Fed delays rate hikes, cites labor market concerns
by Alfred Adask
On June 15
th,
Yahoo Finance reported
:
"The Federal Reserve pushed back its plans to raise its benchmark short-term interest rate, a widely expected move following a series of mixed US economic reports.
"After a two-day policy meeting, the Federal Open Market Committee unanimously voted to hold the federal funds rate between 0.25% and 0.50%, citing
weakness in recent employment data."
That "weakness" was a surprising jobs report that, although economists had generally expected about 162,000 jobs to be created in May, only 38,000 jobs were actually created-"the lowest level in six years."
"
Although the unemployment rate has declined, job gains have diminished," the central bank wrote in its statement.
Say whut? Does it make sense that the "unemployment rate declined" at the same time that the number of "jobs gains diminished" from an expected 162,000 to just 38,000? I won't say that's impossible, but it seems odd that even though expected "job gains" fell by 76% from 162,000 to an actual 38,000, the unemployment rate continued to decline.
If the unemployment rate really declined, it sounds more like 124,000 people (who were expected to have new jobs) simply disappeared from the unemployment rolls. They didn't get jobs. Instead, they were simply deleted from unemployment calculations.
Result? Unemployment rates fell mathematically, but not actually.
"For the second time, the Fed withheld mention of global economic risks and provided no assessment of the balance of risks, implying that officials are still
keeping their options open for an interest rate hike this summer. . . ."
So the Fed is still "keeping their options open," are they?
It's important to have "options" because, so long as one has "options," one has
power--power to choose. When one has no options, he is, by definition, powerless.
Therefore, is the Federal Reserve really trying to "keep its options open" for raising interest rates this summer? Or is it trying to keep the "illusion" of "having options"--and therefore still having
power and control over the economy?
Even if it were true, the Federal Reserve could not publicly admit that it is
powerless to provide additional remedy for the ailing U.S. and global economies and that, therefore, there's no chance that they'll raise interest rates this summer or even this year.
To admit that the Fed has no "options" is to admit that the Fed is paralyzed, impotent, and
powerless to cause positive change in the economy.
If the Fed were powerless, the Fed would implicitly admit that it had become
irrelevant.
We're told that in our debt-based monetary system, the value of the fiat dollar depends on public confidence. Is that confidence inspired or diminished by a Federal Reserve that has no options and therefore no power?
* More, when the Fed claims to be "keeping its options open," what are we talking about? Raising interest rate to 5%? 7%?
No. We're talking about the option/power to raise interest rates by another
one-quarter of one percent-a lousy 0.25%.
Yes, 0.25% may be an "option," but if it is, it's like having the "option" to blink your eyes or wiggle your ears. Technically, that might be an "option," but it's also a triviality and hardly an evidence of power. Insofar as 0.25% is a triviality and the Fed couldn't even raise interest rates by that trivial amount on June 15
th, doesn't that signal that the Fed's power is also trivial to the point of being almost non-existent?
If the Fed were truly powerful, it should be able to walk in the door, holler "Listen up!" and arbitrarily raise interest rates by several percent. But the Fed can't even raise interest rates by another 0.25%. That inability does not inspire confidence. That inability suggests that the Fed may now exist less as a "great power' than as an dying illusion.
* Yes, the Fed still claims to have "options," but that claim may be false and intended more to inspire false confidence in the Fed's power. The Fed is figuratively saying, "Ohh, we could raise interest rates if we wanted to-but we choose not to." But I don't think that's true. I don't think the Fed could've chosen to raise interest rates on June 15
th. I don't think it had any choice-and that implies that the Fed has no power. The Fed's inability to raise interest rates by a lousy 0.25% is evidence that the Fed doesn't really have an option and therefore doesn't really have any power.
This suggests that the Federal Reserve may have lost so much of its former power that it's now nearing the end of its usefulness and life-expectancy. The "emperor" is not merely seen to be nude-he's also seen to be a frail, weezing old man on life support who may not last much longer.
Government and the Federal Reserve-In the End, can there be Only One?
by Alfred Adask
You might remember Highlander-an A.D. 1986 film that starred Christopher Lambert and Sean Connery. The film described an ages-old battle between "immortal" warriors. Its tagline, "There can be only one", meant that all of the various "immortals" were destined to fight and kill each other until only one "immortal" survived.
In this article, I'm exploring the hypothesis that our two institutional "immortals" (the Federal Reserve and U.S. government) are destined (like Highlander's "immortals") to fight each other until only one remains.
Conventional wisdom tells us that the Federal Reserve and U.S. government work hand-in-glove and without fundamental conflict. However, when you stop to think about it, it appears that the current relationship between these two institutions should be so fundamentally adversarial that, in the end, only one can survive.
Debtors love inflation since it allows them to repay their debts with "cheaper" dollars. Almost every American who's bought a new home since WWII has been encouraged to take out a 20- or 30-year mortgage by the promise of being able to repay their debt with "cheaper" dollars. Inflation is the force that renders dollars "cheaper".
