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The Window Has Closed On The Fed
Submitted by Lance Roberts via STA Wealth Management,
Earlier this year I wrote two articles about the Fed's ability to hike interest rates this year. (see "Fed At Risk Of Missing Window To Hike Rates" and "The Window Continues To Close.") In both articles, I discussed the biggest worry of the Federal Reserve, and frankly every Central Banker on the planet, was deflation. The problem with deflation, as an economic pressure, is that once entrenched it becomes extremely difficult to break as conventional monetary policy tools, mainly interest rates, have little effect.
The Federal Reserve has continued to hope for the last several years that extremely "accommodative" monetary policy, near zero interest rates, would spark stronger levels of economic activity leading to a rise in inflationary pressures. Unfortunately, this has yet to be the case. This is likely due to a monetary policy phenomenon known as a "liquidity trap" which is described as follows:
"A 'Liquidity Trap' is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels."
The problem for the Federal Reserve is that getting caught in a liquidity trap was not an unforeseen outcome of monetary policy, but rather an inevitable conclusion. As shown in the chart below of GDP, inflation and interest rates, each time the Fed has intervennd with monetary policies it has lead to lower rates of economic growth and lower rates of inflaton and interest rates. As stated, the current low levels of inflation, interest rates, and economic growth are the result of more than 30-years of misguided monetary policies that have led to a continued misallocation of capital.
For several years, there have been repetitive screams that inflation was imminent due to deficits, a fiat currency and expanding debt levels. Yet, the opposite has been true. The lack of inflation has been a construct of the underlying structural dynamics of the economy. Home ownership rates have plunged, technological advances and productivity increases have fostered wage suppression, and high levels of uncounted unemployed (54% of the 16-54 aged labor force) drag on economic strength.
The exceptionally low yields on government treasuries are clear evidence that inflation is not a threat. For all the money that has been spent trying to ignite the engine of economic growth; it has all remained a futile effort at this point. Now, after more than six years of an economic expansion, interest rates remain near zero, and the velocity of money continues to plummet.
Velocity Of Money
The velocity of money is defined by Wikipedia as:
"The average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. Velocity has to do with the amount of economic activity associated with a given money supply."
As the velocity of money accelerates, demand rises and inflationary pressures increase. However, as you can clearly see, the demand for money has been on the decline since the turn of the century.
The surge in M2V during the 90's was largely driven by the surge in household leverage as consumers turned to debt to fill the gap between falling wage growth and rising standards of living. (For more on the problem with incomes read "The 80/20 Rule.)
The problem with wage deflation for the Fed is for wage growth to occur, the economy really does need to approach "real" levels of full employment. As the supply of labor shrinks, the demand for wage increases occurs. The problem is that with uncounted masses of individuals residing in the shadows, the demand for labor is swamped by the demand for jobs which suppresses wages.
The issue for the Fed is that the decline in the "unemployment rate," caused solely by the shrinking labor force, is obfuscating the difference between a "real" and "statistical" full employment level. While it is expected that millions of individuals will retire in the coming years ahead; the reality is that many of those "potential" retirees will continue to work throughout their retirement years. In turn, this will have an adverse effect by keeping the labor pool inflated and further suppressing future wage growth.
Double-Digit Imported Deflation
But there is more to the deflation story. More than six years after the last recession, deflation remains an imminent threat not just domestically, but globally. The Eurozone, Japan, and even China are all wrestling with slowing economic expansion despite success rounds of interventions and accommodations. The collapse in commodity prices, interest rates and the surge in the dollar are all clear signs that money is seeking "safety" over "risk."
The Economic Cycle Research Institute (ECRI) recently published a very interesting piece on the potential for double-digit imported deflation in the U.S. To wit:
"Even worse is the nosedive in yoy import price growth, which has been exhibiting double-digit deflation since the beginning of the year (bottom line). Indeed, the only other time on record the world has seen such intense import price deflation was during the global recession."
But here is the important conclusion:
"From our cyclical vantage point, we have long been aware of the truism that recession kills inflation. Therefore, when the next recession arrives, it is more likely to push inflation below zero at a time when the Fed has no obvious policy response. The resulting deflation would be the stuff of policy nightmares."
The Window Has Closed
It is becomingly increasingly clear from a variety of inputs that deflationary pressures are mounting in the economy. Recent declines in manufacturing and production reports, along with the collapse in commodity prices, all suggest that something is amiss in the production side of economy.
While the Federal Reserve should have chosen to increase rates long ago, which such tightening of monetary policy would have been somewhat offset by continued floods of interventions. However, the Fed is now trapped in a difficult position as I addressed previously:
"The Federal Reserve has a very difficult challenge ahead of them with very few options. While increasing interest rates may not "initially" impact asset prices or the economy, it is a far different story to suggest that they won't. In fact, there have been absolutely ZERO times in history that the Federal Reserve has begun an interest-rate hiking campaign that has not eventually led to a negative outcome.
