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."
Ultra low rates remove the Fed’s ability to play with the market much.
To me, as a business major, that’s bad because they can no longer act like a regulator between depression and boom.
That’s essentially what Japan has done forever and it’s failed there and it’ll put us on a similar path.
Back to school purchases. Next month, not so much.
“By lowering interest rates US consumers are able to make the household purchases, buy homes etc.”
Not if they have a huge debt overhang and/or no job. We need tons of new investments here, right now, and we also need to ditch the additiction to consumption as a solution to all problems. That is what has gotten into this huge mess to were we cannot pay our bills.
Keynesian's don't get that. They can draw dividends and interest, or spend it on new plant. Obama doesn't want either one. He would rather hold it hostage with threats of taxation and regulation and brow beat them as non patriots because they don't want to fund another boondoggle shovel ready project.
If we feel we can make better returns by investing in new plant and employees, the money will flow out of accounts like honey. Otherwise we will make the prudent economic decision to remain miserly skinflints with our money in a mattress. Happy unemployment!
Keynesian = Epic Fail.
The present problem is Obama’s record spending- the $1T shovel-ready job that went nowhere and the public sector’s bloated costs caused primarily by unions to say nothing of the entitlement programs. If people don’t spend (invest) on goods and services, the economy will go into yet another recession. I think the Feds were smart- just this time, although global forces may alter the best laid plans.
“The present problem is Obama’s record spending- the $1T shovel-ready job that went nowhere and the public sector’s bloated costs caused primarily by unions to say nothing of the entitlement programs”
But that IS consumption. It makes no difference to the bottom line if we spend it or if Obama spends it for us. And the fiscal stimulus didn’t work, did it? That kind of tells me that it isn’t a AD problem, but an AS problem and ultra low interest rates don’t help that.
Peter Schiff is NO ECONOMIC GENIUS as he claims, and many of his predictions are totally bogus!
http://globaleconomicanalysis.blogspot.com/2009/01/peter-schiff-was-wrong.html ,
“ For one, Mike Shedlock of Mish’s Global Economic Trend Analysis gave an incredibly detailed review of Schiff’s track record in an article titled, “Peter Schiff was Wrong.” To get a little flavor of the piece, here is an excerpt:
12 Ways Schiff Was Wrong in 2008
•Wrong about hyperinflation
•Wrong about the dollar
•Wrong about commodities except for gold
•Wrong about foreign currencies except for the Yen
•Wrong about foreign equities
•Wrong in timing
•Wrong in risk management
•Wrong in buy and hold thesis
•Wrong on decoupling
•Wrong on China
•Wrong on US treasuries
•Wrong on interest rates, both foreign and domestic”
http://investingcaffeine.com/2009/09/07/the-emperor-schiff-has-no-clothes/
http://seekingalpha.com/article/106824-being-wrong-for-five-years-makes-peter-schiff-right-now
” Now, had you listened to Peter in 2002, 2003, 2004, 2005, 2006 or even 3/4 of 2007, you lost your shirt. Had you placed bets based on Schiff’s market calls, you lost everything you wagered.
The S&P (.INX) went from 1054 in May of 2002 (the date of the interview) to 1561 in Oct. 2007, a 48% gain and the Dow (.DJI) rose 40%.
Banking stocks, the primary victim of the housing bust, went up (JP Morgan (JPM) 36%, Bank of America (BAC) 41%, Wells Fargo (WFC) 39% , Wachovia (WB) 31% and American Express (AXP) 51%) during that time frame (dividends excluded which would dramatically add to results). “”
ECON 101
When you invest in the firm that is the economic competitor to your own family, and your family does poorly, and their competitor does well, and you KEEP investing in your family’s competitor, YOU ARE PUTTING YOUR FAMILY OUT OF WORK!
Schiff doesn’t invest a SINGLE PENNY in AMERICA!!!
pro-immigration and said that there are too many jobs in the US we NEED to let in immigrants???
Peter Schiff admits on camera that he has ZERO money investigated in American corporations or industry. If Peter Schiff refuses to invest in American companies, how can Peter Schiff say he is helping Americans keep their jobs?
This is SCHIFF in his own words!
PETER SCHIFF IS ACTIVELY INVESTING IN FOREIGN COMPETITOR NATIONS THAT ARE PUTTING AMERICANS OUT OF WORK!!!
