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The Fed will 'inflate away' U.S. federal debt; 'real inflation' is in the double-digits - Matthew Piepenburg

Kitco News

(Kitco News) - Despite Fed Chairman Jerome Powell's hawkish remarks at the recent Cato Institute Monetary Conference, the Federal Reserve will be forced to pivot and reduce rates, according to Matthew Piepenburg, Commercial Director at Matterhorn Asset Management. This is largely due to the U.S. government's excessive public debt.

"We have a 125 percent debt-to-GDP [level], and over $30 trillion in public debt," he said. "The U.S. government's bar tab can't afford rising rates… I don't see a scenario where we can pay for [it]."

Piepenburg also suggested that if inflation were measured according to  1980 criteria, it would be "closer to 18 or 19 percent." Since 1980, the composition of goods that the Bureau of Labor Statistics uses to calculate CPI has changed. Official U.S. headline inflation was 8.3 percent in August.

His comments echo those of other analysts, who warn that the Fed's rising interest rates make it harder for the government to finance its spending or fund entitlement programs.

Piepenburg spoke with Michelle Makori, Editor-in-Chief and Lead Anchor at Kitco News.

'Powell is not fighting inflation'

The Federal Reserve has increased the Fed Funds Rate (FFR) by 225 basis points over the year, and is expected to raise rates by 75 basis points at its next meeting on September 21st.

The current FFR target range is 2.25 to 2.5 percent.

Yet rate hikes are "disingenuous," since the Fed has no intention of fighting inflation, Piepenburg claims.  

"When you've got 8 to 9 percent CPI inflation, you're not going to fight that with a 4 percent, 3 percent, or even 5 percent Fed Funds Rate, which we can't even afford," he explained. "The truth is that the Fed, like most central banks throughout history, wants inflation to be higher than interest rates."

He suggested that the U.S. is a "debt-soaked nation who has its back against the wall," and would reduce the Fed Funds Rate to "inflate away its debt."

"I think Powell is seeking inflation," said Piepenburg. "The only reason they're raising rates today is not to fight inflation. It's so they'll have some [reason] to cut [rates] when the real recession becomes an official recession."

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The U.S. dollar

A "pivotal shift" is coming for the U.S. dollar as a reserve currency, said Piepenburg, who suggested that the U.S. dollar's strength will be "temporary." The U.S. Dollar Index (DXY) is up 14 percent year-to-date.

He pointed to the Fed's tightening of monetary policy as contributing to a stronger dollar.

"It's a disastrous policy, because it forces the dollar to go into a situation where emerging markets, with trillions in dollar-denominated debt, are stretched too thin," said Piepenburg. "[The Fed is] going to have to make the dollar weaker."

Calling the U.S. dollar "a drinker who never takes a glass of water, but just keeps ripping martinis," he said that the dollar will fall "slowly, and then all at once" once the DXY drops below its critical support levels.

"It would be nice to see a central banker be honest about it," said Piepenburg. "But to take no responsibility, and then blame it on COVID, climate change, or Putin, in my opinion, lacks a lot of courage and honesty."

Gold Price

Piepenburg said that the gold price will reach new heights, after the "dollar snaps" and weakens. He added that the price of gold is currently "suppressed" at artificially low levels.

To find out why Piepenburg thinks the gold price is "suppressed" and what his outlook is for the price of gold watch the video above

Follow Michelle Makori on Twitter: @MichelleMakori

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