FORBES magazine recently published an article entitled “The Fed’s Monetary Monkeying Is Ruining Your Retirement And The Economy”. As often happens, excerpts from that article got me thinking. For example:
• “Is there any way that NIRP (“Negative Interest Rate Policy”) make sense?
“Central banks think NIRP will get people to take more risk.”
What’s the Fed mean when it encourages people to take more risk? Drive without fastening their seat belts? Cancel their home owner’s insurance policy?
No. The Fed’s encouragement to take more risk is like telling a man to play Russian Roulette. However, in the context of this analogy, each “bullet” is an item of significant debt.
‘With six chambers in the cylinder and just one bullet/debt in the cylinder, the Russian Roulette player spins the cylinder, pulls the trigger and has one chance in six of blowing his brains out. It’s a dangerous game, but the odds aren’t too terrible.
But the Fed insists that players should take a little more risk by placing a second bullet (more debt) into the cylinder. Then, you’ve two bullets in the six chambers in the cylinder. Spin the cylinder, pull the trigger and you’ve got one chance in three of meeting your maker. More debt equals more risk.
OK—then the Fed says, c’mon, take a little more risk and add a third bullet of debt to the cylinder. Then, the player will have three bullets in six chambers and one chance in two of killing himself.
The Fed’s insistence that we take more risk means going deeper into debt. The underlying theory is that if enough Americans take on more risk (debt) and spend their borrowed funds, we can thereby “stimulate” the economy back to health, strength and prosperity for all.
But, note that the Fed advocates that we “borrow and spend” rather than to produce more, sell our products, and then spend the profits. The Fed’s spend-now-pay-later advice is based on the assumption that what this economy needs is more borrowing (debt) to allow more consumption—rather than more productivity.
However, persistent increases in debt will increase our risk of default and bankruptcy and ultimately lead to a financial, economic and political calamity. Play the game of increasing risk (economic Russian Roulette) long enough and you will die—or at least succumb to national economic depression.
What’s the lesson here? It’s this: When the Fed says the word “risk,” they generally mean “debt” and vice versa. As used by the Federal Reserve, the words “debt” and “risk” are nearly synonymous. It follows that a “debt-based” monetary system and “debt-based” economy are dangerous because both are ultimately based on increasing risk. Sooner or later, the Fed’s risk-based monetary system and/or economy will lead us to disaster.
• “NIRP makes sense if liquidity is undesirable. And some central bankers want to make liquidity unfavorable to get people (and lenders) to take more risk.”
“Liquidity” refers to how much cash you’ve saved that is available for spending. The Fed wants to use inflation and/or Negative Interest Rates to reduce liquidity.
How? By making savings unprofitable. If you hold cash in your hand, its value (purchasing power) will be reduced by inflation. If you hold your cash in a bank account, NIRP would sap its value. In either case, people should be increasingly inclined to spend their currency quickly (while it still has maximum value) rather than save it and lose part of its value.
Increased spending is expected to increase demand, create more jobs and corporate profits, and thereby “stimulate” the economy. That’s the Fed’s theory and they’re stickin’ to it.
• “But let’s look at the Fed’s grand assumption: Lower interest rates will create higher demand for goods and services.”
No. That may be a “grand assumption,” but it’s not the Fed’s “grandest assumption”.
The Fed’s grandest assumptions are these:’
1) Fiat currency can safely substitute for real money (gold and silver); and,
2) A “debt-based” (risk-based) monetary system can safely replace our former asset-based monetary system.
Those are the Fed’s two “grandest assumptions”. Both are false, irrational and certain to eventually push our national economy into a Greater Depression.
• “If lower interest rates truly increase consumer borrowing and demand, then the Fed should have been able to stimulate economic activity by pushing rates lower and keeping them there over these past eight years.
“However, as measured by GDP (or any other standard), [for the past 8 years of “near-zero” interest rates] economic growth has been mild at best. This dearth of desired results is a real problem.”
Nope. The “real problem” is the “dearth” of real, asset-based money and the consequent excessive supply of debt-based/risk-based currency that’s spawned national and global debts that are both too great to ever be repaid in full, and also sufficiently massive to collapse the U.S. and global economies.
The “real problem” is that, so far, the Fed is unwilling to publicly discuss the economy’s “real problems”: fiat currency and a debt-based/risk-based monetary system.
