The Fed’s Empty Toolbox

  • Oh, it’s bank collapse season… Already?
  • Yellen and Kashkari dissemble (financial crisis)
  • The Fed’s worst of all world’s
  • Postcards from the ledge
  • Target acquired (Taiwan’s semiconductor fabs)… Remembering Scarlett… The price of love… And more!

Well, we dodged a bullet — based on what did not happen last night…

Jim Tweet

… but rest assured there’s more incoming fire.


We hope you caught our Special Supplement sent after the market close yesterday — an exclusive video confab diving into the fallout of Silicon Valley Bank’s demise. It featured Paradigm macro maven Jim Rickards and his senior analyst Dan Amoss.

If you missed it, here’s the “tl;dr”…

  1. The Federal Reserve will definitely dial back its planned rate increase next week to a quarter percentage point… but that will create its own set of problems.
  1. With the Fed set to resume bond purchases, the Fed’s 11-month effort to shrink its balance sheet is over — which will shred the Fed’s precious “credibility”
  1. Given the less-publicized blowup at crypto-focused Signature Bank, there remains the potential for the trouble in the crypto space to spill over into traditional finance.

The last of those three is something Jim’s had an eye on ever since the collapse of FTX last November. It hasn’t happened yet… but that doesn’t mean it’ll never happen.

We’ll have more to say about point No. 1 later this week. So for our purposes today, let’s expand on point No. 2…

… because it comes back to something Treasury Secretary Janet Yellen said to beclown herself nearly six years ago, when she was still chair of the Fed.

It’s right there in The 5’s voluminous archives, June 28, 2017: Asked about the potential for another 2008-level financial crisis she answered: “Would I say there will never, ever be another financial crisis? You know probably that would be going too far, but I do think we are much safer, and I hope that it will not be in our lifetimes and I don’t believe it will be.”

On that same day, Minneapolis Fed president Neel Kashkari held a town hall in your editor’s neck of the woods. He was more refreshingly honest: “There’s no question the banking regulators blew it leading up to the financial crisis. And the problem is we’re gonna blow it again…”

But Kashkari is a thoroughly establishment creature, so his honesty went only so far.

In advance of the event, I conferred with Jim Rickards about what I should ask Kashkari. He said I had to ask about the Fed’s balance sheet and how it reflected on the Fed’s credibility.

While the Fed’s interest-rate increases get all the headlines… the Fed’s effort to shrink its balance sheet is just as important for getting inflation under control.

The Fed bought stupendous quantities of Treasury debt and mortgage-backed securities during and after the 2008 crisis… and again during and after lockdown in 2020. “Quantitative easing” in Fed-speak, “money-printing” in plainer English.

Both times, the effect was to blow up the Fed’s balance sheet to previously unfathomable levels — nearly $4.5 trillion in 2015 and nearly $9 trillion last spring.

Money Printer

As you can see, the Fed undertook efforts to shrink the balance sheet — selling some of those Treasuries and MBSs — from 2018–19 and again starting about a year ago.

So back to the question I posed to Kashkari in 2017: Whenever the next crisis rolls around, would the Fed really have the capacity to once more balloon the balance sheet?

The subtext to the question was whether such levels of money-printing would bring out the torches and pitchforks domestically… and undermine the credibility of the dollar and U.S. Treasuries internationally.

No surprise, Kashkari dodged the question: “I think the Fed still has a lot of tools in our arsenal.”

He enumerated those tools like so: zero interest rate policy, quantitative easing and “forward guidance” — that is, the Fed jawboning the markets about its intentions. In other words, a rehash of the 2008 playbook.

As it turns out, that was kinda-sorta enough to contain the crisis brought on by the pandemic and lockdowns.

But while the post-2008 money-printing led to inflation mostly in financial assets (i.e., tech stocks)… the post-2020 money-printing led to inflation in everyday goods and services.

The specter of inflation last year was so extreme that Kashkari instantly flipped from being one of the most “dovish” members of the Fed to one of the most “hawkish.” To his mind, consumer price inflation had to be brought under control and the Fed’s balance sheet shrunk so it could be blown up again whenever the next crisis occurred.

Unfortunately, the Fed is stuck in the worst of all worlds now — facing a new crisis before inflation is back under control.

As it happens, the Labor Department issued the February inflation numbers this morning. They rang in as expected — up 0.4% month-over-month and 6.0% year-over-year.

So on the one hand, the official inflation rate is running at its “slowest” clip since autumn 2021. But on the other hand it’s still alarmingly high by the standards of the last 40 years.

And now the Fed faces the prospect of having to start buying Treasury debt again. That’s because the bailout announced Sunday night isn’t just about covering the uninsured deposits of Silicon Valley Bank customers.

It’s also about an emergency lending facility available to all banks to ensure they won’t have to do what SVB did. As we mentioned yesterday, SVB went down primarily because it had to sell its Treasuries at a loss just to cover all the deposits rushing out the door. Those Treasuries were worth less than face value because of rising interest rates.

The Wall Street Journal editorial board elaborates: “Many banks have hedged their interest-rate risk and diversified their deposits, which comes at a business cost, but some like SVB and Signature didn’t. The Fed is now saying that’s OK — we’ve got your back.”

Result? “They’re going to blow up the balance sheet after they spent a year trying to shrink it,” Jim Rickards said during our video briefing yesterday. “This just completely destroyed the Fed’s credibility on the subject of monetary tightening and fighting inflation.”

