The bear will soon be arriving in earnest, marauding through the canyons of Wall Street while red in tooth and claw.
Our monetary central planners, of course, will once again—for the third time this century——be utterly shocked and unprepared. That’s because they have spent the better part of two decades deforming, distorting, denuding and destroying what were once serviceably free financial markets. Yet they remain as clueless as ever about the financial time bombs this inexorably fosters.
The sum and substance of Keynesian central banking is the falsification of financial prices. In essence, this means pegging interest rates below market clearing levels on the theory that more borrowing and spending will thereby ensue.
To this traditional credit channel of monetary policy transmission has been added in recent years the notion of an FX channel, which works through currency depreciation and export stimulus; and the wealth effects channel, which seeks to levitate the paper wealth of the top 10% of households so that they will feel emboldened to spend more at luxury retail emporiums, BMW showrooms and upscale vacation spots.
Needless to say, currency trashing might work for a tiny export economy like New Zealand. But on a global scale among the big national economies, it’s just a recipe for a race to the bottom. Ultimately it leads to nothing more than the inflation of imported commodities and goods and the reallocation of income and wealth from domestic industries and households to exporters and their shareholders. Japan proves that in spades.
With respect to the false FX channel, even Black Rock’s chief big thinker, Peter Fisher, hit the nail on the head last week on Bloomberg:
“But let’s be clear, negative rates for the FX rate is about a race to the bottom of competitive devaluation,” he asserted. “The International Monetary Fund was established to try to prevent us from doing that again, what we did in the 1920s and ’30s that were such a disaster.”
It is a measure of the political euthanasia induced into American politics by 20 years of central bank dominance that the so-called wealth effects channel is even taken seriously. It amounts to a massive fiscal transfer and trickle-up to the most affluent 10% of US households who own 85% of financial assets.
Moreover, this odious reverse robin hood feat is effected by 12 unelected apparatchiks who sit on the FOMC. From their august perches, they perform live monetary experiments on the American public with no accountability whatsoever.
That these depredations are fostering a hideously unjust redistribution of wealth from main street to a tiny elite of money shufflers, gamblers and silicon valley bubble-riders is attested to by the rise of Bernie Sanders, and Donald Trump, too. Besides stoking xenophobia and racial prejudice, The Donald is heading toward the GOP nomination because, ironically, he is self-funded and can loudly and honestly boast that he is not beholden to the Fat Cats who rule the country.
Besides the rank injustice, there is also the sheer stupidity of it. Implicit in the whole misbegotten wealth effects doctrine is the spurious presumption that the Wall Street gambling apparatus can be rented for a spell by the central bank. So doing, our monetary central planners believe themselves to be unleashing a virtuous circle of increased spending, income and output, and then more rounds of the same.
At length, according to these pettifoggers, production, income and profits catch-up with the levitated prices of financial assets. Accordingly, there are no bubbles; and, instead, societal wealth continues to rise happily ever after.
Not exactly. Central bank stimulated financial asset bubbles crash. Every time.
The Fed and other practitioners of wealth effects policy do not rent the gambling apparatus of the financial markets. They become hostage to it, and eventually become loathe to curtail it for fear of an open-ended hissy fit in the casino. Bernanke found that out in the spring of 2013, and Yellen three times now——in October 2014, August 2015 and January-February 2016.
But unlike the last two bubble cycles, where our monetary central planners did manage to ratchet the money market rate back up to the 6% and 5% range, by 2000 and 2007, respectively, this time an even more obtuse posse of Keynesian true believers rode the zero bound right to the end of capitalism’s natural recovery cycle.
Accordingly, the casinos are populated with financial time bombs like never before. Worse still, the central bankers are now so utterly lost and confused that they are all thronging toward the one thing that will ignite these time bombs in a fiery denouement.
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