37. The Self Licking Ice Cream Cone
All market participants are speculating about the after effects of the feds interest rate tightening. All sorts of credentialed academic economists are commenting when rates will be cut? While the feds quiet manipulation of the money supply goes unnoticed when the treasury offers debt and instead of finding a buyer the Federal Reserve prints the money to pay for it that is what I call (“The Self Licking Ice Cream Cone”). The fed has only two tools, short term interest rate manipulation, which gets almost all the attention and the addition and subtraction of money from our system (the Self Licking Ice Cream Cone), measured by the bonds and mortgage-backed securities the fed holds on their balance sheet does not get much attention. The Federal Reserve Balance Sheet has grown from $800 billion when Ben Bernanke took office in February of 2008 to $7.224 trillion on July 11, 2024. Yet the Economist Community is busy cackling about the interest rate. Many have criticized the Federal Reserve for this or that about interest rates but few have given the over 900% growth in the fed’s balance sheet its deserved attention. Mr. Powell operating fully in the Bernanke mold has become much like the wizard in the Wizard of OZ, behind the curtain he has printed money causing inflation. Mr. Powell enthusiastically returned to the Self-Licking Ice Cream Cone (printing) in ’21 and ’22 driving the balance sheet to a record $9.937 trillion. The analogy would be running our economy over with a Mag Truck than giving us monthly reports from the intensive care ward as it marginally improves.
On March 30 ‘22 the Fed’s balance sheet stood at $8.937 trillion on March 2, ‘23 it had been reduced to $8.340 trillion. To tame inflation, the Federal Reserve had taken almost $600 billion dollars out of the system in a year and had stated they would take over a trillion dollars out of our economy to fight inflation. However, during the first week in March of ’23 they added back over 2/3rds the money that took a year to take out. On March 23rd the Fed had quietly increased its balance sheet to $8.734 trillion. When the Fed buys bonds and mortgages its balance sheet grows and of course they pay for the bonds by injecting newly created dollars into the economy. Conversely when the Fed sells these bonds and mortgages back to the banks, its balance sheet shrinks by taking money out of the system. While constricting liquidity for private businesses by raising interest rates. Then in March of ’23 the Federal Reserve by reprinting money they had just taken out of the system is providing selective liquidity and showing favorites for banks and the Federal Government. Fifteen years ago, in 2008, Mr. Bernanke elevated the printing of money. At that time the Federal Reserve balance sheet was a mere $800 billion. Does anyone believe that printing by the Federal Reserve and borrowing by the United States Congress are solutions to our debt problems? Or, are these very actions the cause?
The self-licking Ice Cream Cone is the center piece of Modern Monetary Theory (MMT). Just to mention of MMT causes the leg hair on certain senators and house members to stand up. They know the power MMT gives them and fantasize its many uses. They believe its properties are magical. But are they? The ceremony of pulling out the Self-Licking Ice Cream Cone is almost religious for many and is never taken lightly by the power elites. Its use is always said to be ‘purposeful and full of good intentions’. But is it?
Mr. Greenspan used it to bail out long-term capital, although the use was not in the Fed Charter. Later when the added liquidity went into over-the-counter stocks, creating a bubble, he blamed us and talked about “irrational exuberance”, never mind that he started it. We forgive him because in 1982 he was instrumental in giving Social Security a 30-year fix. Do we need another fix, you think?
Mr. Bernanke fell in love with the Self-Licking Ice Cream Cone. He used it more than all his predecessors combined. Mr. Bernanke was clearly the cleverest Fed Chair. He would scold the Congress for out of control borrowing and spending, then he would use the Self-Licking Ice Cream Cone print while artificially holding down interest rates, giving the appearance that borrowing was riskless. Ironically facilitating the very borrowing he criticized Congress for by lulling Congress into borrowing more and more with artificially low rates and newly printed money. Ben put us on a bad path toward a debt crisis and ironically received a Noble Prize for it, notably awarded by central bankers.
Clever Ben also regularly performed the counter intuitive process of what he called “twisting.” When 10-, 20- or 30-year government debt came due, he would refinance into short-term bills further understating the annual interest cost of our burgeoning national debt. Rather than refinancing the entire debt for thirty years while rates were low, ironically his short term “twisting” reduced the time to turnover the entire debt curve to five to six years making annual interest cost hugely more susceptible to present rate increases today. Worse still twisting artificially lowered the annual interest carry cost of the debt as cleaver Ben held interest rates near zero giving the illusion that the annual interest carrying cost was manageable against the regime of artificially low interest rates, despite massive annual increases to our total debt. While holding the rates artificially low with the Self-Licking Ice Cream Cone the National debt exploded upward. Requiring much more refinanced shortened term debt today. It has deceptively understated the annual interest cost on our debt. Interest cost on the debt set a record in June ’24 reaching $120 billion for one month! That is unsustainable and will dramatically change against us in two to three years. “Twisting" really Ben?
