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The Fed’s Rain Dance at the Bottom of the Stairs
Wolf Richter www.testosteronepit.com
Apparently, Charles Plosser, president of the Philadelphia Fed, had failed to check with his handlers when he said on CNBC this morning that the Fed might have to raise short-term interest rates later this year—from practically zero to almost zero, I guess—though just last Thursday, the Federal Open Markets Committee had announced the extension of its zero-interest-rate policy (ZIRP) through late 2014.
We’ve been getting the same song and dance from the Fed about its "highly accommodative” monetary policy and "exceptionally low" interest rates since 2009. And by now we've been programmed to believe that extensions will continue ad infinitum, despite some dissenting voices here and there. In the process, the country has become hooked on low interest rates, and even the idea of raising them, or the mere mention of it, causes bouts of painful withdrawal symptoms.
At first, the expectation was that the “exceptionally low” rates would last 6 months, but now it's been three years, and three more years have already been added to the schedule, so six years in total, and soon, it'll be 20 years, à la Japanese, which isn’t exactly the paragon of a healthy economy. While there are cosmetic differences between the two, they do share ZIRP, out-of-control budget deficits, a ballooning national debt, and a political refusal to deal with reality—aided and abetted by a central bank.
It's an ugly situation. Short-term treasury yields are at practically zero, 5-year yields hit a new all-time low of 0.71%, and even 30-year yields dipped below 3%. Savings accounts, money market funds, and short-term CDs yield just about nothing. Yet inflation was 3% in 2011. The many trillions of dollars that individuals, institutions, and countries hold in these assets are slowly being ground down by inflation, but without compensation in form of yield. Financial repression. And the largest slo-mo ripoff in the history of mankind. For more on that whole debacle, and for good laugh, read.... Dear Ben, Please Print Us More Money.
Wages have not kept up with inflation either, not since the wage peak of 2000. Every number hammers home that point.... Oh wait. Not every number. Personal income increased 0.5% in December, according to today’s report by the Bureau of Economic Analysis. This coincided with a flatish December PCE inflation indicator, giving workers the first real wage increase in many months. Last week, the Bureau of Labor Statistics reported a similar phenomenon: a rise in hourly earnings of 0.2% in December and a flat CPI. Real wages increased! A rare event that should be celebrated around the country with a good American brew.
But for the year, real wages were still down 0.9%. For production and non-supervisory workers, the lower echelons of the labor force, real wages for the year were down 1.6%. So, one month hasn’t solved the problem yet. Yet it shows the beneficial effect of taking inflation out of the equation: real wages actually rise. A few months of this, and who knows—consumers might actually buy something with this extra money without having to borrow from the future.
NO, said the Fed, panicking at the mere thought of rising real wages. There shall be no break for workers. Real wages aren’t low enough yet. And so the Fed announced an inflation target: no less than 2% as measured by its low-ball PCE inflation index. So, closer to a CPI of 3.0%. Plenty of inflation to bring down real wages and demolish entire categories of investors, but not so much as to cause a revolt—in the hope that it would stimulate the economy? It’s a rain dance at the bottom of the stairs.
They misjudged the inexplicable American consumer. Consumer optimism, an oxymoron in the current climate, has been rising from morose multi-year lows in August to levels not seen since, well, May. And it whipped hope into a froth: rising confidence would pump up spending, which would pump up everything else. But the toughest creature out there that no one has been able to subdue yet.... The Inexplicable American Consumer strikes back.
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They were a super power.
Most excellent piece from Mises.org today along these same lines:
http://mises.org/daily/5879/Worship-of-the-Mob
Thanks for the link.
Key to remember . . .
But the point . . .
is an astute observation.
well said. this most common moronic misnomer from visitors to this site who have been led to believe that crony capitalism is actually socialism, like the hardest right wing ideals are somehow left wing.
but then perhaps the two wingtips do touch at some point?
crony capitalism ?
What is that?
Is it again one of those hypothetical fetishes US citizens crave or is there time capitalism did not include cronyism?
The Quiet Coup
http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
By Simon JohnsonThere was a time when it was much closer to being fair if you were an average citizen.
Communism and fascism are not exactly the same. That is correct, but they have more in common than they do with classical liberalism - free markets. That's why they get along so well. Read the post from a day or two ago on this site about utopia from Hayek. Communism and fascism are for all intents and purposes the same coin.
Wooo, here's a serious contender.
US citizenism is all about submission.
And you have to submit to pass the line that Communism and fascism get along so well.
Actually, Hayek said that fascism and communism were at each other's throats so much was because they were competing for the same type of gullible follower. Those followers have been shown to be able to switch back and forth between those paradigms quickly and easily. They were and are competitors with each other.