Posted on 08/09/2019 5:11:55 PM PDT by amorphous
There is immense confusion surrounding July’s Federal Reserve meeting and the rather insane aftermath that has been spurred on in the trade war. The Fed’s latest rate decision of a mere .25 bps cut was seen as “disappointing”, this was then followed by Jerome Powell’s public statements making it clear that this was only a mid-year “adjustment”, and that it was not the beginning of a rate cutting cycle and certainly not the beginning of renewed QE. This shocked the investment world, which was expecting far more accommodation from the Fed after 7 months of built up expectations that the central bank was about to unleash the stimulus punch bowl again.
The question that very few people are asking, though, is why didn’t they? What is stopping them? Everyone from daytraders to the president wants them to do it, yet they continue to keep liquidity conditions tight. In fact, they even dumped another $36 billion in assets from their balance sheet in July. Why?
Keep in mind that the latest Fed decision does two things: First, it is an indirect admission that the U.S. is entering recession territory. Second, it is also an admission that the Fed doesn’t plan to do anything about it, at least, not until it’s too late. In other words, all those people who thought the central bank was about to kick the can on the current crash in economic fundamentals were mistaken. As I have been predicting for many months, the Fed has no intention of trying to delay the effects of negative conditions any longer. The crash is now a reality that the mainstream will have to accept.
In order to understand why the Fed is withholding liquidity at this time instead of opening the floodgates, it is important to understand central banker motives. First and foremost, the assumption that the Fed is always concerned with keeping the financial system afloat is incorrect. The Fed has allowed the U.S. system to crash multiple times in its 106 year history. In truth, the Fed has created bubble after massive bubble through stimulus and low interest rates, and then crashed these bubbles using liquidity tightening policies.
The latest example of this is the most egregious – The Everything Bubble conjured in the past decade is the largest and most destructive bubble ever devised. To find anything similar, we have to go all the way back to the onset of the Great Depression.
In 1922-1923, the Fed instituted what was then called the Open Market Investment Committee (later replaced by the Federal Open Market Committee); what some people today might call a “Plunge Protection Team”. The public rationale for this development was to help the Fed enact “monetary policy” which would allow them to stabilize the economy and markets after the recession/depression of 1920-1921. Using the OMIC, the Fed directly influenced the economy, stock markets and credit conditions by artificially lowering interest rates and purchasing government securities and other assets throughout the 1920s.
At first this kind of monetary interventionism in the economy seemed to be working spectacularly. From 1924 onward, the Dow Jones climbed relentlessly higher and recessionary conditions, at least on the surface, seemed to disappear. There were even assertions by economists of the day that recessions and depressions were a “thing of the past”, as were stock market crashes. Sound familiar…?
At the time, short term, long term and overnight lending rates remained relatively low in comparison to the high rates exhibited during the 1920 depression. The Fed stimulated through open market purchases all the way up to 1928. It was then that a sudden and significant shift occurred. The Fed began to deliberately tighten conditions in order to deflate the bubble they created. The Fed hiked interest rates and sold off assets from their balance sheet.
The Fed’s own historic accounts are muddy on this event, yet they do admit that the goal of the central bank was to restrict liquidity in order to disrupt credit conditions that were allowing speculation to thrive. To this day Fed officials act as though they are unaware that their efforts to stimulate actually created financial bubbles. And to this day, they still act as though they are unaware that tightening policy into economic weakness has a tendency to cause those bubbles to implode.
I say “into economic weakness” based on some of the most important underlying indicators of the day. For example, farm mortgage foreclosures increased dramatically in the mid-to-late 1920’s; farming being a huge part of the U.S. economy at that time. Also, outstanding mortgage debt grew by eight times from 1920 to 1929, and consumer debt skyrocketed. The “Roaring 20s” were very prosperous for around the top 5% of Americans, while 70% remained in financial hardship. Again, does this sound familiar?
I find it hard to believe that the Fed is oblivious to the consequences of these actions. Former Fed chairman Ben Bernanke openly admitted that the Fed caused the Great Depression through interest rate manipulation and asset purchases in an address in honor of Milton Friedman in 2002.
So, if they are aware that the actions they took in the 1920s triggered the Great Depression, why are they following nearly the exact same pattern today?
