Ben Bernanke, you are RAISING interest rates No economic recovery on the way
The Federal Reserve's Snake Oil Tour of '09 continues on unabated. The good news, however, is that the regime is down to its own praetorian guard to serve as its apologists. The latest regime apologist is Fed Bank president Janet Yellen, who says that interest rates will remain low. She is absolutely wrong. The Federal Reserve is actually raising interest rates. How so? By trying to hold rates artificially low, this is setting the stage for much higher interest rates.
Because I believe my last commentary was spot-on and well-written, I am re-posting it - but with a prefaced message to Ben Bernanke.
Federal Reserve Chairman Ben Bernanke:
Chairman Bernanke, it is important to understand that interest rates can only be held artificially low for so long. The longer interest rates are held artificially low, the more insolvent the market becomes. Artificially low interest rates are not only bad for the market in general, but also for the loan market which you are trying to save.
The longer the Fed manages to hold interest rates artificially low, the higher they will eventually go. Artificially low interest rates lead to capital decumulation, the destruction of savings, and a drain on bank reserves. All of these last several years we were burning through capital and savings. When there is a paucity of savings, and bank reserves are depleted, the way to reverse this is to let the market set interest rates pursuant to the true supply of real savings.
Yes, rising interest rates are bad...for inefficient, insolvent, and non-credit worthy institutions (the biggest sub-prime borrower of all, the U.S. government). But, Chairman Bernanke, the way to actually lower interest rates in the long-run is to let the market set them where it may.
The more artificially suppressed short-term rates are, the higher long-term rates will be. The higher short-term rates are, the lower long-term rates will go. If we let the market set interest rates, this would stimulate saving, which would engender falling interest rates.
Chairman Bernanke, you and Congress are playing a game of chicken that can't last forever. It is my contention that, in trying to out-inflate interest rates today, you are actually undermining the very bond market that you are trying to support. I can't predict what exact rates will be at exact dates. However, I will go on record with this prediction: interest rates will be higher next year than they are today.
Bernanke, I strongly encourage you to investigate other schools of economic thought. Now please read over my commentary that is posted below.
INTEREST RATES ARE GOING TO THE STRATOSPHERE
I have been writing about the problems we face with this false, bubble economy for years. Over the last several months, I have repeatedly said that eventually interest rates will go even higher than where they would have been absent central bank manipulation.
My intention here isn't to belabor the specifics, since I have gone through everything in detail in my previous commentaries. My purpose here is just to provide a condensed version of what is going to take place.
Understand that inflation, i.e., an expansionary monetary policy, is not synonymous with economic growth. In fact, the two are mutually exclusive. To the extent that real economic growth is taking place, it is in spite of inflation.
What we went through was the bursting of a false, bubble economy. The bursting of the bubble was not the problem. In fact, it was vitally necessary to let it collapse. Greenspan managed to paper over the 2001 recession, and the central bank managed to out-inflate interest rates, creating negative real rates.
Because of those artificially low interest rates, we are bankrupt. We burned through capital and savings. With the paucity of savings, and as the natural consequence of artificially low interest rates for so long, interest rates have to rise. But the political regime, being so bankrupt, can't function without negative real interest rates. Rather than relinquishing some power and returning to Constitutional government, the regime has chosen to try to inflate to push rates down - just like the response to the 2001 recession.
There is no doubt in my mind that this time around is going to be much worse than what came after 2001. We don't have any savings to mitigate the effects of the inflation. All the inflation is doing is stimulating demand, which we shouldn't be trying to stimulate. Demand is infinite, and the problem isn't a demand shortage. Consumption needs to be paid for with production. By inflating, we are certainly stimulating demand, but not production. The government is saying that we can keep paying the bills with inflation, which, at this stage, is tantamount to economic hara-kiri.
A point that I have made when talking to others is that there is no way we can possibly have an economic recovery with dollars. The only path to economic recovery is to bring the false economic activity, engendered by inflation and central planning, to an end.
For a moment, let's think in terms of prevailing orthodoxy, in which inflation is conflated with economic growth. We have three possible outcomes. Let the deflation happen, which the establishment consensus says is bad (but it isn't). Or we experience really low and slow inflation, in which case the central planners will never be able to achieve their desired goal of stimulating as much false economic activity as they did once before (but they would still be blocking a real recovery to the extent we get inflation). Or we have a fast "recovery," in which case there is fast inflation. You got that? The only way to have a fast "recovery" on the establishment's terms is to have fast inflation!
We are starting to see consumer price increases again. Gas prices are on the rise. The only thing that is going to change between the last several months and the next year is that prices, rather than being allowed to fall like they should be, will be rising. An inflationary depression. The faster prices rise, the higher the rate-of-return investors will demand. Thus this "recovery" is going to be accompanied by rising interest rates. Mark my words: interest rates are going to the stratosphere with this "recovery."
My concern is that the temptation is going to be there for the government and its central bank to continue to play its game of chicken by trying to out-inflate interest rates until the dollar eventually collapses. Why? Again, it is all about politicians not wanting to relinquish a single inch of power, by curtailing their spending orgy.
The irony in this is that by trying to prop up Treasury prices, the Fed is actually destroying the bond market. Eventually, we hit a point where investors account for the inflation risk. At that point, which I believe we have already crossed, the more the Fed inflates, the lower bond prices go. The lower bond prices go, the higher rates go. The higher rates go, the more the Fed is going to inflate. And the market will demand payment in specie. When that happens, the dollar is toast. We will have gone the route of Zimbabwe. (Note to Janet Yellen: this is also why the idea that the Fed can reverse its inflation by issuing its own bonds is rubbish.)
You would think that it would be self-evident to economists that cheapening credit does just that: it destroys the very credit they are trying to stimulate. If only we can all have "free" credit. But how good will that credit be? It is rather simple: there can be no credit without savings.
Mark served honorably for four years on active duty in the Marine Corps infantry, and was a Libertarian endorsed candidate for a municipal office in 2002. He has held the NFA Series 3 license (commodity futures and futures options broker) which he did a voluntary withdrawal on so that he can trade futures for his personal account. Since the year 2000, he has spent much of his free time reading the great minds of the Austrian School of economics, such as Murray Rothbard, Henry Hazlitt, Ludwig von Mises, et al.
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Mark served honorably for four years on active duty in the Marine Corps infantry, and was a Libertarian endorsed candidate for a municipal office in 2002. He has held the NFA Series 3 license (commodity futures and futures options broker) which he did a voluntary withdrawal on so that he can trade futures for his personal account. Since the year 2000, he has spent much of his free time reading the great minds of the Austrian School of economics, such as Murray Rothbard, Henry Hazlitt, Ludwig von Mises, et al.