While the Federal Reserve clearly should not raise rates in the current environment, there is a possibility they will regardless of the outcome.
The Fed understands that economic cycles do not last forever, and we are closer to the next recession than not. While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective it might be the 'lesser of two evils. Being caught at the "zero bound" at the onset of a recession leaves few options for the Federal Reserve to stabilize an economic decline."
For Janet Yellen, the "window" to lift interest rates appears to have closed. As the ECRI correctly concluded, this could potentially be a policy nightmare for the Fed, the economy and you.
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Janet will simultaneously raise rates by 5% and cut rates by 6%.
NIRP is coming. Or should I say war?
pods
yellen, bernanke, greenspan - why do they all look like fucking hobbits?
don't understimate my abilities.
as I said before, "if the economy surprises us, our judgments about appropriate (excuse me) monetary policy will of course change. so let me stop there."
hugs,
misteryellens
Misteryellens ends up the bagholder, the music has stopped, and there are no chairs available.
What to do?
Pull the fire alarm.
Yell, "ACTIVE SHOOTER IN THE ROOM!!"
Maybe we'll get lucky.
aint no; because you and I are in this shit called the lord of the rings! Bernankie is really Frodo! aaaaaaaaaaaa!!!!!!!
how do you close something that was never open?
"They know nothing!!!!!"
.. cause they all carry the same genes, and are therefore CHOSEN! It's as simple as this
Interest rates are a LAGGING indicator of how much more ponzi fiat debt the peon muppets are prepared to take on. The muppets are maxxxxed out now and can't take on any more debt , no more expansion of debt = no more expansion of the money supply , it;s the exact opposite , contraction of debt = contraction of money supply Ergo - NEGATIVE RATES BITCHEzzz....
Anything you don't wanna lose in the bail-in's or helicopter drop stick into metal and bitcoin ..
Just don't fuck with my chocolate rations, and nobody gets hurt.
print!
"if we wait too long then we run the risk of raising rates more abruptly, and I think that just increases the probability that we make more mistakes"
-Eric Rosengren, president of the Boston Federal Reserve Bank.
more mistakes you say?
poor guy isnt in yellens inner circle
FED is a Criminal Organization,
AND Treason.
For the benefit of a few at the expense of the many.
GET TO DA CHOPPA!
https://www.youtube.com/watch?v=-9-Te-DPbSE
Run!!!!!!!!!!!!!!!!!!!!!!!!!!!!! GET To DA CHOPPER!!!!!!!!! AAAAAAAAAHHHHHHHH!!!!!!!!!
IS FUCKING RIGHT.
That was Schwarzenegger doing his best performance of a regional fed president, in a deflationary environment.
Why is it that laymen could see this coming years ago, and the "experts" couldn't? They knew exactly what they were doing. They'll profess innocence, ineptitude and even (probably especially) their Jewish faith, anything to escape the noose.
Exactly, Jethro. Exactly.
Blown it all... https://www.youtube.com/watch?v=vxD0IQQeUYg
The fucking farce is complete.
If you think the Fed was ever going to raise rates, boy, have I got some swell oceanfront property in Nebraska for you. Dirt cheap!
Careful...you could be one very broke prophet: http://www.greatdreams.com/maps.htm /s
So the FED should raise rates X percent so that it has the ability to lower them X percent when the recession that action causes is realized? What kind of fucking logic is this? BTW, we are already in a depression so I don't think we need to worry about a recession. How's that for logic. Do whatever the fuck you want with rates, it isn't going to change the flight path of this crash, assholes.
I propose that they institute asymptotic numbers for Fed Rates. Now...where is my Nobel Prize for Economics?
I think they've been over using the square root of minus one for a long time!
Famous last words if the average American dope.
" oh I don't pay attention to that stuff "
Living the dream, baby.
I love how the drones in the population still think we'll get back to the status quo of 25 years ago. It gone baby. Wrapped in cable Tv or betting on all sorts of pro sports, drinking that piss water known as Bud Light.
Even the entertainment factor is fading. Once detatched you can watch, but like the doom stories here, it gets old after awhile.
Wish they would just lihgt this motherfucker and get it moving.
Hey -
I like But Wipe after 12 or so...
Jus' Sayin'
(I think there's a Thomas Jefferson quote somewhere in there)
My entertainment factor for the day, yesterday, was a five hour hike and some target practice, followed by food over a camp fire in the woods - Now that's entertainment that never fades.
The purpose of the Fed was always to secure the oligarchy.
As one window closes, another opens.
"As one window closes, another opens."
I don't think TPTB feel that way at all this time. They are getting while the getting is still good (shale play, anyone?) because the music is about to full-stop.
