Wednesday, January 20, 2016

Firing Blanks ?

In the latest battle within the economy since the financial crisis of 2008, the US government, led by the Fed has responded with all types of stimulus because they believe that you can engineer an economy.
The Fed cut interest rates to near zero. It bailed out dozens of banking institutions. The federal government bailed out GM, AIG and many more. Today, it uses HARP loans for the housing industry along with lowering lending standards in its two SSEs.
Then, the Fed added QE 1. This swelled their balance sheets. They knew that they were putting the bond market out of whack, but they are always right, least of all you and me are wrong. As time passed, they said that QE would end. The addicted markets began to crater. They immediately added QE II. When this failed, they showed their thinking: add credit to debt or more debt upon debt. We got QE III.
The Fed now says, "no more." They insist that rates will rise and return to normal. In December 2015 they demonstatred their conviction with a token quarter point rise. They claim that in 2016 there will be a gradual increase with a possible four more interest hikes.
The market is again cratering under the addiction of cheap money and begets the question, what will the Fed do now? Will they follow through on their guidance?
The Wall Street Journal has the same questions. They worry that if another recession develops, will the Fed have any ammo in its bag of tricks to "engineer" another recovery?
I look at the same questions. Keep in mind the US government has tools for stimulus. The US could...
1) lower interest rates except that they are near zero at present.
2) cut taxes, but our government is already straddled with excess deficits. If interest rates were to return to normal, our payments just on the interest would exceed $ one trillion per year. In addition, the government is facing more deficits to cover entitlements like Social Security and Medicare which are underfunded. Their responses will be muted, especially with gridlock in an election year.
 Also, state governments are seeking revenues and they have begun to raise taxes on fees, gasoline and of course, the sales tax. Not good.
3) print money. Banks do this every day with our fractional banking system, but confidence in the fiat system is beginning to wake people up to its dangers. This process is inflationary, but the media at present is another shill as they declare no inflation! People are becoming aware of these lies too. Praise the Lord!
The Fed will help, but the bond market is facing its own crisis. Higher rates make lower yielding bonds lose value and this could trigger a liquidity crisis bigger than the financial disaster of 2008. This approach has serious limitations because fiat value or valueless will be exposed which is good for gold. This is the reason why our Founding Fathers chose gold to back our currency. It is slow and steady rather than boom and bust.
Again, one cannot underestimate the "tools" that these arrogant, unelected men who are taking control of not only the nation, but global economy can perform. According to them, we are right and you and the market are wrong. They insist that they can equate humans to a thesis and I see this ending badly with "pet rocks" flying. I think Yogi Berra has the correct answer for central bankers, "In theory there is no difference between theory and practice. In practice there is." I love Yogi! End the Fed!