The Fiscal Times recently published the article “Bernanke Was Right: Interest Rates Aren’t Going Anywhere”. According to that article, the Federal Reserve’s March 18th policy announcement was a “big one” because,
“In response to a tightening in the labor market, the Fed set the stage for an interest rate hike possibly as soon as June by removing the ‘patient’ language from its statement.”
But, why did the Fiscal Times describe the Fed’s recent “policy announcement” as a “big one”?
After all, all the Federal Reserve declared was that they weren’t going to do anything right now, but might “possibly” do something in June . . . or maybe September . . . or sometime. Maybe.
What’s so “big” about announcing that you won’t do anything now, but you might do something later?
“The bigger story was what happened with the Summary of Economic Projections of where interest rates will be over time. . . . The end-2016 interest rate estimate was cut from 2.5 percent to 1.9 percent and the end-2017 was cut from 3.7 percent to 3.1 percent. “
Is it reasonable to believe that both of the following predictions by the Fed are true:
1) The Federal Reserve will “probably” raise interest rates sometime later this year; and,
2) The Federal Reserve is nevertheless reducing its previously predicted interest rates for the ends of A.D. 2016 and A.D. 2017 by 0.6%?
Are those predictions at least somewhat contradictory?
Aren’t those predictions evidence that, while the Fed may talk “patiently” about “possibly” raising interest rates sometime this year, the Fed actually expects to see actual interest rates charged by banks to fall for at least another two years?
Isn’t it therefore reasonable to conclude that the Fed will “probably” not raise interest rates this year?
• Here’s a chart that appeared in the Fiscal Times article that illustrates “what fools these mortals be”:
As you can see from the chart’s dark-blue line, the Federal Reserve raised interest rates from 1% to over 5% between A.D. 2004 and A.D. 2007. That raise was probably intended to “cool” the over-heating economy.
The Fed overplayed its hand. They raised interest rates too high. Their attempt to “cool” the over-heated economy worked too well and, in A.D. 2007-2008, the economy began sliding into the Great Recession.
As the dark-blue line indicates, the Fed reversed policy in A.D. 2007 and started to cut interest rates from just over 5% in A.D. 2008 to nearly 0% in A.D. 2009 and then continued to hold that near-zero interest rate until today.
While the 2004-2007 raise in interest rates did “cool” the economy (almost unto death), the subsequent 2007-2009 cut in interest rates has so far failed to revive the economy.
On March 18th, Janet Yellen promised that the Fed might “possibly” start raising interest in June of this year. That “possible” raise is represented by the green line at the right side of the graph.
But, between the 2008 fall in the blue line and the projected 2015 rise in the green line, we see about 18 brown lines that start from the near-zero interest rate and then move upward to end between 1% and 3%. These brown lines are described as “Forward rates implied by futures contracts”. I read that description to mean that, since A.D. 2009, the Fed has repeatedly induced (or at least allowed) the markets to believe that the interest rate was “probably” going to rise in the immediate future.
But it never did.
On eighteen occasions in the past six year, the markets thought the interest rate would rise. But it didn’t.
And now, Janet Yellen is telling us that the interest rates might “possibly” rise in June, or maybe September, or . . . .
Given the fact that people supposed the interest rates would rise 18 times in the past six years—but didn’t—what are the odds that today’s interest rates will “possibly” rise later this year is valid?
If you were a gambler and you saw the previous 18 brown lines that mistakenly projected interest rates would rise, what would you bet that today’s green line projection would prove to be true? Or would it prove false while the interest rate remained near zero? If you bet the percentages, you’d bet that interest rates will stay near zero for the remainder of A.D. 2015.
• The Fiscal Times agrees:
“[E]very time the Fed tries to wean off the cheap money junkies—I’m not talking outright tightening but merely slowing the flow of stimulus by ending its QE1, QE2 and QE3 bond-purchase programs — the economy slows, inflation falls, the stock market rattles and the Fed is forced to dole out more. It happened in 2010. It happened in 2011. And it’s happening again now.”
Implication: The economy is on life support. Since A.D. 2008, the US economy has remained too weak to support itself without trillions of dollars of monetary hand-outs from the Fed and/o artificially low interest rates. The Great Recession has not ended.
In the absence of a convincing “recovery” from the Great Recession, the specter of a Greater Depression looms in the near future.
“So far this year, global central banks [around the world] have cut interest rates 27 times. The European Central Bank has unleashed a long-awaited sovereign bond-buying stimulus program. The Chinese are talking of new stimulus efforts.
