Daily Reckoning founder Bill Bonner thinks central banks are waging war on the markets. He also believes they will lose.
I wholeheartedly agree with Bonner’s rationale. Let’s tune in.
This is a guest post courtesy of Bill Bonner and the Daily Reckoning.
Why the Feds Will Lose Their War on the Markets
The markets continue to dawdle. Not much conviction in either direction.
We’ve already looked at the War on Poverty, the War on Drugs and the War on Terror.
So let’s move on…using our new lens to look at another of the feds’ fake wars.
Dirty War
No war was ever officially declared against the markets.
But for four decades the feds conducted covert operations…a dirty war in which they’ve tried to mislead, obstruct, and suppress market forces.
They used fake money, fake savings, and fake interest rates to confuse investors, businesses, and consumers.
They didn’t say so directly, but their purpose was to give out false signals so that people would change their behaviour.
‘Demand’ was too weak, they said. What to do about it?
They flooded the system with phony savings (credit).
Price signals were distorted. Credit limits seemed to disappear. Debt limits were eased.
Then, in 2008, the war turned hot…with the feds actively and overtly holding down interest rates to push up stock and bond prices.
In response to the crisis they caused — by encouraging too much debt in the housing sector — they claimed that the ‘free market’ had failed.
They were just responding to the ‘emergency’, they said.
Soon, everybody got in on the act — expressing an opinion about how high (or low) interest rates should be.
Force and fraud
Believe it or not, an activist group called ‘Fed Up’ argues that raising rates is…you guessed it…racist!
Institutional Investor magazine reports that a group funded by 32-year-old Facebook cofounder Dustin Moskovitz is lobbying against rate increases on the grounds that higher rates are bad for US workers. From the website:
‘The truth about the economy is obvious to most of us: not enough jobs, not enough hours, and not enough pay — particularly in communities of color and among young workers.
‘Some members of the Federal Reserve think that the economy has recovered. They want to raise interest rates to slow down job growth and prevent wages from rising faster. That’s a terrible idea.
‘We stand with millions of workers and their families in calling on the Federal Reserve to adopt pro-worker policies for the rest of us. The Fed can keep interest rates low, give the economy a fair chance to recover, and prioritize full employment and rising wages.’
What? Who are these people? Do they have tails? Horns?
They’re right about one thing: When the Fed tries to control the economy, it is politics, not markets, at work.
Markets work by persuasion and voluntary exchange. Politics works on force and fraud. Fed Up is a political organisation trying to influence how the force and fraud is applied.
But let’s look at the feds’ War on Markets through our now-familiar scope.
Victory is impossible
First, is this a war the feds can win?
No. Of course not.
Markets can be suppressed, delayed, and denied…but never eliminated.
Markets do not stop working just because you try to bend, distort, and even outlaw them. Victory is impossible.
The market for drugs does not stop just because the feds make them illegal. Instead, they reprice illegal drugs, taking into account the increased cost of doing business.
Nor does poverty disappear just because the feds make war on it.
‘The poor will always be with you,’ said Jesus, wisely.
Wealth and poverty are relative; there will always be some rich and some poor. Passing laws will not change that.
And ‘terrorism’?
Those who do not have access to conventional armies always resort to unorthodox attacks.
That’s what American colonists did when they launched their war against the British in 1775.
It’s what the Jews did when they launched their ‘insurgency’ against the British in Palestine in 1939.
And it’s what the Maquis did during the occupation of France by the Nazis during the Second World War.
Terror won’t stop any time soon. Nor will markets cease to function.
Bubbles, bankruptcies, and misery
Second, does the enemy gain strength from the ‘war’ against it?
Well, yes and no.
Markets work perfectly well whether you make war on them or not. Governments can put any price on anything they want. But only markets can tell you what they are worth.
Just look at what happened in the Soviet Union. Or China, pre-1979. Or Venezuela.
Who bought anything from China when the communists were setting prices?
Who goes to Venezuela to do his shopping today?
