Who Cares? by Robert Gore

For the record, SLL has no clue whether the Fed will or will not raise its federal funds target rate by twenty five basis points (one quarter of one percent) this week. Goldman Sachs is far more plugged into the Fed than SLL. They have said for some time that the Fed won’t raise the rate and SLL will go with that. Our lack of insight about the imminent move is exceeded only by our disinterest.

Supposedly a hike will unleash Armageddon, while standing pat will stoke a monster equity rally. We’ll see, but keep in mind financial markets’ long history of responses contrary to consensus predictions. The intense preoccupation on the decision is unhealthy, like old people whose sole topic of conversation is their ailments and medications. It betrays all sorts of misconceptions, chief of which is that the economy and financial markets are puppets dancing on strings controlled by the Fed puppeteer.

It is true that the during the eighty months the Fed has held the federal funds rate at zero and instituted three quantitative easings, the stock market has rallied and the economy has staged a feeble recovery. That does not amount to Quod Erat Demonstrandum (QED), the Latin phrase denoting that the proposition—Fed omnipotence—has been demonstrated. Fed easing failed to prevent market crashes and economic contraction after stock market tops in 1929, 2001, and 2007. Similarly, there have been numerous instances when the economy and stock market have done quite well in the face of constrictive Fed policies. The Fed’s interest rate moves usually follow, rather than lead, moves in the Treasury debt market. Whether that is because markets are anticipating the Fed or are actually leading it is a discussion best left for another day.

Once upon a time, the US economy managed to function without a central bank. It had its ups and downs, but the Industrial Revolution remains the high point for the American economy in terms of economic growth and rising per capita incomes. It is an apex of technological, scientific, and industrial discovery, innovation and progress. However, studied indifference to that period, along with an embrace of the shibboleth that government and central bank control of the economy are necessary and proper, are cornerstones of statist conceit. This Fed-centric view feeds into media and Wall Street inertia and intellectual rigor mortis. It is far easier to endlessly discuss the actions of a small group of monetary mandarins, to use David Stockman’s phrase, than it is to figure out what’s really going on in the $17 trillion US economy or the $77 trillion global economy.

Right now, the most salient trend, the reality that shapes all other realities, is debt, which globally stands at about $200 trillion. Central banks have something to do with that debt, of course, ballooning their balance sheets, monetizing sovereign debt and other assets, and suppressing interest rates. However, after an underwhelming recover they force fed, it is clear that all this debt has led only to malinvestment, overproduction and overconsumption, and funded a speculative mania that has systematically mis-priced financial assets and divorced markets from underlying economic reality. Now, with economies sputtering, commodity prices crashing, global trade shrinking, widespread gluts of raw materials and manufactured goods, and anemic growth in consumption, it is clear that the marginal value of an addition dollar, yen, euro, yuan, or real of debt has gone negative, even with zero or negative official interest rates in much of the world. The stage is set for a global debt contraction.

Since 1994, the balance sheets of the world’s central banks have grown from $2 trillion to $22 trillion, 13 percent per year. Impressive indeed, but put that up against the world’s $200 trillion in debt. A 10 percent “correction” in global debt would in effect wipe out the entire two-decade central ban increase. One can argue about multiplier effects magnifying the impact of central bank credit, but with the marginal value of debt going negative, those multiplier effects have gone missing. In the US, the Fed’s balance sheet expansion has only improved the economic prospects of Wall Street speculators, and have not reverberated and multiplied in the real economy.

The debt contraction, heralded by the carnage in commodities, will be much more severe than a 10 percent correction. Debt is interlinked—one entity’s debt is another’s asset—and once it begins to unravel significantly, (housing and mortgage finance in 2008, commodities and emerging markets laden with almost $10 trillion in dollar-denominated debt in 2015) it creates a chain reaction of further unraveling. In 2008 it was stopped only by huge infusions of government and central bank debt and transferring private debt to public balance sheets. The 2008 measures forestalled, but will not prevent, an ultimate reckoning. Total world debt has grown, central banks’ balance sheets are engorged, interest rates are about as low as they can go, and governments are running into financing and political constraints on deficit financing. Against his backdrop, whether or not one central bank raises one interest rate all of 25 basis points will be treated—after whatever market spasms the decision elicits—as the irrelevancy that it is.

One final note. Some commentators have argued that the Fed will raise its rate this week to maintain its credibility. That’s laughable. The Fed was set up as a way to disguise the transition from real money, gold, to fiat debt. For over 100 years it has obfuscated that purpose, disguised its intentions, surreptitiously intervened in markets, and piously maintained its supposed “independence,” zealously fighting all perceived challenges, although it is the financial, political, and regulatory handmaiden for the banking industry. It has no credibility left to maintain, just a set of pretenses that many in the financial industry expediently profess to believe. Whatever decision Janet Yellen and her merry muppets reach, the Federal Reserve will have the same amount of credibility after the decision that it had before it: none.

HISTORICAL FICTION THAT’S BETTER THAN HISTORY AND BETTER THAN FICTION

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