Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Seven Years of Monetary Quackery; Can the Fed Admit it Got it Wrong?

Interest-Rates / US Federal Reserve Bank Jan 29, 2016 - 12:39 PM GMT

By: Mike_Whitney

Interest-Rates

America’s richest investors are betting trillions of dollars that the US economy will stay lousy for years to come.

Who are these wealthy investors?

Bondholders. And their views on the state of the economy are reflected in the yields on long-term US Treasuries. At present, the yields on long-term debt are very low which means that investors think the economy will continue to underperform while inflation remains in check.


This pessimistic outlook is not new for bondholders, in fact, yields have remained stubbornly low since the onset of the financial crisis in 2008, which means that investors were never swept up in the hype about “green shoots” or an “economic recovery”. They knew it was baloney from the get-go and their opinion hasn’t changed. There’s no sign of recovery anywhere except for the fake government payroll numbers that don’t jibe with any of the other data. By any rationale measure, the economy is stuck in a long-term slump that shows no sign of relenting anytime soon. Bondholders seem to grasp that fact and have made a ton of dough betting on crappy growth and perennial stagnation, which are the logical corollaries of the Fed’s goofy monetary policies. (Stephen Roach explains low yields on 30-year USTs here.)

In any event, bond yields are a heckuva lot more helpful in forecasting the future than the cheerleading pundits on the business channel. Yields–which are the amount of return that bondholders receive for lending the government their money–reveal investors expectations of future economic activity and inflation. They are a barometer for measuring the health of the economy. If growth is strong and the future looks rosy, yields will rise as the demand for money increases and the prospects of higher inflation seem more likely. But if investors expect growth to fall-short and disappoint, then yields are going to drop reflecting lower expectations for future activity. The fact that the yields on 30-year USTs are below 3 percent at this phase of the game suggests that policymakers either don’t understand how the economy works or simply refuse to initiate the changes that will spur growth. Either way, it’s a damning indictment of the Central Bank’s role as steward of the system.

At present, (Jan 26) the yield on benchmark 10-year Treasuries is just a whisker below 2 percent at 1.98 percent. That means that investors will get 1.98 dollars annually per every $100 invested, which is nearly nothing. Think of it this way: Let’s say your buddy Ernie wants to borrow $5,000 to open a Gelato stand in Granite Falls. So you’re wondering how much you need to charge him above the price of the loan to be fairly compensated for the risk you’re taking. (since Ernie has had a few bad ideas in the past that blew up in his face.) If you decide to charge him 2 percent per year, then you’re barely making ends meet since inflation is currently running at roughly 1.5 percent. So you need to charge something above 2 percent or you won’t even break-even.

The point is, when you lend your money to the USG for a paltry 1.98 percent, you’re basically getting bupkis on your investment. The only upside to the deal is that you can be reasonably certain that the government will pay you back, unlike Ernie.

The focus on interest rates as the only means for fixing the economy should have run its course by now, but, of course, it hasn’t because the Big Money that runs the country likes things the way they are. Low rates and easy money mean bigger profits for Wall Street regardless of their impact on the real economy. What matters most to bondholders is not growth or inflation, but policy. That’s what keeps the boodle flowing into the coffers. Policy. And as long as they’re confident that the Fed’s “accommodative” policies are going to be coupled with fiscal belt-tightening (which has been adopted by both Dems and Republicans), then they can rest assured that the economy will continue to sputter while bonds “rip the cover off the ball”.

But the Fed’s loosey goosy monetary policies do come at a cost, and that cost is borne by businesses and working people alike. For example, there was an op-ed in last week’s WSJ about the knock-on effects of low rates on capital investment by Michael Spence and Kevin Warsh. The title of the article tells the whole story: “The Fed Has Hurt Business Investment.” Here’s an excerpt:

“Extremely accommodative monetary policy, including the purchase of about $3 trillion in Treasurys and mortgage-backed securities during three rounds of “quantitative easing” (QE), pushed down long-term yields and boosted the value of risk-assets. Higher stock prices were supposed to drive business confidence and higher capital expenditures, which were supposed to result in higher wages and strong consumption. Would it were so.

