I wrote this article last week. It deals with the Federal Reserves decision on September 18th to not begin to “taper” QE easing injections of cash into our economy. I should’ve published this article last week; it would’ve been more timely and more relevant. However, it was lost in the hopper, so I’m only getting around to it now.
If you’re still interested in the Fed’s “tapering” issue, this article may worth your time. If you’re no longer interested in “tapering,” you could give it a pass.
• I’m not an attorney, but for twelve years, I edited and published a magazine called the “AntiShyster” that focused on the law and judicial system. As a result of studying all that “legalese,” I became a dangerous man because:
1) our political and economic worlds are composed of words; and
2) I can read.
I don’t read perfectly. I don’t read without error. But I catch a lot that most people would miss. Editing forces you to learn that skill
During my stint as editor, I also learned that much of the language of law is intentionally deceptive. I learned to recognize many of the grammatical tricks used by lawyers and judges to seeming say one thing while in fact saying something very different or even opposite to whatever most people would suppose. Over time I learned to read the “white” on the paper, as well as the “black”. I learned to read that which was implied almost as clearly as that which was expressed.
The people at the Federal Reserve are at least as skillful at the use of deceptive language as lawyers. A good example of the Fed’s subtlety and deception is seen in the Fed’s September 18th announcement that there’d be no “tapering” of Fed purchases of bonds and mortgage-backed securities (derivatives) in the near future.
If you’d like to read a complete copy of the Fed’s announcement, visit: 2013 Monetary Policy Releases
Here are few excerpts of what the Fed wrote in that announcement and what I read:
● The Fed wrote:
“Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated.”
We are coming into a mid-term election in just 14 months. If unemployment remains high, voters will lynch the Democrats. The Fed signals that the primary problem they intend to address over the next 13 months is unemployment . Other concerns will be deemed secondary.
● The Fed wrote:
“Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth.”
Nothing will be done to stimulate “household spending” and “business fixed investment” since both are advancing on their own and are apparently deemed to be at satisfactory levels.
However, the second problem (after unemployment) that the Fed will address is rising mortgage rates.
Implication: mortgage rates will not rise in the near-term and may actually fall between now and the mid-term election .
I’m not sure what the Fed means by “fiscal policy is restraining economic growth”.
However, they certainly imply that government is doing something to restrain economic growth. Whatever it is, the Fed disagrees with that governmental “fiscal policy”.
The Fed’s critical reference to “fiscal policy” faintly suggests that if we have a collapse, don’t blame the Fed—the fault will be that of the government and especially the Congress. The Fed’s language seems to create evidence of its own “innocence”.
If so, the Fed implies that:
1) the risk of some sort of economic downturn is rising; and
2) the Fed doesn’t want to take the blame if the stuff hits the fan.
Instead, the Fed wants to cover its backside and lay a foundation now for blaming government for any future economic downturn.
By doing so, the Fed faintly suggests that its relationship with government in general and the Congress in particular may be increasingly adversarial.
The Fed’s criticism of “fiscal policy” signals that the Fed and Congress aren’t marching in lockstep. Their united front may be superficial and about to crumble. Behind Obama’s and Bernanke’s placid facade, there may be division or even acrimony.
If so, who is really in control? Bernanke? Obama? Anyone?
● The Fed wrote:
“Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”
The Fed complains that the current rate of inflation is too low and expresses its determination to raise the rate of inflation.
The “official” rate of inflation is 1.5% but does not include variables like “fluctuations in energy prices”. However, by including such variables, John Williams at Shadowstats.com concludes that the real rate of inflation is running between 5% and 9%. I believe Williams. If he’s right, the Fed intends to raise the real rate of inflation.
This conclusion is consistent with world’s initial reactions to the Fed’s September 18th announcement of “no tapering”. As measured on the US Dollar Index, the value of the fiat dollar fell over 1 point (1.3%) in a matter of hours. Many foreign currencies rose by 2 to 3% in relation to the dollar. Gold jumped $55 (4.2%). Silver shot up $1.23 (5.64%). All of these dramatic events indicated that world markets believed the Fed’s announcement signaled its intent to significantly increase the real rate of dollar inflation.
● The Fed wrote:
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.”
The Fed’s “dual mandate” is a legal obligation to foster: 1) maximum employment; and 2) price stability.
But is it possible to have full employment and price stability without government price controls? Isn’t it true that as we approach full employment in a free market, increased demand for goods and services will cause rising prices and rising inflation?
If so, aren’t “maximum employment” and “price stability” antagonistic?
Does the Fed believe that by causing inflation and rising prices the Fed can indirectly cause increased employment? I.e., can inflation’s “tail” wag employment’s “dog”?
The truth is that the Fed has never worked to maintain price stability. Instead, the Fed has always worked to hold inflation at a fairly steady rate of about 2% per year. Instead of price stability, the Fed has worked to maintain “inflation stability”. Not too fast, not too slow, but juuust right.
By declaring that “The Committee expects that, with appropriate policy accommodation, economic growth will pick up . . . ,” the Fed again seems to dump responsibility for any future economic downturn onto government. The Fed is telling us for the second time that its current actions should cause the economy to “pick up”—provided that those idiots in Congress and the White House make the “appropriate policy accommodations”.
What’s the Fed mean by “appropriate policy accommodation”? They mean that the gov-co should do whatever it is that the Fed recommends.