Here is a link to his investment company and their business dealings from Google
http://www.google.com/search?sourceid=navclient&ie=UTF-8&rlz=1T4RNTN_enUS381US381&q=Schiff+%2b+pacific
http://blogs.courant.com/rick_green/2009/10/peter-schiff-arrives-give-me-m.html
Why do the Ron Paul guys support gay marriage?
http://www.queerty.com/ron-paul-on-gay-marriage-20071210/
http://www.schiffforsenate.com/index.php?q=news/constitutional-candidates-congress
Schiff’s own website endorses Adam Kokesh
http://www.youtube.com/watch?v=nDttx64zk4I
SCHIFF himself admits he believes the Iraq War is a QUAGMIRE in 2009!!
http://www.freespeechmonster.com/?p=103
Schiff has said this many times
http://peterschiffsays.com/defense.htm
Aug 7, 2009, Iraq is a quagmire
http://www.youtube.com/watch?v=P9t741ewbGA
Schiff blamed Iraq on bankers? Not on Saddam?
http://www.youtube.com/watch?v=zo81QDSuixk
What the Tea Parties are not telling you about Peter Schiff:
Libertarians need to infiltrate the GOP
VIDEO of Schiff saying just that!
http://www.youtube.com/watch?v=3ncLTFoTFa8
http://belowthebeltway.com/2009/06/02/peter-schiff-libertarians-need-to-infliltrate-the-gop/
http://www.facebook.com/note.php?note_id=110955225375
http://www.campaignforliberty.com/blog.php?view=19285
http://www.godlikeproductions.com/forum1/message808505/pg1
http://answers.yahoo.com/question/index?qid=20090707200009AAzSQfB
Peter Schiff admits on camera that he has ZERO money investigated in American corporations or industry. If Peter Schiff refuses to invest in American companies, how can Peter Schiff say he is helping Americans keep their jobs?
Peter Schiff repeating talking points of the lunatic left, listen yourself. He says in 2009 that Iraq is a QUAGMIRE when we already won!! He blames the war on bankers and whoever, and not a word about blaming it on terrorists! listen yourself, Schiff repeats left wing talking points to his radio audience about the Iraq war!
http://www.youtube.com/watch?v=zo81QDSuixk
Peter Schiff has made open statements that are quite like the statements of the anti-war leftists, to include the OTHER Ron Paul endorsed candidates Rand Paul and Adam Kokesh
http://www.google.com/search?hl=en&source=hp&q=schiff+%2B+isolationist&aq=f&aqi=g10&aql=&oq=&gs_rfai=
Peter Schiff is pro-choice on abortion
SCHIFF’S OWN WEBSITE CONTAINS AN ENDORSEMENT FOR KOKESH WHERE KOKESH IS NAMED AS AN ANTI-WAR PROTESTER
http://schiffforsenate.com/index.php?q=news/constitutional-candidates-congress
Adam Kokesh
Adam Kokesh is best known as an Iraq War veteran who returned opposed to the war and was a keynote speaker at Ron Paul’s “Rally for the Republic” that competed with the Republican National Convention in the summer of 2008.
Peter Schiff is pro-choice on abortion
http://www.youtube.com/watch?v=nDttx64zk4I
with respect to his personal feelings, he would not make it illegal, women have a right to abort, he is against 3rd trimester,
BUT FIRST TRIMESTR OR SECOND ONE ITS OKAY
Hear it in his own words
pro-immigration and said that there are too many jobs in the US we NEED to let in immigrants???
Peter Schiff admits on camera that he has ZERO money investigated in American corporations or industry. If Peter Schiff refuses to invest in American companies, how can Peter Schiff say he is helping Americans keep their jobs?
This is SCHIFF in his own words!
video of Peter Schiff saying that LIBERTARIANS must infiltrate the Republican Party
http://www.youtube.com/watch?v=3ncLTFoTFa8&playnext_from=TL&videos=gKm7t4j9Wgc
http://www.youtube.com/watch?v=3ncLTFoTFa8
http://www.ustream.tv/recorded/1583738
This second link is the full 2 hours. You cant download it directly, I tried, but hey, you can record it! :)
Peter Schiff appears at a Rand Paul/Adam Kokesh/Peter Schiff fundraiser
http://www.youtube.com/watch?v=AYwb_P-ssK0
Rand Paul, Adam Kokesh, Peter Schiff, and others holding a fundraiser at Webster Hall in New York.
http://www.randpaul2010.com/2009/08/rand-paul-at-webster-hall/
http://www.wallstreetstocks.net/rand-paul-adam-kokesh-peter-schiff-fundraiser
http://www.youtube.com/watch?v=AYwb_P-ssK0&feature=player_embedded
http://www.randpaul2010.com
http://www.schiffforsenate.com
http://www.kokeshforcongress.com
Read it for yourself, folks, all three of these candidates are the type of people that this organization supports and even wants to send money to!
http://www.google.com/search?q=schiff+kokesh+site:http://www.stormfront.org&hl=en&lr=&filter=0
The RAND Paul Money Bomb! Help Elect Rand Paul to U.S.
http://www.stormfront.org/forum/showthread.php?t=624677
Stormfront!!!!
