Hear this, you who trample on the needy and bring the poor of the land to an end, saying, “When will the new moon be over, that we may sell grain? And the Sabbath, that we may offer wheat for sale, that we may make the ephah small and the shekel great and deal deceitfully with false balances, that we may buy the poor for silver and the needy for a pair of sandals and sell the chaff of the wheat?” The Lord has sworn by the pride of Jacob: “Surely I will never forget any of their deeds.” Amos 8:4-7
Today is Thursday, 17 September 2015. Today the Federal Reserve “Open Markets Committee” (… they promote open markets the same way Kim Jong Un promotes freedom …) will again set the short term interest rate used in the US banking system – the “Fed Funds Rate”. It could be an interesting day.
Since the “Great Recession” the FOMC has held short term interest rates at zero in an attempt to spur the economy. The cover story for this is some Keynesian nonsense about “aggregate demand” and the notion that fiat currency can be used to generate an economic perpetual motion machine – we’ll just print our way to prosperity. We’ve had zero percent interest for about seven years now, yet it doesn’t seem that the economy is roaring. In fact, all through history we’ve never seen a single instance of using printed money to create aggregate wealth. All it can do is transfer wealth from on group to another – which is exactly what it has done here in America. The big bankers and the government cronies have made quite a bit of money these last seven years. Not so for the common man.
Our view on the matter is well known. The dual mandate of full employment and stable prices is a cover story for printing money until systemic financial risks threaten the system. See the Bernanke (now Yellen) FED decision tree here:
If you attempt to buy the cover story, surely the whole thing seems ridiculous. Does anyone really think that raising the short-term interest rate from the current 0.0%-0.25% band, which typically works out right about the middle of 0.125%, to a paltry 0.25% will threaten economic growth?
So what will the Fed do today? Every prognosticator under the sun has a guess, surely someone will be right. My guess: they’ll raise the rate by 1/8 of a point, not 1/4 – either to a “band” of 0.125%-0.375% or to a fixed 0.25%. The market will react violently lower. Then Janet Yellen will take to the podium and ensure the markets that the printing will continue if it needs to (i.e., if the markets crash). Regardless of the outcome, whether they hold at 0-0.25, or raise by a full 0.25, expect volatility around 2:00 this afternoon.
Long term is a different story. The global money-printing shell game can’t go on forever. Systemic capital misallocation and malinvestment will unwind at some point. (Possibly having violent effects on markets thanks to high-frequency- and leveraged-algo-traders.)
Nobody ever looks forward to such a scenario – and it is only a scenario. But, in the midst of a crash, or a recession, or a depression, it is important to remember the John Mills dictum: “Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” (or, in this case, hopelessly unproductive share-buybacks on Wall Street and ghost cities in China.)
So if you’re around the computer at 2:00 this afternoon, you might check out the stock market / bond market / currency market reactions right at 2:00 (when the algos auto-read the text of the statement and react immediately) and then again at 2:30, when one misinterpreted word at Yellen’s presser moves billions of dollars across the markets. What a silly time we live in.