However, if the governmental “idiots” screw up and fail to enact “appropriate policy accommodations” (laws and regulations), the economy could tank and thereby defeat the Fed’s valiant efforts. If so, blame the politicians, not the Fed.
The fact that the Fed qualified its “expectation” of economic growth with uncertainly about “appropriate policy accommodation” implies that the Fed doubts that Congress and President will do the “appropriate” thing.
Again, with the “appropriate policy accommodation” qualification, the Fed implicitly distances itself from the government and attempts to shift blame for any coming economic downturn to the government.
Thus, the Fed again implies that chances for a significant economic downturn in the near future are at least high enough to warrant concern. In order to evade responsibility for that possible future downturn, the Fed is already blaming politicians before the downturn happens . If the stuff hits the fan, the Fed can point to this current announcement and say, See, we warned you that if the idiots in gov-co don’t do the “appropriate” thing, the system might suffer and the politicians (rather than the Fed) should be held responsible.
This is the second instance in the Fed’s announcement that suggests:
1) The probability of a future downturn is significant; and,
2) The relationship between the Fed and the politicians may be increasingly divisive and even acrimonious.
Nothing we’ve seen so far guarantees that a significant economic downturn will happen in the next 13 months. But much of what we’ve seen implies that the Powers That Be are much concerned that the probability of such downturn is high and possibly rising.
● The Fed wrote:
“The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”
But inflation is not “below its 2 percent objective”. Inflation is probably 5% to 9%. Nevertheless, for the second time in this announcement, the Fed indicates that it wants higher inflation. The Fed implies that inflation will only rise to 2%, but if John Williams at Shadowstats.com is right, the real inflation rate is already at least 5%. If so, the Fed intends to bump the real inflation rate even higher—not to 2% but to 6% or 10% or who knows where? Real, double-digit inflation is possible.
● The Fed wrote:
“[T]he Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”
There’s not enough evidence of economic “progress” to believe that the economy can sustain itself without the injection of $85 billion in freshly “spun” currency each month ($1 trillion per year; over $3,000 for each man, woman and child in the US).
The economy is not even sufficiently improved to reduce the monthly QE3 by $10 billion per month. Thus, the economy is still on life support and arguably no better off than when QE3 began last Fall.
● The Fed wrote:
“The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”
The Fed will continue to spend $85 billion per month on US Treasuries and “mortgage-backed securities” (“derivatives”) until: 1) employment is up; and 2) prices are stable (no inflation).
I doubt that the government can simultaneously produce more jobs and price stability (little or no inflation).
I know that gov-co can’t produce many more jobs very soon.
I believe that the Fed’s determination to inflate the dollar will last at least until the A.D. 2014 election. Therefore “price stability” is at least a year away and is more likely to be several years away.
This doesn’t mean that QE3 will continue until Hell freezes over, but it implies that it’ll last for at least another year and probably more.
● The Fed wrote:
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
“Continued progress”? “Maximum employment and price stability”? How heroic. How inspiring.
The Fed’s language sounds increasingly like something written by the former Soviet Union that everyone knew was nothing but propaganda and bold-faced lies.
It’s not surprising that the Fed’s prose should emulate the former Soviet Union’s propaganda. The Soviet’s believed in “central planning” of their economy. The Fed is implementing “central planning” for the American economy.
I’m reading the Fed’s language as conducive to authoritarianism and Big Brother.
● The Fed wrote:
“In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. “
Interest rates will be kept at irrationally low levels until unemployment levels fall below 6.5% and inflation is projected to be no more than 2.5%.
The Fed didn’t say if they meant “official” or “real” unemployment and inflation rates.
Reducing the “official” unemployment rate (7.3%) to the Fed’s target 6.5% doesn’t sound like too much of a chore. I could happen in 1 or 2 years.
However, I can’t see how the economy can improve until the “real” unemployment rate (estimated to be 9.7% by the New Yorker, 14.3% by Forbes, and over 23% by Jerome Corsi and also by John Williams at Shadowstats.com) is reduced to, say, 5% to 6%. That reduction won’t be fast or easy and could drag on for at least three years.
The real rate of inflation is going to rise over the next year—perhaps to double-digit levels.
Based on increased inflation, US Bonds may suffer a serious decline in value.
Those who have capital stored in US banks will receive interest rate gains that are small and well below inflation rates losses.
Capital will therefore flee the US.
Interest rates may be amazingly low, but there’ll be little or no capital available to be borrowed. Access to mortgages and consumer credit will diminish. Only productive businesses will have access to “cheap” credit.
If so, the U.S. will enjoy irrationally low interest rates, but may also suffer increased inflation (possibly double-digit) plus an outflow of capital for some considerable time into the future.
Third world economies will be stimulated by the influx of American dollars seeking higher interest rates; the US economy will be decimated by inflation and the outflow of capital.
Because the Fed’s objectives are not only difficult, sometimes contradictory, and often irrational, I begin to suspect that they might only be “achieved” (however superficially) by means of price controls.
I see little cause for celebration in the Fed’s September 18th announcement. Instead, closely read, that announcement tells me that a significant downturn is likely—not certain, but likely—within the next year. Even if the downturn is avoided, serious inflation seems inevitable.
Those who store their wealth in the form of paper dollars will lose their assets. Those who store their wealth in the form of gold or other tangible investment media will see their wealth at least preserved and probably increased.