We visited Russia soon after the Soviet Union was disbanded. Markets were just opening up. But after 70 years of price fixing, there was almost nothing to buy. Almost everything that was being sold had been pilfered from the army. We bought a pair of boots for $1.00. We still have them. The soles are so stiff they barely bend.
There are really only two types of economies — command economies and market economies. The latter work for everyone — but you never know who the real winners will be. The former work only for the commanders. Then, when they have stolen everything there was to steal, markets reassert themselves.
Economies are price-discovering, information-generating learning systems. On the world market, every economy has access to the same resources, more or less. It’s what you do with them that counts.
Dictating prices is like teaching students that Japan won the Second World War…or saying that two plus two equals five…or rounding off Pi to three just to make it easier to remember.
But the more fake information you give out, the more valuable real information becomes.
A war the feds will ultimately lose
Third, did it create a new, corrupt Deep State industry? And fourth, do the combatants on both sides gain as the public loses?
Not exactly.
This is different from other ‘wars’ announced by the Deep State. This is how the insiders fund their other wars…and how they shift trillions of dollars from the public to themselves.
The War on Markets distorted almost all industries and corrupted the entire economy.
As reported here many times, suppressed interest rates alone probably cost savers as much as $10 trillion since 2008. Goosing up asset prices probably shifted another $10 trillion or so to the people who own them (typically, the elite).
As in all of these fake wars, the casus belli is phony.
Markets do not hurt people; they help them. Price signals, set by markets, are essential. Otherwise, you don’t know whether you’re adding wealth or subtracting it.
Trying to suppress free markets or abolish them always leads to confusion, bubbles, bankruptcies, and misery. Economies weaken; people grow poorer.
Since 2008, wages have been stagnant or falling for most people…GDP growth has declined and is now probably negative…productivity growth has declined more than any time in the last 40 years…world trade levels are back to 2009 levels…and the bounce-back from the Great Recession was the weakest on record.
For now, the war serves its real purpose: to increase the power and wealth of the Deep State insiders.
But it is a war that the feds will ultimately lose.
Trying to suppress markets is like putting a giant cork in the mouth of a volcano. It doesn’t stop the eruption; it just makes it more violent.
Regards,
Bill Bonner,
For The Daily Reckoning, Australia
End Bonner – Mish Start – Fed Up
Let’s start with three truths by Bonner.
- Markets work by voluntary exchange.
- Politics works by force and fraud.
- Fed Up is a political organisation trying to influence how the force and fraud is applied.
Cockroach Theory
I wrote about Fed Up on August 23, in Is it Possible to Overhaul Cockroaches?
A People’s Fed
Andrew Levin [Fed Up founder] proposes a “People’s Fed“.
Problem of Control
Levin notes the Fed is unique in that it is a mostly-private enterprise. Fair enough. But do we really want our model to be similar to the pathetic performance of the bank of Japan or the EU?
Conflict of Interest
On the surface, that’s clearly a problem but would making the Fed public change anything?
Please note that ECB President Mario Draghi is an Ex-Goldman Sachs Managing Director.
This brings us to point number three of Levin’s misguided plan.
No Voice
Diversity for Diversity’s Sake
Diversity for the sake of diversity is pure nonsense. Black, white, red, or Latino makes no difference at all. The problem is group think, not race.
Every person at the Fed (central banks in general) has been trained in the same kind of Keynesian and monetarist thinking.
If “Fed Up” really wanted diversity it would seek diversity in thinking, not diversity in skin color.
Along those lines, one might propose Zero Hedge, Peter Schiff, or me. That would bring diversity to the group for sure. But that’s not the answer either.
My Proposal
While pissing and moaning about what is broken, Levin never explained why we need a Fed at all.
So why we need one?
The Fed, The ECB, the Bank of Japan, the Reserve Bank of Australia, etc., all have a proven track record of blowing bubble after bubble.
