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In Thrall To The Federal Reserve
Submitted by Jeff Deist via The Mises Institute,
Perhaps no economic pronouncement in history has been anticipated, discussed, predicted, dissected, and reported like the Federal Reserve’s momentous decision today not to raise interest rates.
The outpouring of relief witnessed today by the financial press is nothing short of cathartic. Fear and anxiety, built up over months, is replaced by relief, even euphoria.
This is not to say the hype is unwarranted. On the contrary, the decision to raise interest rates even just 25 basis points would have represented nothing less than the end of an era, as one Bank of American analyst described (courtesy of Zerohedge):
On Wall Street only 2 things matter: interest rates and earnings. Everything else is noise unless it impacts rates and earnings. No one impacts interest rates more than the Fed. So the … rate hike decision is a big deal.
Should the Fed decide to raise interest rates, it will be the first Fed hike since June 29th 2006. In the 110 months that have since past, global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero interest rate policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime.
As noted above, a rate hike with a stroke ends this era.
A stroke indeed. By unelected, unaccountable, anti-market bureaucrats whose identities are completely unknown to virtually all Americans.
After so many years of the “new normal,” we have to be reminded just how extraordinary — and unprecedented — the Fed’s actions since 2008 have been. But does it not occur to bankers, much less the media breathlessly covering stock and bond markets, that these actions have set America on a hopelessly dangerous and unsustainable path? Or that placing so much economic power in the hands of a select few might not end well?
In a digital world, where information increasingly is decentralized and disseminated through multiple channels, it is astonishing to witness the degree to which a tiny group of individuals issues the single most important piece of information in the entire global economy.
By “tiny group” I mean the 10 people who sit on the Fed’s Open Market Committee: 5 Federal Reserve Board Governors (with 2 vacancies), and 5 of the 12 Federal Reserve Bank presidents on a rotating basis.
When the whole world waits with bated breath for the economic pronouncements of 10 people sitting in one room, we might call that central planning. We might accurately call those 10 people elites, since the shoe fits. And when those elites effectively determine the cost of borrowing money across whole economies, we might call that price fixing.
Interest rates are indeed prices, make no mistake about it. They are a critical component of economic calculation, providing instant information to entrepreneurs seeking to deploy capital to its best and highest uses. In a rational world, interest rates reflect the (ever-changing) relative time preferences of both lenders and borrowers.
But we live in an irrational world, where the judgments of real economic actors with skin in the game are thwarted by omniscient bureaucrats who openly seek to distort the price of money. Since the Crash of 2008, that distortion takes the form of suppressing interest rates below what Ludwig Mises called “originary” levels.
The FOMC explicitly targets a particular federal funds rate, the weighted average rate at which commercial banks lend their Fed reserves overnight. This hardly differs from explicitly targeting the price of a new Honda or a bushel of wheat.
Apologists bizarrely assure us that the Fed does not in fact “set interest rates” through this targeting, because the fed funds rate applies only to overnight lending of bank reserves that (by definition) cannot be lent commercially to the public.
But the fed funds rate is termed the “base” interest rate for a reason: it forms the baseline from which commercial banks apply cost-plus lending. The interest rate that borrowers with good credit pay commercial banks — the prime rate — absolutely is tied to the underlying overnight rate banks pay each other.
David Stockman calls the fed funds rate the most important price in all of capitalism. And since we don’t know what interest rates should be thanks to central banks, Stockman argues, we really have no honest pricing of assets anywhere on the planet.
Since 2008 the Fed has kept the rate effectively at zero, and even pays interest on reserves at a .25 percent rate to forestall an environment of real negative rates and encourage banks to keep reserves higher.
But these many years of price fixing have failed to produce anything other than ersatz economic growth, mostly represented in overpriced equity markets, luxe housing, and bogus government spending. Average people are not better off than they were in 2008, and in many cases they are worse off.