Currently, most major fundamental indicators are showing sharp declines in the U.S. economy. There is no getting around this. The Fed has ignored all of these warnings for the past two years and tightened policy despite them. Whether or not someone agrees with the Fed’s actions is not really relevant; the point remains that the Fed has done all this before, and the result has always been the same – A historic crash.
The rate hikes and asset selling by the Fed in 1928 and early 1929 led directly to the “Black Monday” equities crash. Keep in mind the pattern here: The Fed stimulated through monetary intervention just after the recession/depression of 1920-1921. Around 8-9 years later the Fed tightens liquidity as the fundamentals are already faltering. A year to two years after that stocks finally realize what is happening and they crash.
Today, the Fed has stimulated a historic bubble in the decade after the recession of 2008/2009. This has mostly translated to a vast stock market bubble but very little improvement anywhere else in the economy (unless you actually believe the fraudulent numbers coming from the Bureau of Labor Statistics or the Fed’s GDP calculations). As economic fundamentals including housing sales, auto sales, manufacturing PMI etc. began to decline more aggressively, the Fed started to tighten liquidity. They also raised interest rates as corporate and consumer debt was hitting all-time highs, just as they did in the late 1920’s.
In the aftermath of the Great Depression banking conglomerates were able to buy up considerable hard assets for pennies on the dollar while at the same time consolidating political power. I suggest that the Fed and most central banks deliberately create financial bubbles and then deliberately pop them through tightening in order to engineer economic crashes. This allows them to absorb hard assets cheaply while also increasing their social influence. It is no coincidence that after every major financial crisis the top 1% increase their wealth by a wide margin while everyone else grows poorer.
That said, if we have established a pattern of behavior for the Federal Reserve, as well as a motive, then what happens next?
The Fed will continue to withhold stimulus measures until it is far too late to defuse crash conditions or to kick the can down the road. Jerome Powell told us this is exactly what they would do after July’s meeting. There are some analysts who refuse to believe that this will happen and that the Fed will be “forced” to introduce QE in the near term. This will only happen when the current crash in fundamentals hits its peak, and probably not until there is a sizable crash in stock markets (at least 20% if not more). The Fed will not be “forced” by market conditions to intervene early. They WANT a crash. This is the only explanation for the Fed’s decision and statements in July.
In the meantime, the trade war conveniently kicked into high gear only one day after the Fed broke the hearts of investors looking for an easy profit. The Fed’s minor “rate adjustment” and promise of no QE is all but forgotten as Donald Trump initiated new tariffs on China starting in September. China retaliated with a freeze on U.S. agricultural purchases, the U.S. labeled China a “currency manipulator” for the first time in 25 years, and China is now devaluing the Yuan (though not quite as much yet as many had feared they would).
As expected, the trade war circus has only escalated and there will be no end to it before the next U.S. election. It has also provided perfect cover for the actions of the Fed, and the current economic downturn is being consistently attributed to trade tension rather than the central bank’s policies.
Essentially what the Fed has done is create an economic time bomb, a sensitive explosive that could be set off by the slightest tremor. Any new geopolitical shock event could trigger this bomb. A No Deal Brexit, a shooting war in Iran, etc. The public will look to these events as the “cause” of the economic crisis, when it was actually the central bank that made it all possible.
Another interesting development has been the spike in gold and silver. As I predicted in my article ‘Gold Will Rise Even If The Fed Doesn’t Cut Interest Rates’ published in early July, the Fed has denied investors near zero interest rates and new QE in the near term, and precious metals jumped in price anyway. The dollar even bounced initially in response. Normally this would have caused a dive in metals but the dollar is not the only driver of gold. Market turmoil also causes price rallies in hedge commodities, and we have plenty of that now.
After the crash of 1929, the fed lowered rates substantially, but I would point out that this was no guarantee of stability. In fact, the Fed raised interest rates yet again only a few years later in 1932, which was a death blow to the economy. I would again assert that there are no guarantees that the Fed will not raise interest rates even in the midst of a dramatic downturn. They have done it before and they can do it again.
I would also point out that expectations of the Fed folding to White House pressure are misplaced. Powell has stated that he has no concerns of Trump attempting to fire him and would stay in his position regardless. Also, any attempt by Trump to enforce currency devaluation through a declaration of national emergency could simply be denied by the Fed. This kind of battle between the central bank and the president would lead to a collapse in faith in the U.S. ability to pay off government debt as well as the eventual loss of the dollar’s world reserve status, but that is a subject that must be examined in depth in a future article.
