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Dear Reader, |
The Federal Reserve is hooked upon the horns of a mighty dilemma — a dilemma of its own creation. |
On the one hook: |
The Federal Reserve claims it is out for "price stability." Thus it endeavors to harness the inflation rate at 2%. |
I do not believe that 2% inflation equals price stability. |
It is an arbitrary and capricious figure lacking all scientific basis. |
It is as arbitrary and capricious as the 30-mile per hour speed limit. |
Yet the Federal Reserve believes 2% inflation represents price stability. And so I let it pass. |
The kernel here is its pursuit of price stability. |
The Second Horn of the Dilemma |
Let us now consider the second hook upon which the Federal Reserve has hung itself. |
In response to the Great Financial Crisis… it has engineered a financial and monetary system utterly and thoroughly reliant upon habitual monetary expansion. |
Absent this habitual monetary expansion, the entire edifice of playing cards it has erected will likely come heaping down. |
Hence the Federal Reserve's mighty dilemma. |
It can go chasing after price stability. Or it can labor to keep the fragile edifice of playing cards upright. |
Yet it cannot pursue both. |
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Structurally Impossible to Achieve |
Here I cite quantitative analyst Hamoon Soleimani: |
The Two percent inflation target — monetary policy's sacred commandment for three decades — has become structurally impossible to achieve. Not because central bankers lack skill, but because every attempt to hit the target destroys the financial architecture that previous monetary expansion built. This is the endgame of central planning: a system that cannot tolerate its own success criteria without collapsing. |
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I do not necessarily dispute the author's claim that central bankers possess skill. Yet it is a highly technical and focused skill. It is the skill of a mechanic. |
What they lack is an expanded vision. What they lack is wisdom. |
Yet to proceed: |
We've financialized every asset class, built supply chains optimized for fragility, and erected a debt tower requiring perpetual refinancing at suppressed rates just to avoid collapse. The two percent target was designed for a world we've already destroyed… |
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To hit 2 percent consumer inflation, central banks must restrict money supply enough to destroy demand among ordinary households — the people furthest from the monetary spigot. |
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But they've already inflated assets to the point where millions of families, pension funds, and governments depend on continued expansion to stay solvent. Tightening enough to hit 2 percent CPI means liquidating the phantom wealth propping up the entire system. |
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We glimpsed this in 2022-2023: modest rate increases triggered bank failures and sovereign debt crises. |
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And so: |
The Fed cannot pursue "price stability" without triggering sovereign default. It cannot monetize the debt without abandoning its inflation target. Monetary and fiscal policy have fused into a single system where every path leads to ruin. |
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A conundrum! Yet as I stated at the outset: It is a conundrum of the Federal Reserve's own creation. |
The Fed's Signalled It's Abandoning Price Stability |
Meantime, the Federal Reserve has abandoned its wistful pursuit of price stability. It has hoisted the white flag of surrender. |
It has instead thrown in with inflation. |
Mr. Soleimani: |
The Federal Reserve announced in October 2025 that quantitative tightening will end in December after reducing its balance sheet from $9 trillion to $6.6 trillion. This isn't a policy choice — it's mathematical surrender… |
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The Fed cannot shrink its balance sheet to pre-crisis levels without triggering a liquidity crisis. The modern financial system operates under an "ample reserves framework" — a euphemism for permanent monetary expansion. |
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Banks, pension funds, and Treasury markets have become structurally dependent on massive reserve creation… They're stopping [QT], not because inflation is conquered, but because the financial system cannot handle genuine monetary normalization. |
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The QT cessation sets the stage for QE's inevitable return… The QT cessation signals their choice. |
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The Die Is Cast |
Alea iacta est, as Julius Caesar supposedly uttered upon crossing the Rubicon River — the die is cast. |
I hazard the die is indeed cast: |
The Fed's balance sheet cannot shrink because the economy was restructured around permanent monetary expansion. Interest rates cannot normalize because the debt burden makes higher rates catastrophic. |
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The 2 percent target isn't failing because central bankers lack competence — it's failing because it represents an impossible constraint on a system that has already inflated beyond the point of return. |
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Precisely as Caesar's Rubicon crossing represented the point of no return. |
What then is the "endgame," Mr. Soleimani? |
Inflation stays persistently above target, the Fed's balance sheet can never shrink, and fiscal policy becomes increasingly untethered from reality. |
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This is the endgame of monetary central planning: not with hyperinflationary bang or deflationary whimper, but with the confused stumbling of policymakers who cannot admit their tools have welded them into a cage… |
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We have built an economic system requiring perpetual monetary expansion to avoid collapse, and we've run out of ways to pretend this is sustainable policy rather than slow-motion currency debasement… |
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If Only the Fed Never Intervened in 2008 |
My thoughts return to the Great Financial Crisis… and the Federal Reserve's colossal interventions to preserve the financial system. |
What might have transpired if it merely stood paws off — and allowed events to run their natural course? |
Interest rates would have gone skyshooting. Marginal businesses dependent on low interest rates and cheap credit would have sunk to the bottom. |
Yet the bottom is where they belonged. |
The agony of bankruptcy would have been acute. Yet the agony of bankruptcy would have likely been brief. |
Sound business would have likely withstood the blow. |
A new, sturdier economy could have risen upon deeper anchorings. Business could have clawed its way back up, on its own steam, on its own hook. |
Meantime, the stock market may not have boomed these past several years. Yet it would have found its own way… at its own pace. |
Dare I say, at a normal pace. |
In brief, a far saner system could have emerged from the previous crisis. But it was not to be. |
And so we are left with an insane system we cannot abandon without the risk of systemic collapse. |
It is too late now to reverse the dead-end course. |
The die is cast. |
Regards, |
Brian Maher |
for Freedom Financial News |
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