Former Fed Insider on Recession & Hyperinflation Risk. Bullish for Gold?

Craig Hemke (00:00)
Well, hello out there to everyone watching. It is August 2025. It's time for your Ask the Expert segment here at SprottMoney, SprottMoney.com. I'm your host, Craig Hemke, and on my mind this month is the economy and the Fed. And I thought, what better guest to bring in as said expert than my friend, Danielle DiMartino Booth. Danielle, thank you so much for spending some time with me.

Danielle (00:34)
It's great to be here, lots to talk about.

Craig Hemke (00:39)
My gosh, do we have a lot to cover? Like I said, with everything that's going on, you were the first person I thought of to be the expert this month. ⁓ Two things, one, I want to remind everybody, and Sprott Money is a sponsor of all this content, so you want to visit their site regularly, anytime you're in the market for precious metals, but you also want to subscribe on whichever channel you are watching this content, because Ask the Expert is just one of the things they publish every month, and you don't want to miss anything. Because there's a lot of great stuff still coming up in August. ⁓ Danielle, if you could, for people that don't know about your background and what you do at QI Research, can you kind of fill everybody in first?

Danielle (01:14)
Mm-hmm.

Yeah, so, it's funny you ask, I've got two boys who are studying finance at McCombs at UT right now. So when I left McCombs, after getting my MBA, I went off to Wall Street where I had a career working for a firm, Donaldson, Lefkin and Genrette. We sold a lot of private equity before it was a thing. It was during the internet bubble. So I learned quite a bit during that chapter of my career. And of course, most people know me because I was... an advisor to Richard Fisher when he was president of the Dallas Fed for almost a decade throughout the financial crisis. So former Fed insider, that's what people always, that's how people always describe me. And I just celebrated the 10 year anniversary of QI research. So we've been cranking out in very independent research here for more than a decade now, have a great following, great client base, and just love to do what I used to do for Richard, but now I do it for the for the investing public.

Craig Hemke (02:19)
I, people have heard me on this platform and at my site talk about how important it is in 2025 especially to have as many objective and independent voices in your ear as possible. Danielle at quillintelligence.com, correct? Please check it out. Danielle, like I said, we're now kind of in the dog days of August. know, a lot of European traders are on holiday. I sit here watch the gold price every day. In US hours, it's basically just the inverse of the dollar index. It's just the machines trading it. So I thought, what a great month to focus on the bigger picture. And again, like I said, no better guess than you to go there. The two main things I want to discuss, we'll just dive right in with number one. 

Craig Hemke (03:07)
This idea of where the economy is, where is the US economy? The most recent GDP numbers look pretty good. Then we had these job revisions to the job report. ⁓ It was now two weeks ago. And it's like, if gosh, if Powell had that information accurately at the time, he might already started cutting. So where do you think we are economically in the US?

Danielle (03:29)
So, you know, it's interesting that everybody now knows the word revision as if it's some kind of a great, you know, grand new phenomena. But we've actually seen downward revisions to payrolls for 24 out of the last 30 months. That is a lot of downward revising. And in fact, when you look through the other types of revisions that you get when all 12 million US employers report hard headcount numbers to census on a quarterly basis, which is required by law. ⁓ It looks like net job destruction began in the second quarter of 2024. So we have been in a recession. people don't like to acknowledge that, but certainly the PhDs in economics at the Fed who dig into the data as I do, they're highly aware of this. So I can only imagine how much tension there has been between the staff at the Fed and Jay Powell and his insistence that the job market is solid when we've got hard data in hand that show that it's anything but solid. And again, this was not a July phenomenon. July was appropriately fireworks and the magnitude of the revisions were large and more than half of those revisions came from government positions. That's not even survey data. For the Bureau of Labor Statistics, that's data that's reported directly to them from government agencies. So highly suspicious downward revision almost looks like they had Trump in the crosshairs here. ⁓ And now, of course, it's become a complete political football. I think had Powell been paying more attention to his staff and more attention to the data,

Danielle (05:21)
and really not playing politics as much as unfortunately he was, I don't think that he would be in the same position that he's in today. But yet here we find ourselves, know, Mr. Solid is headed off to Jackson Hole in just a few days. And the topic of discussion is the labor market and monetary policies. So awkward.