“The Fed is just another typical government agency. Staffed with people creating the very problems they’re supposed to prevent and arrogant enough to not realize it.”
AAAAAAAAAAmen, AAAAAAAAAAAAAmen, AAAAAAAAAAAmen, Amen, Amen
I agree that the direct effect on our real economy from the Chinese economy imploding is not overly significant from a trade balance point of view (South Korea, and other Asian economies, including Australia will take a bigger hit).
Big slowdowns in other trading partners would further reduce our exports.
Additionally, there could be effects from shortages of some products or components, if Chinese suppliers closed shop suddenly in bankruptcies.
Also, American companies with investments or sales in China, would take some losses or slowdowns, reducing corporate earnings somewhat. Like our direct trade with China, it would be a small effect on overall corporate earnings, but would be increased to some degree by the secondary effects of other countries slowing down as a result.
The big potential effect could be financial. Banks with a lot of exposure to Chinese debt might fail, and others that survive would have less available to lend. Money could dry up for new investment, and possibly be withdrawn from marginal businesses who need loans to fund their ongoing operations (a common practice).
Because China is a big economy, and they are so extremely loaded with debt and fraudulent accounting, the down draft from the financial industry having to write off most Chinese debt would be significant. Money would dry up (Governments would jump in with liquidity, interest rate cuts and bailouts).
On the other hand, there would be some upside effect of American producers jumping in to fill shortages from the withdrawal of Chinese producers.
So there is a range of potential outcomes, but the worst case includes a global financial crisis and recession. Not the end of the world, not a Great Depression, but still a significant drag. Personally, I feel it would be a cost worth paying, compared to the future cost of war with a Communist superpower.
Roger that.
Likewise American industry, which tariffs were intended to help, has taken a hit. For example, RV manufactures with an overall economic impact on the US economy of $114 billion, supporting nearly 600,000 jobs, contributing more than $32 billion in wages, and paying more than $12 billion in federal, state, and local taxes, is really hurting too.
Tariffs Promise Long-Term Damage to Ag, Also Hurting RV and Metal Makers
~ ~ ~
Slapping tariffs on imports was a bad move on the Trump Administration's part, IMO. I totally agree we've gone off the rails with importing, but there are better ways of turning this around and bring manufacturing back to the US.
While only certain sectors are feeling the pain now, everyone is going to feel it soon, and probably just before next year's elections.
If Trump loses in 2020, where does that leave us?
“The ONLY reason that “...America would be destroyed, if we had to go through that today”, is because of the spoiled, cozzetted, and coddled SNOWFLAKES that are around today!”
They can’t be like my cousins and I were, we grew up walking behind a plow, chopping wood with an axe or pulling a long crosscut saw, hoeing weeds out of the cotton, picking cotton, feeding the livestock etc. They could lay down the danged cell phone and get some exercise though.
Interesting theory. Should be easy to test.
What hard assets were absorbed by central bankers after the 2008 crash?
I would have just said assets, since small and medium business and family farm foreclosures rarely make the news, but if it's hard assets we're interested in, I'd start with records from auction houses/services during that period.
Below is a short burp from Wiki;
Consequences
While the collapse of large financial institutions was prevented by the bailout of banks by national governments, stock markets still dropped worldwide. In many areas, the housing market also suffered, resulting in evictions, foreclosures, and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the Great Recession of 2008–2012 and contributing to the European sovereign-debt crisis.[28][29] The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP Paribas terminated withdrawals from three funds citing "a complete evaporation of liquidity".[30]
The bursting of the US housing bubble, which peaked at the end of 2006,[31][32] caused the values of securities tied to US real estate pricing to plummet, damaging financial institutions globally.[33] The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for subprime borrowers; overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate; questionable trading practices on behalf of both buyers and sellers; compensation structures that prioritize short-term deal flow over long-term value creation; and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making.[34][35][36] Questions regarding bank solvency, declines in credit availability, and damaged investor confidence affected global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.[37] Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts.[38] In the US, Congress passed the American Recovery and Reinvestment Act of 2009.
https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008
~ ~ ~
Who owns a lot of the rental properties now?
Blackstone is now 'the largest owner of real estate in the world'
https://www.businessinsider.de/blackstone-is-largest-owner-of-real-estate-2015-11/?op=1&r=US&IR=T
I earned $0.03 lb for picking cotton, $0.75 day for feeding 65 head of cattle thru the winter. Chopped wood for free, just to stay warm.