In The Theory of Money and Credit, Ludwig Mises made the case more than 100 years ago — before the Fed and ECB ever existed — that monetary interventions cannot create prosperity:
Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crises and depression. Recurring economic crises are nothing but the consequence of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit.
The key words here are “as must constantly be emphasized.” It is incumbent on all of us to do everything in our power to make the case against central banking, one of the great evils of our time. We must make the case against the Fed loudly and repeatedly, even as the world is in thrall to it.
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No shit.
...Sherlock...
People are used to central planning, and the story they heard in government schools was mostly a heartwarming hallmark channel thing as to FOR and company's bold persistent experimentation.
Methinks the Fed just committed unintentional Seppuku. The Fed is now irrelevant, price discovery on the way.
Yes, the Fed has been irrelevant for quite some time now. Get your tribe in order.
Not irrelevent but useless and it was set up so the mega-bankers never had to ever take any real risk. Too bad that their hopium is about gone.....
Kiss the United States goodbye! Bankster drug dealers run this country, led by a cokehead president and his satanist followers. There is not newspaper in this country that has reported on government approved drug running in this country, with special Air Force flights bringing in tons of narcotics from Afghanistan. Nor is there any coverage of "Brady Bonds," the multi-trillion dollar ripoff of taxpayer funds that motivated the Bush crime family to conspire with the Saudis on the 9/11 attack. What happens next is that the crime familes who run the government will start extorting money from the super-rich, with people like Ken Griffin of Citadel told that they must deposit a billion dollars into a Cayman Island numbered account or face the consequences. If you have a government that already kills Americans with impunity, then extorting money from the super-rich as protection payments would be no problem.
Open Letter to Janet Yellen from THE MARKETS:
Hello Janet,
I speak on behalf of all markets when I say that we are sorry for being a little grumpy since your most recent testimony. The truth is that we are very confused. You seem to say one thing and do another. You have consistently lied to us and we frankly just cannot trust you anymore.
You see back in 2008 your predecessor told us that 0% interest rates were a temporary emergency situation due to the financial crisis. Well here we are 7 years later and we are still in emergency mode?
You told us years ago that as long as employment got to certain levels we could come off 0% rates. Currently we are near FULL employment and according to the BLS the employment picture has been improving every year. However for some reason you moved the bar and a interest rate decision was now going to be made based on other criteria. Ya see that’s quite confusing for us. You told us one thing and then pulled the rug out from underneath us.
Perhaps the reason for this change of heart is that you actually looked under the hood of those employment numbers and saw what many others saw. Yeah sure the US is creating jobs but they are not good jobs, they are primarily waiter and bartender jobs or Mcjobs. Perhaps you saw that the US for the last 7 years cannot create good paying, quality jobs. Perhaps you saw that the unemployment rate is so low because millions have stopped looking for work because in this country you can sit at home and watch the View and get all sorts of free stuff from the US government. So much so that for many they would need a $60,000 per year job to make them get off the couch, anything less than that they would actually be losing money. I guess you probably also saw that many Americans are also working 2 part time jobs to stay afloat. I guess what we are saying is Ok, you get a pass for lying to us about employment. Hey if the numbers don’t really reflect a true employment market then you cannot really use them to make a decision as important as raising rates a whopping .25%.
Here is where things get a little trickier though. You started talking about inflation and if inflation started to creep up then you would raise rates. See there is a problem with these figures as well. We do not think that the way your government calculates the official inflation figures is an accurate calculation or depiction of true inflation. I mean it is supposed to represent a figure that Americans spend their hard earned money on. What do Americans spend their hard earned money on?
Housing- This one is tricky. We do know for a fact that rental rates are at all time highs and the rates have certainly gone up more than 3% per year. In fact in many major cities rates have increased over 10% per year. Now if you are “lucky” enough to be a homeowner things are a little different. For many they could not take advantage of your historical low interest rates because they are actually underwater on their property and the banks will not allow them to refinance. As for those that could refinance they probably have seen their monthly savings eaten up by ever increasing property taxes that mostly go to fund a failing education system. So for the guy that could not refinance he gets a double whammy. Higher rates and higher taxes. This is certainly inflationary in our book.