Craig Hemke (05:44)
Yeah. Well, and what can be done? mean, for 15 years at my site, we've called it the BLS BS because it's just statistical guesswork and seasonal adjustments. How can they possibly know on the first day of the month how many jobs were created in the prior month? What, I mean, do they, should they start to kind of aggregate the data different and maybe release the numbers less frequently? What, what's the solution?

Danielle (05:50)
Mm-hmm. Yep.

don't think less frequency is necessarily the solution. If a company can report to the census what its headcount is on a quarterly basis, it can probably do that on a monthly basis. I think we should just go directly to the source and move away from the guesswork, from the imputations, from the birth-death model. Just get the flat-out data.

And we have blockchain, we have technology, this is the 21st century. We're not asking for anything incredible here except for companies to report with greater frequency. It's pretty simple.

Craig Hemke (06:46)
Yeah, which certainly seemed like that they should be able to do that for crying out loud. Where does that leave? Do you think the state of the economy and where do you think the bond market will be headed? Fed funds rates, that sort of thing. If you think that maybe we're already in a recession.

Danielle (06:50)
Mm-hmm. Well, certainly I think that the Fed has some catching up to do. And the main subject of debate now is will it be 25 basis points or 50 basis points in September, which gives you a real sense of deja vu because last summer in July, the Fed did not cut rates and the same debate ensued. And lo and behold, it was 50 basis points in September of 2024. When Treasury Secretary Scott Besson gets on TV and says, you know, we need that 50 basis point rate cut and he's making his rounds of the media, ⁓ the pressure is going to start to build from within. And I think it'll be even greater than just the two dissents ⁓ that were cast in the July meeting. If they end up getting the nominee to replace Fed Governor Adrena Kugler quickly nominated and confirmed before the September 16th, 17th.

meeting. mean, then you could easily see a triple descent. And on top of that, we've had some very dovish Fed voters, importantly, people who voting in 2025 come out subsequent to this labor market data and say, you know what, it is time for rate cuts. there's actually, I did a scenario analysis for my clients yesterday in my Bloomberg chat room, and you could easily get to six individuals.

Danielle (08:26)
out of 12 voters who would be in favor of a 50 basis point rate cut. we haven't seen anything like that. That would be tantamount to mutiny on the Federal Open Market Committee. But you can easily get there right now. And I think that there is a lot of tension right now on that committee.

Craig Hemke (08:36)
Yeah.

And with Stephen Mirren as the, what's he going to be, ⁓ member for Governor Coogler, right? Till January. So there's another voice. And wasn't the last meeting where there were two dissenting voices, was that like the first time in three decades or something like that? Yeah.

Danielle (09:04)
Yes, it was highly unusual. I mean, governors, I mean, before it was, you know, March when Christopher Waller dissented. And then before that, ⁓ a few months prior to that, was Michelle Bowman dissenting. But before that, we're talking about 1995. Especially for governors. That's why I'm saying this is a very, very unusual time in the markets, because there is the potential

Craig Hemke (09:22)
It's just rubber stamped. Yeah.

Danielle (09:33)
for so much more dissent than we've seen since Paul Volcker was running the Fed and himself suffered mutiny.

Craig Hemke (09:41)
Yeah. Well, all right. Speaking of unusual times, the second thing I wanted to get your opinion on is this, I don't know, I guess I almost sense like a grand plan, you know, I don't want to be like John Nash, you know, in the beautiful mind movie, you know, where they come to my garage and I just got all the sticky notes and the string connecting things, but there seems to be a bigger movement afoot. A bigger strategy out there. Trump has made it clear.

that even if he can't come up with a reason to fire your own pal for cause, that he's going to get somebody more dovish in there come May. And we've heard the secretary of the treasury, Bess, talk about, you know, he wants to somehow reform the Fed and kind of mold it together in a new model that works a little more hand in hand with the treasury department. What do you make of all this, Daniel? What would that look like?

Danielle (10:19)
Mm-hmm.