Meanwhile, the “doomier” outposts of social media look upon all of these events as part of a grand plan….

Josey Tweet

As we’ve said at other times and in other circumstances… that’s giving the power elite way too much credit for forethought and planning.

We think Janet Yellen was totally honest in 2017 when she said another 2008-style crisis was unlikely to occur “in our lifetimes.” We think the current Fed chair, Jerome Powell, was straight-up when he told Congress last week he didn’t see any risk to the banking system because of his rate-raising policies.

But… the powers that be are forever eager to exploit a crisis when it does occur.

Which is why Jim Rickards has been on guard for a major new development this week in his “Biden Bucks” thesis, the march toward a central bank digital currency. And why thousands of readers like you eagerly watched his special event this past Sunday night, Biden Bucks: The Final Countdown.

During that presentation, many of them learned for the first time about a “control account” that can insulate them from whatever new edicts come down from Washington, D.C.

This event is still available to watch… but if you want access to this one-of-a-kind account, you need to act by midnight tomorrow night. Watch the replay right here, right now.

Wall Street is staging a relief rally — and the battered regional banks are in on the action.

At last check, the Dow is up nearly 1.5% to 32,272… the S&P 500 is up over 2% to 3,933… and the Nasdaq is up nearly 2.5% to 11,460. Bond yields are moving back up, the 2-year Treasury note at 4.32%.

The KBW Bank Index has rallied over 4.5%. First Republic Bank — whose action was so volatile that trading was suspended for a while yesterday — is up 48% today.

Gold continues to hover just over $1,900 and silver is a dime away from $22. Crude is down just over 1% to $74 on the nose. The crypto rally has pushed Bitcoin back over $25,000 and Ethereum to $1,768.

➢ One other economic number of note: Small-business sentiment as measured by the National Federation of Independent Business ticked up in February from 90.3 to 90.9 — still below the NFIB’s long-term average. Inflation continues to top the “single most important problem” part of the survey, cited by 28% of respondents.

From the Department of Problems We Hadn’t Started Worrying About Yet…

Semafor Tweet

Look, we’re just getting this on the record. Last year, hedge fund billionaire Ken Griffin warned that America would sink into a depression if China invaded Taiwan, or even blockaded Taiwan. That’s because of America’s extreme dependence on Taiwanese semiconductors: A major disruption to supply would collapse the U.S. economy by 5–10%.

Now, former national security adviser Robert O’Brien says if China invades Taiwan, Washington should act first and destroy the Taiwanese chip factories.

In an interview with Semafor, O’Brien used a World War II analogy: In 1940, the British bombed the ships of their French allies in the Mediterranean, to prevent the fleet from falling into Nazi hands. By the same token, “The United States and its allies are never going to let those factories fall into Chinese hands.”

As it happens, a paper published by the U.S. Army War College in 2021 proposed the same thing, more or less.

From our perch, it would seem that preventing a Chinese attack on Taiwan should be a major goal of American leaders. Instead, they seem determined to provoke one. But that’s a topic for another day…

We don’t usually do an “on this date in history” feature, but we can’t resist after stumbling upon this…

He died

“I am so sorry to hear about the sudden loss of your sweet kitty Scarlett,” reads one of maybe a dozen emails that came in after yesterday’s edition.

“We also have experienced the shock and heartbreak of returning with an empty carrier to a suddenly empty home. I pray for peace and comfort for you and your family in the days ahead.”

From one of our regulars: “I’m very sorry to learn of Scarlett’s passing.

“Unfortunately these Earth suits expire. They come in all shapes and sizes, and some are incarnated with special souls.

“I have lost so many family and friends during my time. Yet somehow I’m still here (despite all the stupid things I’ve done to earn a Darwin Award).

“God must have a design. There is no earthly explanation.

“Her soul and many others will be waiting for you on the other side.

“Apparently our work here is not done.”

A third: “I had a cat named Finnian who left us under the same circumstances. Such a surprise, and it occurred after our regular vet hours, so off to the vet emergency hospital. Only to later return home, like you, with an empty cat carrier, tears streaming down both of our faces.

“It’s been a few years now, and I still miss Finny. I hope you’re both feeling a little better and you know that there was no way you could have known about her illness or done anything to stop or prevent it. I’m glad you let us know. Being able to be human can be such a relief.”

And finally: “I am so sorry to hear about the passing of your beloved cat, Scarlett. It is amazing how much you can bond with a special cat. They each have their own personalities. I am glad you had many good years with her. Although you may (and I hope you do) adopt another cat, it will never be the same.

“I enjoy your emails every day. Thanks for writing them.”

The 5: Little puddy, big personality: Scarlett was named by my wife after Scarlett O’Hara… and like her namesake, Scarlett had a flair for the dramatic.

Case in point: Long after adopting Scarlett and her litter-mates, we adopted a fourth cat, Quincy, in 2018 after an older acquaintance who lived alone died unexpectedly.

As it happens, Quincy gravitated to the office like Scarlett. Whenever they were in the office together, and my wife or I would give Quincy attention, Scarlett would take on the most sour countenance…


Why are you doting on this interloper?”

Really, the picture doesn’t do it justice. You had to be there — and in a way, you were, as Scarlett kept me company while researching and writing.

So thanks to everyone who wrote in with their sympathies. I leave you today with a final thought passed along by a dear reader: “Grief is not a sign of weakness, nor a lack of faith. It is the price of love.”

Best regards,

Dave Gonigam




Dave Gonigam
The 5 Min. Forecast

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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