Health care – Do we really even have to discuss this? The bottom line is that the average person is probably paying twice the amount for health care than they did in 2008. Certainly inflationary.
Food- Go to any grocery store and most items have increased dramatically over the last 7 years. For certain items instead of a huge price increase the manufacturer simply gave you less in the package. The cost to feed one’s family has certainly increased greater than 3% per year since 2008. Inflationary!
Education – The cost of education has sky rocketed and has increased roughly 7%-10% per year. Many Americans need to pay for higher education. Inflationary!
Now you are going to tell us that Americans are saving big money on energy costs. This is true but you also told us that those savings would work their way back into the economy and increase the GDP. Well they actually did because the average family is saving $100-$200 per month and they are spending it! Hence the increase in bartender and waiter jobs. So the average family is going out to eat a couple more times per month (most likely at some corporate owned chain restaurant where they sing to you on your birthday). They are being waited on by a very nice 22 year old with a degree in Finance. She then takes her tips at the end of her shift and visits her local watering hole and drops half what she made that evening on shots of Fire Ball because she can’t believe she is 22, has a degree, lives in her parents basement, has $26,000 in student debt and is working the Saturday night shift at the Olive Garden.
The truth is Janet the “Stuff” that Americans buy, you know the stuff they need to survive has increased pretty dramatically. There really is inflation. Again this confuses us. On one hand you have “told” us that the headline unemployment numbers are not to be trusted and you cannot raise rates because of it. Then you don’t use the same logic when it comes to inflation. Because anyone with half a brain knows that “stuff” is more expensive today. Honestly it’s cute that one can massage the numbers by claiming that the cost of an IPAD or flat screen TV have not increased. The problem is that Americans do not eat IPADs and a flat screen TV won’t help them if they need to go to the emergency room.
So let’s get to the big picture and just simply tell you why we think “We the Markets” are going to go down from here.
We believe economic conditions are actually worsening. The data actually tells us this. Jobless claims have been steady for some time no real pick up in hiring. Consumer spending is not what is should be. Consumer spending makes up a substantial portion of GDP. The consumer is tapped. They cannot borrow any more their wages have not increased in 7 years, the things they buy are more expensive and they are terrified they are going to lose their jobs.
The strong dollar will be sure to hurt many multinational companies in the US. This will be reflected in weaker earnings and profits which often results in downsizing and layoffs.
We have yet to see the affect of China’s tanking economy on the US’s already fragile economy. You know we don’t like uncertainty and you definitely know China’s economic numbers cannot be trusted.
Let’s be honest most of our gains for the last few years can be attributed to many companies buying back shares in the open market, M&A activity funded by your 0% rate policy, and Algos gone wild. We have not exactly built the best foundation here.
But mostly Janet here is what scares the crap out of us.
After 7 years of 0% rates and three rounds of QE where you have spent at least a couple trillion on bonds that we know of the US economy and the US consumer are in worse shape today than they were in 2007 before the SHTF. What your actions are telling us is that the US economy cannot take a .25% increase to rates after all of that? I mean we need 12-15 quarter point moves just to get to normal.
We think you certainly are not raising this year because future data is going to be weak. We think that China is going to cause issues with the US economy and let’s be honest we are pretty over valued anyway.
With this in mind we will be pulling back at least 20% from these levels. Our advice to you is to batten down the hatches and buckle your safety belt because it’s going to be a thrilling ride. Your QE did not work and your 0% rate policy did not work. We suggest you do a helicopter drop. Yup you heard us…avoid the banks and just send every tax payer in the country a check for $5000 and tell them it is their patriotic duty to spend it and if they pay down debt with it they will be fined.
Regards,
Equity Markets, Bond Markets, Commodities Markets, and FX markets.