If we did not have a Fed, it wouldn’t be beholden to Goldman Sachs. And it would be as diverse as the free market. Nothing is more diverse than that.
Yet, diversity cannot and will not fix that problem because diversity is not the key problem.
The key problem is the central bank coupled with a Fiat credit system that can be expanded by central banks at will, in direct response to government deficit spending.
Two Way Political Stunt
Fed Up is nothing but a collection of self-serving opportunists who actually understand markets even less than the Fed, quite an achievement actually.
Yet, ahead of the last Jackson Hole meeting, the Fed did meet with Fed Up.
At that meeting, the Fed pretended to care what Fed Up had to say, and Fed Up pretended to believe the meeting accomplished something.
We need neither Fed Up, nor the Fed. We should all be fed up, with the Fed and with the charlatans at Fed Up, a tax free foundation whose entire premise is complete foolishness other than pad the pockets of its creators.
Fed Up preys on the very people it purportedly seeks to help.
Mike “Mish” Shedlock
Fed Up – another SJW mission. Dustin Moskovitz will rally his band of mindless warriors to keep interest rates low? For what real reason?
To Make sure that nobody has anything to do except spend all their time on his site that generates mega bucks for him.
Communism doesn’t work because prices and profits are not available to guide allocation of resources.
Government doesn’t work because, while it may have pricing signals, it is not guided by profits but by political motivations of government decision makers.
The Fed’s fiat money and interest rate interference distorts pricing decisions and destroys the ability to project future profits. Fooling with the monetary system interferes with rational allocation of the underlying resources.
Low interest rates are intended to stimulate demand, however, credit limits for the average Joe are now tapped out, so the only beneficiaries continue to be the elite. Asset markets will continue to rise until that over-leveraged elite tries to take their money off the table.
Mish:
When the fed was first created their only mission was to be a lender of last resort to banks to prevent runs and insolvency. They were supposed to lend in exchange for good collateral to prevent system wide collapse and liquidity crises. I am unclear on if they were mandated to set invest rates back then unless it was based on their lending rate for cash to banks in need. Anyway I think the original intent is valid still but all the other added mandates are ridiculous. Giving a bunch of Ivy league PHD’s, who haven’t earned a dime in the free market, control the worlds’s largest economy is ridiculous. I am unsure of how interest rates would be set without the fed but nevertheless you have to give some credence to the original intent of the fed of supplying liquidity when needed.
Thanks for the great commentary.
Regards,
Harold
Originally, the Fed purchased corporate bonds to help the economy (private sector). It was the war that changed the purchases to treasuries, which CONgress conveniently never reversed. Eliminate the career politician through short term limits and real reform can begin.
Great post. Thank you. We are at a cross roads where we must choose between a formal analytic framework per Steve Keen, or a more seat of the pants Austrian school approach or worse, a bastardized Kenesian approach of so called neoliberal or neoclassical economics. The seat of pants Austrian school at least acknowledges that banks create new credit money by lending. This is the crux. The sine qua non of macroeconomic analysis. The cusp. The breaking point.
And so I say again: start here. The truth will set you free. Banks create money when they lend. This is the problem.
No, just get out of the way. Let the markets figure it out. If someone bites off more than they can chew, too bad. It’s a learning experience and maybe they won’t do the same again, or maybe they will and they can take a second lump.
Stop steering the markets. Let interest rates go where they may, stop buying assets from insolvent banks, and, please, put some of these criminals in jail. Let the law work!
Sine qua non!!! That you is money!!!
Bill Bonner, please find a way to become Donald Trump’s economic adviser.(Hillary Clinton is beyond hope).
Donald is not nearly as bad as Hitlary but he needs a lot of advisors.
This three-minute video of Janet Yellen answering questions from Congressman Scott Garrett says it all. Is she capable of giving a “yes” or “no” answer? I mean, this looks like someone who would have been in a remedial reading class. Garrett was questioning whether Lael Brainard, since she had contributed the maximum amount of money to the Clinton campaign and was apparently in talks with the Clinton campaign about a future job, had ever recused herself or been asked to recuse herself.
http://www.bloomberg.com/news/articles/2016-09-28/yellen-cornered-by-lawmaker-in-heated-exchange-over-fed-politics
Of course the Fed is political.