Clever Ben, fully understood the power of the Self-Licking Ice Cream Cone. He set up accounts at the Federal Reserve to pay the banks a fat interest rate to redeposit the newly printed money so it would not get into the system and multiple through lending, causing inflation. During the Obama years of slower growth debt spending facilitated by artificially low interest rates gave a false sense of stability. Also, through the growth of repos and reverse repos Ben greatly expanded the Fed’s control over money markets and eventually the discount window. Traditionally if a bank needed a loan, they would go to the discount window and borrow from another bank that would take a long look at their balance sheet before lending. Banks would serve as checks on the financial integrity of each other. With the Feds expansion to lending at the discount window, government oversight is not nearly as picky. Hence Benedict Ben with the help of inexpensive Chinese imports helped kept inflation down so the banks parked the newly printed money back at the federal reserve so it wouldn’t circulate. These actions greatly expanding the power of the central bank at the expense of our fractional banking system.
Ms. Yellen was a student of Mr. Bernanke and continued his policies to a fault. Now we come to Mr. Powell. Rumor has it he is often on the phone with Mr. Bernanke and Ms. Yellen getting instructions on how to use the Self-Licking Ice Cream Cone. Boy did he really learn quick!
Yes, the intrinsic power of the self-licking Ice Cream Cone enables its user to buy anything at any price and pay for it with newly printed money, money that did not exist a moment before. The new Fed Chair, Mr. Powell, a slick talking lawyer, in ’21 & ‘22 printed 40% of the money needed to run the government for Mr. Biden by using the Self-Licking Ice Cream Cone. A significant amount of Mr. Trumps four trillion covid money was borrowed then printed by Powell, using the Self-Licking Ice Cream Cone.
Isn’t it just so wonderful to have Congress issue debt and to have Messrs. Bernanke or Powell, or Ms. Yellen behind the Curtain with the self-licking Ice Cream Cone printing the money to pay for it? Aren’t the very people we trust to cure inflation its cause?
When we look a little closer, the Self-Licking Ice Cream Cone has a sketchy history.
In 1919, Friedrich Ebert, a socialist democrat, became the new Chancellor of Germany, taking over for Kaiser William II. He was saddled with a huge bill for WWI war reparations and a huge trade deficit. Georg Frederick Knapp who started the Cartelist School of Economics convinced the new German Leader to use the Self-Licking Ice Cream Cone to fix the problem. Knapp believed it didn’t matter how much money the government printed. If inflation appeared because the value of the money was going down merely increase the tax rate. Prior to 1918, the German mark was valued at 4.1 to a US dollar, by 1923 it took 7,000 marks to make up one US dollar. The self-licking Ice Cream Cone led Germany to a severe depression and Hitler.
On January 6, 2002, Argentina broke its currency reserve with the dollar and began a floating rate currency. Previously the Argentine Peso had been pegged, one peso to one US dollar. The political class was enchanted by the self-licking Ice Cream Cone. Argentina is European, with one third of the population of the US and all the natural richness of the US. By January 2010 it took 3.8 pesos to equal one dollar, by January 2015 it took 8.7 pesos to equal one dollar, by January 2020 it took 84.13 pesos to equal one dollar. After 21 years of infatuation with the Self-Licking Ice Cream Cone the Argentine peso underwent a steady decline. Today one hundred Argentine Pesos are worth ½ a US penny. The Argentine Government has impoverished what was the 4th richest nation in the world. Today Javier Milei has a deep hole to climb out of. A hole that our political class is descending into at a rapid pace.
During the eleventh century of Byzantine dominance as the premier Empire in the world, Constantine the 8th discovered the self-licking Ice Cream Cone by putting cheaper alloys into the single gold coin that had sustained them for over 10 centuries. Years later, the historians wrote about how the Ottoman Mongols overran Byzantium.
Most every empire in history before its collapse used the Self-Licking Ice Cream Cone. Some would shave the sides of the coinage others would change the metals composition, for example instead of pure silver or gold they would add some lead. Thereby expanding the quantity. The result was always the same governments were granted power from the extra coinage in the short-term but it always ended in debasement and runaway inflation. Its deceptive power always looks and feels good in the short-term but overtime it brings pestilence, poverty and depression.
Yes, Mr. Trump and Mr. Biden, dramatically expanded our debt during periods of artificially low rates, or in Biden’s case passed huge spending programs. Mr. Bernanke, Ms. Yellen and now Mr. Powell have liberally used the Self-Licking Ice Cream Cone, to facilitate our debt decline. Now while starving mom and pops businesses of liquidity with higher interest rates the imperial state is flexing its newly obtained powers as the self-licking Ice Cream Cone is taking a rest for now.
Does anyone believe that a resumption of money printing during every future economic hiccup will quell inflation? Or that reverting back to using the Self-Licking Ice Cream Cone does anything but move the date forward of a larger economic problem with guarantee of a certain recurrence? If we know this, which we do, why don’t we act to cure the problem instead of treating symptoms as they occur? What are we waiting for? A failure of a weekly debt auction? I hope not.
When the only tool you have is a hammer, everything looks like a nail. The Federal Reserve’s hypocrisy must stop to have any hope of reversing our current decline. My only hope is that people will understand what the primary cause of our varied problems is and who is responsible so we can stop blaming each other. The Federal Reserve, which has no reserves and the political class that have exploited it by using this extended period (‘08-’22) of artificially low rates have put America under a mountain of debt, causing our divisiveness and polarity. Our political aspirants today have had a free pass by deflecting attention and blame on us they have avoided all consequences of their profligate debt spending. One thing we may conclude for certain, Modern Monetary Theory is not Modern and although future economic activity is variable debt is a constant.
Have a Blessed Week!
Tony Chris