Well, it would look a lot like 2020 when Steven Mnuchin, ⁓ shrewd banker who he's been his entire career effectively launched a leverage buyout of the Fed. I we've seen this before and we've seen it in recent memory in the immediate aftermath ⁓ of the pandemic hitting, the Fed blew up its balance sheet.

by trillions and trillions and trillions of dollars and was directly monetizing the debt of the treasury. ⁓ So this is something that we do have historical analogs to look back on. In fact, Mariner Eccles, the building is named after, it is the Eccles Building, the Federal Reserve Building. In 1948, President Truman was very adamant that he bend to his will and

Danielle (11:31)
and lower interest rates, Echols said no. And he was summarily not renominated to be Fed Chair again. And Echols said, you know, checkmate, I'm staying and finishing my term.

Craig Hemke (11:46)
This is history rhyming

and repeating, Danielle. Keep going.

Danielle (11:50)
But it was that era that brought about the 1951 accord. That era and Eccles saw the way through to the separation, the distinct separation of the Federal Reserve from the Treasury Department. And a lot of people in wonky circles, we've been saying that we need another accord to make sure that exactly the opposite of what Treasury Secretary Besant

is suggesting is ever allowed to happen. So I completely agree. A lot of the things that Besant is saying, it's clear he's read my book, but because the Fed is long overdue for many reforms. They've had mission creep, the employment mandate has been shown to be a failure. It's in direct conflict with the inflation mandate. ⁓ So there are a lot of...

whatever, there are 784 PhDs. We don't need that many PhDs to screw in a light bulb. Again, there are other ways to collect data in this world. don't need this massive bureaucratic apparatus that we have, but we definitely need for the Fed to remain independent. And we don't need for there to be greater collaboration with the Treasury. That is as sure a route to hyperinflation and a banana republic as you can get.

Craig Hemke (13:09)
What do you think then, what does Besant mean then when he says these things? you think that, he posturing? Is it just, know, hold the hammer over Powell to try to get him, you know, we're gonna do this if you don't play ball.

Danielle (13:23)
⁓ you know, I think, ⁓ when I think of posturing, I certainly think of the president. I, I don't think of Besant as much, when it comes to, posturing. ⁓ so I hope that's not the case because he has been one of the calmer voices, ⁓ of the current administration. He's certainly able to, to calm the financial markets. And, ⁓ and I hope that he's not.

Danielle (13:52)
sincere about an idea of the Treasury effectively running monetary policy. that, mean, if you have the Federal Reserve do your bidding, there's absolutely no reason to even pretend that you're interested in fiscal discipline. None.

Craig Hemke (14:10)
Yeah, right. Which that kind of leads me, I guess, to my final question along these lines. know, you're at $37 trillion in debt here in a supposedly robust economy, another $2 trillion in this fiscal year, it looks like by the time we wrap up at the end of September. So the train is not slowing. You mentioned that period in 1948 to, you know, after World War II.

That was a period when the Fed trying to manage the terrible GDP debt ratio that we had back coming out of World War II, they ran a ⁓ period of yield curve control.

Danielle (14:53)
They certainly were.

Craig Hemke (14:55)
Do you, is that a possibility again?

Danielle (14:59)
anything is possible. And truly anything is possible ⁓ in a world when we can't even keep the pace with the change that's occurring. ⁓ And the amount of division that we're seeing, mean, you know, we, you the United States is a checks and balances constitutional democratic republic. Technically speaking, we have checks and balances, but boy, it takes the court system a long time to do that checking and balancing.

Craig Hemke (15:00)
That's true.

Danielle (15:28)
And ⁓ so, ⁓ you know, Congress also has a role, you know, to play here, but anything, anything is possible. You know, before there was a Federal Reserve building, the Federal Reserve's, you know, the leadership of the Federal Reserve offices were in the Treasury's building. And the Fed literally did the Treasury's bidding. And so certainly that's not indicative of

capitalism, it's not indicative of democracy. ⁓ And you certainly would not want to go in that direction. You know, I have greater concerns, though, that if there's a big political turn in the United States, if we if the pendulum swings towards progressive politicians who are in favor of things like modern monetary theory and universal basic income, you could you could end up going in the exact same destination.

Craig Hemke (15:59)
Right. Right.

Danielle (16:27)
that you're describing through a different political party and different means.

