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Fed Managing Expectations Only of the Gullible

EST

The Fed has done it again, purporting to manage our expectations with yet more, excruciatingly public dithering over the timing of a rate hike. The central bank is now saying there will be no policy change before June at the earliest. This latest little piece of kabuki can only add to the credibility of our own forecast, which is that that the Fed will never raise rates. Okay, we were being facetious when we first made that prediction a couple of years ago; never is indeed a long time. But what kind of odds would you take to wager that there will be no rate hike for at least another ten years? You could probably get thirty-to-one from economists, editorialists, pundits and other useful idiots who never seem to tire of telling us that a rate hike is imminent. Realize that you would be within a year of collecting on the bet if you’d made it back in 2006, when the last rate hike was announced.

Things were different then, as readers will recall. For one, the danger of crashing the financial system with a small turn of the monetary screw was not as great. The dot-com crash was a distant memory, and, outside of the doomsday blogosphere, the gestating housing bubble was not a concern. These days, however, the banking system is as shaky as a drunk on a high wire. Still worse is that the drunk has much farther to fall, since the financial leveraging that has occurred since 2009 is so vast as to be almost beyond calculation. The derivatives bubble is estimated by some to be as large as a quadrillion dollars. But even if you accept more conservative valuations of around $300 trillion, you’re still talking about a highly flammable gas-bag of digital money that dwarfs global GDP fourfold. The clear implication is that the main business our planet, economically speaking, is creating financial instruments, not providing actual goods and services.

Too Many Dollars to Manage

Another factor that has added greatly to systemic risk is the dollar’s steep climb, a market-driven event that is putting increasing pressure on all who have borrowed in dollars, particularly for financial speculation. A strong dollar is incipiently deflationary, and nothing short of helicopter money can stop it at this point. Under the circumstances, why would the Fed risk provoking the Godzilla of All Deflations by gratuitously pushing up the fed funds rate by a few basis points? In any event, although the doomsday camp has obviously been premature in predicting a global financial crash, it was always foreseeable that the cause of the collapse would be some sort of dollar crisis. That’s because the market for dollars is many orders of magnitude larger than all other financial markets combined. Indeed, one could view the entire gamut of financial “products,” including stocks, bonds, repos, swaps, CDs, reverse floaters and all the rest, as mere hedges against currencies that are all being devalued more or less simultaneously. These investment vehicles do not even remotely reflect economic value – as how could they in a world in which money for speculative financial transactions is in almost unlimited supply? Small wonder, then, that stocks around the world are trading near record highs — or that the Fed would be skittish about doing anything that could end the delicately crafted illusion of good times that comes from rising share prices.

I have a theory concerning how the Fed has continued to fool the economic world into believing that a rate hike looms nonetheless. In practice, they only have to fool some of the people some of the time to make the ruse work. The two easiest groups to bamboozle are the news media and economists. The former are mostly economic imbeciles, too lazy to deviate from the official narrative they receive in the form of press releases from the Fed. The economists are equally stupid, at least where the dismal science is concerned, and because most of them tilt well to the left politically, they can be counted on to lend intellectual authority and a veneer of respectability to the Federal Reserve’s transparently idiotic ideas. Chief among them is the extraordinary popular delusion that America can return to prosperity by borrowing and spending trillions of dollars that have been plucked from the air.

Comments on this entry are closed.

Shawn Brown February 3, 2015, 7:52 pm

RA,
It won’t take much to implode the house of cards, for sure. The token raise might just cause a blow off top in equities first. The Fed Heads will initially look like geniuses for sliding the token rate hike through but all H#LL is gonna break loose if an improbable series of hikes take place. Surely they know there’s no amount of TARP, TALF, QE or Twisting that could be done once the tide recedes revealing Mr. Yellen’s gender.

PhotoRadarScam.com February 3, 2015, 6:19 am

I’m telling you, a meaningless 0.1% rate hike is coming. That will allow them to save face with their claims about a coming rate hike while changing literally nothing.

