One day Wall Street and Washington will discover—as countless regimes have discovered—that nothing real comes from fake money. From Jeff Deist at mises.org:
Does cheap money and credit make us richer? Does more money and credit create more stuff, or better stuff? Do they make us happier and more productive? Or do these twin forces actually distort the economy, misallocate resources, and degrade us as people?
These are fundamental questions in an age of monetary hedonism. It is time we began to ask and answer them. Millions of people across the West increasingly recognize the limits of monetary policy, understanding that more money and credit in society do not magically create more goods and services. Production precedes consumption. Capital accumulation is made possible only through profit, which is generated by higher productivity, thanks to earlier capital investment. At the heart of all of it is hard work and human ingenuity. We don’t get rich by legislative edict.
How we lost sight of these simple truths is complex. But we can begin to understand it by listening to someone smarter! The great financial writer James Grant probably knows more about interest rates than anyone on the planet. So we should pay attention when he suggests America’s four-decade experiment in rates that only go down, down, and down appears to be over.
The striking thing about the bond market and interest rates is that they tend to rise and fall in generation-length intervals. No other financial security that I know of exhibits that same characteristic. But interest rates have done that going back to the Civil War period, when they fell persistently from 1865 to 1900. They then rose from 1900 to 1920, fell from 1920 or so to 1946, and then rose from 1946 to 1981—and did they ever rise in the last five or 10 years of that 35-year period. Then they fell again from 1981 to 2019–20.
So each of these cycles was very long-lived. This current one has been, let’s say, 40 years. That’s one-and-a-half successful Wall Street careers. You could be working in this business for a long time and never have seen a bear market in bonds. And I think that that muscle memory has deadened the perception of financial forces that would conspire to lead to higher rates.
—James Grant, speaking to the Octavian Report
Central banks are boring, and their actual importance to the economy is massively overstated (I traded bonds for 22 years and never paid much attention to any of them). The one thing you can count on is that when all prices are rising, like they are now, they will attribute it to everything but its true cause—inflation of the medium of exchange by a government or central bank. Presently no government issues a currency or debt instrument backed by real money, gold (see “Real Money”). From Wolf Richter at wolfstreet.com:
Blame whatever. Just don’t blame money-printing and interest-rate repression.
“To front-load the path to higher interest rates,” the Bank of Canada today jacked up its main rate by a 100 basis points to 2.5%, the fourth rate hike in a row, and the biggest rate hike since 1998, which made the BoC the first of the G-7 central banks to raise by 100 basis points in this cycle.
“An increase of this magnitude at one meeting is very unusual,” said BoC Governor Tiff Macklem in the opening statement. “It reflects very unusual economic circumstances: inflation is nearly 8% – a level not seen in nearly 40 years.”
CPI inflation in May had spiked by 7.7% from a year ago, and the June CPI hasn’t come out yet, but we know from the 9.1% June fiasco in the US, where services inflation is now spiking, that in Canada, June CPI readings are going to be ugly too.
If printing money increased wealth, we could make everyone billionaires. From Bryce McBride at mises.org:
If while driving your car you suddenly noticed that you were heading straight for a cliff edge, of course the sensible thing to do would be to apply the brakes and sharply turn the wheel.
If, however, rather than traveling by yourself you were instead driving a carload of children holding bowls of hot soup, you might choose to maintain your speed and direction while opening a newspaper up in front of you. For the next few moments, by keeping the car stable and the children unaware of any pressing danger, you have made it unlikely that they will spill hot soup on themselves and suffer burns.
However, while by ignoring and obscuring the problem of the approaching cliff edge you have kept your passengers calm and the soup in their bowls, you have solved nothing. By failing to brake or turn, you have ensured that you will all plunge over the edge of the cliff in a fatal crash.
This analogy almost perfectly describes the current economic and political situation in the West.
Ever since Alan Greenspan was sworn in as Federal Reserve chairman in 1987, central banks, and in particular the US Federal Reserve System, have taken it upon themselves to smooth out any disturbances in asset markets through interest rate cuts and other forms of intervention.
They didn’t take on this ill-conceived responsibility entirely on their own. In response to the “Black Monday” crash of October 1987, which saw a one-day drop of over 22 percent in stock prices, the Reagan administration established the “Working Group on Financial Markets” (colloquially known as the “Plunge Protection Team” or PPT), which brought together representatives from the US Treasury, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) as well as the Fed.
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