Is The Fed Lying About Inflation? | James Lavish

0:02I wouldn't want to be in Besant's seat trying to manage all these deficits and just watch Congress continue to pile on more and more spending, have absolutely no solution for Social Security, which I've paid into all my life. And suddenly they're talking about, oh, we're just going to start cutting it. What do you mean cutting it? It's not even keeping up with inflation. Are you kidding me? They have a pretty big problem in front of them here. And it's obvious what the solution is. It's just how are they going to do it? What acronym are they going to put on it? And can they get away with it in a way that doesn't cause a massive spike in the separation of wealth in the short term?

0:39Another thing that's happening, Danny, is people are, they have fully 100 % embraced the debt-based economy and they live on debt. The first quarter Fed, New York Fed numbers came out and credit card delinquencies, 90 day delinquencies are, they're matching the 2008 levels now. Let's talk about the Fed, James. I have this. It's been super interesting to see what's happened since Walsh has come in because it's not been what I expected. I don't think it's been what most people expected. But one of the most interesting parts of it that I've been watching, and I have an inkling as to what's going to happen next, is are they going to start lying to us about inflation?

1:21And when I say lying to us, we already know that CPI is a bit of a cook number, but they've got this inflation task force now. And are they about to start overtly lying about what's happening? I mean, I talked about this a long time ago where I think we're so used to the 2 % inflation number. We've just become conditioned to it. It's a frog boiling, you know, kind of just turn up the heat a little bit. Yeah, inflation is kind of normal. You need inflation because you will need people to spend money for goods in order to keep the economy going and all that, get people to buy into it. I had an argument with somebody about this, years ago about how inflation is just, it's insidious.

2:02You don't need it. It's just part of a debt-based system. It's a reality. And people become conditioned to it. So once you get them to that level, and we've talked about this before, how the Fed was asked, Powell was in a congressional hearing, and I can't remember who asked him, but they were like, why 2 %? Where does that come from? And he gave this long, drawn-out answer that had to deal with the neutral rate and everything. And it was like, he just completely obfuscated the answer, which was because that's what we can get away with. You know, it's that people don't notice it three, four, five, 6%.

2:40You start noticing that come out of your paycheck because you go down the street to get groceries. And you're like, oh man, I, that that's a lot more than last month. And my wages haven't gone up yet. And so I'm like, I'm now I'm suddenly behind. And so So 2 % is, there's a saying that came from your area of the earth where Australia decided in the, I believe it was in the early 80s that they kind of, they stated that number. I think it was New Zealand. I'd never heard this before. That's right. Alan Farrington wrote an article recently and mentioned, that's the first time I'd ever seen it. But apparently it was like a central banker in New Zealand who got asked in an interview on TV and just said 2%.

3:25And that's where the whole mythology around 2 % started. Yeah. And I don't know if it was because that was kind of matching the expansion of the gold supply for mining. But in any case, I wrote about this a long time ago. I said, look, people are conditioned to 2%. They're going to kind of say, yeah, somewhere around 2 % or 3%. And then eventually it'd be somewhere around three, three, 4%. And they'll just kind of let it slide. And people are like, oh, well, inflation is a little bit hotter now, whatever. But then they just get on with their lives. And part of the issue here, Danny, is that when you have an oppressive fiscal system like this, people are struggling just to survive.

4:09Like they don't have time to dig into why this stuff is happening. I understand it. They're just trying to be like, what do I need to do to make more money, to feed my kids, put clothes on their back, pay for the car, pay for the rent, and just keep going. They're inundated or they're just overwhelmed with that need. And then the two working spouses and double salaries, and now you're paying for childcare. It's just overwhelming. So the answer is, that's a long way of saying, yes, I think they're going to change the definition. Now, I thought that they would kind of gravitate towards a 2 % to 4%, 2 % to 3 % range.

4:56We're going to be on there because it's really hard to hit a target and it's subjective. We're going to call it a range from now on. That seemed like the shortest putt to me, but changing which measure you want to use. So Warsh has been quoted as liking the trimmed mean PCE, which is the it's the it's the other type of CPI, the PCE, the pricing index that measures goods and services. and the trimmed mean is you're just throwing out the outliers. So if energy is way up on one month, you throw it out. If rent is way up, you throw it out. And that way you get to a point where you're like, ah, well, those are kind of outliers.

5:42The problem with that, though, is historically, it's been kind of a canary in the coal mine that, oh, energy's way up. That's going to push everything else up. or housing's way up because of something else structurally going on. And that's, everything's kind of moving that direction. And so it ends up being that it's a lagging indicator. And then when they're way down and you throw them out, well, it's a lagging indicator the other way. So over a long period of time, sure, it smooths it out, but it misses moves. And since we're already in, we're using data that's already lagging. So now we're lagging the lag.

