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.
The good news is the market seems to be shrugging of the relatively bad news. The assumption is that the Federal Reserve is unlikely to raise rates before the end of the year in light of the jobs report. The central bank won’t raise rates because it can’t, though it wants to. (Most people think anyway. Some think the Fed has no intention at all of raising rates anytime soon. They are the small minority though.) As such Wall Street gets to continue enjoying 0% rates. So the Street sees at least a bit of a silver lining (for itself) even if “economists” do not.
The jobs numbers are quite poor but not grim. In light of the Chinese, and increasingly global slowdown the dip in the number is of serious concern however.
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.
By Ron Paul
This month marks the seventh anniversary of the bursting of the housing bubble and the subsequent economic meltdown. The mood in Congress following the meltdown resembled the panicked atmosphere that followed the September 11th attacks. As was the case after September 11th, Congress rushed to pass hastily written legislation that, instead of dealing with the real causes of the crisis, simply gave the government more power.
Just as few understood the role our interventionist foreign policy played in the September 11th attacks, few in Congress understood that the 2008 meltdown was caused by the Federal Reserve and Congress, not by unregulated capitalism. Not surprising to anyone familiar with economic history, the story of the 2008 meltdown starts with the bursting of the Fed-created tech bubble.
Following the collapse of the tech bubble, the Fed began aggressively pumping money into the economy. This money flooded into the housing market, creating the housing bubble. The Bush Administration and the Republican Congress also added fuel to the housing bubble. These so-called “free-market” conservatives expanded federal housing programs in hopes of creating an “ownership society.”
If Congress understood the Austrian theory of the business cycle, it would have allowed the recession that followed the housing bubble’s inevitable collapse to run its course. Recessions are the economy’s way of eliminating the distortions caused by the Federal Reserve. Attempts by Congress and the Fed to end a recession via inflation and government spending will only lead to future, and more severe, economic downturns.
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.
We wish Ms. Yellen the best. I heard a recount of this moment on Bloomberg Radio and the word “excruciating” was used. And it is to watch. She falls silent for more than 20 seconds. To her great credit Ms. Yellen got through it. It must have been a very difficult moment.
But this is of concern. Yellen is the arguably the second most powerful person in the world and we are in a particularly sensitive time economically.
It has been getting a bit warm around here. I thought it was just that the air conditioner was getting a little long in the tooth.
I almost didn’t post this headline because the term “leftist” is used in a pejorative sense. That is not terribly constructive.
But the article itself is important. The author reports on a statement made by the new UK Labour Party’s economic flag bearer who said that the money one earns isn’t actually one’s money. You don’t actually pay taxes so much as give the government back its property. Essentially he is saying that your ability to feed and clothe your family, indeed to prosper in any way economically, is at the pleasure of the government, of the state.
Yeah, the Federal Reserve and the Feds have made all the right moves. Good grief.
This does not come as welcome news to this homeowner. But it’s not surprising. Even in my hometown, 90 miles outside of one of the few cities not clocked by the Great Recession, Washington DC, even as bulldozers plow new ground for new home sites not far from me, one can feel a cooler wind blowing through the real estate market. I’ve watched it like a hawk for the past 18 months and the market feels very strange. The best word is probably “uneasy.”
I also drive to Washington all the time. I have family who live much closer to the city and one feels the cooler (not even cool, certainly not cold) breeze there too. This in a place which barely hiccuped after the 2008 Crash. I will be up near DC this weekend and I’ll do a little research. The attached article says things are challenging in much of the metro area. More challenging than maybe I thought.
Regardless, what we are seeing is likely a new stage in the housing “recovery.” We had frozen solid and people being turned into the streets. Then we had the long delayed thaw. Then near optimism. Now something new, but it’s too early to say what. It doesn’t feel like we are building on optimism though.
It is also interesting that the areas which stand out in the attached article are not even the mountain states and Texas which may be slipping into a recession as oil continues to slump.
But trust your realtor. They’ve got your best interests in mind. Ahem. (The real estate economists are even better.)
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?
OK, Politico did not use the exact term, but Charles Davidson and Jeffrey Gedmin make a pretty bold statement in today’s edition. China is a kleptocracy and this encourages instability in the country and in the global economy.
We have argued this pretty much since the founding of this website. A broad system of crony capitalism like the one in China creates distortions in the economy, prices are obfuscated, the connected become wealthy, dishonesty is compounded, until the facade eventually crumbles when the lies become apparent. To some degree that is what we are seeing now with the Chinese downturn.
Such a system is destabilizing politically as well. As corruption is rewarded and cronies amass power and wealth, resentment increases among everyday people. Anger bubbles as the cancer spreads throughout the land.
Davidson and Gedmin are right to highlight the system of kleptocracy in China as President Xi is visiting the United States. But they argue that we should be actively undermining the regime on moral grounds, and from a position of ethical superiority.
But we have serious (and similar) problems in this country. Perhaps we should first extract the log from our own eye.
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.