I repeatedly warned that the headlines would blame Trump tariffs for the incoming inflationary wave. Jerome Powell stated that “uncertainty is unusually elevated” as a result of tariffs, adding, “someone has to pay for the tariffs.”
“Ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer,” he told reporters, noting that many retailers are only now replacing pre-tariff inventory. “We do expect to see more of that over the course of the summer.” This is a complete misread of the economic landscape based on antiquated economic principles.
Tariffs are taxes that are passed on to consumers. However, Powell is confusing a one-time price adjustment with a monetary-driven inflationary wave that began after the pandemic. The Fed is looking at the situation through a domestic lens while ignoring the international monetary crisis that is unfolding. We are experiencing a drastic shift away from public confidence worldwide, and that is causing capital to lose confidence in governments that are already deeply indebted.
The Fed is terrified of crashing the bond market if it hikes too fast, and equally terrified of sparking a dollar collapse if it cuts too soon. Government debt is no longer viewed as a safe haven. The computer has been warning that the sovereign debt crisis cannot be ignored for much longer. The Fed can no longer control inflation through interest rates. That was a Keynesian principle established when the government was not the largest borrower. Raising interest rates can have no impact on demand, as the government will simply borrow more, and the central banks simply have no say.
There is no limit to what the government will spend with “money” that simply does not exist. Governments continue to borrow perpetually with no real intention of paying back their debts. This is one piece of the Sovereign Debt Crisis that will implode like a nuclear bomb the likes of which we have never witnessed. The business cycle cannot be manipulated, and what’s more, the Keynesian model cannot account for declining confidence in both government and the economy.