Business investment in the real economy is weak … In 2014, S&P 500 companies spent considerably more of their operating cash flow on financially engineered buybacks than real capital expenditures for the first time since 2007 … We believe that QE has redirected capital from the real domestic economy to financial assets at home and abroad. In this environment, it is hard to criticize companies that choose “shareholder friendly” share buybacks over investment in a new factory. But public policy shouldn’t bias investments to paper assets over investments in the real economy.” (The Fed Has Hurt Business Investment, Michael Spence And Kevin Warsh, Wall Street Journal)

This is a fairly typical complaint, that the Fed’s policies have lifted asset prices but hurt business investment which requires strong demand for their products. The fact is, businesses can’t grow unless people are employed, wages are rising, and money is exchanging hands. None of that is happening currently, in fact, according to the Atlanta Fed, the Forth Quarter (4Q) GDP is expected to come in below 1 percent. (.06 percent) which means the US economy should probably be wheeled down to the morgue ASAP so the embalming process can begin pronto. For all practical purposes, the economy is kaput.

Of course, President Obama rejects that type of negativity outright. In the State of the Union Speech in January, Obama waved his finger threateningly at the teleprompter saying: “Anyone claiming that America’s economy is in decline is peddling fiction.”

Fiction?? Not according to economist James Hamilton. Here’s what he said this week on the Oil Price website:

“The global economy is slipping into recession. The evidence is showing up in all the usual ways: slowing output growth, slumping purchasing-manager indexes, widening credit spreads, declining corporate earnings, falling inflation expectations, receding capital investment and rising inventories. But this is a most unusual recession– the first one ever caused by falling oil prices.” (Could Low Oil Prices Cause A Global Recession?, Oil Price)

And then there’s this from the Wall Street Journal:

“Every U.S. recession since World War II has been foretold by sharp declines in industrial production, corporate profits and the stock market. Industrial production has declined in 10 of the past 12 months, and is now off nearly 2% from its peak in December 2014. Corporate profits peaked around the summer of 2014 and were off by nearly 5% as of the third quarter of last year. The Dow Jones Industrial Average is down 7.6% so far this year…

unlike past declines in industrial production, today’s decline has been driven primarily by the collapse in the oil industry…. mining output has fallen over 10%, driven by a 62% decline in oil- and gas-well drilling…

“Manufacturing tends to lead the economic cycle and it tends to be an indicator of the swings,” said Thomas Costerg, senior economist at Standard Chartered. “Manufacturing is struggling.” (Recession Warnings May Not Come to Pass, Wall Street Journal)

The truth is that the economy is still very weak and the Fed’s monetary hanky-panky hasn’t produced the credit expansion that was expected. Adding excess reserves at the banks was supposed to boost lending which would lead to stronger growth, but it hasn’t happened mainly because households and consumers aren’t borrowing like they did before the crisis. Instead they’re setting more money aside and trying to pay down their debts. Take a look at the chart on bank loans which illustrates how lending is basically flatlining. (See here.)

No bank loans means no borrowing. No borrowing means no credit expansion. No credit expansion means no new activity, no new spending, no new hiring, no new business investment, no stronger growth. Nomura’s chief economist Richard Koo summed it up succinctly saying, “When no one is borrowing money, monetary policy is largely useless.”

Bingo. It is useless. We know that now. Neither QE nor zero rates promote growth. The ‘Grand Experiment’ has failed. Keynes was right and (Milton) Freidman was wrong. Here’s Keynes:

“For my own part I am now somewhat skeptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organizing investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.” (John Maynard Keynes, The General Theory of Employment, Interest and Money, marxists.org, 2002)

Keynes is just stating the obvious, that you can’t pull the economy out of a severe slump by tinkering with interest rates or pumping up bank reserves. It doesn’t work. What’s needed is ‘good old fashion’ fiscal stimulus mainlined into the economy through ambitious federal infrastructure programs that stimulate activity, boost employment and keep the economy moving forward until private sector balance sheets are repaired and personal spending returns to normal.

The Fed has wasted the last seven years trying to reinvent the wheel when the solution was always right under its nose. Are we really going to waste another seven implementing the same failed strategy?

By Mike Whitney

Email: fergiewhitney@msn.com

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

© 2016 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules