"Everything you need to know about gold"
ALL HAIL THE FED!
As investors continue to gobble up stocks and the dollar prices of most assets continue to climb, it would appear that all is well. Concerns about weakening economic activity and recession have been moved to the back burner. Now, the focus is squarely on inflation.
The Fed always does its job. So, just what is their job? And, how well do they perform?
For the answer to the first question, one statement will suffice: The Fed’s job is to create money; at all times and in all seasons.
The Federal Reserve Bank creates money for the US government to spend and for banks to loan. It is a partnership that dates back more than one hundred years.
EVERYTHING IS GOING LOWER
Nothing epitomizes cheap money more than the lofty level of bond prices and their corresponding low yields. The old adage of “never chase yield” seems to have been pushed aside in favor of “buy more when the interest rate approaches zero”.
Yield-hungry investors think they are being conservative, though. Some of that reasoning is due to the obvious volatility of the stock market; especially during the first twenty years of this century.
BONDS BIGGER RISK THAN STOCKS
Even before the latest stock market dump, bonds could be considered a bigger risk than stocks. The risk is greater now than it was in 2007-08; and probably more so than at any other time in history.
FED-WATCHING IS OVERHYPED
If you are one of those who is looking for clues from the Federal Reserve as to the direction of the markets, forget it. You are too late.
Too many people think that the latest Fed minutes will give them some indication of what to expect from the markets. Those same people think that the Fed actually has a strategy and that they are “managing the economy” with the intention of pursuing what is best financially and economically for the country.
Wake up! The Federal Reserve does not exist and operate with the intention of acting in our best interests financially, economically, or in any other way.
The term “too big to fail” refers to certain businesses whose viability is considered critical to the survival and effective operation of our economic system. These very large businesses are designated as too big to fail because their failure or bankruptcy would have disastrous consequences on the overall economy.
The potential effects are considered to be severe enough, and the costs so unbelievably large, that these businesses are afforded special attention and consideration in the form of bailouts and protection from creditors.
FED INFLATION HAS LESS IMPACT
The chart below shows the ratio of the gold price to the monetary base for the past one hundred years.
The monetary base used in the chart is calculated by the St. Louis Federal Reserve and the following definition is from their website:
“The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.” (source)
When government (or a President) claims that Federal Reserve policy is hurting the economy, they are either grandstanding, or are ignorant about the function and purpose of the Federal Reserve.
No one wants to see the economy suffer, anymore than they want to see a plague, or infectious disease, affect millions of people. And no President wants to be in office to preside over a recession or depression. But neither can they exercise any power or influence regarding the implementation of Fed policy; particularly when it comes to interest rates.
ALL HAIL THE FED!
The United States Federal Reserve Bank has left a century-long trail of damage in its wake. A misguided attempt to manage the stages (growth, prosperity, recession, depression) of the economic cycle has led to nearly complete destruction in the value of our money.
The Federal Reserve caused the Depression of the 1930s and worsened its effects. Their actions also led directly to the catastrophic events we experienced in 2007-08 and have made us more vulnerable than ever before to calamitous events which will set us back decades in our economic and financial progress.
The new Chairman of the Federal Reserve, Jerome Powell, is personable, likable, candid, and direct. But he cannot and will not preside over any changes that will have lasting positive impact.
The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.
And their actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.
Yet they are not totally independent. In fact, they have a very cozy relationship with the United States Treasury. That relationship is the reason they are allowed to continue to fail in their attempt to manage the economic cycle. You can learn about that relationship in my new book ALL HAIL THE FED!
Whatever your understanding is about the Federal Reserve, it will change after reading this book…
With each succeeding day, obsession with the Federal Reserve continues. And the obsession is a good indicator of just how misinformed most of us are.
This is true with respect to various policies, statements, and actions; and includes comments made by board members, either in speeches or interviews. But it is also true regarding purpose and motivation.
To a large extent, it is a matter of perception. Some, maybe most, people see the Fed as the lead driver. There is an assumed aura of authority and control. On all matters economic, we look to them for direction. But where are they taking us?
FED’S 2% INFLATION TARGET
Within the Federal Reserve sometime in 1996, a discussion took place among FOMC (Federal Open Market Committee) members regarding the subject of inflation targeting. Federal Reserve District Governor (San Francisco) Janet Yellen believed that a little inflation “greases the wheels” of the labor market. Her preferred “target” was 2%. She asked Chairman (at the time) Alan Greenspan his preference.
The Chairman replied. “I would say the number is zero, if inflation is properly measured.”
On the surface, it might seem that Chairman Greenspan is indicating that no inflation is preferable to “a little” inflation. But that is contradictory to the actual mechanics of ongoing monetary action by the Fed since its inception in 1913.
The Federal Reserve creates inflation through ongoing expansion of the supply of money and credit. Our fractional-reserve banking system is intrinsically inflationary – at the very least. And what did he mean by the parenthetical comment, “if inflation is properly measured”.
More likely, he was adopting the role of devil’s advocate and trying to promote further, active discussion among FOMC members. The results seem to indicate this.