&&&&&&

I tend to agree. It would really be something if a measly 10 basis points wound up toppling the whole house of cards. Sort of like that little slant pass to Lockette. RA

rdanneskjold February 3, 2015, 4:46 am

With at least $3.5 trillion on its books as assets, a 1/2 of one per cent (.5) increase in interest would lower bond prices enough to wipe out their total asset base. I have noticed their desire to homonymously pluck the rest of the country, but I haven’t noticed any suicidal tendencies emanating from the Fed. When they replace their long-term bonds with short-term bonds, or reduce their long-term bond holdings to under $500 billion, an increase might be coming.

Based on historic returns of 3% above inflation, we should have T-bills at 5+%. Goodbye USA; and that is based upon palpably provable prevarications as to the real rate of inflation. How about 8-11% interest rates? At least that would provide a reasonable return to those who responsibly prepared for retirement – if any financial system still existed at those rates.

When Obama demands and the poltroonish Republicans accede, college savings funds, 401Ks, IRAs, and pension funds (except for those of the executive branch and congress) will be exchanged for government bonds.

If the Fed exchanges their bonds for the gold in Fort Knox (once it is returned by those who leased it -hah, hah), we are truly basted and served.

John Jay February 3, 2015, 4:36 pm

RD,

We have been off the map of Economics since the TARP Financial Coup vaulted the Oligarchs into the saddle.
They have been making it up as they go along since then.
The way things are flowing it seems a Debt Based Currency demands ever lower interest rates, and the destruction of any legacy based savings held by the old middle class types.
That would be us!
Everyday we are setting new records for total population, concentrated wealth, and global competition for resources and jobs.

As I said above, we are now off the map, and seeing an alien financial landscape of ZIRP and NIRP, Everest sized mountains of worthless debt, growing Legions of the FSA/GSA parasites, etc.
There is no map to consult, we will just have to see what awaits us over the next Debt Mountain!

John Jay February 2, 2015, 6:56 am

Well, Helicopter Ben has already come right out and said he never expects to see “Normalized” interest rates in his lifetime.
And, in fact, everyone in a position of wealth and power on this planet knows it.
And the Superbowl watching masses wouldn’t know the Federal Reserve Bank from a Pop-Tart!

The Main Stream Media hasn’t expressed an Anti-Government opinion since the Viet Nam war ended and Richard Nixon was run out of office!
The MSM since then just issues Press Releases from the Federal government and the Oligarchs, who have both been steadily increasing their control for decades.

But I actually feel fairly confident that our new, Debt Based Currency will reign supreme unless we go to all out war with Russia/China.

Why?
Look at the competition:
Japan?
Twenty years farther down that road than we are.
European Union?
Apart from Germany, they are imploding.
Switzerland?
Ha! The last thing they want is the world bidding up the Swiss Franc!
China?
A lot of potential there, but they need to export around the clock to keep hundred of millions employed.

So I am ready to accept the Financial NWO.
To quote an old Hank Williams tune:

“Well I am not going to worry wrinkles in my brow
Cause nothins ever gonna be alright no how
No matter how I struggle and strive
I’ll never get out of this world alive”

A very wise philosophy!

Other Paul February 2, 2015, 6:51 am

I totally agree, Rick. If the Treasury can borrow at a real interest rate of near zero percent with the Fed’s support, and, thus cause others borrowers’ rates to plummet, who’s unhappy, besides the prudent savers with their old-fashioned Savings Bonds, money market funds and CDs?
With tax rates going up there will be even less incentive for eligible capital gains winners to cash out.
It hasn’t mattered to most Congress critters, besides Sen. Cruz, nor the President, how much the national debt has increased the past few years. Yellen sure hasn’t raised a concern. The debt could double or triple as older, higher interest rate debt is retired.

Jason S February 3, 2015, 7:08 pm

As a comment on the Govt. being inclined to increase the debt three or four fold with these low interest rates; the budget that the President proposes has the interest payments for our debt eating up 13% – 14% of the projected budget in 2025. This assumes near zero interest rates at that time. What happens if rates rise just 1%? We are so screwed.



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