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.
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.
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.
Think of 2008 as a primer. A very difficult and disruptive primer. Nothing’s “fixed.” Markets never really cleared.
Additionally, as is explained below, the now 0% interest rates are almost locked there as the cost of serving US debt by the US government would explode upward with increased (and very likely closer to real market level) rates. That’s a sticky place to be to say the least.
But people will continue blissfully along, until they can’t. Then they’ll scream that “capitalism” messed everything up. Watch.
The Chinese have just cut rates and reduced the reserve requirements for banks. Now US stock futures are indicating a strong open to the upside. See, everything is fine. At least if you work for a high frequency trading firm.
Wall Street broadly is hoping, praying, that the central bank mojo will work again. We’ll see.
Why is the stock market turning down now? Why the current carnage?
The reason we had the Crash in 2008 was because the Fed kept rates too low for too long. In response to the tech implosion and then the 9-11 attacks Allan Greenspan and the FOMC panicked and ended up inflating a worldwide housing boom which morphed into the disaster (to put it mildly) which is the Great Recession. There’s more to it than that but that’s basically what happened.
Consider now that Ben Bernanke (and Janet Yellen) have kept interest rates much lower for even longer than Greenspan did.
Ron Paul calls out the Plunge Protection Team on CNBC. I don’t think I’ve ever heard it mentioned on financial television. Seriously anyway.
And boy is he right. There is an assumption that the Fed will never let stocks (and other assets) revert to real levels.
The thing is the Fed for all its power is still subject to the laws of thermodynamics, just like the rest of us. That is, even the mighty central bank will feel the sting of its hubris.
Of course so will the rest of the planet. Which let me tell you is a real bummer.
Well yeah. But sadly this is a revolutionary idea for many of the world’s old school Keynesian economists.
We do not have a capitalist system any more. The central planners have taken the reins and continue to warp the economy. The dislocation when reality breaks through, and it always does eventually, could be (will likely be) much worse than the 2008 Crash and Depression.
There was some debate a few months ago as to whether the massive drop in oil prices constituted a “black swan” event. Meaning that it was a completely unforeseen highly important event which had the potential to change economic sentiments quickly.
Free money is a hell of a drug. It keeps a party going. But when it’s gone and the lights come up all that debt doesn’t look as pretty as it once did. One remembers all of a sudden all the stupid things one did under the influence, and even worse that those actions have consequences.