Send me that $5k and i'm gonna have a boating accident...
Not bad at all. Well done.
"It is incumbent on all of us to do everything in our power to make the case against central banking, one of the great evils of our time. We must make the case against the Fed loudly and repeatedly, even as the world is in thrall to it".
~ Con-gress could slam the brakes and the doors on the un-fed reserve in the blink of an eye/passage of a bill.
So ask your congressman why they do not? Of course you won't get an answer, other than mumbled bullshit.
They will not and are not because they are all bought and paid for... owned by banksters inc.
Damn the country to hell, as they line their pockets!
The existence of the Federal Reserve Board is due to the persistent application of the methods of organized crime through the political processes. Most people still do not perceive that, while most of the few that do continue to want "solutions" based on impossible ideals that deliberately ignore how and why civilization necessarily operates according to the principles and methods of organized crime, because civilization necessarily operates as entropic pumps of environmental energy flows.
Political puppets "are all bought and paid for... owned by banksters inc.." They are voted for by enough of the masses of muppets, so that the Federal Reserve Board can continue to engage in legalized counterfeiting of the public "money" supply, within the overall systems of DEBT SLAVERY, backed by wars based on deceits, which are generating numbers which become debt insanities, that will provoke death insanities.
The deeper problems with respect to "central banking, one of the great evils of our time," is that behind that view there is too little "sympathy for the devil." Money is measurement backed by murder, as the most abstract form of private property based on backing up claims with coercions. Since human beings, as soon as we perceive them as separate from their environment, live as entropic pumps of environmental energy flows, human beings and civilization necessarily operate through the dynamic equilibria of different systems of organized lies operating robberies, with the banksters' frauds being symbolic robberies.
So let me see if I got this right… almost a decade ago the FedReserve started cutting the Fed Funds rate to juice the economy with cheap ass debt. This allowed their shareholders, the BigBanks, to make obscene amounts of money. They levered it up until the WMDs they had created blew up, rendering almost every financial institution on the planet insolvent and putting civilization on the brink. None of those responsible are punished, instead taxpaying commoners are actually forced to pony up to save these guys. In the process not only are children and unborn grandchildren sold into debt slavery, all risk averse savers are punished. Basically these unprecedented rate cuts are simply a way to re-capitalize the insolvent banks at our expense??
In other words:
The Bank gets a 0% loan (I as a taxpayer ‘give’ them $100)
The Bank loans it out at 2-3% (they just turn around and give me back my $100 --by buying a bond that is an IOU of said taxpayer)
The Bank charges me forever ($2-3 on the $100) for giving me my own money back.
And we agreed to this???
Now the amount of the Debt [printed to solve this original debt problem] is SO large that they cannot increase rates by 0.25% or the economy will crash?
Why aren’t these folks' heads on sticks on our national mall?
I'm serious when I mention that you have to limit individual wealth including corporate ownership to 10,000,000 otherwise humans will blow up the planet. It is in their genetic makeup.
Every country that practized QE and easing has low economic growth and low iflation for 6 years. What does it tell you? It is like giving pain killer to cure a cancer. The fed an all the monetary authorities are cluess and stupid and not helping the economies but only their buddies. The fed is only interested to protect their own 4.25 trillion book. On every fomc meeting they have so many excuse to make , this time they play the China card, next time they will use Russia or Opec countries or Iran or just somebody not to raise rate.. Totally incompetent and corrupt. Fed is massaging its own book by determining its own interest rate.. How is this possible?. Every message from fomc is pessimistic about something.
They are not incompetent!!! It's by design.
"Interest rates are indeed prices, make no mistake about it."
This fact means they must keep rates low, -0% after inflation, to service the impaired debt. They will steal from savers with high inflation (-0%rates), until there is nothing else to steal. A USSR-like collapse coming unless they manufacture another fake war.
Capt. Hindsight here? Yes-- SouthPark's rendition (with Gen. Yeller as Cartman) of '*CARRY-ON-Risk'!
