Sunday, July 22, 2018

The President, the Federal Reserve, and Raising Interest Rates

For the entire life of this blog, which goes back to the second year of the Obamanation, I've been hammering on the Fed and their monetary policies.  The Federal Reserve Bank and all central banks are the worst bit of central planning that the entire world has fallen for and I believe they're not just unnecessary they're damaging.  The only things they add to the financial world are all the things wrong with the financial world: destructive levels of debt, countries engaged in constant currency manipulations to try to get an advantage over each other, the creation of money out of nothing, money as debt rather than asset, the destruction of the information channel in monetary transactions.   Everything that's wrong with the world's economies goes back to central banks.  

If you don't see what I'm saying, I can't summarize much more here.  Just use the search bar in the upper left and search on terms like Ben Bernanke, or "Bernank" as I often called him, Janet Yellen, quantitative easing (QE), interest rates, the Fed, or any other related term.  Or just go to the bottom of the right column where the list of labels appears, click on Economics and get all 458 posts so far.  Be prepared to spend days.

So where am I going tonight?  You might have heard that president Trump criticized the Fed for raising interest rates.  He says the Fed is working at cross purposes to his economic program.
In an interview published on CNBC, Trump said he wasn’t thrilled with the Fed’s rate hikes — despite calling Jerome Powell, whom he picked to replace Janet Yellen, a “good man” — and said he didn’t care that he was breaking a precedent under which presidents do not comment on the Fed so as to safeguard its independence.

“So somebody would say, ‘Oh, maybe you shouldn’t say that as president. I couldn’t care less what they say, because my views haven’t changed,” Trump said.
The media, predictably, is getting the story completely wrong, focusing on Trump's statement being political pressure on the Fed.  Fed head Powell has said he’s not concerned about political pressure from the administration. Instead, Powell responded with this knee-slapper:
In an interview with the public-radio program “Marketplace,” Powell said “the Fed has a long tradition of conducting policy independent of all political concerns.”
The Fed is “independent of all political concerns”?  Don't make me laugh.  Central banking is inherently a centrally controlled economy (by controlling what's arguably the most important information in the economy: the cost of money) and that's essentially leftist.  Everything they do is big government control.  They may think they're independent, but they inevitably help any president who's in office when the economy goes into downturn with their interventions to end the downturn, and hurt any president who's in office when the economy is booming with their interventions to slow down the growth.  Their enabling of deficit spending helps all elected officials over the unelected.  Just as now their fear of Trump's tax cuts "overheating the economy" is inherently biased against his free market-based solutions and toward central control of money. 

After the '08 crash, the Fed created trillions of dollars in an attempt to stimulate spending.  Other central banks around the world did the same, with smaller totals in dollars.  The fact that it took the economy almost eight years to recover leaves us to speculate if they really helped or hurt.  Perhaps they just lined the pockets of a few well-connected bankers.  The problem with all those trillions out in the world is that they don't have to be stuck in bank vaults; they can be spent and that will tend to devalue those dollars; that is, cause inflation.   I've been advocating for the Fed raising interest rates back closer to normal, historical means for years.  That will impact government spending as the amount spent on interest returns to historical averages, percentage-wise.  It leaves less to spend on other programs.

Yes, Mr. President, the Fed is at cross purposes to your programs.  Quite frankly, they think they know better than you.  For some reason, probably the inflation of the 70s which followed the final elimination of the gold standard, the Fed seems to fear middle class wages going up more than any other indication they look at.  You ran for office saying that middle class working families haven't had an increase in standard of living in decades; the Federal reserve is the reason behind that.  Whenever wages go up, they raise interest rates to slow down spending.  With less spending, some jobs go away and there's less wage pressure.   

It would take enormously bold leadership, but hobbling the Fed's powers would help the nation.  During the transition, Trump advisor Dr. Judy Shelton was advocating we provide something like the Treasury Inflation Protected Security (TIPS) bonds which would be redeemable in either dollars or gold, effectively tying the two together without a formal gold standard.  That would be a good start.  This idea was actually first floated by Alan Greenspan in 1981!