For example, if I were to borrow $100,000 over a period of time when there was 10% inflation, I'd repay $100,000 but those $100,000 would have only $90,000 in value (purchasing power) as compared to the $100,000 I initially borrowed. I'd be repaying my debt with "cheaper" dollars. That would be good for me, but bad for the creditor that loaned me the $100,000. My creditor would receive only $90,000 in purchasing power in return for the $100,000 in purchasing power that he loaned me.
Inflation favors debtors and robs creditors.
*
Inflation destroys fiat dollars.
We see evidence of that destruction in the fact that, since the dollar became a pure fiat currency circa A.D. 1971, the fiat dollar has lost over 95% of its purchasing power. Inevitably, it will lose 96%, then 98% and finally 100%. Reduced by 100%, the dollar's purchasing power will be zero and the fiat dollar will be useless and therefore dead.
I'm going to postulate that, since the Federal Reserve's primary (only?) product is fiat dollars, the Fed doesn't want its dollars to be destroyed. If the fiat dollar dies, the Fed will also be useless and therefore also die.
It follows that the Fed should have a vested interest in
preserving the fiat dollar.
Therefore, the Fed should be
opposed to the inflation that will ultimately render its fiat dollars worthless and the Fed useless.
* Deflation destroys debtors.
Deflation is the opposite of inflation since deflation
increases the value/purchasing-power of the fiat dollar. That increase can bankrupt debtors since they're forced to repay their debts with fiat dollars that are increasingly more valuable.
For example, imagine a man who could just barely afford to borrow $100,000 to invest in his business during a time of 10% deflation. He'd be forced to repay the equivalent of $110,000 in purchasing power. If he couldn't afford to pay that extra 10% in purchasing power, he'd be forced into bankruptcy-by deflation.
The U.S.
government is the
world's largest debtor. As such, the U.S. government is thesingle institution
most vulnerable to bankruptcy caused by
deflation.
Therefore, the U.S. government has a vested, vital interest in
avoiding deflation.
Conversely, the overly-indebted U.S. government has a vital interest in
causing inflation since inflation allows debtors (including government) to repay their debts with "cheaper" dollars.
Again, imagine that I borrowed $100,000 during a period of 10% inflation. When I repaid that $100,000 principal it would only have $90,000 in purchasing power as compared to its purchasing power when I first negotiated the loan. Inflation is great for debtors but terrible for creditors.
Like all debtors, the
U.S. government should want inflation.
Like all creditors, the
Federal Reserve should want deflation.
* No one destroys anything that's growing more valuable.
Deflation causes fiat dollars to become more valuable and thereby
increases the fiat dollar's life expectancy. Given that the Federal Reserve's only product is fiat dollars, the Fed should have a vested interest in causing deflation.
Similarly, as the world's biggest debtor, the U.S. government has a vested interest in inflation (which reduces the real value of the National Debt). Therefore, the Federal Reserve and U.S. government have
diametrically-opposed interests and are therefore
adversaries rather than co-conspirators.
* In the past few months, the Federal Reserve has said repeatedly that the solution to current economic problems must be
fiscal (government-based) rather than
monetary (Federal-Reserve-based). The Fed has repeatedly said or implied that there's nothing else they can do to heal the economy. According to the Fed, it's now all up to
government to devise a "fiscal" remedy (adjust tax rates and/or increase government spending) for our economic malaise.
Other than implement some crazy idea like negative interest rates, the Fed's monetary policies had only two mechanisms for stimulating the economy: 1) lower interest rates; and 2) increase the currency supply. When the Fed declares that there's nothing else that it can do, are they expressing a matter of mathematics, or a matter of
conflicting special interests?
If inflation "stimulates" the economy but also destroys the fiat dollar by reducing its value/purchasing power to zero-and if the fiat dollar is the Fed's only product-it follows that the Fed has a vested interest in
preserving the fiat dollar and therefore causing
deflation rather than inflation.
Yes, since A.D. 1971, the Fed has acted against its own interests by causing inflation. But the fiat dollar has lost 95% of its purchasing power. There remains, at most, only 5% of the dollar's original value to lose to inflation. That's not much of a margin for error. If the remaining 5% in purchasing power is destroyed, the dollar dies. This implies that the Federal Reserve can no longer participate in causing inflation and probably explains why the Fed has repeatedly said that there's nothing else it can do to "stimulate" the economy. The Fed can't cause much more inflation without destroying the fiat dollar and the Fed, itself.
* Given that inflation allows debtors (including the U.S. government) to repay their debts with cheaper dollars, the U.S. government has a vested interest in causing
inflation which will repudiate part of the government's debt.