*that never stops giving...
indeed the FRBs is all but a tool of USSA foreign policy? where foreign policy was but a agent of change?
change being, 'beggard-thy-neighbor' with the tempest of free-trade... wealth, and all that comes from capitalism, enshrined in glorious independence via exceptionalist amerika democracy?
just ask the EUC?!?
we can't have any 'jumping-the-shark' by these ASEAN folks, giving those communist Chinese any moar hegemony thoughts of a PetroYuan...
so, yes the market sold-off. but, not because of fundamentals or data. it was decided in the 'situation room' as all fascist/dictatorship governments in the free-market-world work'eth their magic? as in the, 'NWOs BIS`HQs **!!!
**{(if they raised rates... the asean's markets would tank and jump, eventually one by one straight into china's 'pandas'`arms)(if they held status-quo as they did the market would validate the underlining uncertainties,.. esp, with Xi's visit in late Sept!?!) what better message to send Xi than the USSA FRBs is nothing moar than a SOE as is China's Central Bank?)}
NOTE: we've already [FRBs/USA entity] neutralized those outspoken 'Monroe Doctrinaire's renegades... Venezuela, Brazil?
"ASEAN Economic Community 2015: Will it happen?" --- 'Twelve[12] things to Know about the ASEAN Economic Council'
http://www.adb.org/features/asean-economic-community-12-things-know
http://www.thejakartapost.com/news/2014/11/24/asean-economic-community-2015-will-it-happen.html
This is not about an unelected select few, this is about Jewish domance of finacial matters in the USA and legalized theft!
Why just because the current or most revent heads of the treasury {and the deputy treasurer and ALL 3 undersecretaries}, fed, irs, cbo, office management budget, commerce, cftc, national economic council, council economic advisors, office of the trade rep, SEC, FDIC, and a handful of others have been Jews who are 2.5% of the population?
You're anti-semantic!
According to Macquarie Research:
https://app.box.com/s/hx16540dwpct4uj5h5iohxsa4197zozd
Time for a policy U-turn?
Back to the future: British Leyland
From conventional QEs to more unorthodox policies…
- As discussed (here and here), we do not believe that investors are likely to benefit from acceleration in growth rates, trade or liquidity and indeed on the contrary, negative feedback loops from EMs to DMs imply that neither would be able to support global growth. Secular stagnation is the key explanatory variable (here). The deflationary pressures from overleveraging, overcapacity and technology shifts can be either allowed to work through economies or the public sector needs to continue resisting via expansionary policies.
- Since ’08, monetary policies were doing most of the lifting with limited participation by fiscal authorities (bar China). In other words, in the absence of either private or public sectors driving higher velocity of money, it was Central Banks that were supplying incremental liquidity to preclude contraction of nominal GDP and avoid stronger deflationary pressures. However, marginal utility of incremental injections has been declining (witness much lower impact of recent ECB’s QE and increase in BoJ accommodation since Dec ’14).
- Part of the reason for monetary stimulus fading is that supply of US$ remains low. Global economy continues to reside on a de-facto US$ standard and current incremental supply is almost non-existent (depending on definition growing at +2%/-1% clip vs. average since ‘01 of ~15%). In other words, due to lack of recovery in the US velocity of money and lack of QEs, global economy is not getting enough US$ to continue leveraging.
…as efficacy of conventional monetary QE is questioned
- At the same time efficacy of continuing with conventional QE policies is being challenged and not just by independent observes but also ‘insiders’ (such as recent SF Fed paper). As velocity of money globally continues to fall, conventional QEs have to become exponentially larger, as marginal benefit declines. If the public sector is not prepared to step aside, what other measures can be introduced to support nominal GDP and avoid deflation?