It's also true as you say, Mr. President that other countries manipulate their currencies to try to get advantage over us (and others).  As Dr. Shelton also pointed out,  the proper monetary foundation for genuinely free trade has to be stable exchange rates. That way nobody can manipulate currency to get an advantage.  That means that we couldn't manipulate our exchange rates, and I believe the Fed's machinations are manipulating our currency.

There's a saying that "if you're going to dream, dream big" and that would be "End the Fed".  That would take a far more work, and if you think the intelligence services know how to screw over anyone that messes with them, imagine the Fed trying to demonstrate how important they are.  

Overview of the Federal funds target rate, through this March.  NY Times graphic.  What stands out to me is the over 30 year downward trend in the interest rate, and the prolonged period at essentially 0% (the notorious ZIRP - Zero Interest Rate Policy).


  1. Yes, it's time to end the Federal Reserve. America can take back its currency (and monetary policy). There's always the concern of inflation, but not now, not yet.

  2. If I were king, the interest rate would be 10%. All the time. Feel free to explain why that would be wrong.
    What I'd really like to know is "What does somebody give in exchange for a government bond? As in "The Chinese are the ones who hold our bonds." Since the point of selling bonds to raise cash for government operations or spending, they can't give dollars, because that would be a circular transaction.
    Have an explanation, Teacher?

    1. Much like the minimum wage argument, why 10%? Why not 1%, 10.5%, 19.9%? The price of money is a very important signal (information) and arbitrarily setting any number breaks the feedback mechanism and ruins the information flow in money. (Not that it hasn't been broken since 1913, but bear with me) Yes, interest rates will go up and down. Yes, when the rate is higher there is less borrowing and the decisions to borrow are made with much more worry and anguish, while when the rate is lower there's less anguish and more borrowing, but nothing is wrong with that.

      One of the problems in the economy now is there was so much free money around for so long that companies borrowed stupidly. Some invested in themselves, others did stupid things and are getting in trouble as loans come due. The bankruptcy of Gibson (the guitar company) I posted about comes to mind.

      China buying our bonds is one of those things that stable exchange rates work for. When we buy products from China, we buy them in dollars which can be converted to any other currency by the buyer or the seller, but you can think of our trade deficit as dollars going to China. They can then buy bonds with those dollars (considered a safe place to store dollars, like sticking them in a vault) or convert to any other asset.

      The worldwide trade in currency has grown to be over the 1/3 of the US annual GDP every day. Source and more info

      The Chinese don't hold the majority of US debt. The US government and the Federal Reserve do. They monetized the debt, meaning they have the money because they say they do. Think of them as fiat bonds.

      "Fiat" as used in here or in fiat currency means "by declaration". Money is worth something because they declare it to be. A dollar is only worth something because enough people believe it is. If they stop believing, no more dollar. Those bonds are only valid because they say they are.

  3. "Currency inflation" is another name for official counterfeiting, meaning issuing currency tokens which are not redeemable in something of value. Currency inflation misinforms people there is more wealth available in the economy than really exists, and so they overrun prudent limits and overinvest, building things which are not sustainable. These overinvestments then fail because the wealth to sustain them doesn't exist, and the overinvestments become waste.

    The Federal Reserve is a circuit with gain and feedback and a time delay, it is an oscillator. Cyclical variation in currency inflation creates the boom/bust business cycle. There is no small or managed amount of currency inflation which is constructive, all currency inflation is unhelpful fraud. The Federal Reserve can do no right, it is destructive by its very existence.

    Keep currency inflation at 8%/year and it becomes very hard to save for retirement. In 20 years the loss of purchasing power of the inflated currency is a factor of 4.7, in 30 years a factor of 10.

    Perhaps Trump criticized the Fed for raising interest rates because if the Fed stops inflating, interest rates will correct to high enough the larger interest on the federal debt will immediately bankrupt the government.

    the proper monetary foundation for genuinely free trade has to be stable exchange rates. That way nobody can manipulate currency to get an advantage.

    Nope, government is a predator, it doesn't manage things to the benefit of the middle class. The only reason any government fiat currency has value is because if you don't pay it to government, their employees will kill you. The proper monetary foundation for genuinely free trade is to remove government control over money, by not using government currency. The way to get monetary liberty is a jubilee. Individuals should repudiate the national debt, all the state debts, all the corporate debts, all the personal debts, everything. Stop paying debts, and keep your house and car. All of these debts were contracted in an environment of banking monopoly, and the terms are bogus. Like buying yourself out of slavery, the initial situation was morally invalid, and your decisions were made under duress.