6:23And then not only are we lagging the lag, but then you've got these meetings that are lagging that and their decisions. And once you start putting something into place, then the effects of that is lagging. So it just produces a mess like we saw in 2020 to 2022 when we printed all that money. Goods and services started going up in price. They blamed it on transitory inflation from bottlenecks of, you know, manufacturing and supply chains. And they were wrong. I mean, flat wrong and way behind the curve. So that is kind of the concern here. and one of the things that he said he's going to do is like with this way a new way of figuring out inflation is go back to what he says first principles he starts a task force but what do you think the first principles he he's trying to get to are because i don't think i don't believe that he's going to get back to sort of the first principle definition if me and you sort of start talking about inflation well i think he's saying first principles he's talking about okay let's look at the market as a whole and dynamics around it and you cannot deny that ai can be disinflationary or deflationary like you just can't deny that it's uh it now um whether or not that flows through to pricing remains a pretty big argument because of what lynn talks about all the time which is fiscal dominance and when you have the government paying for goods and services up the wazoo and we're running multi-trillion dollar deficits on the back of 39, almost 40 trillion dollars of debt, servicing that debt, then having to reissue all that debt.

8:16That's just borrowing upon borrowing upon borrowing and it's driving the economy. And so first principles would say, yeah, but this is all going to be disinflationary or It's going to be deflationary at some point because you've got these LLMs that are going to be doing the work of multiple people. And especially when you get into agentics, you know, where you've got agents, everybody's got an agent. And instead of me hiring, you know, an accountant to do my books for my business and an accountant to do my taxes, I can just have somebody come in and check the work of the AI to make sure it's right.

8:55check it off and, you know, pay him a smaller sum of money. And so it'll take up whose jobs? It'll take up the jobs of the people who are working for him, compiling all that data and putting it into the models, into the, you know, the programs to kick out the numbers. That's all done automatically now. And so you're, obviously you're seeing layoffs at places like where they have data, you know, entering or, you know, just simple analysis. You're seeing a slowing hiring there. Does that mean that we're going to lose all the jobs? No, but you could see how that becomes like you're doing more work for less effort, clearly.

9:37However, the money is still, it's going to be spent one way or another. I'm going to spend it on AI agent, or I'm going to spend over here on a purse and maybe spend less on the agent, obviously, but this is going to go into that into Anthropic or OpenAI or, you know, Grok. And then the next thing you know, you've got an increasing separation of wealth. So it's just, I hear him on the first principles. I get it. I agree. We should be looking at first principles, but you can't parse out the principles. You've got to take them as a whole, right? You wouldn't reuse a Bitcoin address, so why does your phone broadcast the same identifier for life?

10:19Every SIM has a static ID and carriers, ad networks, and bad actors all use it to track you. The big carriers have been caught selling that data over and over again. CAPE is America's privacy first mobile carrier. Their identifier rotation feature changes your ID every 24 hours so you look like a different subscriber every single day. And SIM swaps are off the table. Your number can't move without a 24-word phrase that only you hold. There's also no name at sign up, no social security number, and there's no profile to build on you. If you're a Bitcoiner in America, I honestly don't know why you'd use any other network.

10:52You can head over to cape.co forward slash WBD and use the code WBD for 33 % off your first six months. That's C-A-P-E dot co forward slash WBD. If you own a Bitcoin ETF, especially if it's GBTC, you need to listen up. Spot Bitcoin ETFs provide price exposure to Bitcoin, not direct ownership. You can't withdraw it, you can't self-custody it, and they charge you a management fee every year to hold it. Well, Swan recently announced Swan Real Bitcoin Exchange, and it's ready to use right now. RBX is a structured in-kind exchange that converts your Spot Bitcoin ETF shares into real on-chain Bitcoin.

11:29It does that without selling on the open market, and it's designed to support a tax efficient outcome. So for example, if you hold GBTC, you're paying 1.5 % a year in management fees for Bitcoin price exposure. But by swapping GBTC for real Bitcoin with RBX, you can drop that figure as low as 0 % by just holding it in self-custody. This is designed in a way that maintains your cost basis and in a manner that supports the deferral of capital gains tax. So if you own a Bitcoin ETF, especially if it's GBTC, you need to talk to Swan Private about RBX today. Head over to swan.com forward slash WBD and book in a call with one of their team.

