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July
18
2019

What Would Happen If the Federal Reserve Did Nothing?
Bill Bonner

The FOMC [Federal Open Market Committee] has been navigating between the shoals of overheating and premature tightening with only a hazy view of what seem to be shifting navigational guides…

– Jerome Powell, Chair of the Federal Reserve

YOUGHAL, IRELAND – The Fed has a less than “hazy” view of its “navigational guides.” It is lost at sea. It has no idea what is north or south… up or down… right or left.

The U.S. economy, says Powell, is in a “good place.” The president, meanwhile, says it is in a great place, that it’s “the greatest economy ever.”

But according to both Powell and Trump, it got to this good place – even by sailing in the wrong direction.

Here’s Bloomberg:

While Powell’s comments on Capitol Hill about the current outlook cemented expectations for an interest-rate cut this month, he also acknowledged for the first time publicly that officials have potentially tightened monetary policy too much because they underestimated shifts in the U.S. economy.

Maybe Mr. Trump is right. If the Fed had just been able to see through the haze more clearly… if it had just a bit of the instinctive, stable genius of the commander in chief… Wow! We really might be at Dow 30,000… or, what the heck… Dow 50,000!

Stay Wrong

Yesterday, again, the stock market took a rest… barely leaving home from sunup to sundown. Investors must have been wondering…

The Fed set the wrong course… but seemed to end up in the right place. The lowest unemployment in 50 years. The highest stock market ever… Maybe it should just stay on the course it’s on.

And, now that it can see more clearly… unemployment will go down even further and stocks will go higher, right?

But what makes us believe the Fed has got it right now? If it was wrong before, maybe it’s wrong again… and maybe everything won’t go so well this time…

Or, maybe Fed policy doesn’t really have any effect at all?

If any of them bothered to think about it for more than a second, their heads would be spinning with even more questions…

If the economy is in such a “good place,” why does it need a key lending rate suitable for an emergency?

If “the greatest economy ever” has already knocked unemployment down to rock-bottom levels, for whom is the Fed creating more jobs?

And how did our fathers’ economy – of the 1970s, 1980s, and 1990s – function with the Fed’s interest rate more than twice what it is today and still produce growth rates twice as high?

Maybe you, Dear Reader, have asked those questions yourself. (We hope not; don’t you have something better to do?)

But rather than confronting them head on, we will sneak around back and ambush a related question that might help us with answers to them all.

Too Late for Heroics

We’ve seen that the Fed’s bias towards lower and lower interest rates is meant to stimulate the economy… and that all forms of stimulus are varieties of inflation. They “work” only by tricking people into spending money they don’t actually have.

In the early stages, the feds can sometimes make a heroic effort to stop this inflation from getting out of control. That is what Paul Volcker did when he put the federal funds rate at 20% and halved consumer price inflation in 24 months.

But when Paul Volcker took over at the Fed in August 1979, the U.S. government had less than $1 trillion in debt. Now, it has $22 trillion. Add household and business debt and the total is $72 trillion.

Then, stocks were at their lowest level in 50 years. Now, they are at their highest level ever. Then, too, unemployment was almost twice what it is today.

In the early 1980s, there was everything to gain from getting ahead of inflation. Today, there’s everything to lose. Now, it’s too late for heroics.

This is the answer to the question you have not yet asked. How come the feds have to make the situation worse by further distorting prices… adding more fake money… and increasing the debt burden?

Why can’t the Fed just leave interest rates alone? Why does it have to cut them?

Inflate or Die? Couldn’t we just stand still… neither inflating more nor dropping dead?

Stay tuned…

Regards,

Bill

 

Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail The Daily Reckoning. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest. Since then, Agora has grown to include dozens of newsletters focusing on finance, health and travel. Since the early '90s Bill has vigorously expanded from Agora's home base in Baltimore, opening offices in London, Paris, Bonn, Waterford, Ireland and Johannesburg, South Africa.

 

 

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