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The Fedís Alice In Wonderland Economy - What Happens Next?


 -- Published: Friday, 25 September 2015 | Print  | Disqus 

By Nick Giambruno

After the president of the United States, the most powerful person on the planet is the chairman of the Federal Reserve.

Ask almost anyone on the street for the name of the U.S. president, and youíll get a quick answer.

But if you ask the same person what the Federal Reserve is, youíll likely get a blank stare.

They donít know - partly due to the institutionís deliberately obscure name - that the Fed is really the third iteration of the countryís central bank. Or that the Fed manipulates the nationís economic destiny by controlling the money supply.

And thatís just how the Fed likes it. Theyíd prefer Boobus americanus not understand the king-like power they wield.

By simply choosing to utter the right words, the chairman of the Fed can create or extinguish trillions of dollars of wealth both in and outside of the U.S. He holds the economic fate of billions of people in his hands.

So itís no shocker that investors carefully parse everything he says. They have to, if they want to be successful. Some even go as far as to analyze the almighty chairmanís body language. Of course, the mainstream financial media revere the Fed.

You may recall the unhealthy spectacle that occurred in 1996. Thatís when Alan Greenspan, the Fed chairman at the time, spoke the now famous phrase ďirrational exuberanceĒ in what should have otherwise been a dull and forgettable speech.

Investors heard Greenspanís phrase to mean that the Fed would soon raise interest rates to slow the global economy.

Itís worth mentioning that Greenspan didnít actually say the Fed would raise rates. Nor did he intend to signal that.

Nonetheless, the reaction was swift and panicky. U.S. markets were closed at the time, but stocks in Japan and Hong Kong dropped 3%. The German stock market fell 4%. When trading started in the U.S. market the next day, the market opened down 2%.

Billions of dollars of wealth vanished in a period of 16 hours.

Thatís the absurd power over the global economy that the Federal Reserve gives to one human being.

The words of the chairman can make or break the fortunes of anyone with a brokerage account.

The Fedís Alice in Wonderland Economy

I almost fell out of my chair when I heard itÖ

A journalist recently asked Janet Yellen, the current chair of the Federal Reserve, if the central bank would keep interest rates at 0% forever.

Her response: ďI canít completely rule it out.Ē

I was stunned.

The deferential financial media hurried to ignore the significance of that statement. Instead, it acted the way big city police might act after making a messy arrest on a busy sidewalk. ďMove along folks, nothing to see here!Ē

Clearly, there was something to see. Something very important.

Yellenís words came amidst one of the most anticipated economic pronouncements in a generationÖ whether the Fed would finally raise interest rates for the first time in nine years. Short-term rates have been at zero since the 2008 financial crisis.

Interest rates are simply the price of borrowing money. Setting them at an artificial level is nothing other than price fixing. Not surprisingly, it has led to enormous amounts of malinvestment and other distortions in the economy.

Malinvestment is the result of faulty decision-making. Any investor or business can make a mistake, but central bank manipulation of interest rates subsidizes bad, wasteful decisions.

Cheap borrowing costs trick companies. It causes them to plow money into plants, equipment, and other assets that appear profitable because borrowing costs are low. Only later, when the profits donít show up, do they discover that the capital was wasted.

Seven years of quantitative easing (QE) and Fed-engineered zero interest rates have drawn the U.S. and much of the world into an unsustainable "Alice in Wonderland" bubble economy riddled with malinvestment.

The pundits had expected that, at this recent meeting, the Fed would move to raise rates just a little and give the global economy a tiny taste of sobriety.

Not even that nudge materialized.

Instead, the Fed sat on its hands. It kept interest rates at zero.

And Janet Yellen couldnít even rule out that rates would stay at zero forever.

If she canít even do that, how is she going to start a sustained series of rate hikes, as many of those same pundits now expect her to do a few months down the road?

The truth is, seven years of 0% yields and successive rounds of money printing has so distorted the U.S. economy that it canít handle even the tiniest increase in interest rates. It would be the pin that pricks the biggest stock and bond market bubble in all of human history. The Fed cannot let that happen.

What Happens Next

Itís clear that the Fed canít raise interest rates in any meaningful way. It would trigger a financial meltdown that would quickly force them to reverse course.

The Fed might be able to get away with a token increase, but thatís all.

In other words, the Fed has trapped itself.

Former Fed chairman Ben Bernanke admitted as much recently when he said he didnít expect rates to normalize in his lifetime.

And then, we have the current chair Janet Yellen saying that rates might stay at zero forever!

Yellenís belief that she has the power to suppress interest rates until the end of time is a frightening sign.

As powerful as the Fed is, it isnít stronger than the markets. A crisis in the markets could force rates higher even if the Fed doesnít want them to go there. And the longer the Fed tries to sustain abnormalities like QE and 0% interest rates, the more likely it is that the whole business will end with the markets crushing the Fed.

And thatís not even considering a collapse of the petrodollar system or China pushing the establishment of a New Silk Road in EurasiaÖtwo catalysts that would likely force interest rates higher.

So Iíll go ahead and disagree with Yellen and rule out the possibility that rates might stay at zero forever. They wonít, because they canít.

At the next sign of a market swoon or of a weakening economy, or with the next episode of deflationary jitters, the Fed will again ramp up the easy money. It could be another round of QE. Or the Fed could push interest rates into negative territory. If that fails, the Fed could go for the nuclear option and drop freshly printed money out of helicopters as Bernanke once infamously suggested Ė or, more likely, into everyoneís bank account. Theyíll do whatever it takes, no matter what the eventual damage to the dollarís value.

Whatever the details, one thing should be clear. This politburo of unaccountable central planners is the greatest risk to your financial wellbeing today.

What You Can Do About It

Itís a terrifying thought that the actions of a few people at the Fed so endanger your financial security.

But the facts are worse than that. Thereís more to worry about than just the financial effects. The social and political implications of the Fedís actions are even more dangerous.

An economic depression and currency inflation (perhaps hyperinflation) are very much in the cards. These things rarely lead to anything but bigger government, less freedom, and shrinking prosperity. Sometimes they lead to much worse.

Fortunately, your destiny doesnít need to be hostage to whatís coming.

Weíve published a groundbreaking step-by-step manual that sets out the three essential measures all Americans should take right now to protect themselves and their families.

These measures are easy and straightforward to implement. You just need to understand what they are and how they keep you safe. New York Times best-selling author Doug Casey and his team describe how you can do it all from home. And thereís still time to get it done without any extraordinary cost or effort.

Normally, this get-it-done manual retails for $99. But I believe itís so important for you to act now to protect yourself and your family that Iíve arranged for anyone who is a resident of the U.S. to get a free copy. Click here to secure your free copy.

 
The article was originally published at internationalman.com.

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 -- Published: Friday, 25 September 2015 | E-Mail  | Print  | Source: GoldSeek.com

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