Why? Because the Fed is the source of our risk-based, fiat currency. The Fed can’t openly condemn fiat dollars without cutting its own throat.
• “The data is starting to show that consumers (and some businesses) are actually saving money in low or negative interest rate environments. So, not only has the Fed failed to stimulate demand, it has arguably reduced demand as people save more and spend less.”
OMG! Why are those idiot consumers saving instead of spending?!! A “consumer” who saves rather than spends is no longer a “consumer”. So long as consumers save rather than spend, the consumer-based economy is toast.
Don’t the darn fools know that whole fiat monetary system is based on public confidence? Don’t they know that saving is an expression of distrust in the economy, monetary system and even government? Don’t they understand that, by saving, they’re “de-stimulating” the economy?
Sarcasm aside, “spending less” is nearly synonymous with “saving more”.
If debt means risk, then it follows that saving means something like “safety” and “security”. People save more when they lose confidence and believe they’re in danger. Savings are an expression of diminished confidence in the future capacity of government and the economy to keep producing prosperity. Increased savings express an growing public fear that the economy has finally taken on too much risk/debt.
• Our debt-based/risk-based monetary and economic systems depend on consumers going ever-deeper into debt/risk so they can spend enough to stimulate the economy. In the context of a debt-based monetary system, it follows that saving (refusing to spend and go deeper into debt) is evidence of an anti-government sentiment. Thus, from the government’s perspective, to stimulate the economy and preserve the government, savings must be reduced.
How could government reduce savings and indirectly force people to spend more? Three answers come to mind:
1. Increase public confidence in the economy to increase public willingness to spend and consume.
2. Increase the rate of inflation to reduce the value of the cash in their hands.
3. Decrease the rate of interest to near-zero or even negative numbers to reduce the return on currency deposited into banks or even U.S. bonds.
First, I see no way for the Fed to increase public confidence in the fiat dollar or the economy in the near future. Virtually everyone agrees that the economy is shaky.
Second, if people can’t earn a decent return on their savings, they’ll be expected to spend, spend, spend, consume, consume, consume. Increased inflation and/or low interest rates are supposed to dissuade people from saving and induce them to spend—but that’s not happening. As the Forbes article warns:
• “Most Americans have excessive debt, low credit ratings, or both. Low or even negative interest rates will not make them spend more money as long as that is the case.”
Implication: since most Americans already have “excessive debt, low credit ratings, or both,” most Americans are anxious and so distrustful that they refuse (or are unable) to take on more debt/risk. They won’t go deeper into debt to increase their spending enough to stimulate the economy.
“Easy-money” borrowing depends on public confidence and optimism in the government, currency and economy. Increased savings are evidence of distrust and fear.
So far, low, near-zero and even negative interest rates have failed to overcome the people’s fears and cause them to resume spending. That’s why the Forbes article complained that, “Low or even negative interest rates will not make [consumers] spend more money.”
Not everyone fears our future economic prospects. But public anxiety is growing. As it does, more people refuse to risk going deeper into debt and therefore don’t spend enough to stimulate the economy.
Result? We’re at least headed for a period of stagflation. At worse, we might be headed for an economic depression.
• “Corporations are also hoarding cash. Apple, Microsoft, and other US tech giants have billions stashed outside the country for tax reasons. And they’d still keep cash even if the tax disadvantage went away. They have no need to spend it and very little to invest in. They see no reason to risk losing it or to bring it back into the US to pay high corporate taxes.
“So there that money sits—not stimulating anything.”
Bummer, hmm? U.S. corporations are saving their much of their U.S. profit in foreign banks where it can’t stimulate for the U.S. economy.
However, it’s not just high tax rates that drive currency out of the U.S. economy.
Currency is also, and perhaps primarily, pushed out of the U.S. economy by low interest rates.
The Fed sets low interest rates to induce consumers to save less and spend more. No doubt, that strategy works to some degree. However, for some savers, the solution is not to stop saving and spend more, but instead, to move their savings out of the U.S. economy and into a foreign investments where interest rates and returns are higher than U.S. interest rates.
Thus, the Fed’s near-zero interest rate policy has not only failed to cause most Americans to spend, it’s also induced some Americans to move their savings overseas. Insofar as U.S. funds flow to foreign banks and foreign investments, the U.S. domestic currency supply tends to shrink. As the currency supply shrinks, the fiat dollar tends to deflate and become more valuable.