12:04That's swan.com forward slash WBD. If you're already self-custody Bitcoin, you know the deal with hardware wallets, complex setups, clumsy interfaces, and a seed phrase that can be lost, stolen, or forgotten. BitKey fixes that. BitKey is self-custody built for real life. It gives you an intuitive, easy to use wallet with no seed phrase to sweat over. And it has a strong recovery system and built-in inheritance for long-term peace of mind. and bitkeys just had a massive upgrade the new device now has a screen so before you approve something you can check it on the bitkey itself the transaction the address or any account changes it's a big difference you're not just trusting what's on your phone you're seeing it for yourself on the device it's simple secure self-custody without the stress go to bitkey.world today and use the code wbd to get 10 off the new bitkey that's bitkey.world and use the code wbd how does he prepare for that future that we are going heading into because like clearly ai is going to have a more important role in the jobs market going forward like undeniably already is like block have already got rid of a load of workers uh i saw bit go i've got rid of a load of workers like this is already happening so is it that he can ignore inflation numbers for now knowing that disinflation or deflation is coming in the future i don't think it's ignoring i think is he's just putting everything aside and waiting, you know, like, that's why I think one of the, one of the big reasons that he doesn't want to give guidance is because he knows that things are changing rapidly here and it's going to be difficult to anticipate that.

13:36I can't anticipate it. It's way too complex to figure out. Um, that's just, I mean, when these things came out, Danny, when I, you're too young, but when I had a BlackBerry, which was just, uh, it was basically a, um, a messaging tool, they didn't have, they didn't have screens on, they just had a little text screen on it. But when that stuff, when that came out, and suddenly I was in, and this is the, this is the late nineties. So when this came out though, I, I, we all thought, wow, this is going to make us, this is going to make it so much easier to get work done. And you're going to be able to be productive and get stuff done in shorter period of time.

14:18And that wasn't really the case. All it meant is that you're going to have more work piled on top of you and you're not going to have any working hours. You're literally going to be on the clock all day, every day. I mean, I was trading in Australia at 10, 11, 12 o 'clock at night. I mean, I was at dinner trading Australia in Dallas and I'm sitting there with my kids. I'm on the, I'm on my BlackBerry, you know, trading Australia. I'm like, this is insane because at two o 'clock in the morning, I'm getting phone calls on my cell phone now from Europe. And they're like, hey, it's going to open here.

14:50What are you thinking about that? I'm like, I don't, it never turns off now. And that's what this has turned into instead of it being, oh, it's going to be a great productivity tool. It's going to make everybody work less. No, it just means everybody's on the clock now. So what does that mean for, for AI? I don't know. And that's why it's difficult to get a gauge of what's really going to happen. So that is a long way of saying that I think that's what he's trying to do is just give himself time and say, we're going to look at the data. We're going to make decisions that are data dependent, just like the last chairman Powell did.

15:23And we're going to not really talk about it. We're going to see what comes in. Now, if he changes the inputs, though, and says, well, this data is a little bit different than it was six months ago because I think it's a little bit better way to look at it. He's the chairman of the Fed. That's his job is to decide what they're doing and what they want to see and how they want to digest what. So, but he's also got a job of getting everybody on that board of governors and the officials, the Fed officials who are voting in each of these meetings to get on board to whatever he's thinking. And they can have a collective vote on it rather than just have a fight and then have a bunch of dissension.

16:09And it's just not going to be healthy. So I think his challenge is multifold. And so where he comes out, I believe, is not raising or lowering rates in the next meeting or two. I just don't see it happening. Could he raise rates later in the year? Well, sure, if we see a continued uptick in inflation, but I just don't think that's going to happen. I think with a resolution in the Middle East, oil coming back down in price, producer price index numbers coming down, which means that that's going to feed through to the CPI. Remember, that's what pushes all first, because the producers start raising their prices, then the consumer, you know, then the manufacturers are raising their prices, then the stores are raising their prices, and they're trying to get those margins and keep some sort of margin, and it passes on to the consumer.

17:05and so it and then it unwinds backwards the other way right so we'll have to we'll have to see what happens but i think that's what he's going to do and i just don't think that there's an impetus for him to act right now i think he's going to be sitting on his hands for a little bit when he came in everyone expected him to be super dovish want to cut rates and he's actually come in very hawkish so far um is this all strategy is he basically trying to be like look i'm not just a Trump puppet, this is still an independent thing, and trying to get the other board members on side? Or is the data telling him that he can't do what he wants to do?

