By Stefan Gleason – Money Metals Exchange….
“The last duty of a central banker is to tell the public the truth.”
—Alan Blinder, former Federal Reserve Board Vice Chairman
The Federal Reserve Board finds itself back in a quandary of its own making. When Fed chair Janet Yellen pushed through an interest rate hike this past December, she confidently cited an “economy performing well and expected to continue to do so.”
The Fed set the stage for more rate hikes in 2016. But something went awry along the way – namely, the Fed’s upbeat forecast.
Official pronouncements of optimism don’t square with the economic realities now unfolding. Since the Fed’s rate hike, warning signs of a looming recession have rapidly accumulated. Industrial production is slumping. Global bulk shipping rates are in the dumps. The number of people without full-time jobs is growing. Corporate earnings are weakening. The junk bond market is melting down, and the stock market appears to be following suit.
Most of these warning signs were flashing back when the Fed decided to hike. The stock market was still positively diverging from economic indicators, but now that the Dow Jones Industrials too is rolling over, the Fed is back-tracking on rate hikes.
The Fed’s next move could be to cut rather than raise rates – perhaps even pushing them into negative territory as central banks in Europe and Japan have done.
The Fed Has a Remarkable Track Record of Failed Forecasts
Federal Reserve policymakers can be counted on to react to market developments, because that’s all they can do. Time and again, they have shown that their forecasting models don’t work. The Fed doesn’t actually prevent financial crises from occurring. It just comes in after the fact to try to clean up the mess its loose money policies helped create – the 2008 financial crisis being the latest example.
Fed officials won’t admit publicly that they’re just making it up as they go. But that’s the reality. As James Rickards explained in an interview with Mike Gleason, “I’ve spoken to Fed governors, I’ve spoken to Regional Reserve presidents, I’ve spoken to a lot of senior officials at the Federal Reserve, and insiders there. They don’t know what they’re doing. They won’t say it publicly but they do say it privately.”
If Fed officials admitted that they couldn’t outsmart the market or forecast the economy, that they don’t know anything beyond what’s in latest edition of the Wall Street Journal, then they’d be admitting there is no reason for them to be in charge of setting interest rates or managing the money supply.
The Fed’s Rarely Admitted Mission Is Psychological Manipulation
But as alluded by the unguarded comment of Alan Blinder quoted above, incompetence is not the only problem with the Federal Reserve System. Although that would be bad enough.
As much as anything, the Fed is a disinformation and propaganda machine.
A primary goal is to manipulate the public and the markets, and spewing false information is justified by a larger objective. It’s all part of “managing inflation expectations” and jawboning to prop up the market. Central bankers know that perception can become reality, at least in the short run.
Of course, the whole public justification for the creation of the Federal Reserve system in 1913 was that enlightened policymakers would tame the animal spirits that drove economic booms and busts. What a farce that turned out to be.
The Fed went on to give us the Great Depression, a great stagflation in the 1970s, one asset bubble (commodities, stocks, housing, etc.) after another. The central bank always re-inflates the system rather than allow deflation to cleanse it out completely. So the bubbles rotate from one asset class to another in perpetuity. Before the creation of the Fed, major asset bubbles were a once in a generation event. Now they are the norm.
The Fed Has Unequivocally Failed in Maintaining “Price Stability”
One of the Federal Reserve’s core mandates is “price stability.” Yet the Fed’s pursuit of stable price levels has translated into a 97% loss in the purchasing power of the U.S. dollar since 1913.
The decline in the value of the dollar accelerated beginning in 1971 – as did the frequency and severity of asset bubbles. That’s no coincidence. In 1971, President Richard Nixon revoked international gold redeemability, rendering the U.S. dollar a purely fiat currency.
“We had a gold standard from the 1790s right through the 1970s, a hundred and eighty years, and it worked very well. We had the most phenomenal growth of any country in the history of the world,” said Steve Forbes in a recent Money Metals podcast. “Since then we’ve had more financial crises, more dangerous banking crises, lower economic growth, and we see the stagnation that we have today.”
Negative Interest Rates and Helicopter Money Drops Are Next
How will Fed officials respond to the present stagnation if it morphs into something worse? Probably as before, with the only tool left in their toolkit: the printing press.
If 0% interest rates prove ineffectual, then they can push rates into negative territory. If negative rates don’t nominally lift financial markets and economic indicators, they can always try helicopter drops (or the digital equivalent).
Or they could try the sound money approach.
They could re-link the currency to gold, allow the value of the dollar hold a constant purchasing power over time, and stand aside while markets determine interest rates and asset valuations. The major hurdle to transitioning toward sound money within the Federal Reserve System is that central bankers would have to admit markets know better than they do.
It’s not in the nature or the institutional interests of people like Janet Yellen – an Obama-appointed leftist – to announce that their services aren’t needed. So the path forward for monetary reformers may be to work outside the system.
Toward that end, we are helping to expose the Fed to the general public. We aim to educate the people about precious metals as real, alternative money. The more individuals who adopt their own personal gold standards, the less relevant the Fed will become.
Stefan Gleason is President of the Sound Money Defense League, a national grassroots lobbying organization working to restore gold & silver to their historical role as America’s constitutional money. He also leads Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason has frequently appeared on national television networks such as CNN, FoxNews, & CNBC, & his writings have appeared in hundreds of publications such as the Wall Street Journal, TheStreet.com, Seeking Alpha, Detroit News, Washington Times, & National Review.
What is missing in the Fed’s thinking is actually the global economy and International Bank of Settlements as well as analysis of large flows of wealth. With such a large share of what the USA consumes produced outside the USA inflation is really outside the control and almost beyond even the influence of the Federal Reserve Board. The USA is the only nation that has no direct say in the value of its currency to other nations. Other nations manage their currency in direct relationship to the USA dollar, but the USA really has no way to respond no we won’t sell you dollars at that price because so many dollar deposits have actually left the USA entirely.
The Fed might do better in fact managing money supply only for the sake of maximizing employment within the USA and where possible minimizing underemployment which is even more destructive to national morale than unemployment as least while receiving unemployment benefits and Food Stamps. Very deep resentment boils when you go deeply into debt to attend college or trade school only to get employment you could have gotten as a high school graduate. This is also at the root of discontent in the Middle East today even though China has the opposite problem, not enough college graduates to reach its national potential through management jobs.
Also a problem for the Fed is that much of the actual money supply no longer resides in banks but in commercial paper, corporate bonds, corporate treasuries not deposited with banks but invested in corporate paper or formally lent to banks, mortgage securities, and derivatives, which are all outside of its authority.
/* “Also a problem for the Fed is that much of the actual money supply no longer resides in banks but in commercial paper, corporate bonds, corporate treasuries not deposited with banks…” */
Thank you for your succinct analysis. With so much of the world’s money supply based on intangibles, and with the prices of precious metals long deregulated, returning to a precious-metals standard is almost certainly no longer an option or at best would be mind-numbingly difficult and disruptive.
Note that I’m not making any judgement as to whether that situation is reasonable. I’m simply saying that the calendar can’t be turned back. Those who simply want a return to the days of fixed-price gold and silver need instead to look for solutions that recognize the complexity of today’s economic world.