Hedge accordingly.
That the oligarchy is secured is the only reason they could "allow" the window to close on the Fed.
"Another opens," is not a breath of fresh air.
They still have lots of lower echelon to feed upon.
(this can go on for awhile)
Yeah, I know. The great grandfather to USA's first official Tyrant may not even be born yet.
Or, the people could fix it per Article V's second convention of states?
http://www.conventionofstates.com/solution
The people could fix it with this election cycle, if nobody turned out to validate the crooked game.
I would not recommend holding your breath on that one, though.
"technological advances and productivity increases have fostered wage suppression"
I'd say that some additional factors, major ones, would be related the exportation of better paying manufacturing jobs to countries with wages lower than that required to feed and house slave labor in the U.S. along with the allowed illegal importation of labor from mostly southern climes, a topic to which only lip service is paid.
Thank goodness I'm no longer in the labor force.
Banzai!
The!
Nirp!
<3
The Fed has always followed the neo Keynsian business cycle for its propaganda excuses, which generally means 6-8 year boom, 1-3 year bust. It's hilarious that they act surprised that there is a cycle. Did they really believe there was going to be a permaboom?
What not so funny is that most of the people have such a short memory, they don't even remember this propaganda point and are genuinely surprised that there could ever be another recession.
You will never get a Nobel Prize in Economics with that mindset.
The first premise of Nobel Prize-winning economics is that Central Banks and/or Central Governments can control business cycles and, done properly, assure perpetually increasing prosperity for all in a constant and stable progression.
Start by reading Bernanke's "The Great Moderation" thesis.
The Fed's only purpose from its inception was plunder of the productive.
Interesting that income tax came into being at the same time as the Fed, don't you think?
Can't have the fed without it.
Wrap it up in fancy terms if you want to, but that's the truth of the matter
The window of printing more money never close! so not sure why anything else matter?
Awsome! Prison time for the FED.
Dang if ya do dang if you don't..rinse and repeat
It's kinda hard to believe the window has closed when the fed built the house with windows that were never meant to open.
And calling yourself trapped is just as difficult to swallow when you do everything to set and release the trap.
Kinda like a gay man purposely getting caught so you can go to jail to get raped in the ass!
Q: What is deflation, as meant by Central Bankers?
A: It is the contraction of the money supply that occurs when people don't pay back their loans. This is so because money for loans, to include loans to the government with which to create currency, come into existence at loan signing time, using depositor's deposits as collateral for the loan. This means that a loan recipient is being loaned nothing but an undisclosed claim on someone else's money. A depositor deposits $100, and up to $1,434 dollars can be loaned from this amount in the banking system using a 10% reserve requirement as the money changes hands. Please note that this means that only $100 of every $1,434 is real currency (a.k.a "Base Money"), and the rest is credit. Inasmuch as Central Bankers are worried about this as a facet of monetary policy it is because when loans are not repaid the difference between the base money and the credit ($1,334 in this case) simple ceases to exist, and the money supply contracts by that amount. When the money supply contracts due to such monetary deflation, everything in denominated by the currency is eventually revalued lower by a percentage proportional amount. Shortly, deflation makes it increasingly likely that other loans will default because there is less money left in the economy with which to repay.
Q: So...what do Central Bankers do when people have take out so many loans, even breaking the banks reserve ratios, that there literally isn't enough money in all the world to pay them back???
A: They lower the interest rate to buy time (if people can't pay back the loans, then at least they can refinance the loans such that they can pay interest if not principal). Then they go on a money-printing spree in the hopes that the money filters throughout the economy enough to ensure there is enough money circulating that loans CAN be repaid. The main problem with this is that money can't be added to the system everywhere at once. It has to be added at specific points. People positioned at the points in the economy where Central Bankers introduce new base money get money for less real effort than everyone else. They get the money before it bids up prices throughout the economy, and as such they always have an advantage over everyone else in their efforts to become wealthy. The points where Central Banks typically inject currency are Government, and Primary Government Debt dealers (a.k.a 'Primary Dealers'). Secondary recipients will be all of those entities cronies.
Q: Does this distort the economy?
A: Yes. since all the new money is going to a tiny fraction of a percent of the people in the economy, these people exercise an outsized influence on the economy. Yet because they are a tiny fraction of a percent, their preferences, desires, the things they spend money on, shortly, very little resemble the things everyone else spends money on. This leads to whole industries producing products and services EXCLUSIVELY catering to these dealers and their cronies. All of those industries and all the jobs and money in them owe their existence to Central Bank Policy. Essentially, they are what is mean by 'Malinvestment'. People have invested a great deal in things that are not viable in and of themselves.
Q: What happens when the distortions in the economy from Central Bank policies become so extreme that they wholly displace double-digit percentages of the real economy?
