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Americans are spending as fast as ever they're borrowing as fast as ever in fact if you look at the most recent revision to the savings rate which was contained in the last revision to GDP the household savings rate has now collapsed to its all-time record low by the end of the second quarter of this year the savings rate was all the way down to 3.4 percent and in fact I'm sure it's lower than that now as Americans continue to deplete their savings not only is this bad news because it indicates that American households are in worse shape to weather the recession but it also flies in the face of the comments made by Jerome Powell when he assured everybody that the reason the U.S economy was so strong the reason it could withstand higher interest rates was because households were so flush with savings well the facts completely belied the assertions made by Jerome Powell not only don't households have high savings they have record low savings proving once again that whenever Jerome Powell says something he either is completely wrong or is flat out lying but not only are U.S households rapidly depleting their meager savings they're also racking up debt we got to Consumer Credit numbers also on Friday and the increase in credit card debt was 17.2 billion that is the second biggest monthly increase ever in credit card debt the record was actually set this March when credit card debt went up by 25.9 billion so consumers are spending like crazy they're draining their shallow savings pool and they're piling on more credit card debt to buy stuff this is not how you fight inflation If the Fed was successful in fighting inflation savings would be going up credit card use would be going down you have to stop people from spending to bring inflation down and you have to encourage them to save because when you have more savings and less spending two things happen one the reduced demand for goods helps bring down the price of goods but the increased supply of savings results in more Capital Investments and more production of goods to bring up the future supply of goods so by raising interest rates high enough to encourage savings and discourage debt and consumption then you end up fighting inflation but the FED has not done that yes the FED has raised interest rates but not enough to bring them into positive territory and you're not going to encourage savings with negative interest rates you're still punishing people for saving with negative interest rates you're not going to discourage people from borrowing when they can borrow money at a rate that's lower than the inflation rate because they're being paid to borrow contrast that to what happened with Paul volcker in 1980 when short-term interest rates went all the way up to 20 percent the highest inflation got was 13.5 percent so you're talking six and a half percent real interest rates that encourage people not to spend money because if they save their money instead of spending it they could buy a lot more in the future because the interest that they were earning greatly exceeded the inflation rate that they were expecting so it made sense to defer consumption because by Saving now and spending later I could buy a lot more stuff because I could spend the interest that I earned now with a lot of people saving to earn that interest now you have more money available for for businesses to borrow to invest in more productive capacity so that's why those higher interest rates worked but what the FED has done will not work because interest rates are still negative so people are still going to spend money as fast as they can why hoard it and spend it in the future because the interest that you're going to earn is nothing compared to the increase in prices and in fact most Americans are still earning nothing on their savings accounts because those interest rates haven't moved up now yes they can buy treasury bills and get four percent but four percent is nothing if prices are going to go up by eight percent you'd be dumb to put your money away to earn four percent just spend the money right now buy stuff before the prices go up and so if we're not going to bend that curve and alter Behavior you're not going to fight inflation and of course if we're not going to get an increase in the savings rate businesses don't have money to borrow and in fact the savings rate is plunging so the FED is not going to make any Headway in fighting inflation until we see a meaningful increase in the savings rate and a meaningful reduction in the amount of consumer credit and that's not going to happen unless we get a real increase in interest rates much bigger than we've seen now but that is impossible because the FED cannot do that without creating a financial crisis and if they do create a financial crisis or if we are poised on the precipice of such a crisis we already know what the fed's going to do they're going to do exactly what the bank of England did they're going to do exactly what they've done in the past when presented with a financial crisis they will always choose inflation over financial crisis and they're going to make the same Choice again yes right now they can Bluff they can pretend that they're going to fight inflation no matter what that's because no matter what hasn't happened yet and in fact look what happened with the stock market rally as soon as investors anticipated that the FED may be considering a pivot we had this huge rally in the stock market and therefore the FED had no reason to Pivot based on the markets because the rise in the stock market based on the anticipation of a pivot in effect takes the pivot off the table what has to happen is the markets have to throw in the towel on their expectation for a pivot the stock market needs to crash and the crash of the stock market May in fact bring on the pivot so if investors really want to Pivot they can't buy stocks in anticipation of that pivot they have to dump stocks expecting no pivot and then they'll get the pivot of course it's not just a stock market crash that could be the Catalyst for a pivot it could be something happening in the bond market or any other part of the economy you never know what that catalyst is going to be the only thing you know for sure is that that catalyst is out there and that's why the FED can't really fight inflation it can't admit that so it has to pretend so it is Raising interest rates but not by enough to do the job but ironically one of the only things the Federal Reserve has accomplished with its rate hikes is its increased costs that businesses absorb and ultimately pass on to the consumer because all businesses have debt and now that debt is more expensive to service and that's just another cost just like raw materials just like labor and so those higher interest costs have to be factored in to Consumer prices and they are helping to push prices higher so every time the FED raises interest rates it's raising costs it's just like workers getting a raise or raw material prices going up it is putting upward pressure on consumer prices the same thing with rents you're a landlord you own some apartment buildings you also have some debt your interest costs are going up how do you recover that you raise your rents and your tenant ends up paying the higher interest rates in the form of higher rent just like any other costs that are going up the tenant has to cover those costs for the investment to be worthwhile for the landlord so the FED is actually moving further and further away from its goal of fighting inflation
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