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Posted on 08/12/2011 9:33:33 PM PDT by sickoflibs
This week's wild actions on Wall Street should serve as a stark reminder that few investors have any clue as to what is really going on beneath the surface of America's troubled economy. But this week did bring startling clarity on at least one front. In its August policy statement the Federal Reserve took the highly unusual step of putting a specific time frame for the continuation of its near zero interest rate policy.
Moving past the previously uncertain pronouncements that they would "keep interest rates low for an extended period," the Fed now tells us that rates will not budge from rock bottom for at least two years. Although the markets rallied on the news (at least for a few minutes) in reality the policy will inflict untold harm on the U.S. economy. The move was so dangerous and misguided that three members of the Fed's Open Market Committee actually voted against it. This level of dissent within the Fed hasn't been seen for years.
Many economists have short-sightedly concluded that ultra low interest rates are a sure fire way to spur economic growth. The easier and cheaper it is to borrow, they argue, the more likely business and consumers are to spend. And because spending spurs growth, in their calculation, low rates are always good. But, as is typical, they have it backwards.
I believe that ultra-low interest rates are among the biggest impediments currently preventing genuine economic growth in the US economy. By committing to keep them near zero for the next two years, the Fed has actually lengthened the time Americans will now have to wait before a real recovery begins. Low rates are the root cause of the misallocation of resources that define the modern American economy. As a direct result, Americans borrow, consume, and speculate too much, while we save, produce, and invest too little.
It may come as a shock to some, but just like everything else in a free market, interest rate levels are best determined by the freely interacting forces of supply and demand. In the case of interest rates, the determinative factors should be the supply of savings available to lend and the demand for money by people and business who want to borrow. Many of the beneficial elements of market determined rates are explained in my book How an Economy Grows and Why it Crashes. But allowing the government to determine interest rates as a matter of policy creates a number of distortions.
It was bad enough that the Fed held rates far too low, but at least a fig leaf of uncertainty kept the most brazen speculators in partial paralysis. But by specifically telegraphing policy, the Fed has now given cover to the most parasitic elements of the financial sector to undertake transactions that offer no economic benefit to the nation. Specifically, it will simply encourage banks to borrow money at zero percent from the Fed, and then use significant leverage to buy low yielding treasuries at 2 to 4 percent. The result is a banker's dream: guaranteed low risk profit. In other words it will encourage banks to lend to the government, which already borrows too much, and not lend to private borrowers, whose activity could actually benefit the economy.
This reckless policy, designed to facilitate government spending and appease Wall Street financiers, will continue to starve Main Street of the capital it needs to make real productivity-enhancing investments. American investment capital will continue to flow abroad, denying local business the means to expand and hire. It also destroys interest rates paid to holders of bank savings deposits which traditionally had been a financial pillar of retirees. In addition, such an inflationary policy drives real wages lower, robbing Americans of their purchasing power. The consequence is a dollar in free-fall, dragging down with it the standard of living of average Americans.
Until interest rates are allowed to rise to appropriate levels, more resources will be misallocated, additional jobs will be lost, government spending and deficits will continue to grow, the dollar will keep falling, consumer prices will keep rising, and the government will keep blaming our problems on external factors beyond its control. As the old adage goes, "insanity is doing the same thing over and over again and expecting different results."
If you realize both parties in Washington think that our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus that has some magic easy cure for the economy; someone who is going to get elected in Washington and fix everything just by cutting your taxes, investing (more government spending) a few trillion more we don't have and will never have, and who will just command some countries to lower their prices and others to raise their prices all to suit your best interests, then this list is not for you.
You can read past posts by clicking on : schifflist , I try to tag all relevant threads with the keyword : schifflist.
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The Austrian Economics School’s Commandments plus :From : link
1) You cannot spend your way out of a recession
2) You cannot regulate the economy into oblivion and expect it to function
3) You cannot tax people and businesses to the point of near slavery and expect them to keep producing
4) You cannot create an abundance of money out of thin air without making all that paper worthless
5) The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever
6) You cannot live beyond your means indefinitely
7) The economy must actually produce something others are willing to buy
8) Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: “First, do no harm!”
9) Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10) Gold is God’s money.
Add mine:
1) Businesses don't hire workers just because of demand for products or services, they hire because it makes them money. Sorry to have to state the obvious.
2) Government spending without taxing is still redistribution
3) Taking one man's money and giving it to another is not a job.
4) Paul Krugman and Bernake have been wrong about everything, as well as the other best and brightest Keynesian's who have been fixing our economy for over a decade.
5) Republicans in the minority (esp out of the White House) act like Republicans, in the majority they act like Democrats .
Equity bubble rules:
1)If something goes up too fast, it is going down faster,
2) By the time it looks like everybody is getting rich, it’s too late, stay out!
3) To get rich you have to get in early start of recovery and get out at the first really 'bad' news, and ignore the experts that claim that they will stop the next crash(our buddy Bernake.).
4) Don't invest money you will probably need, or worse money you don't really have.
Recent reports are that banks, businesses and private individuals are sitting on mountains of cash that is not being spent. What’s with this?
ping
ping
It’s called SAVINGS....
The low interest rates are bad in other ways too. Who wants to take risk and make a loan for almost nothing? It might be better to just sit on cash and collect from the IOR program and wait until rates rise enough to make loaning money more worth while.
Are you kidding with this question??? Where have you been?
Too much government and no confidence in our leaders.
Oh, and corporate profits are at record levels, but that's being done by eliminating jobs.
No one is going to move not knowing what might lurk around the next corner.
As soon as business senses that the Gov't is on their side...that not only will they will Gov't not throw up some heinous new rule but will move to LOOSEN regs on their behalf money and jobs will flow.
It's really that simple.
Consumer spending accounts for 2/3 of GDP- By keeping the rates low this will hopefully continue. Retail sales were up last month that accounted for the 400+ Dow Jones climb on Thursday.
Consumer spending accounts for 2/3 of GDP- By keeping the rates low this will hopefully continue. Retail sales were up last month that accounted for the 400+ Dow Jones climb on Thursday.
I’m talking capital formation, not consumption.
&/or are there other skewing factors?
Funny. Your equity bubble rules apply to all bubbles... including gold.
Please add me to this ping list.
Currently, corporations are sitting atop mountains of capital. An LA Times article recently reported that they are investing and spending it in countries where consumers have the cash to buy. By lowering interest rates US consumers are able to make the household purchases, buy homes etc. This is a point that Schiff doesn’t appear to take into account.
He portrays these people as anti patriotic and greedy if they don't volunteer to give their money to him to be thrown down the nearest sewer.
By asking this question, it sounds as if you might agree. This is basic American capitalism and you should know this already. Do we smell a troll?
They know that the deflationary forces aren’t done yet.
In a deflation, cash is King. The movement of money flow, called velocity, slows, and people sit on cash because there doesn’t appear to be a better place to keep it. Low interest rates also encourage this. And low yields on UST.
Just like in 2008, staying is cash is wise IF another market crash is on the horizon. Without the next QR3 being certain, people are staying OUT of the market and IN cash, to be safe.
Once the next QE is in swing, the inflationary forces will be let lose once again, grinding up the little people with less and less room to be able to support themselves.
Until the next deflationary scare.
Unless the US dollar collapses, then all bets are off.
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