A: Typically this leads to conscious abuse of the monetary transmission mechanisms: Corruption, Cronyism, Fraud, etc. The economics name for this is 'Moral Hazard' where official policy gives people POWERFUL FINANCIAL INCENTIVES TO INTENTIONALLY DO THE WRONG THINGS.
Q: What happens if monetary policy excesses and moral hazard become extreme, and are invested in coercing the rest of the population rather than invested or spent on goods and services? And how do Central Bankers respond to this?
A: Monetary and/or societal collapse. War. No one knows precisely how central bankers will handle this as this is the next stage. In the past they have disavowed all responsibility, while placing themselves as far out of harms way, with as much stored wealth as possible at their disposal. If prosecuted, suicide is a frequent response.
'The collapse in commodity prices, interest rates and the surge in the dollar are all clear signs that money is seeking "safety" over "risk." '
Well, when CBs redefine low-risk return as zero or even negative rates, surprise, surprise people take their money to cash.
All of this lays at the feet of CBs mispricing risk returns to innapropriately low values. No one is going to put their money into at-risk investments for 2% returns.
There is a higher return buying amazon gift cards at a grocery store with a cash-back credit card than there is putting your money into a bank or money market fund. By orders of magnitude. Think about how fucked up that is for a while. CBs turned the entire planet into a third-world economy. But hey, they "saved" the banks. Good job, guys. Hope that explanation works at your show trials.
and that's what mini-strokes are made of...
They are about to NIRP so hard their eyes will bleed, but not because of any desire to levitate a dead global economy.
They will NIRP exactly because it is a backdoor into every savings account (and most other buckets of money) out there. They'll sit back and watch the money roll in. By the time any sufficiently scary number of people notice, the money will be gone. Without their money the scary people cannot even sue the banks to get their money back. A few local bank managers are hung in the street, the mob goes home to drink themselves blind, and another incredible episode in the ages of man comes to a bitter close.
Cue the historians. Start to forget.
We Nirp'ed Some Folks.
...and I sent an $69.95 USD RPG thru the window of the local bank.
Damn, did I just say that out loud on the InterWebz?
You must be getting your RPGs on the cheap!
No way. NIRP will take us out a few more years - NIRP will force savers to spend or put cash into bonds (NIRP) or markets (pushing negative GDP stock prices higher).
Isn't that right Mr Orwell?
Looks like archibald meat pants is going to have a fun night!
The deflation/low-inflation premise is TOTAL nonsense! Seriously! Do authors observe actual prices? Do authors simply accept the endless obviously bogus soundbites from governments, central banksters and mainstream media propagandists?
How about stock prices?
How about home prices?
How about rental prices?
How about food prices?
How about ALL prices that most people have to pay?
True, the prices of a FEW items fall or flat-line for short periods. But overall, the rise in "cost of living" has clearly been rising at 5% to 12% per year for at least the past 15 years.
About the only outright deflation I see is... in the prices of precious metals, which are massively manipulated by governments, central banksters, and their agents.
Also, the past year or so, the collapse of EM currencies has artificially held down some prices measured in USD, but this is inherently temporary, and almost certain to reverse sometime in the next several months.
-----
Having said the above, what needs to be remembered is the following. The greater the debt an entity must service, the less that entity has to make other purchases... unless the entity borrows even more every year, which simply makes both the level of debt and the drag of debt grow ever greater every year.
In a more normal economy this would usually cause prices to rise more slowly or even fall. But in the current situation of extreme debt burden, most corporations cannot lower their prices, but may need to increase them in the face of a bad economy to compensate for the high and increasing debt service costs they face.
The modern economy: SNAFU.
NIRP or BUST,eom.
Ok - they should have raised two years ago. They didn't. They fucked-up. And speculation has run riot. But raising now would be another mistake. So, we have to play the easing course. The world needs more dollar liquidity as the world want's to carry dollar assets with Euro or Yen funding. So the Fed needs toput more assets on the balance sheet. But the question is what? My simpistic idea: beaten down commodities. Attack the beast of deflation on two fronts. One - push cash dollars into the financial system. Two - bid up gold, oil, copper to relieve mark to market pressure on the loan books, avert bankruptices and refloat corporate borrowing. Brilliant.
Ok - they should have raised two years ago. They didn't. They fucked-up. And speculation has run riot. But raising now would be another mistake. So, we have to play the easing course. The world needs more dollar liquidity as the world want's to carry dollar assets with Euro or Yen funding. So the Fed needs toput more assets on the balance sheet. But the question is what? My simpistic idea: beaten down commodities. Attack the beast of deflation on two fronts. One - push cash dollars into the financial system. Two - bid up gold, oil, copper to relieve mark to market pressure on the loan books, avert bankruptices and refloat corporate borrowing. Brilliant.