“Claudio Borio, head of the Monetary and Economic department at the BIS [Bureau of International Settlements], cautioned that the low rate environment could result in political instability and create a world in which monetary ‘easing begets easing,’ leading to a situation where ‘technical, economic, legal and even political boundaries may well be tested.’”
Traditionally, mankind “tests political boundaries” with war.
Mr. Borio is warning that:
1) The global economy won’t recover without the continued stimulus of an artificially “low interest rate environment”;
2) Low-interest rates are likely to persist globally for some time into the future; and
3) By robbing creditors, low interest rates could trigger a significant global war.
If interest rates are slowly declining on a global basis, what are the chances that the Federal Reserve will raise rates for the US anytime soon?
- “Now, there is growing concern . . . about the side effects of interest rates falling into outright negative territory, which is happening in parts of Europe.”
Given that interest rates are even going negative in some countries, what are the odds that the Federal Reserve will raise rates anytime soon?
• “This brings to mind something former Federal Reserve Chairman Ben Bernanke let slip at a big-ticket dinner earlier this year, as reported by Reuters: Interest rates would not return to normal—at around 4 percent—in his lifetime, as the Fed would wait longer and move slower on rate hikes than many believe.”
Assuming that Mr. Bernanke knows anything about macro-economics and finance, his previous prediction is good evidence that, again, the Fed is unlikely to raise interest rates anytime soon.
If interest rates are destined to stay abnormally low for the balance of Ben Bernanke’s lifetime, doesn’t that mean that creditors will tend to make less, or even lose, on their loans? Will saved capital be thereby destroyed?
Does Bernanke’s prediction mean that, in order to allow consumers/borrowers to keep purchasing more “stuff” to keep the economic hamster-wheel spinning, creditors will have to be robbed by paying them artificially low rates of interest on their loans?
If so, will the institutionalized robbery of creditors (by means of low interest rates) also open the door to seizing savings accounts and pension funds of small “creditors” (private savers) for the greater glory of the “homeland”? (“Homeland! Homeland! Uber alles!” )
I.e., if the Fed and government can rob creditors with artificially low interest rates, why not also rob them by seizing their bank accounts and pensions?
• Don’t persistently low interest rates also imply that the Federal Reserve and US government intend to increase the National Debt?
The government can’t hope to adequately “stimulate” the economy without injecting more currency into the economy. Government can’t raise taxes to acquire that additional currency without slowing the economy. Government must therefore borrow (or steal) the additional currency. But the government can’t even afford to borrow more currency—except at near-zero interest rates.
Ergo—the Federal Reserve is extremely unlikely to raise interest rates anytime soon.
Which is ironic since the Federal Reserve is the lender of last resort. I.e., unable to borrow more currency (to stimulate the US economy) at near-zero percent interest rates from private creditors, the government’s only remaining “lender” has been the Federal Reserve.
Which means that:
1) The Federal Reserve is ultimate “creditor” for the US government;
2) When the Federal Reserve cuts interest rates to near-zero, it cuts its own potential profits on lending to the US government to near-zero; and,
3) The current monetary system should inspire less wonder and more hilarity.
I.e., since A.D. 2008, the Federal Reserve has “loaned” most of $3 trillion to the US government. Thanks to inflation and near-zero interest rates, the Federal Reserve is losing money on those loans.
Logically, the single creditor who loaned the most to the US government is the same creditor that must be suffering the greatest financial losses due to low interest rates. That means that the Federal Reserve—which loaned $3 trillion to the US government and also set those low interest rates—may be the primary victim of low interest rates.
Yes, yes—I know that the Fed isn’t lending real money to the US government. They only “lend” freshly-printed fiat dollars. Thus, the Fed isn’t really suffering a loss (other than paper and ink).
But still, what happens to the perceived value of the Fed’s one-and-only product (the fiat dollar) when the world figures out that the Fed is only loaning monopoly money, the US government is only spending monopoly money, and most of us are being paid for our work, blood, sweat, tears and property with monopoly money?
The Zero Interest Rate Policy (ZIRP) is dangerous to the economy, to the fiat dollar and to the Federal Reserve. And yet, we seem unable to escape that policy without collapsing the economy.
• Could there ever be a time when the government simply can’t go deeper into debt? Could there be a time when the debt has grown so great and so unpayable that creditors (including the Federal Reserve) stop lending to the US government at any rate of interest—especially if all they could hope to get in return is more monopoly money?