Just as inflation usually causes people to stop saving and start spending, it follows that deflation causes people to increase savings and slow spending.
Paradoxically, the net result of low interest rates is deflation, economic stagnation and, maybe, collapse
• The Fed rationalizes low interest rates as a means to cause Americans to save less, spend more and thereby stimulate the economy. However, for the past eight years, that rationalization has proven to be unfounded
Instead, it’s arguable that the Fed’s low interest rate policy has pushed savings overseas in search of higher interest rates, thereby reduced the domestic currency supply, contributed to deflation and perhaps even caused Americans to save more and spend less.
But, is it simply “ironic” that the Fed claims low interest rates will stimulate the economy, when, in fact, they may be slowing the economy? After all, the other primary reason corporations keep their cash in foreign countries is to escape high U.S. taxes imposed by the U.S. government’s fiscal policy. Thus, the Federal Reserve’s monetary policy of low interest rates and the federal government’s fiscal policy of imposing relatively high corporate taxes are both helping to slow rather than stimulate the economy.
Is that an irony? A coincidence? An unintended consequence?
Or, are the Fed and government knowingly using monetary and fiscal policy to intentionally slow the economy? Are our fearless leaders simply stupid—or are they treasonous? Inquiring minds want to know.
• By means of low interest rates, the Fed has helped cause billions of dollars to flow from the U.S. domestic currency supply into foreign markets that pay higher interest rates.
By lowering interest rates, the Fed blunted the effect of Quantitative Easing (printing more fiat currency to inject into the currency supply and thereby “stimulate” the economy). i.e., by printing more currency to stimulate the U.S. economy at the same time it lowered interest rates and drove currency out of the economy, it appears that the Fed was, at least, working at cross-purposes.
Apparently, the Fed can’t stimulate the economy by simultaneously increasing the currency supply (printing more fiat dollars) and decreasing the interest rate to supposedly stimulate more borrowing and spending. The Fed should be able to increase the currency supply at the same time it raised interest rates, but it can’t lower interest rates without reducing the currency supply as capital flees to foreign markets in search of higher interest rates and lower taxes.
1. Big government (high taxes and deficit spending) and the Federal Reserve (fiat currency and low interest rates) have both been pushing paper capital out of the U.S. economy and into foreign markets. Even if interest rates are Near (or below) Zero, there may be less currency left in the U.S. economy to be loaned to U.S. consumers, less available credit, and less stimulation for the U.S. economy. As currency flows out of the U.S. into foreign economies, much of the “stimulation” provided by the Fed’s QE printing of more currency has accrued to foreign economies.
2. The Fed claims to have two “tools” to manage the economy: 1) control of the currency supply; and 2) control of interest rates. However, in our brave new digital world, digital currency can cross national borders at the speed of light and go anywhere to escape low interest rates and seek higher interest rates.
That means the Fed is no longer really in control of the U.S. currency supply. Currency can enter or leave this economy in an instant, with or without the Fed’s approval, based on the Fed’s latest interest rate. That means the Fed can’t really control the currency supply. As a result, the Fed has only one remaining “tool” left to manage the economy: interest rates.
That’s not enough.
• The Fed’s ability to control of the economy is being lost. The Fed is becoming increasingly impotent, irrelevant and even detrimental to our economy.
If the Fed wants to control the domestic currency supply and doesn’t want Americans’ wealth to chase across national borders in search of higher interest rates, the Fed will need an alternative form currency that can’t be digitized. That means gold or silver.
I’m not predicting that the Fed or any other central bank will reestablish gold and silver as money anytime soon. I am simply observing that there are technological forces at work right now that are pushing the world and central banks away from the debt-based/risk-based fiat currency and towards the resurrection of real money.
If the Powers That Be need to control the domestic currency supply, they’ll almost certainly have to restore gold and/or silver as money at some point in the future.
On the other hand, if the Fed insists that we’ll never again use gold and silver as money but will always have a digital, fiat currency—then the Fed will have concede that its former power to control the national currency supply is gone.
The technological realities of fiat currency, digital currency and the internet allow currency to go wherever it wants, whenever it wants, at the speed of light. Those technologies are rendering the Fed impotent and fiat currencies increasingly unreliable.
All of which points to a future time when the irresistible force of digitized currency collides head-on with the immovable object of governmental control of national economies. At the moment of that collision, we’ll suffer an economic collapse and/or radical change in our debt-based/risk-based monetary and/or economic systems.