    1. While I largely agree with The Federal Reserve is a circuit with gain and feedback and a time delay, it is an oscillator. the conclusion that the Fed is the cause of the boom/bust cycle isn't right. One of the stated reasons for creating the Fed was to reduce boom/bust cycles in the economy. The business cycle is a function of normal activities. There are studies where economists try to prove they really did reduce the magnitudes of the boom/bust cycle, by fudging data in various ways. As always.

      BTW, you misinterpret Dr. Shelton's statement about stable exchange rates. She's arguing for exactly what you are, getting central bank control out of managing exchange rates.

      I come down on the side that currency trading and speculation, like oil trading, is more of a good thing than a bad thing, but when worldwide currency trading is over 1/3 the US GDP every day, with 97% of that speculation, I wonder if it's really too much. A return to a commodity standard, where the currencies aren't free to float almost at random, would have to reduce that currency trading quite a bit.

      Currency trading concentrates income and wealth in the government-linked financial sectors and Too Big to Fail banks, which brings about the maldistribution that leads to so-called "income inequality", which leads to envy and resentment and everything you're seeing out of the "new" socialists.

  4. A small amount of inflation is necessary to grow the economy as productivity and population increase. How much should this be? Nobody knows. However, over time, the "invisible hand" of the free market (if it isn't shackled) will adjust prices and wages to match.

    1. A small amount of inflation is necessary to grow the economy as productivity and population increase.

      I disagree. Inflation is not economic growth, it doesn't do anything for the increased population. There's no reason for any long term value of inflation other than zero. All you're saying is that the cost of everything will double every so many years (depending on percentage). It will double your pay but it'll double the cost of everything you buy for a net of no change. Why is that a good thing?

      Consider gold. They say that an ounce of gold bought 350 loaves of bread in the time of King Nebuchadnezzar, almost 2,600 years ago, which is pretty much what it buys today, depending on the exact brand of bread (and I'm sure there was some variation in what a loaf of bread cost back in King N's day). Likewise, you'll hear that an ounce of gold would buy a good toga with sandals in pre-Christian Rome, and buys a well-tailored suit and shoes today. Or you'll hear that a $20 gold piece bought an 1851 Colt Single Action Army revolver, and today buys a good grade 1911.

  5. Just what do you think the almighty dollar would be worth if they actually did an audit of all the gold that is supposedly in Fort Knox?

    1. As stated above, it's 'fiat currency'. It's worth what the Fed says that it's worth. I don't think that a declaration that Ft. Knox is empty would move the value of the dollar one small tick. Since almost all currencies these days are 'fiat currencies', it's one big circle jerk with other nations fearful of revealing Oz, because it will crash their fiat currency too.

  6. The Fed interest rate dropped to zero. THAT is the real story. That it is now creeping up to 1.75% and they hope to go higher is only because Trump/a Republican is president. If Trump had not turned the economy around the Fed rate would still be 0% or close to 0%. This is extrodinary. In late 2008 we entered into new economic territory and it took trillions of dollars and a lot of regulation and arm twisting not to drop off that economic cliff. We have not fixed the underlying problems we have only put off the inevitable and made it all worse.

    I keep telling my wife that the Democrats must crash the economy (just as Chuck Schumer was trying to do prior to the 2008 election) to win. They are desperate to cause a recession but Trump's policies have prevented it. BUT, I think they will succeed before the 2020 election. They must or they can kiss the presidency goodbye. The Fed increasing rates is part of this effort. They must slow the economy and cause some kind of economic crisis that triggers a recession. BUT, as I said the underlying problems are still there and if the Democrats are successful in triggering a recession I think we will have the mother of all great depressions. Because something is very wrong. It could be our massive debt, our yearly deficits as we cannot balance the budget, it could be all the state retirement systems going bankrupt, it could be the overhyped stock market, it could be almost anything. Something is wrong and it is being propped up by the fed and massive spending and now the Fed is walking away from the effort to prop up the economy. Look for a terrible financial collapse between now and summer of 2020.

