by Gary Alexander

January 17, 2024

(With More Losses to Come if They Don’t Cut Rates Soon)

Here is one more unintended consequence of Modern Monetary Theory (MMT), the “free lunch” school of economics, which says that sovereign governments can print as much money as they want with no serious consequences, as long as they control the printing press. Well, how is that working out so far?

We got near-double digit inflation in 2021 up to mid-2022, then the fastest rate increases in history to quell that inflation, resulting in a historic hangover of the Fed’s first loss this century: $116.4 billion.

The Fed told us this sad story late Friday, January 12, perhaps hoping it would be lost in the long holiday weekend news blackout and blizzard overtaking voters in Iowa – and drivers in most other states, as well as those of us hoping to catch an Alaska Airlines 737 Max 9 to a Jazz Cruise in Miami early this morning!

Last Friday, the Fed told the world that it ran an operating loss of $116.4 billion last year, its largest ever and the first this century, a hangover from goosing the economy with $6 trillion to fight COVID (for far too long), then ratcheting up interest rates too far too fast – and too late in the game – pushing the annual federal debt higher in fiscal 2023 and 2024, thereby requiring more debt auctions and higher bond rates.

This chart came out of the Fed’s annual report, released last Friday – “red ink” disguised as orange ink:


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This $116.4 billion loss comes from paying more in interest to financial institutions than they earn from their balance sheet, which they bought when interest rates were lower. Starting in 2022, the Fed created IOUs they call “deferred assets,” which are now becoming losses. To its credit, in the decade before 2021, the Fed was a profit center. Between 2019 and 2021, its Treasury remittances nearly doubled, reaching a record $109 billion in 2021. Then the high interest came due. The Fed is now a big drain on the Treasury.

The Fed will likely continue to run accounting losses for as long as it holds interest rates above 3.5% (vs. the current Fed funds rate of 5.25% to 5.5%), which argues for making 7 or 8 quarter-point rate cuts this year, or even four 50-basis point rate cuts. It’s not beyond the scope of possibility, considering that over 90% of full-time economists at the Fed are Democrats and they wouldn’t mind re-electing the incumbent.

Even though Chairman Jerome Powell seems like a fair-minded fellow and talks a non-political platform, those who vote on the FOMC and those who supply the data have a singular point of view, like a stacked deck. Of 228 Fed economists who claimed Party affiliation, 208 claimed to be Democrats (91.2%).

 Economists At The Federal Reserve With Party Affiliation Are…Democrats – Committee To Unleash Prosperity

After all, the last Fed chair (Janet Yellen) was quickly promoted to become President Biden’s Secretary of the Treasury and is now his unapologetic spokesperson, and the most recent Federal Reserve Vice-Chair, Lael Brainerd, became President Biden’s chief economic advisor, so the Fed looks like a one-party club.

How the Fed’s “Dual Mandate” Came into Being – Starting 50 Years Ago

If you think last week’s Consumer Price Index (CPI) was disappointing at 3.4%, consider 50 years ago today, when the Commerce Department reported that the fourth quarter of 1973 delivered the worst quarterly inflation increase since 1951. In the previous week, the U.S. Department of Labor reported that our wholesale price index (now called producer prices) had risen 20.9% for the full year of 1973, from 47.4 to 57.3. In the 1970s (January 1971 to January 1981), the PPI gained over 150%, from 37.3 to 95.2.

In the trivia department, on January 17, 1974, the Nixon administration printed 4.8 billion gas-rationing coupons at a cost of $11 million, plus $11,000 a month storage (they were never used). The next day, an amazing thing happened. About 750 investors “invaded” the Fairmont Hotel in New Orleans in a modern gold rush, in an overflow crowd as the first gold-oriented investment conference opened in New Orleans.

I say these investors “invaded” New Orleans, since sponsor James U. Blanchard III only mailed out 5,000 invitations and got a phenomenal 15% response rate, such a surprising response rate that he said, “we had to frantically change hotels and banquet halls at the last minute. Even then, we could not fit everyone at the same time and had to use closed-circuit video monitors in various adjoining rooms. Imagine getting 750 responses for a $300 price tag, from a mailing list of only 5,000 today…plus air fare and lodging” (quoted from “Confessions of a Gold Bug,” by James U. Blanchard III, 1989, co-authored by yours truly).

The S&P declined 45% in 1973-74, amid rising inflation, giving birth to the term stagflation, stagnation plus inflation. Previously, the “Phillips curve” assured economists that this was impossible – you either had inflation OR unemployment – you had boom-times (inflation) or bad times (unemployment), but not both at the same time. But in 1973-75 and again, but worse, in 1979-82, we had both at once, giving birth to a new but more earthy math mash called “the misery index” of the inflation rate + the jobless rate:

Unemployment Table 1

StagFlation Table

In between those two “miserable” periods of high inflation and high unemployment in 1974-1982, the Federal Reserve Reform Act of 1977 was passed in late 1977, President Carter’s first year. It chartered the Federal Reserve to solve two problems at once – inflation and unemployment. You can see from the table above how poorly they executed their dual mandate in the five years after that “Reform Act” was passed (1978-82), until Paul Volcker used painful high interest rate medicine (up to 20% at one point).

Misery Index Chart 1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Misery Index Chart Text

According to Investopedia, The Federal Reserve Reform Act of 1977 “explicitly stated the Fed’s goals should be ‘maximum employment, stable prices, and moderate long-term interest rates.’ These goals, which remain today, came to be known as the Fed’s ‘dual mandate.’” Well, pardon me, but that’s a clear listing of three mandates, a dual mandate of jobs and inflation, but also “moderate interest rates.”

It’s interesting that Congress and the press keep referring to the “dual mandate” (jobs and prices), yet they usually concentrate on that third mandate, interest rates: “What will the Fed do in their next FOMC meeting – lower rates, raise them, or leave them the same?” The truth is that the Fed cannot do much about jobs and hiring or firing. They can do a lot about inflation, but they can only “follow the market” when it comes to interest rates. Bond traders and international bond buyers determine long-term rates.


Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The lesson from all this is that the Powell Fed didn’t learn the full lesson from the mistakes of the 1970s Feds, chaired by Arthur Burns (1970-78), G. William Miller (1978-79) and then Paul Volcker (1979-87).

Thankfully, Powell doesn’t have to overcome a full decade of entrenched stagflation, as Volcker did, but Powell went too far with his “helicopter money” in 2020-21, then too far with his “transitory” excuse in 2021, then he waited too long to apply the medicine, then applied it too fast, so now he’s paying a price, to the tune of $116.4 billion in 2023, and more to come in 2024. There is no “free lunch” with MMT.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Why the Fed Follows the PCE, not the CPI or PPI

Income Mail by Bryan Perry
Bracing For More Volatility Ahead

Growth Mail by Gary Alexander
Why the Fed Lost Over $116 Billion in 2023

Global Mail by Ivan Martchev
U.S. M2 Money Supply is Still Shrinking

Sector Spotlight by Jason Bodner
How Long Can This Market Stay Overbought?

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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