Craig Hemke (16:33)
Does that make it kind of inevitable? I just had this rolling in my mind that that's eventually where they're headed. I have no idea if yield curve control would work in 2026, but gosh, it sure would seem to be inflationary, not good for the dollar.

Danielle (16:49)

No, it wouldn't be. you know, I have been pounding the table about the perils of repeating the CARES Act and the stimulus and the helicopter money and, you know, pausing people's debt obligations and paying their rent for them and paying them not to work. And because we had double digit inflation, that's what we got. And we don't need to go back there.

Craig Hemke (17:02)
Yeah.

Danielle (17:16)
by any means. ⁓ at a deeper level, you also end up on this kind of roller coaster because it's stimulus and then the stimulus comes off and the economy slows and then full-time jobs are being lost and there's people working part-time and multiple jobs. And then there's going to be calls during the midterms, well, we want more stimulus. it just puts you in a very warped adverse feedback loop, which is a...

a word dismal scientists throw around so that we can sound smart or something. don't know.

Craig Hemke (17:46)
Hahaha. Danielle, as we wrap up, just I apologize for putting you on the spot, but where do you think it looks like a year from now?

Danielle (17:59)
Gosh, I mean, a year from now, we'll have a new Fed chair, presumably that'll be July, ⁓ August of next year. You know, it's, if we have interest rates at too low of a level by then, and retirees are robbed of their interest income, you we could have a much different financial market backdrop. We have to...

always keep in the front of our minds that people who are 70 and older own 40 % of the US stock market. Those retirees need a decent level of ⁓ risk-free interest on the $7.5 trillion in money market funds, on another $3 trillion or so in certificates of deposit. We're playing with fire if, as President Trump is insisting, the federal funds rate was to go to 1%.

because you could unleash, release the crack-in type of thing with retirees who could no longer reenter the workforce as they did in 2001, as they did in 2007. They're too old now. So if they're forced to start liquidating their stock holdings, we cannot tell what that environment would be like. And that's why I tell people all the time, watch what you wish for.

Craig Hemke (19:17)
Yeah. Yeah.

Danielle (19:26)
because we don't, mean, it'd be even worse if we went back to the zero bound, because again, demographics are not on the side of such policies as they were in 2001, as they were in 2007. So I hope we do see a lower Fed funds rate, but not by much.

Craig Hemke (19:43)
But not that low. That's an excellent point. These kind of unknown unknowns, you the unknown consequences that a lot of folks don't think about and you can't really anticipate. Maybe at least Danielle by August of next year, we'll be discussing whether the Texas Longhorns can go back to back national champions, right?

Danielle (20:05)
I certainly hope so. Go Longhorns, beat the Buckeyes.

Craig Hemke (20:09)
Hey, I can't wait right out of this shoot. Isn't that gonna be fun? Call that a yes.

And I'm wearing I'm wearing my burnt orange. I've been wearing burnt orange almost every day. I'm like, I'm bringing on the Arch Manning era, but dear God, yes.

Craig Hemke (20:19)
You got it. You and Matthew McConaughey, right?

Well, I hope you have a great fall. Thank you so much for your time. It's just always so insightful to visit with you again. Danielle DiMartino booth. You can find her work at that website. QI research.

Danielle (20:40)
You can Google QI research. can still come to our old website, quillintelligence.com. We have some copyright issues, but we still own the website domain. just Google. When you Google me, it all comes up, I promise.

Craig Hemke (20:54)
There you go. And you put out information every day and, many.

Danielle (20:57)
Every trading day of

the year, we put out a flagship weekly as well. I put out a Saturday intelligence briefing. This is for my institutional clients. We publish eight times a week without fail.

Craig Hemke (21:07)
Perfect. Again, one of the smartest people in finance you're going to come across. Demartino Booth. Daniel, thank you so much for your time.

Danielle (21:14)
And thank you for having me.

Craig Hemke (21:16)
And from all of us, Sprop Money, SpropMoney.com. Again, keep an eye on this channel. More to come here in August, that's for sure. And keep Sprop Money in mind every time you're in the market for some physical precious metal. Thanks everybody for watching. We'll have more for you very soon.