“Diversity for the sake of diversity is pure nonsense. Black, white, red, or Latino makes no difference at all. The problem is group think, not race.”
Indeed, it is a problem. Diversity propaganda, both racial and social class (e.g. low-paid workers vs evil capitalists; blacks vs evil white cops) is just warmed over Marxism, pitting groups against each other as cover for an elite to gain power under guise of creating a classless Utopian world of equality. It’s the same disease that afflicted the Soviet Union and Eastern Europe, and what George Orwell wrote about in Animal Farm.
A major reason Trump is so anathema to the Mainstream Media and must be stopped at all costs is that he constantly punches holes in the Politically Correct Group Think and thereby threatens agendas. Group Think is analogous to “Big Brother” in George Orwell’s 1984, a blaring chorus that punishes “incorrect” thinking, contrary Facebook posts, etc. So, it is not “pure nonsense,” but rather part of the means of ascent to power of Comrade Obama, Comrade Hillary and the Clinton Foundation. Equality and Obamacare for all, and endless foreign wars. Chic Bolshevism, USA style, but nonetheless a deadly sinister totalitarian disease similar to the Third Reich. But, cool anti-corporate and anti-capitalist. It will all end when Hillary has the USA looking like her bombed out handiwork in Libya. But she may get Trumped.
So instead of a corrupt central planning bank run by bank CEOs making secret decisions behind closed doors, the fed-up fascists want a corrupt central planning bank run by political party apparatchiks making secret decisions behind closed doors?
The only group proven to screw over the poor more than bank CEOs are the political parties. Tax the rich and the middle class and the poor — feed the politicians and bureaucrats.
Only a left winger could visit the DMV and say — oh yeah, we want more of that.
“Who are these (((people)))? Do they have tails? Horns?”
Asked and answered.
We don’t need to do anything about the Fed. Let it be. Denationalize the currency. Abolish the legal tender acts and let currencies directly compete with each other. And let the Fed do as she pleases.
The paper chase is transitioning to the electronic chase, as the war on cash picks up steam. The root problem is not the Fed, but the career politician. Economic/monetary crisis’ occured many times before the Fed existed because of govt corruption and largess, which occurs because of the career politicians power to protect their self interest, which drives the actions of every person – especially those attracted to govt, with their noble intentions.
Since the wealth of a nation is determined by the total productive capacity of its people, and not the land and resources it posseses, as Japan and Russia have demonstrated, the focus must be on maximizing freedom, which enables the free flow of ideas and capital. Govt, by its definition reduces freedom, capital, and the equal enforcement of the rule of law.
https://www.armstrongeconomics.com/research/a-brief-history-of-paper-money/the-paper-chase-part-i/
Term limits on elected officials … without corresponding term limits on bureaucrats … transfers power from the elected whom the electorate can fire (at the next election) to those whom the electorate can never fire.
Why?
Because as long as power exists, it will be exercised.
If elected officials are constrained to a small number of years but bureaucrats can serve for 20, 30, 40 years or more, governmental power does not vanish, it merely transfers to the unelected … who due to long service behind the scenes will exercise ever more control.
If the public vents its spleen, it will be at the elected but increasingly impotent and ephemeral office holders, not those that truly control the reins of power.
Want more control over government?
Then radically downsize it and keep it tightly constrained.
Best wishes,
Kiisu
We need honest money. Divers weights and measures are counter productive.
The article states: “Wealth and poverty are relative; there will always be some rich and some poor. Passing laws will not change that.” On the other hand, many people now believe returning to the billion dollar cannabis & hemp industries would help boost the local economies. So, passing a federal law allowing these industries to return to the free markets might help many break out of poverty. Cannabis & Hemp = Power To The People.