17:41No, I think that that is definitely a part of it. I think he wants to be seen as independent, that he's not a sock puppet for Trump, as Elizabeth Warren called him in those hearings, the confirmation hearings. I think he wants to be seen as independent, strong. He came across is kind of hokey, you know, the way his language was just down to earth, just a hokey little, you know, we're going to have a little family fight about this and, you know, and so, um, I think he wants to come across as just an independent, thoughtful guy. Um, but not going, not going to do the bidding for any of anybody. Now that said, he has breakfast weekly with the Treasury Secretary.

18:29He and Bessette know each other, know each other well. And so, you know, Bessette has his own issue here. He's like, I'm rolling this debt. I'm rolling$12 trillion of debt in the next year. And then I'm going to have to do it again the next year. And next, and it'll be$14 trillion. So he understands that every single month that they keep Fed funds high is it just, it continues this ongoing deficit and increase in deficit because you're rolling these bonds off. You've got longer term bonds that are maturing along with all of these T-bills that they piled up because Yellen was playing chicken with the Fed and she screwed up, she didn't term out the debt.

19:23She didn't push out to longer-dated maturities when she had the chance to. Fair that we're looking back, you know, hindsight 2020. But she also saw us print$5 trillion. And she had been the chairman of the Fed. She must have known that was inflationary. But she got behind the curve there. She didn't just hurry up and get out on the curve a little bit. on all those months and quarters that she could have issued longer-term debt at lower yields, but she didn't do that. And Bassett was highly critical of it during the campaign about that. But now he's in the same spot. So do you think he's going to have pressure on the Fed and on Warsh to, hey, we got to get these rates down?

20:12Well, most people think that that would be the case. However, if you recall, when Powell did cut rates by 100 basis points right before the election, what happened to the 10-year treasury? The yield went up 100 basis points. Why? Because the bond traders, they didn't swallow it. They called the bluff. They're like, no, no, no, no, no, no, no, no. You're going to cause inflation here. And that means that I'm going to have to be paid more yield on the longer end of the curve to get a real yield on my money. So you can cut rates all you want. And, you know, and you could talk about how the treasury, how the mortgage rates are going to come down if you cut rates.

21:00But it's not the case. And the fact is, if you just look at the 10-year hovering around 4.5 % here, it's gotten up to just about 5%. And it's backed off. But, you know, the reality is the bond traders understand that we have a we are in fiscal dominance and we have an issue here of having to to issue more and more and more debt to pay for all the, you know, the deficits that we're running. And so they're not buying it. They're just not biting on that hook. And so what happens from here? Well, that's why we have to be watching, Danny. I think that this rate, it's almost noise, almost. All this rate talk is noise.

21:48Because the real issue is, when do they come in and start buying bonds again? Now, they're buying T-bills to replenish bank reserves and in order to make sure that the general account is topped up. But they've backed off that a little bit. And the Treasury is buying what's called off-the-run paper in a regular Treasury buyback, which is not regular in any way, shape, or form. Yeah, there's the balance sheet. Exactly. So we have to watch that. And you saw it's ticking up here since the end of last year. And it's going, it's ticking up slowly, but it's not rolling off. So what are they doing? Well, every single mortgage-backed security that matures are taking, instead of taking that money and just taking out of the system, they're going back and using that money from that they're getting from, you know, they're basically Basically, the Fed is getting money from the Treasury for the maturity of these, you know, basically they're getting money for the maturity of the bonds, the T-bills.

23:03And they're getting money for the maturity of these mortgage backs. And they're turning around and taking those mortgage back money and plowing it back into bonds and into T-bills. So that's why this is still expanding. because at a lower rate, it's not expanding at a higher, but if you split out the treasuries versus mortgagebacks, you'll see that the mortgagebacks are coming off and the treasuries continue to rise. So as an asset split, but that's what's going on. So this is what we're watching. We're watching that closely to see, okay, when do they really start buying here? And are they doing some sort of yield curve control or, you know, operation twist?

23:50Because go back, if you leave that right there, Danny, just leave that right there. Go right before 2020. You see a little hump there? Yeah, that's where we got into that. That's where we got into the repo crisis. The repo crisis, yeah. Where there's a shortage of dollars. Well, guess what's going on around the world right now? Look at the U.S. dollar. You know, it's not at all time highs, but it is up over a hundred bucks again. And so, um, you know, that's a, that's a signal that there's a shortage of dollars around the world that other central banks need dollars. And so, you know, what is the case now is that you're watching Japan.

24:37The whole Japan experiment is, man, that has gotten to a point where this is a real issue. you've got rates going up, you've got the, the yen collapsing in the face of it, which is telling you that basically it's telling you that investors in Japan, they don't believe that the, that the rates are high enough for them to be compensated for the risk of continued expansion of, of spending out there. And so, you know, I'm not saying the yen is collapsing, but I'm saying the confidence is falling in it and people don't want to be holding yen. And so that's another issue. And you're just seeing all these things play out in real time.

