When a leading nominee for President gets something exactly right, we should applaud them for it. In this case, Donald Trump’s call to audit the Federal Reserve is dead on correct. Most Americans don’t realize this, but the Federal Reserve has far more power over the economy than anyone else does – including Barack Obama. The funny thing is that the Federal Reserve is not even part of the federal government. It is an independent private central bank that was designed by very powerful Wall Street interests a little over 100 years ago. It is at the heart of the debt-based financial system which is eating away at America like cancer, and it has no direct accountability to the American people whatsoever.
Italy is big enough to matter (it is the eight largest economy on the planet), but so uneventful that most does not pay any attention to what is going on there. We contend that Italy will, during the next year or two, be on everyone’s radar screen as it has the potential to derail the European project for real.
The bear will soon be arriving in earnest, marauding through the canyons of Wall Street while red in tooth and claw. Our monetary central planners, of course, will once again - for the third time this century - be utterly shocked and unprepared. That’s because they have spent the better part of two decades deforming, distorting, denuding and destroying what were once serviceably free financial markets. Yet they remain as clueless as ever about the financial time bombs this inexorably fosters.
The same Fed which for 7 years provide generous funding to offshore commercial banks, is now granting foreign central banks the same arbitrage privilege, one which worst of all, is almost entirely shrouded in secrecy.
In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates – one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis.
What negative interest rates are really projecting are low-to-no growth and zero-profit environments for the entire global economy sometime in the future, where businesses simply cannot make money. The implication of this is that all businesses will come to the government seeking subsidies. We already see it in agriculture. Education. Health care. Housing. Whether it is loan programs for customers or outright grants. There will be more. This is why capitalism cannot survive no growth. Economies would naturally revert to some form of subsistence, where the need to trade is reduced greatly.
As with Japan, Western economies that pursue a long-term policy of low or negative interest rates can expect decades of low growth unless these “unorthodox” monetary policies are rapidly abandoned. Recessions are not a problem of insufficient demand. They are a problem of supply being misaligned with demand.
Feel. The. Bern. "I have long been concerned that you see your major function and your position as the need to represent the wealthy and I must tell you that your testimony today only confirms all of my suspicions."
In response to questions that took issue with the Fed paying banks on excess reserves The Chair seemed not only defensive, but rather perplexed, as to why they were even questioning it to begin with. This line of questioning in my view opened up, and brought to light, the Pandora’s box of Keynesian insight and thought processes now emanating from the Fed. In fact, we're quite sure Ms. Yellen herself didn’t realize just how far she threw the lid open.
"There is excessive debt everywhere and negative interest rates are dangerous... My number one fear? That’s the same as asking me where it will start. When you view the economy as a complex, adaptive system, like many other systems, one of the clear findings from the literature is that the trigger doesn’t matter; it’s the system that’s unstable. And I think our system is unstable... Central Bank models are just wrong"
Moments ago S&P continued its downgrade cycle, this time taking the axe to the regional banks with the highest energy exposure due to "expectations for higher loan losses." Specifically, its lowered its long-term issuer credit ratings on four U.S. regional banks by one notch: BOK Financial Corp., Comerica Inc., Cullen/Frost Bankers Inc., and Texas Capital Bancshares. The outlooks on these banks are negative.
We are hostage to a dysfunctional monetary system, run by people who don’t understand how it works in the first place. No wonder the global economy is in the doldrums, and finance markets are having dyspeptic attacks.
Now that talking about NIRP in the US is no longer anathema but a matter of survival for market participants for whom frontrunning the Fed's policy failure has emerged as a prerequisite trade, the question is: what are the mechanics of NIRP, what are the implications of negative rates for US markets. Here is the handy answer
Because a currency represents a relative relationship, Fed hikes could have helped pull other central banks away from the dangers and consequences of negative rates, while still helping their hidden desire for a weakened currency. Opposing central bank policy actions would cause too powerful of an impact on exchange rates. Unfortunately, it appears the path into negative territory is winning the directional battle. A classic prisoner’s dilemma has arisen for the Fed.