Dazed and confused

Manufactured angst over when — or if — the Federal Reserve will raise interest rates after its seven-year policy of keeping them at zero overlooks the fact that actions speak louder than overanalyzed words.

ZIRP began as a so-called “emergency measure” to inject liquidity into the system (read: big banks) and stabilize the economy (read: big banks and capital markets). Rather than raise rates after a year or two, which would have avoided the speculative asset bubbles that sprouted since, the Fed continued its policy while “courageous” Ben Bernanke and successor Janet Yellen dished out doublespeak over the desire to raise rates one day.

I’ve written it before in the Trends Journal: Central-bank subsidies of the banking system (or “bankism”), via the recent overreaching power grab of the Federal Reserve — and by competitive necessity, other elite central-bank entities — have artificially provided the appearance of financial stability, but not the reality.

Still, there is prevailing consensus among Wall Street analysts that the Federal Reserve wants to raise rates. That it hasn’t yet is considered more an issue of timing, not preference. This notion infers that the Fed’s policy has achieved at least tepid stability — but it hasn’t. If a system needs life support to avoid a “code black,” it’s not stabilized.


The Fed has offered a gamut of benchmarks — from inflation to unemployment to the price of tea (or value of the yuan) in China — as necessary factors for rate hikes. Indeed, the goalposts of such hikes are in constant flux. If the Fed were running the World Cup, no goals would be scored. No footballer would be able to locate them.

There are two ways of viewing the Fed’s reluctance to raise rates:

• The Fed doesn’t believe the national or global economies are ready for such “extreme” action. This would mean the Fed, and certain economists and politicians, believe the policies are aiding general economies vs. big-bank CEOs.
• The Fed’s artisanal money policy since the financial crisis erupted is a big, fat seven-year failure. Pumping money into the financial and banking system was supposed to elevate liquidity and resiliency. It was supposed to trickle down to the masses, loosen small-business credit and invoke real, sustainable growth. It didn’t. The system would collapse absent Fed and other global-central-bank largesse.  

If you consider this latter (and real) reason, the Fed’s paralysis makes perfect sense. The critical period for banks’ liquidity needs is not over. Markets and large financial institutions are unable to function without the aid of no-cost money being funneled through the biggest banks, as well as other quantitative-easing perks, including the Fed’s stash of about $2.5 trillion in Treasury debt and about $1.5 trillion in big banks’ mortgage-related securities. 

This isn’t just a US phenomenon.

The European Central Bank remains on a €60 billion-per-month securities-buying binge, including purchasing securities issued by big European banks. When it’s all done, more than €3 trillion of securities will have been paid for out of fabricated money injected into big financial players’ betting-chip stacks.

The Bank of Japan is on pace for a $6.6 billion (80 trillion yen) annual debt-buying spree. The People’s Bank of China has injected $48 billion into the China Development Bank and $45 billion into the Export-Import Bank of China, which, though not officially called quantitative easing, smacks of manufactured liquidity.

The Fed has played instigator, collaborator and hostage of the stock, bond and corporate loan bubbles that its policies fueled. The “supreme leader” of global central banks catalyzed a worldwide race to zero-interest rates, devaluation of currencies relative to the dollar, and an international central-bank competition to concoct creative ways of fabricating “money” that serves little productive purpose.


Due to its unnatural and unprecedented nature, the result of this monetary-policy game has been elevated volatility (which I predicted in Trends Journal earlier this year.) The VIX, or volatility index, rose 200 percent to a 6½-year high in August; that’s when China’s stock market plummeted as speculators fled. Though volatility levels retreated in October, the volatility of volatility signals more chaos ahead.

Entities from the International Monetary Fund to the Bank for International Settlements have repeatedly warned that markets remain dependent on zero interest-rate policies or variations of them. They are not driven by organic productivity or growth, but by central-bank-related activity and rumors. 

The Federal Reserve has exacerbated the cheap-money-addiction and rate-debate hysteria through obtuse and often impromptu messaging, intermittently releasing various disparate statements to tease or test the market waters.   


Take New York Fed President and former Goldman Sachs Chief Economist Bill Dudley’s flip-flop on the matter between August and September. 

In Dudley’s words on August 26, “At this moment, the decision to begin the normalization process at the September [Federal Open Market Committee]meeting seems less compelling to me than it did several weeks ago. But normalization could become more compelling by the time of the meeting as we get additional information.”

In other words, Dudley had no clue. 

Really, timing is predicated on being certain that markets wouldn’t tank and liquidity wouldn’t die with a rate hike. Higher US interest rates and an even stronger dollar also would impinge on other countries’ trade revenues and ability to repay dollar-denominated debt that would lead to worldwide defaults.

Before Asian markets nosedived in August, 82 percent of economists surveyed by The Wall Street Journal predicted the first Fed rate hike would come in September; 13 percent forecast December. The Wall Street Journal did not ask my opinion, but in these pages and elsewhere, I stated that I did not believe the Fed would raise rates in September. 

Why? The August tumult in global stock markets ensured the Fed would not hike rates.

With interdependence among central banks and markets, the Fed can’t risk hurting co-dependent banks or unleashing global or domestic market meltdowns, particularly as other central banks remain in intervention and money-printing mode. 

To artificially stimulate its markets and banks, the People’s Bank of China, having devalued the yuan three times in three days in August, chose to liquefy its market by
further reducing reserve requirements for Chinese banks. China also imposed stock-selling restrictions and established a fund to buy local stock to subsidize its stock market (that was China’s version of subsidized share buybacks.)

Among other measures, the People’s Bank of China also cut rates to inject liquidity into its banking sector under the guise of stimulating the economy, adopting the Fed and European Central Bank’s logic.

After Japan’s Nikkei dropped 5.42 percent on August 17 to its lowest level since August 7, 2006, the Bank of Japan injected the third of three rounds of aid into the market, or 1.2 trillion yen (US $10.5 billion; €7.8 billion). These as-needed moves are more the norm than the exception.

To curtail market “contagion” in the Eurozone, European Central Bank head and former Goldman Sachs Managing Director and Vice Chairman Mario Draghi reiterated his commitment to the round of quantitative easing that began this March. The ECB bought €63 billion of debt during September. 

Meanwhile, real European growth remains anemic. Youth unemployment is near all-time highs. Greece must pay for more austerity-linked debt with money it doesn’t have. And the refugee crisis continues. All could be helped with the €60 billion per month serving banks and capital-market speculators. 

The phenomenon of Fed-centric rate-hike speculation is further fueled by extensive media debate surrounding Federal Open Market Committee meetings and announcements. Yet the financial significance of, say, a 25 basis point rate hike is miniscule. The psychological or market reaction to the idea of the Fed’s printing press shutting down is far greater. The notion that rates could return to anything reflecting a historical average of 4 to 6 percent for US government debt freaks out banks and speculators the same way a cocaine addict gets freaked when his dealer is busted.

Meanwhile, stock markets in particular remain propped up by fabricated money that has caused historic levels of corporate buybacks and the self-fulfilling behavior of stocks rising because rates are so low there’s nowhere else to obtain a quick return on capital. For the same reason, commodity and metals markets remain soft.


But the facade of financial health is increasingly cracking.    TJ  

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