In meetings the next day, Greenspan summarized the discussion: “We have now all agreed on 2 percent.” The Federal Reserve now had an internally stated, unofficial inflation target. Their own “guiding light”. But they didn’t want to talk about it publicly. At least Greenspan didn’t.
He termed their discussion “highly confidential (in) nature” and said: “I will tell you that if the 2 percent inflation figure gets out of this room, its going to create more problems for us than I think any of you might anticipate.”
Ben Bernanke didn’t share Greenspan’s reservations. He wanted everyone to know that the Fed’s inflation target was 2%. But why?
One possibility is the need for justification.
Actions by the Federal Reserve are historically unclear as to logic and purpose. That allows for a modicum of privacy and the false descriptive of an independent Fed. It also suggests an aura of ‘special dispensation’ surrounding the Fed.
By late 2010, however, those notions were unravelling quickly as people wallowed in the after effects of the financial crises of 2007-08. Mr. Bernanke and his fellow practitioners of monetary medicine were seen as ineffective, at best, and appeared as if they did not know what they were doing.
Action was, in effect, demanded. And they were not afraid to pull the trigger. But they needed a clear, publicly observable target. How does anyone know you hit the target if they don’t know what you are aiming at?
Having a clearly acknowledged target changes the focus. Judgment is restricted to the new area of focus. Did you hit the target or didn’t you?
This presumes that the target is justified, of course. And if an inflation target is justified, why 2%? Why not a lower number? Or any other number? In truth, it probably doesn’t make any difference.
From the Fed’s perspective, it gives them a license to openly discharge their firearms in the public square. If they miss, they can just reload and fire again.
Should they happen to hit the target, they can either maintain their current posture, or tweak it accordingly so as not to overshoot in the future.
But they will never “hit” their target. Especially this one. Why not?
Because it is a moving target, comprised of moving parts. And it is the result of the Fed’s own previous actions.
There is only one cause of inflation: government. The term government also includes central banks, especially the US Federal Reserve Bank.
What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation. The “increase in the general level of prices for goods and services” is the result of the inflation that was already created. …Kelsey Williams
Bernanke pushed until he got his way. A formal, precise inflation target rate of 2% was adopted at the FOMC meeting on January 24, 2012.
Five years later…
HEADLINE: The Fed’s Janet Yellen could use some target practice…
Quote: Ever since the Federal Reserve adopted an explicit inflation target of 2% in 2012, the central bank has had limited success in hitting it. Only once, in fact, in the months between April 2012 and today, did the year-over-year increase in the personal consumption expenditures (PCE) price index breach 2%. …MarketWatch/Caroline Baum 12July2017
That shouldn’t be a surprise given that it’s a moving target. But there is more to it than that.
Right now, the inability to hit the target serves as the Fed’s perfect excuse for not acting more decisively. This is especially true with respect to raising interest rates. In addition, Ms. Yellen is afraid to do anything. Here’s why.
The bigger risk to the economy and financial stability is another credit collapse. And they can’t claim ignorance as they did the last time. They know its coming. They just don’t know when.
The levels of debt, the convoluted intricacies of the derivatives market, the interwoven relationships within the shadow banking system are all at hugely more precarious tipping points than ten years ago.
And it is the Fed’s own inability to hit the 2% inflation target that is warning them.
Think of all the hundreds of billions of dollars that went into saving the system from collapse before. And then force feeding the money drug into the patient for another nine years.
The problem is that all of the beneficiaries (i.e patients) of the Fed’s assistance are now hard-core addicts. If the Fed tries to raise rates they could very easily trigger another collapse much worse than before.
The Fed continues to look for the effects of all of those hundreds of billions of dollars to show up in the ‘rate’ of inflation. Supposedly that would be a sign to them of improved economic activity and growth. That isn’t happening.
The reason is because most of the ‘help’ effects showed up in ever higher prices for financial assets (stocks and bonds) and real estate.
And all of those toxic assets (CDOs of every letter and color, and various other esoteric derivatives) have swollen in price to levels far beyond any reasonable value. In addition, far too many of them are resting quietly on the Fed’s balance sheet.
The Fed has actually blown another bubble much bigger than the previous one. Nothing fundamental has changed. The only difference is that the situation is worse than before. Now, out of fear, they are trying to steer a course between action and inaction.
The action, of course, is raising interest rates and offloading their own balance sheet. But their actions could trigger events similar to 2007-08. In which case the Fed’s image would forever be tainted. (I think this is more of a concern for Janet Yellen than her fellow board members.)
The inaction – doing nothing – is pretty much where things are currently. If the Fed maintains ZIRP (zero interest rate policy), the patient could overdose and slip into a coma.
The Fed’s 2% inflation target is an attempt to predict the effects of inflation. That’s impossible. It is also unwise as it reinforces the acceptance of a “little inflation” as normal, necessary. It isn’t.
A “little inflation” is why the U.S. dollar is worth ninety-eight percent less than in 1913 when the Federal Reserve originated.
(Read more about the Federal Reserve here
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!