  7. SiGraybeard writes: One of the stated reasons for creating the Fed was to reduce boom/bust cycles in the economy.

    I don't have a reference handy, but I've heard Queen Victoria was on a gold standard, and didn't have any business cycle. Yet there was business cycle before and after.

    How about I'll print up some machining permission slips, and you send me 1 of every 20 engine models you make. I'll claim to do this to smooth out your production rate of models, but it won't be optional. Occasionally I'll print more paper to tax the paper you've saved. Sounds legitimate to me.

    The Fed created paper currency for the cost of printing it. Then the bankers collected interest for hiring the printers, which they called a loan, but wasn't a loan because they didn't loan anything. The amount printed was declared to match the year's total national production. After a year, the bankers received "interest" on their non-loan, thereby collecting 5% of their tickets back, which could be exchanged for 5% of the year's production. I'm sure the reality was more complex and there was some gold at the bottom of it, the swindle doesn't sell unless there's genuine bait. Fiat currency gets value because the issuing government demands to be paid it in taxes. The issuing government's subjects do whatever to acquire fiat to turn in, so the tax collectors don't kill them. The Whiskey Rebellion was objecting to taxation without representation to pay war bonds nobody voted on, and was using alcohol for money instead of the constitutional cabal's debt currency. Washington squashed it with a huge army.

    McChuck writes: A small amount of [currency] inflation is necessary to grow the economy as productivity and population increase.

    You've incorrectly defined the word "economy" as pointing to "currency", instead of pointing to "productivity and population". Currency is not a requirement of an economy, Gilligan's Island can operate on barter. When Ginger and Maryann have babies the population has increased, when the children are old enough to fish the productivity has increased. Legislating tree leaves as fiat currency is not necessary to grow the economy of productivity and population. Gilligan's Island contains 7 people and is surrounded by uninhabitable ocean. Planet Earth contains 7 billion people and is surrounded by an uninhabitable ocean of space. Same economics in both places. M-i-croeconomics is the behavior of markets. M-a-croeconomics is the behavior of governments redistributing money at gunpoint.

    How much should this be? Nobody knows.

    Then the Fed doesn't know, either, and can't plan the amount.

    However, over time, the "invisible hand" of the free market (if it isn't shackled) will adjust prices and wages to match.

    The Fed existing means there is no free market invisible hand adjusting interest rates.

    Mark Matis writes: Just what do you think the almighty dollar would be worth if they actually did an audit of all the gold that is supposedly in Fort Knox?

    Historically, gold warehouses don't fail by being empty, they fail by being oversold in fractional reserve, which is revealed in a bank run. See discussion of bubbles in _A Random Walk Down Wall Street_.

    LL writes: 'fiat currency' [is] worth what the Fed says that it's worth

    The government will exchange fiat currency for whatever the Fed decides, but that's not what it's worth. Fiat currency is worth whatever your life is worth, you pay fiat to government to avoid being killed by the tax collector.

    1. The problem with a gold standard is you must have the gold AND you must be willing to pay debts in gold. This was marginally possible in a world of a billion people most of whom neither traded nor purchased anything from us. Today with 7.5 billion people it is impossible. Within a year you would have zero gold reserves and your economy couldn't function. We aren't ever going to a gold standard. The only reasonable option is fiat money with good management/budgeting by politicians. That should be the goal, not the pie in the sky gold standard.

    2. I may agree there's not enough gold for its commodity value as an electronics engineering metal to be larger than total world trading volume, the instant demand for money in all the transactions in flight.

      Simply use barrels of oil as a store of value instead of gold. That's what the US petrodollar actually is. The value of a barrel of oil is not set by anybody's fiat, but by its value as a useful object.

      Ignore politicians, they're useless parasites.

    3. It’s why I prefer the term “commodity standard”. It doesn’t have to be gold and it doesn’t even have to be one thing; there’s a basket of standards approach. It just needs to be agreed upon and finite, not like fiat currency. Inherently valuable throughout history is a help.

  8. re: "I don't have a reference handy, but I've heard Queen Victoria was on a gold standard, and didn't have any business cycle. Yet there was business cycle before and after. ANON

    Read Homer's History of Interest Rates.
    I have the third edition and highly recommend the book.

    Dan Kurt