However, if inflation, ultimately
destroys the fiat dollar and, thus, the
Federal Reserve, while simultaneously reducing the U.S. government's debt and thereby
preserving that government from overt bankruptcy-isn't it obvious that the relationship between the Federal Reserve and U.S. government must be fundamentally
adversarial?
More inflation (to supposedly stimulate the economy) will destroy the fiat dollar and, ultimately, the Federal Reserve. However, that same inflation will allow the U.S. government to rob its creditors, repudiate its debt, avoid bankruptcy and thereby survive.
Government wants and needs more inflation.
The Fed wants and needs more deflation.
"In the end, can there be only one"?-the government or the Federal Reserve?
I think the answer must be Yes.
* Through most of the past century, the
Fed should've represented its own interests (as a major creditor) as well as the general interests of all creditors.
Throughout most of the past century, the
U.S. government (world's biggest debtor) should've represented its own interests as well as those of the nation's debtors. During much of that time, the Fed-vs-government struggle maintained a rough "
balance" between the competing interests of creditors and debtors. Neither side profited so excessively that it destroyed the other.
However, in the last two or three decades, we became a "consumer" (debtor) economy and government became the world's biggest debtor. During that time, whatever "balance of power" that previously existed between the Fed/creditors and the government/debtors has shifted to favor government/consumers/debtors so excessively that American creditors are in danger of being destroyed. This is particularly true during the last seven years of the Obama administration when the National Debt doubled in order to "stimulate" the economy.
As evidence, look at what the likely result of our monstrous National Debt. It's too big to be repaid in full. That means it
won't be repaid in full. That means the debtor-government that borrowed all of those funds must cancel most or all of the National Debt by open repudiation or by inflation-or suffer a national bankruptcy. In either case, most of the government's debt
will be repudiated, canceled and rendered void.
It also means that creditors who loaned the wealth to the government in return for a gen-u-ine U.S.-issued, paper debt-instrument (U.S. bond) are going to lose their assets. These creditors include banks, the Federal Reserve, institutions like pension funds and private individuals who are "safely" invested in U.S. bonds.
Those creditors will be robbed by insolvent debtors in general and the U.S. government in particular.
* Given that most Americans are debtors (consumers) rather than creditors (producers), most people might cheer if the National Debt were repudiated. However, what will all those cheering debtor-consumers do when they learn that when the debt was repudiated, their creditors were destroyed and there's no longer any paper capital left to borrow?
Once the creditors are wiped out and government can no longer borrow to feed its dependent consumers, those dependents will start to starve. How long will the poor welfare-recipients and wealthy subsidy-recipients have to go hungry before they realize their only means of survival will be by violence or by hard work at depression-era wages?
Even if the debtor-consumers resort to violence to steal whatever the remaining producer-creditors have of value, how long before even the debtor-robbers realize that, without producer-creditors, they will also soon starve?
I.e., if the debtor-consumers rob farmers of theri crops this year and even steal his seed for next year, there'll be no crops next year and both the farmer-producers and the debtor-consumers will starve.
My point is that the only escape from our debt-based debacle and from government policies that excessively favor debtor-consumers, is for each of us to start working again. Working hard. Working for little profit-at least initially. Becoming, once again, a nation of
producers (and then
creditors) rather than a nations of
consumer-debtors.
If we don't return to productivity, our standard of living will continue to fall, our life expectancy will shrink, and we'll simply die and make room for the next influx of immigrants able to produce more than they consume.
* In the meantime, the Federal Reserve claims that its "monetary policy" (altering the currency supply and the rates of inflation or deflation) can do no more (can't safely cause any more inflation) to "stimulate" the economy. In doing so, the Fed has arguably refused to participate further in death-by-inflation of the fiat dollar, in the destruction of American creditor-producers and in the destruction of the Fed, itself.
Government, on the other hand, insists that it must have more inflation to "stimulate" the economy-but also to stealthily repudiate some of the value of the National Debt.
Implication: We're watching the fundamentally
adversarial relationship between the Federal Reserve and the U.S. government devolve into a "civil war" between the nation's consumer-debtors and the nation's producer-creditors.
* One last point: during the last seven years of the Obama administration, the National Debt has
doubled. That doubling is evidence of the lost balance between the government and Federal Reserve. It's also evidence that the Federal Reserve has been very nearly destroyed (sacrificed, if you prefer) by the U.S. government.
This implies that: 1) the much-maligned Federal Reserve may be more of a victim of government than a co-conspirator; and 2) the Fed's role and powers are inferior and subordinate to those of the U.S. government.
In the end, there can be only one-either the inflation-dependent U.S. government or the deflation-dependent Federal Reserve. Either too much inflation will destroy the dollar and the Federal Reserve, or too much deflation will bankrupt and destroy the U.S. government.
Neither institution is truly "immortal". For now, however, it appears that the fiat dollar and Federal Reserve are on the brink of being sacrificed to save the U.S. government. If so, creditors are approaching a moment of ruination.
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TAKING THE POWER BACK