If there were a time when creditors (including the Fed) would no longer lend to the US government and the US government could no longer “stimulate” the economy, what would happen then?
If creditors pull the plug on lending to the US government, would the economy tend to strengthen—or to collapse?
The point, as usual, is that our overly-indebted economy and fiat dollar have placed The United States of America on an unsustainable economic trajectory. That trajectory is less supported by economic fundamentals than by the manipulations and illusions of Quantitative Easing 1, 2 & 3—and soon, 4.
How long can the illusion last?
What happens when the illusion disappears?
• As things currently stand, it seems likely that if Obama isn’t forced to do so, the next President will have to admit that we’re in an economic depression—and have been since A.D. 2008.
Obama or the next President should be forced to admit that the big problem in our economy is debt and:
- The National Debt is too big to ever be repaid in full;
- We’ve reached a point where the debt can’t grow any larger because legitimate creditors won’t lend to the US government;
- The only remaining “creditor” willing to lend to the US government is the Federal Reserve. But, the Fed doesn’t lend “legitimate” currency out of its vault to the government, but can only purchase US bonds with fiat dollars (“monopoly money”) spun out of thin air causing inflation or hyperinflation and devaluation of the fiat dollar; and,
- Despite however many disagreements may exist between economists, politicians and pundits concerning our economic malaise, there’s one point on which everyone agrees: the current financial and economic system is unsustainable.
In fact, systemic unsustainability is the one economic “fundamental” on which investors can rely. Everyone knows that the whole economy is going to collapse—and probably soon. But nobody knows When.
Even so, as an investor, if you know that something is going to happen (but you don’t know when), doesn’t it make sense to invest according to that one fundamental truth, and then just sit back and wait for your profits?
• Unless the political will is found to make voluntary, dramatic and painful changes in our economic system (which would include disposing of the fiat dollar and raising interest rates significantly), the current economic system is guaranteed to suffer a catastrophic failure which will throw the US and global economies into poverty, chaos and possible war.
That catastrophic failure probably can’t be avoided, but it can be temporarily postponed by injecting more currency into the economy. Because the economy is too weak to support higher taxes, that currency must be: 1) borrowed from lenders; 2) spun out of thin air by the Fed; or 3) seized from bank accounts and pension funds.
Insofar as currency may be borrowed, the government can only afford to pay near-zero interest rates. Which means legitimate creditors will be robbed and capital will be destroyed or at least misallocated to the non-productive government. And, that means that legitimate capital will flee the US market to seek higher interest rates in foreign countries.
Thus, if the Federal Reserve (lender of last resort) refuses to lend more “monopoly money” to the US government, the seizure of bank accounts and deposits may be the next logical step for government desperate for funds.
The government needs more currency to “stimulate” the economy and prevent an economic collapse. Government will get that currency one way or another, and will not be dissuaded by moral considerations. If some people must be robbed to sustain the racket, government racketeers will rob them.
Lastly, the government can attempt to provide the currency needed to “stimulate” the economy by working with the Federal Reserve to simply “spin” more and more fiat dollars “out of thin air”. The result should be significant inflation or even hyper-inflation and devaluation of the fiat dollar.
The government has already alienated most private creditors since they no longer lend to the US government.
The government may have already alienated the Federal Reserve since, when the Fed terminated QE3, it stopped buying the government’s bonds.
Implication: Government is left with only a few stark choices. These choices aren’t necessarily mutually exclusive. Government might try to implement two or three of these choices simultaneously:
1) The Fed “lends” more “monopoly money” to the US government under QE4;
2) Government seizes funds from bank accounts and pension funds;
3) Government starts cutting government welfare, pension, and subsidy payments; or,
4) Government admits it’s bankrupt and simply lets the economy crash.
• In a sense, our economic problems are not “all about the money”. Technically, in a debt-based monetary system, we don’t have any money—only a debt-based fiat currency. In our brave-new, debt-based monetary system, debt is wealth.
So, what happens if the American people refuse to borrow and go deeper into debt? What happens if the government loses its capacity to go deeper into debt by raising taxes, borrowing or seizing funds? Where will more debt (an illusion of wealth) come from?
A: The illusion that debt-is-wealth will fail, the house of debt will fall, and the world will starts screaming for a return to real (asset-based) money.
Q. What Happens If the Fed Can’t Print and Gov-co Can’t Borrow?
A: The Gov-Co will steal from every bank account, pension fund, and even wallet that it can find.
P.S. According to some reports, that kind of theft has already begun.