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.
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.
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.
Peter Schiff and I diverge on some important points. For instance I don’t think he gives the Chinese economic system a hard enough time. I think he totally recognizes the crony nature of the place but I think it’s more fragile than he does.
And he’s been plenty wrong at times. (Who hasn’t been?)
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.
At this point any rate hike looks like a big giant excuse for people to sell off stocks. People want to sell, really sell, one can feel it, but people don’t want to fight the Fed. However, if Yellen shoots a flare into the sky people will move on it. People just want a reason. Which is why Yellen probably won’t move rates.
It would be a pretty bold move for Yellen to hike in the midst of what looks like a possible looming recession in much of the world (Brazil, Australia, China) even if things are barely positive in the US from her perspective. On the other hand if recession is looming a move now might signal confidence in the US economy just enough to let the Fed gather some ammo for what is coming down the line. (Not that a quarter point would make much difference.)
Alternatively we could just have markets set interest rates, like they should, and we could all stop hanging on the words of a financial politburo. But that would make too much sense.
Got to have an official fall guy I guess. This fellow was sufficiently powerless so he got pinned.
By David Stockman
The mainstream economics narrative is so far down the monetary rabbit hole that the blinding clarity of the chart below has no chance whatsoever of seeing the light of day. That’s because it dramatizes the real truth regarding all the Fed gibberish about “accommodation” and “stimulus”. Namely, that what lies beneath its “extraordinary measures”, such as ZIRP, QE, wealth effects and the rest of the litany, is a central banking regime that systematically destroy savers. Period.
An interesting quote above to be sure, and former Chairman Greenspan is absolutely correct. We are still expanding the Fed balance sheet. We are “tapering” but we are still pouring money into the global economic system. We don’t know what will happen exactly when the Fed goes neutral or starts to raise interest rates.
In the July 26, 2013 edition of the Bank Credit Analyst, editor Jim Grant notes that when Ben Bernanke was beginning the second round of “quantitative easing,” he described it in February 2011 Congressional testimony as equivalent to an interest rate cut. In recent Congressional testimony explaining what might be (or might not be) a forthcoming “taper” in “quantitative easing,” he suggested that it would not be equivalent to a rate hike.
The money’s going to keep on flowing for a good while, at least that’s what the Street thinks.
That’s probably bullish for stocks, it has been. So party on, at least that’s what they say on CNBC.
Here is what Business Week writer Brendan Greeley tells us about the effect of personal taxes on our economy: “Economists have known for a while that personal marginal tax rates, and in particular those on the rich, don’t seem to have much of an effect on the economy.”