Well, we know who the Fed Board of Governors were at the time.
Have any of them accumulated massive wealth since the crash by buying distressed assets?
Seems like some pretty basic research one would do before publishing this theory.
Blackstone is now 'the largest owner of real estate in the world'
Not sure I see the relevance. Blackstone was founded by Stephen Schwartzman in 1985 and I don't think he ever had anything to do with the central bank.
My family stories, though very real and factual, are just that: MY FAMILY STORIES; hence anecdotal and private, so I shan't share those, even though one is pretty funny!
But the BEST thing that they knew was...HOW TO INTERACT, FACE TO FACE WITH OTHERS!
Though nothing is 100%, there are probably more exceptions than we realize,many of those in younger generations have the maturity level of a 2 year old and also about the same level of knowledge of EVERYTHING!
https://corpwatch.org/article/blackstone-group-buys-houses-bulk-profit-mortgage-crisis
Excerpt:
"You can't compete with a company that's betting on speculative future value when they're playing with cash," says Alston. "It's almost like they planned this."
"In hindsight, it's clear that the Great Recession fueled a terrific wealth and asset transfer away from ordinary Americans and to financial institutions. During that crisis, Americans lost trillions of dollars of household wealth when housing prices crashed, while banks seized about five million homes. But what's just beginning to emerge is how, as in the recession years, the recovery itself continues to drive the process of transferring wealth and power from the bottom to the top."
#74
Whoa, whoa, whoa!
The author said central banks created booms and busts to enrich themselves.
None of those people or organizations are part of the Fed and none of them get a vote on monetary policy.
"Central bank" isn't the same as any random rich guy.
Do the rich and powerful come out of these things better than most? Absolutely, but where's the evidence of the Fed members enriching themselves?
You’re just a weird conspiracy nutter; looking to blame those whom you obviously see as some kind of “enemy”/ have a bias against. And you just don’t know enough nor have the facts with which to prove your theories. Hence you post stuff from Wiki and others’ words to shore up what can’t be shored up, since especially this bit is stupid opinion!
Has anyone ever held a position at a big bank or investment firm who later held a position at the Fed or Treasury? Who owns the Fed? Who does the Fed work for? Are Fed chairpersons really peons/automatons. How much does the Fed chairman make in a year? Who was the president who signed the Federal Reserve Act? When was it passed? What did he later say about what he had done? Did anyone who owns/controls the Fed become wealthier during the financial crisis of '08? If not wealthier, after helping to cause the crisis did they escape unscathed? Who was bailed out? What word do 'banks' and 'central banks' have in common? What do they both handle? What do they do with what they both handle?
Certainly. But you probably knew that.
Who owns the Fed? Who does the Fed work for?
The Federal Reserve Board is appointed by the US government and the board members' salaries are set by the government, so you could say that the taxpayers own it.
The network of regional Federal Reserve Banks are owned by the federally chartered banks in their region but all operating profits from the entire system go to the US Treasury. The "owning" banks get a fixed dividend on the capital they contribute but earn no profits.
But you probably knew that.
Are Fed chairpersons really peons/automatons.
Jerome Powell is the current chairman and Trump certainly doesn't think he's an automaton.
But you probably knew that.
How much does the Fed chairman make in a year?
The 2019 salary, as set by Congress, is $203,500.
But you probably knew that.
Who was the president who signed the Federal Reserve Act? When was it passed?
The Federal Reserve Act of 1913 was signed into law by Woodrow Wilson.
But...never mind.
What did he later say about what he had done?
Probably lots of things. Is there something in particular that you want to discuss?
Did anyone who owns/controls the Fed become wealthier during the financial crisis of '08?
Don't know. The author of this article implies that they must have but offers zero evidence
If not wealthier, after helping to cause the crisis did they escape unscathed?
Not entirely. They suffered some reputational damage.
Who was bailed out?
Lots of financial institutions as well as parts of the auto industry.
What word do 'banks' and 'central banks' have in common?
Banks.
What do they both handle? What do they do with what they both handle?
I assume you're talking about money?
They both are concerned with it but do very different things. Most banks hold and lend money. The central bank primarily decides monetary policy.
Do you have some point you would like to make or do you think that if you just ask enough inane questions people will think there must be something to your conspiracy theory?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.