Pity the guys now running the Fed. They’ve inherited an economy that requires ever-bigger infusions of new credit and ever-lower interest rates to avoid financial cardiac arrest. But with interest rates already perilously close to zero the usual leeway is no longer there.
Making the best of a bad hand, Fed chair Jerome Powell has been cutting the Fed Funds rate but managing expectations for future cuts by calling the current ones “recalibration” and “insurance.” In other words, “don’t expect a quick excursion into steeply-negative territory. In fact this latest cut might be all there is.”
But the economy, like any addict, is profoundly uncomfortable with not knowing where the next fix is coming from and is behaving accordingly. From just the past couple of days’ headlines:
US manufacturing survey contracts to worst level in a decade
US gross national debt jumps by $1.2 trillion, to $22.7 trillion
Student loan debt soars, totaling $1.6 trillion in 2019
There is good reason to fear the repo
Midwest’s faltering economies will spread pain nationwide
Treasury yields sink after U.S. manufacturing weakness raises recession fears
VC veterans host emergency meeting of unicorns as IPO ‘bubble’ implodes
Now equities are picking up the anxious vibe. See Global stocks plunge for a second day to start Q4.
What happens next? Almost certainly, a “coordinated” round of aggressive easing by the US Fed, the ECB and BoJ. With some unconventional coercion thrown in by the People’s Bank of China.
As for the timing, it’s just a question of “the number.” That is, how far does the S&P 500 have to fall before the stampede begins. Since this question will be answered by a bunch of largely clueless men dripping fear sweat and trying to figure out why their models have stopped working (and more poignantly why their life’s work has turned out to be a fraud), the number is unknowable in advance.
But it probably won’t take too many more days like the last couple before the Fed issues its “whatever it takes” statement, cuts rates by a half-point or more, and initiates a QE program that includes equities along with bonds.
Oh, and before a US-China trade deal is signed that accomplishes little but is sold as “historic” and “huge.”
And before a trillion-dollar infrastructure plan passes both houses of Congress with bi-partisan support.
Stocks will of course pop on these announcements, which makes the “short everything in sight” impulse less than the sure thing it appears. But the initial upward thrust won’t hold because there are limits to both how far interest rates can fall and how big central bank balance sheets can become before even the pretense of capitalist free markets evaporates. We don’t know what those limits are but they’re definitely out there.
Put another way, an economy that has been LBO-ed by its government is no economy at all.
9 thoughts on "The Fed’s “Insurance” Rate Cuts Didn’t Work. Now For The Emergency Cuts"
The private, debt-based central banking model is a massive part of the problem, the “root” if you will. We should go back to debt-free constitutional money like we had before instead of having private banks create money out of thin air and our national treasuries issuing bonds instead of debt free notes. The power of private banks to issue 30-40 times more money than they have on hand causes massive inflation, not to mention corruption, unproductive investments that have zero value in economy building and are speculative short-term gain oriented only, criminality and of course a business cycle that tanks the economy and fleeces the sheep in the financial markets every 5-8 years.
Central banks should create the money debt free as necessary to satisfy the spending needs of governments while citizens should be direct owners and shareholders so that they can keep managers accountable and ensure liquidity remains in the economy while not overspending and creating inflation. Inflation can be controlled with interest rates–lending money to private banks for commercial lending–as well as through taxes and retiring funds used to finance large infrastructure or social projects. In a debt-free system, taxpayers are saved enormous amounts of money in sovereign debt, which would mean no more income taxes–remember that income tax was created to pay off the debts the Federal Reserve was understood to incur. For more about this watch the movie Moneymasters or visit their website.
New tax schemes could free us of the burden of income tax so that we could tax other things such as luxury goods, pollution, energy, stock-trading (a minute amount that deters speculation and encourages productive investment), investment properties and conspicuous consumption so that the low and middle income earners are spared most tax while industry and the rich pay more to ensure they pay for pollution/harm they cause and ensure the wealth gap is much smaller. We want some competition in society, but not serfdom and revolution.
One idea could be to cap wage/benefit inequality within organizations to a maximum of 20:1 anywhere in the value chain. This would avoid overzealous tax rates of 60-90%, deter 3rd world exploitation, and enhance fairness and economic justice so that everyone has a living wage, healthcare, education, security, and opportunities for creative fulfillment. It’s much better than having a billion poors enraged at their disenfranchisement and poverty revolting and lynching rich people in the street.
Just some ideas, but I think they have merit.
Here I go again going out to buy some more rice, beans, and bullets. Fill up the old Blazer with diesel. Check my chainsaw, freshen its fuel, and get ready to head out to the swamp for an extended camping trip.
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Inheriting an economy? They R trying 2 figure out what 2 do with and economy they Created. End the Fed is a must . We can never pay off this debt they have created not even with inflated dollars. The Fed is Dead. Rest in Hell all of U beneficiaries and Promoters. Goof Riddance.
If you watch “Moneymasters” the movie you’ll see that a massive debt crisis is the logical end of the Federal Reserve system. At that point, the “creditors” who are rentier capitalists (or at least a very large majority are), take possession of everything as collateral from the “debtors” and permanent debt-slavery is almost assured. As you know, the “debts” were largely created out of thin air in a process that if you or I did it would be called “counterfeiting.” Fractional reserve lending is legal counterfeit.
I admit, it’s starting to get exciting, but I’ve been too early to the party before to open the bar just yet. I’d like to think the repo market issue is the real deal but it rings of so many other warning signs that never seem to manifest.
However, the number one thing that I still can’t figure out (along with why Pres. Obama deported so many illegal immigrants) is why – IF the central banks are such big, bad entities run by an evil cabal of globalists, etc, etc. – then why are they trying to salvage the financial markets? If the markets stay up, let alone rise any further, Trump is likely to maintain the US Presidency, and by every account the “elites” hate Trump and his nationalist, populist “Make America Great Again” agenda. I don’t understand it. It would seem the elites could just sell out of their positions and then let the avalanche play out. Lots of impoverished, disillusioned, scared people to “globalize” and socialize and make miserable. Not that I want that to happen, but it just seems so obvious that I must be missing something.
Maybe the elites are afraid of an even more populist or socialist president after Trump.
To be fair, Trump gave to the elites a huge tax cut.
The “elites” I’m talking about are beyond tax cuts, etc. Wealth is not their goal, it’s power, at least as far as I can tell.
Interesting you think there could be an even more populist president after Trump. Socialist definitely – if not communist or Marxist – but that’s what they are so no matter. That’s assuming, of course, there would even be more elections.