- Fed Chairman Jerome Powell has only “terrible” options, said financial researcher Luke Gromen.
- Powell faces historic inflation and the risk of recession and financial catastrophe, he said.
- The Fed’s inflation fight threatens to worsen the US government’s debt and deficit problems, he said.
Jerome Powell has only “terrible” options to choose from as the Federal Reserve Chairman weighs the threat of historic inflation against the risk of financial and economic catastrophe, a veteran researcher has said.
Powell’s last headache, the recent wave of bank failurespoints to a far greater threat to America, Luke Gromen says RealVision in a recent interview. The head of Forest for the Trees, a financial research firm, said the central problem is government debt and deficit.
“It’s not a problem of the banking system,” he said. “It’s a US Treasury G7 sovereign debt, a balance of payments issue.”
“Treasuries underpin everything,” Gromen continued. “It’s the guarantee of the whole system. So if we’re going to have a cash flow problem, we’re going to have a problem with everything.”
The federal government is about $31.5 trillion in debt, outpacing the U.S. economy’s fourth-quarter GDP by $26 trillion, says the Pew Research Center. Debt servicing costs about $400 billion a year, or almost 7% of the government’s annual budget. The federal deficit also increased by nearly $250 billion to $723 billion this fiscal year.
The US government partially finances its deficit by issuing treasury bills. Silicon Valley Bank imploded in part because soaring interest rates over the past year reduced the value of its long-term Treasuries. The lender chose to sell some of these government bonds to shore up its finances, causing its customers to panic and withdraw their largely uninsured deposits. The bank run prompted the Federal Deposit Insurance Corp. take control of the bank and guarantee all its deposits.
Gromen argued that the banking saga is symptomatic of the problem facing the Fed and the US government. Demand for treasury bills from foreign central banks has declined over the past decade, and rising interest rates mean government debt is becoming more expensive, he said.
If the Fed continues to raise rates to crush inflation, it risks causing a recession that will result in lower tax revenues, with banks selling Treasuries to offset more defaults and the government spending aggressively on support the economy, he said. This would exacerbate the debt and deficit problems of the United States, he noted.
A recession would also likely lead to lower asset prices, which could deter consumers from spending, erode GDP and trigger a “debt death spiral,” Gromen said. Essentially, the Fed must choose between letting inflation run wild or tightening policies further and risking financial and economic catastrophe.
Gromen warned that if Powell went ahead with the fight against inflation, he could “crash the system”, cause the Treasury market to fail and trigger Western sovereign debt defaults.
“Paul Volcker might be a badass because the US government, the operation of the Treasury market was never endangered by what he was doing,” Gromen said, referring to the former Fed Chairman who “broke the back” of inflation in the 1980s. “It’s from Powell and you can see it.”
“He tried to bluff the markets as he held a hand with three highs,” he continued, referring to Powell’s promise to defeat inflation. “When the markets have a royal flush, trying to bluff her with three highs is a stupid move.”
Gromen’s advice to investors navigating this tricky environment is to avoid excessive leverage, allocate 5-10% of their portfolios to gold, and hold around 2% in bitcoin, as he expects to what the most popular cryptocurrency outperforms.