Peter Schiff for Senate Video Blog July 14 2009
http://www.youtube.com/watch?v=nlXqlz31SXk
Ron Paul, Adam Kokesh at Freedom Fest in Las Vegas July 2009
http://www.youtube.com/watch?v=D9oiTQD7Cms
Schiff attended this same conference hosted by Ron Paul and is in this video in the early part
Rand Paul amp Adam Kokesh Take Over The Interwebs
http://www.youtube.com/watch?v=PE9gVeykPAU
GOE Site for Adam Kokesh
http://americanpatriotsagainstkokesh.ning.com/
Adam Kokesh for Congress
http://www.kokeshforcongress.com/posts/whisper-campaigns
Ron Paul Supports Adam Kokesh
http://www.campaignforliberty.com/blog.php?view=20098
This Aint Hell..re Oathkeepers..Adam Kokesh.
Note the connection between Oathkeepers & Ron Paul.
http://thisainthell.us/blog/?p=14586
I guess they don't teach the Plunge Protection Team in College.
Ask the Professor if he knows anything about the ESF.
http://www.youtube.com/watch?v=2ssrcD5GdPQ&feature=related
You have it backwards, it isn’t consumer spending that matters in a healthy economy, it is investment.
When the rates do go up, they will be left having made purchases they cannot afford.
I don't have paid access but John Williams of ShadowStats.com is is supposed to have said the "Retail Sales Gain Was Statistically Meaningless and Largely Reflected Inflation."
So businesses are sitting on cash. So what. What do you expect them to do? Give it to you?
Suppose their customers are bankrupt or out of business, what then?
Should they buy more raw materials, make stuff, and sit on finished goods when no one is buying?
Try this: open a bakery in the desert, 100 miles off the road and try to sell apple pies before they rot.
Individuals are paying down debt and now saving and maybe sitting on cash because they may need to survive.
It boggles the mind how many people lack critical thinking skills and common sense.
Why would firms invest in building homes etc, if prospective buyers cannot get a loan? or in boat construction or light aircraft or autos........? By holding rates at a guaranteed low both firms and consumers have access to cash and this is what makes the private economy grow. Again, all this is subject to external forces that may impact the international economy. Bernanke got this one right. It’s the last ace in the deck of cards.
NO! Tell me it aint so LOL, Next thing he will be critical of Afghanistan and Libya.
I think we’re just talking past each other because I am saying almost the same thing Schiff is saying, but in a different way. His basic premise, and that of the Austrian School, is that when the Fed doesn’t let the markets set interest rates, the natural and more efficient allocation of resources cannnot occur.
What I am saying is that we are at least 10 years behind the eight-ball in aggregate supply not only because of Greenspan, but also because of the jacking of the capital reserve ratios in 2001 that lowered the reserve requirements for securities from the GSEs and governments of all levels with a rating of AA or higher to zero. ZERO! And that dramtically lowered the cost of these “investments” compared to those that would have been made in the broader private sector so we can make things and make real money off productive investments, and expand the economic base.
Therefore, in the housing bubble, the final, sought after product was NOT houses, it was the securities behind mortgages that flowed through the GSE clearing houses and gov’t bonds. They were all gravy for the lenders because they needed no reserve for them. What that did was funnel money from pension funds and 401(k)s, etc, and convert it from productive capital into government consumption. And instead of expanding the economic base all those years, all we have is tons of securities and munis that are not worth the paper they are written on. And the opportunity cost to the economy from this is lost supply.
We have been way over stimulated and over consumed. And the traditional view that it’s just “the consumer is out to lunch” is completely wrong. We have huge supply-side issues and the current Fed policy of ultra-low interest rates AND paying interest on reserves is not going to do anything to get us to where we need to be.
Yeah?
Wadduh yuh mean?
/S
Perhaps they are recognizing that the inflationary forces of higher energy/gas and food has decreased margins in many a household budget. With a personal credit bubble of those near or exceeding zero margins, a climbing interest rate would quickly push many into bankruptcy.
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