25:26I would not want to be in either of those seats. Let's put it that way. I wouldn't want to be in Besant's seat trying to manage all these deficits and just watch Congress continue to pile on more and more spending, have absolutely no solution for Social Security, which I've paid into all my life. And suddenly they're talking about, oh, we're just going to start cutting it. What do you mean cutting it? It's not even keeping up with inflation. Are you kidding me? You've got to be joking. So you'll have an uprising here if we do that, especially with people who really, really, really need it. But so these guys have, they have a, they have a, um, they have a pretty big problem in front of them here.

26:08And it's obvious what the solution is. It's just, how are they going to do it? What acronym are they going to put on it? And can they get away with it in a way that doesn't cause a massive spike in the separation of wealth in the short term? See, the thing I don't understand about that, like, cause obviously you're saying that they can print money and and that'll get them out of this hole and i can understand from say percent's point of view why that would be attractive but if the fed is independent why would wash want to do that because his dual mandate is inflation and jobs right so they're praising jobs yeah exactly so and at the moment like uh percent's in this problem where he's rolling over debt it's costing him an absolute fortune but why does wash care about that or why should the fed care about that Why do you feel like they have to be sort of accommodative there?

27:00Well, this is a great question. This goes back to first principles. Why does he care about inflation? Why? Why does he care about inflation? So some people have to deal with it for a little while. Why do they care about it? First principles. They care about it because his job is to instill confidence in the US dollar, period. The job of the treasury is to do the bidding of Congress, figure out a way to issue debt and borrow enough to cover all that spending or to manage the treasury in a way that if we were in, somehow we got into, we got away from deficits and we had a surplus to manage that surplus with investments or whatever, but that's not the case.

27:44The case is the entire balance sheet of the treasury is, you know, the only growth that's happening there right now is on the debt side because we're not repricing gold primarily. You know, but so when you look at the Fed and you look at the Treasury, those are the first principles. That's what their jobs are, to manage the spending on the Treasury side and to instill and keep confidence in the dollar on the Fed side. And so, you know, when the Fed has to find a way to do that, So they use inflation. The inflation he's got, they know they must manage, they have to manage inflation and have inflation.

28:30There's just no way around it with the debt-laden economy that we have or the system we have here. I mean, the math is just working heavily against these guys. And I think what they're hoping for, Danny, truly, I think these guys are both hoping that, man, this AI will be so disinflationary that we could just keep printing money and buying debt. And we're kind of backdoor our way out of this because what we'll do is we'll have a productivity miracle where you have an increase in productivity without having to increase all the spending. I don't get to that math myself. Why not? What stops you from getting there?

29:17Well, I mean, think about it. if you have a productivity miracle, meaning there's, so what you have robots and AI basically doing all this work for very, very, very little cost. And then prices go down, you know, or like if you had like, if you had a deflationary shock to the system, which again, I think that would take us getting to AGI, you know, or close to it, where these computers are just so much smarter than us that, you know, that we're not, that we can't be employed. But what are you going to have? You're going to have universal basic income. I mean, you've got, you've got on one side, you've got uh elon musk saying that people are going to be paid a lot of money like everybody's going to be wealthy you're going to have an universal high income universal high income right so um but you know how do you so how do you get there without pain in the middle how do you get there without unemployment without a spike in unemployment benefits and and costs the government there and then an, you know, a massive spike in, in deficits and spending there.

30:39I, I don't know. And then what are you going to have? Like a handful of companies paying all the taxes that, that the government needs to take in to, to pay down its debt. I just, I can't get to the math and maybe it's because I'm, I'm not smart enough. Um, but it just, I just don't see how the productivity miracle would get us there. Um, it's interesting. Have you ever seen, have you ever seen this chart? I'm going to pull up, I'm going to pull up two things actually and see if, see if you've seen these, because this is really interesting. Um, I'm going to pull them up together. And this is kind of what, I think this is what everybody's afraid of.

31:22And And this is a great article. It was years and years and years ago that I read this, I was saying 2010 or 12 or something. And I was like, wow, that'd be really interesting if that was real. And I couldn't, you know, I just kind of dismissed it. So, but you see this? So the intelligence staircase, have you ever seen this? No, I don't think I have. okay well down here on the second step of the of this huge staircase you've got an ant right then like a few steps up you've got a chicken then a couple steps up you've got a monkey and then a couple steps up in there you got us the human right and it seems like i mean we're you know so much smart in this ant and we're you know about eight or ten steps above it give or take.