The 1933 Banking Act requires the Federal Reserve “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
No problem. Except maximum employment – are we talking within a month, a year or over the long term. Ditto for stable prices and moderate long term interest rates.
The stable prices have been manipulated by the government over the last 50 years with so many changes and adjustments to how price increases are calculated. In fact, many changes have been made to ensure prices always remain low with a bias to adjust lower if increases occur.
This is fact, not my opinion. There are plenty of researchers keeping track of older government calculation methodologies – all of which point to significantly higher inflation rates if used old calculation methodologies. No older calculations show lower inflation rates that I know of. (Shadow CPI shows Annual inflation at 5.5% if calculated based on 1990 methodology - http://www.shadowstats.com/alternate_data/inflation-charts.)
So in the never ever quest for maximum employment – and controlling inflation – the Federal Reserve keeps interest rates significantly below the equilibrium rate – arguably by 5% today. This blows through their third mandate of moderate long-term interest rates. Long term interest rates have NEVER been lower. But if the Fed didn’t keep long term rates much lower than the mandated “moderate”, the government would not be able to service their debt and spending would have to be slashed. Thus leading to less than maximum employment.
But the byproduct of only focusing on maximum employment over the short term – which is the result of such heavy political influence (so much for an independent and trustworthy institution), the Fed is forced to always add accommodation to any slowdown in the business cycle.
As a result, we have runaway financial inflation – financial asset prices that are so overvalued that new speculative asset appreciation is bubbling up every day.
Now that the latest bubble has inflated at a dizzying pace – Game Stock – a brick and mortar video game company that loses money every year – that has gone from $19 to over $400 in two weeks - on no news, leaving a graveyard of hedge fund managers that were short the stock behind, government officials are clamoring to ensure no market manipulation.
Squeezing short sellers is market manipulation, but the Fed has fostered an environment of market manipulation in all areas of investment with good intention by being the largest manipulator in the markets. They have taught the world how to manipulate financial markets with the best of them.
Like the King, Mice and Cheese fable where a king tried to rid his mouse problems with cats to only have cat problems, then going to dogs and eventually elephants to fix the problems – trying to cure one problem with what will amount to a larger problem over and over again, eventually a problem the size of an elephant creates a problem the system can’t contain or control further.
The best way to salvage this is to acknowledge the system will always have issues – employment will never be as high as you would like, inflation and interest rates never as low as you like. But if you end up with elephants rampaging as a result of your quest to do more than you should, you’ll be worse off than if you were satisfied with an outcome that is more realistic for the long term.
Yes, in today’s instant gratification age there is no tolerance from the masses to under-perform. But that is why the Fed is supposed to be independent.
So let’s try to get the Fed their independence back and focus on rational and symmetric policy (both higher and lower rates without printing Trillions of dollars with every economic gyration) before it is too late. Let us live with mice, a small nuisance of a problem that can be controlled. If not, lets support every asset class to the outer stratosphere of value and spend some of those QE dollars on Game Stop. Shouldn’t they at least get some cheese while the elephants feast on free peanuts? Its definitely looking more nuts!!!
by Michael Carino, Greenwich Endeavors, 1/29/2021
Michael Carino, CEO of Greenwich Endeavors, is a finance specialist with over 27 years of experience. He has owned financial firms with roles including portfolio manager, trader, accountant, risk manager and treasury manager. He typically has positions that benefit from a normalized bond market, higher yields and value investments.