.

Consumer Price Index for all Urban Consumers All Items in US City Average
Consumer Price Index for all Urban Consumers: All Items in US City Average

In  1981, while Paul Volcker was pivoting, M2 money supply was not going down. It was not flatlining. It was actually going up.

M2 money supply 1981
M2 money supply 1981.

What is the impact going to be when Jerome Powell is raising rates at an unprecedented pace while M2 money supply is actually going down?

Unfortunately, we've only begun to scratch the surface. Let's go ahead and look at that chart of month-over-month CPI.

2022 - Month-Over-Month CPI
2022 – Month-Over-Month CPI

It goes from 0%, up to 1%. And keep in mind is the exact same timeframe as the chart above it, January to December 2022.

So the CPI in January was 0.6%. And then we go up to a peak at 1.3%. And again, this is just month-over-month. But then in June, it just absolutely plummets all the way down to 0%.

In the month of July, prices did not increase at all. Whereas in the month of June, they increased by 1.3%.

The next question becomes, what happened after we saw CPI Absolutely tank?

What happened after CPI tanked?
What happened after CPI tanked?

Well, CPI went up slightly, back to 0.4%, in the months of September-October. But then in November, it went down. And then in December, it went down to a negative… -0.1%.

How Interest Rate Increases Impact The Economy

Forward looking month-over-month CPI.
Forward-looking month-over-month CPI.

So my main point here is if we were to take the last six months of the month-over-month CPI readings and move them forward, assuming that the next six months going into 2023 will look similar, the CPI will have gone from, let's say, 9%, all the way down to roughly 2.5%.

And keep in mind, there's a huge lag effect to Jerome Powell's interest rate hikes. Let's go ahead and review quickly to make sure we're all on the same page.

In 1981, when the CPI crashed, right around that timeframe Paul Volcker pivoted.

1981 Federal Funds Effective Rate
1981 Federal Funds Effective Rate

And we also have to remember that M2 money supply was going up.

1981 M2 money supply was increasing while Volker was pivoting
1981 M2 money supply was increasing while Volker was pivoting

If anything, this gave a tailwind to the CPI, which I'd like to remind you stayed at a relatively low level going into 1982 and then throughout the 1980s.

So I think it's safe to assume that if Paul Volcker would have continued raising rates higher and higher, instead of pivoting when he did, the impact on the US economy would have been far greater. Instead of a severe economic recession, it may have been an economic depression.

Now, in 2022, what has Jerome Powell done in the face of:

  • Declining money supply, which should put downward pressure on CPI,
  • Considering that CPI has gone from 1.3%, all the way down to 0%, and in December, it's at -1.0%?

Well, despite all of this economic data, he continues to raise rates higher and higher and higher.

Unlike Volker, Jerome Powell continues to raise rates.
Unlike Volker, Jerome Powell continues to raise rates.

If Jerome Powell had been Paul Volcker, he would have pivoted way back in June of 2022. I'd like to remind you that we have yet to see the full impact of these interest rate hikes.

Interest Rate Hikes: What to Expect

Unfortunately, I think throughout the rest of 2023 and into 2024, we are going to see economic devastation created by these excessive rate hikes.

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7 months ago

Good information.