- There are several policies that could be and probably would be considered over the next 12-18 months. If the private sector lacks confidence and visibility to raise velocity of money, then (arguably) the public sector could. In other words, instead of acting via bond markets and banking sector, why shouldn’t public sector bypass markets altogether and inject stimulus directly into the ‘blood stream’? Whilst it might or might not be called QE, it would have a much stronger impact and unlike the last seven years, the recovery could actually mimic a conventional business cycle and investors would soon start discussing multiplier effects and positioning in areas of greatest investment.
British Leyland failed, but it might work at least for a while
- British Leyland (formed from nationalized British car companies in the late ’60s) destroyed its automotive industry but for a time it provided employment and investment. Central Banks directly monetizing Government spending and funding projects would do the same. Whilst ultimately it would lead to stagflation (UK, 70s) or deflation (China, today), it could provide strong initial boost to generate impression of recovery and sustainable business cycle. It could also significantly shift global terms of trade (to the benefit of commodity producers) and cause a period of underperformance by our ‘Quality & Stability’ portfolio and improve performance of ‘Anti-Quality’ screen. What is probability of the above policy shift? Low over next six months; very high over the longer term.
I think we are headed into a period of decentralization. I see signs everywhere, in the growing 'Us vs. them' attitudes, the mistrust of central authorities, the agitation of various religious groups. As the elites try to corral us all into one pen, we are breaking out almost as fast as they can shove us in there.
Those 'leaks' will continue, and get worse. Eventually even the ones still left in the pen will turn on each other, then turn on their would-be masters.
They are forcing us into a societal structure we simply are not equipped to live in. Even zoos know better than to shove all their animals into one cage. Each needs his own place, with his own kind. Each requires different care, food, handling. While it might be easier for staff to have them all in one pen, it can never work.
NWO, meet reality.
http://news.goldseek.com/GoldSeek/1442494200.php
Try making up for a past mistake and make another? That’s playing from behind, if you will, and it’s not out of the question if you know the Fed’s history:
1. Not a single post-war recession has been predicted by the Fed a year in advance, according to former U.S. Treasury Secretary Lawrence Summers; and
2. Neither of the last three recessions were recognized until they were already under way.
Incompetent or ulterior motives for policy?
Regardless, here we are with expectations ramped up for a rate hike, as the rest of the world is easing.
What’s notable for investors is that since the 2008 crash, we have not been able to achieve new market highs without central bank stimulus. Full stop.
But it’s only a quarter point…
According to a study released by McKinsey Global Institute in February of this year, global debt has increased by $57 trillion USD since 2008. With such an enormous amount liquidity in the system (M1 money supply near lifetime highs) financial markets are increasingly becoming nothing more than a currency game; and the currency game is a relative one. I print, you print, they print, but who’s printing more and where is capital flowing in and out of? Within this context, a quarter-point rate hike would be much more than simply symbolic.
As we have seen since late 2012, the rise in the U.S. dollar has had major implications on global markets, whether it be currencies, commodities or interest rates. A rate hike would equate to further USD strength and will accelerate the deflationary spiral we have witnessed over the past few years. Raising rates into a slowdown could also place the U.S. firmly on a path to recession in 2016.
Conversely, no rate increase does not meet the expectations set by the Fed and will re-inflate commodities in the immediate term. Arguably, it pulls forward the possibility of QE4 as well.
So it seems the Fed finds itself in a self-imposed conundrum here: make a policy error and raise into a slowdown, don’t raise and openly recognize growth is slowing. Which brings me back to my previous point: since 2008, no new market highs have been achieved without central bank stimulus.
As always, government remains the No. 1 risk to financial markets, and I will change my views as the facts change.
“The Federal Reserve is not currently forecasting a recession.” – Ben Bernanke (January 2008)
A question on greed. Just WHAT does a human being plan on buying with unlimited money-say, a hundred billion? Is there something that cost more than that?
One does not need to make the case that the FED should be abolished. Everyone knows the FED is controlled by de Rothschild Bank, and everyone knows they are being ripped off by de Rothschild Bank.