Yes, We Can “Trust” the Fed, Secretary Yellen

As Congress finally came to an agreement yesterday to temporarily lift the debt ceiling, investors breathed a sigh of relief. The stock market bounced and commodity indexes ran up to new multi-year highs.

Precious metals markets, meanwhile, staged modest advances after showing virtually no reaction to the preceding debt drama in Washington.

As metals markets try to turn the corner for a fall rally, other raw materials are moving relentlessly higher. Energy commodities including crude and natural gas are leading the charge. 

Also pushing higher are agricultural futures. Rising food costs are hitting consumers’ pocketbooks whenever they shop at the grocery store or go out to eat at a restaurant. 

Especially noticeable is the soaring cost of meat – as seen in everything from strip steaks to sliced bacon. Beef prices have risen 14% this year.  Pork prices have jumped 12%.

Speaking of pork, politicians in Washington are going to be bringing home a lot more of it now that the debt ceiling is being lifted once again. There was never any real doubt about whether the government would find a way to keep borrowing. The only question was how it would go about doing it.

In this case, Mitch McConnell, the Republican Leader in the Senate, folded. After months of insisting he wouldn’t help Democrats raise the debt limit, he finally agreed to do just that. McConnell’s deal with Democrats enables the government to borrow another $480 billion through December 3rd.

Leading up to that date, another debt showdown may loom. The political maneuverings that may occur are uncertain, but the ultimate outcome isn’t.

Even if Congress failed to push another debt limit extension through in time, the Treasury Department and the Federal Reserve have emergency backup plans in place. 

One of them entails minting a trillion-dollar platinum coin and depositing it at the Fed. A former director of the United States Mint has confirmed that it would be a quick and easy process to retool the existing Platinum Eagle mold for the lofty new denomination.

Treasury Secretary Janet Yellen pooh-poohed the idea when asked about it during a CNBC interview this week. Obviously, it would be embarrassing for officials to have to resort to such a maneuver. Doing so would make the Fed’s role in monetizing government spending far too obvious. 

Janet Yellen: I trust the Fed to make the right decisions. The platinum coin is equivalent to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt. It compromises the independence of the Fed, conflating monetary and fiscal policy.

I trust the Fed to make the right decisions. Supply bottlenecks have developed that have caused inflation. I believe that they're transitory, but that doesn't mean they'll go away over the next several months. I trust the Fed to make the right decisions.

Former Fed chair Yellen wants us to trust current Fed chair Jerome Powell when he says inflation is “transitory” and merely the effect of supply disruptions. 

She doesn’t want us to focus on the fact that the central bank is now buying well over 50% of all new Treasury debt. Nor does she want us to be concerned that the M2 money supply is growing at a 13% annual rate.

Sure, let’s trust the Fed.  What the Fed can absolutely be trusted to do is continue inflating. 

But that means investors can’t trust fiat dollars to hold their value. Debt instruments denominated in U.S. currency will almost certainly return less than the inflation rate. Over time, bondholders risk an enormous loss of purchasing power even if the issue never results in formal defaults.

All financial assets entail some amount of trust in counterparties to make good on their promises. By contrast, hard assets have intrinsic value that doesn’t require any trust in counterparties, institutions, or governments. 

Gold and silver coins are the only forms of money that have endured throughout the ages as empires have come and gone and as all fiat currencies have eventually failed. In a true flight to quality, precious metals will be the most sought-after asset class.

For the time being, investors still trust the Fed to keep stimulating the stock market and propping up the bond market. But when they realize they can no longer trust central bankers to maintain price stability, they may begin to dump vulnerable paper assets.

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