We added the question mark to the above headline from Zerohedge. We think such a depression is entirely possible, perhaps beyond possible. But regardless there are serious shudders moving through the world economy right now and we are deep into the current “expansion.”
So what happens when a recession happens when we are already starting from a lower baseline? Well, you know what happens. Things get ugly. And this time the geopolitical stakes are higher than they were in 2008.
As we’ve said China is driving things economically right now. The Federal Reserve doesn’t want to say it. It wants everyone to think that though our boat is leaking it is unlikely to leak as much as the rest of the the world’s economic “boats.” And right now that may be true. But we are still taking on water. The Great Economic Experiment post 2008 is failing, as many of the more market oriented have long predicted, and now the American central bank has very few options.
Zero Interest Rate Policy (ZIRP) is failing for the reasons outlined below.
At least before ZIRP was just failing generally. Now we appear however to be feeling the first acute effects of this grand experiment. And that is not good news.
To turn things around, or at least to begin turning things around, rates have to normalize. Which means likely that rates need to go up.
It happens. It hasn’t for a while. But it happens.
Still, pretty crazy if you think about it.
We’ll see how the rest of the day pans out. At this moment we’ve got an hour and a quarter to go. But medium term sentiment on Wall Street appears to be be shifting as we see yet another day of broad selling.
It’s been a weird ride since midsummer. Mostly down but with a few big pops up. The Dow is off 2000 points or so from its high. People are starting to look around with a little more adrenaline in thier veins. Is this it? Have we run out of gas? Are the predictions of the Fed critics coming true?
Again, we’ll see.
3 bold statements just in the headline, but even CNBC granted that Schiff deserved to take what it called a “victory lap.”
Schiff argues that the Fed does not plan to raise rates at all because it can’t raise rates. 7 years ago with the start of ZIRP and QE Schiff says the Federal Reserve entered a “monetary roach motel.” That the Fed is now stuck. Which is of some concern to say the least.
It should be noted also that there seems to be a lot of talk about less than 0% interest rates as of late (LZIRP). So what does that tell you?
Guess what? 0% interest rates are highly addictive. And not just in the psychological sense. No, the addiction is physical and therefore that much more difficult to break. For many institutions super cheap money is necessary even to function.
Some wonder if this is even true for the US government itself.
The bank bailouts in 2008 left a bitter residue which even now, 7 years later (7 years!) I can taste. I spit it out, but it always lingers. If I meditate too long on that time, that time of foreclosures, and panic, and of George Bush “abandoning capitalism to save free market capitalism,” of weekend meetings at the Fed, of Hank Paulson playing God, my blood pressure still rises. It was such a tremendous scam on such a gigantic scale. Then 2 quarters after the bailouts Goldman Sachs paid out the biggest bonuses in its history. Many Americans were just trying to make ends meet. Some have never recovered.
Another good one from David Stockman – and now he has a beard! What’s up with all the Wall Street guys wearing beards these days?
Now I know I am getting older. There is quite a lot to be said for having an advisor who at least knows what rising interest rates feel like.
Could? Well, I suppose so. In the same sense that taking drugs away from an addict is likely to trigger a “drugs crisis.”
If you don’t know, the entire financial world is on tenterhooks right now waiting for the latest declaration from the Federal Reserve, or as David Stockman puts it, the financial politburo. Will they raise rates or won’t they? Look to the skies. Stare into the crystal ball. What will the masters of the universe do? We, those who do not reside on Mount Olympus, can only wait, and fear/hope/whatever. (We are supposed to be a free market economy I thought. Why do we have these guys setting the price of money arbitrarily? I mean I know why. People want to believe in the cult. But seriously, in the 21st Century, why should we?)
If the Fed does raise rates it will be an historic moment for sure. We’ve been at 0% interest rates for almost a decade. It will likely freak world markets out even more than they are already.
Robert Shiller, not always our favorite economist here, is warning that the stock market is looking particularly bubbly. This isn’t a huge story except that talk of a bubble is now coming from one of the accepted shamans of Keynesianism. Shiller also called the tech bubble and housing bubbles accurately. His book Irrational Exuberance is a classic.
Yeah Hank, yuck it up.
The video is embedded in the linked article.
The reason for increased wealth inequality is because of the fiat financialization of the global economic system. Once we completely detached from gold in 1971 it was off to the races for many folks with assets and at least peripheral access to the Federal Reserve system.
Funny, gold was always feared as a tool of the rich. Yet it wasn’t until true fiat money came, non-gold money, that we saw the massive disparities of wealth.
Calls to reform, audit, and even eliminate the Federal Reserve have been growing in recent years. We certainly call for an end to the Fed and I encourage anyone interested in monetary policy and the Federal Reserve to read Free Prices Now by ACC co-founder Hunter Lewis. Hunter is a scholar of the highest order and a remarkably successful financier. If you want to understand the sins of the Federal Reserve read his book.
But many people already understand the sins of the Fed and many of these people gathered in a counter summit to the party the Federal Reserve was having this week in Jackson Hole Wyoming. One of the people criticizing the Fed was Benn Steil who, believe it or not, is a director of international economics at The Council on Foreign Relations.