It’s Not the Economy, Stupid… It’s the Fed

3 | By Shah Gilani

Back in the 1992 presidential race, James Carville, Bill Clinton’s campaign strategist wanted his candidate to blame incumbent George H.W. Bush for the recession the country was facing and pressed the Clinton team into focusing on that key talking point by telling them, “It’s the economy, stupid.”

That phrase is still used today.

But it shouldn’t be when it comes to the stock market.

In fact, anyone who thinks the market’s wobbling because the economy is wobbling might be stupid.

The market is having an ugly bout of hiccups, not because there are any problems with the economy, it’s hiccupping because the Federal Reserve is stupid.

Here’s what the Fed’s doing that’s stupid, why we’re stupid to believe they’re not the problem, and how to fill in the hole they’ve dug for the country and the world…

Intervention Is Socialism

The bottom-line is that the Federal Reserve, America’s private so-called central bank, has been intervening in the economy and free markets, to the point where our economy and markets aren’t free anymore.

Instead of after-the-fact reacting to an overheating economy or a stagnant or recession-plagued economy, the Fed leads us into unsustainable expansions that inflate dangerous bubbles by keeping rates artificially too low for too long and then artificially has to lower them a lot more by extraordinary means to prevent the deflation they hung us with when their last fully aided and abetted mortgage mania imploded U.S. and global economies.

How the Fed “commands” the economy isn’t exactly communist, but it sure is a form of socialism.

Congress punts to the Fed.

Politicians gave the Fed the power they exercise.

Why? Because it’s the economy, stupid.

The Fed was created, by the most powerful bankers in the U.S. and the world, to take over America’s money supply so it could print as much money as it wanted, to distribute to its constituent banks, so they could buy debt issued by the Treasury.

That way politicians can spend without having to raise taxes on account of printed money being used to absorb deficits and the nation’s debt.

How else could the country have issued trillions of dollars more in debt in the last ten years and not raise taxes to cover all the social spending politicians lavish on voters?

The way it works is that the Fed gives money to banks to buy government obligations, then the Fed buys those bonds from them and parks a good part of America’s debt on its imaginary balance sheet.

Yes, it’s a Ponzi scheme.

And it’s global.

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When the Fed lowers rates other central banks around the world always have to lower their rates.

If the Fed lowers rates, it affects the value of the U.S. dollar. Lower rates put downward pressure on the dollar. That means the dollar doesn’t buy as much. So other exporting countries who want their goods to be cheap to U.S. consumers lower their currencies by having their central banks lower their rates.

In days gone by currency manipulation occurred at the government level when treasury departments intervened in spot currency markets to lower the relative value of their currencies by selling them on the open market.

But there are direct and indirect costs to intervening in currency markets.

Direct costs are transaction costs and using reserves to manipulate currencies.

The indirect costs are political. It’s easy to determine when a country is in the market selling its currency in huge amounts, trying to devalue. Governments get blamed for that, because it is government directed devaluation. There are political consequences for direct intervention and they often trigger global responses.

That doesn’t have to happen anymore.

Central banks do that job now by lowering interest rates from the top down, or bottom up, since we’re talking about lowering the federal funds rate.

It’s pure socialism. It’s government authorized manipulation to direct the economy by punting to the Fed, or any other central bank. That’s how deficits get absorbed and how central banks move economies and ultimately bond and stock markets.

There’s nothing free about our economy or markets, only on the “local” level.

Equity markets reflect Fed manipulation.

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What’s stupid about the Fed, besides the fact that it exists, is how they’ve gone whole hog in their efforts to lead the economy to greener pastures, instead of reacting to what the economy does when its free to ebb and flow normally.

Everyone who defends the Fed says without it we would have been sunk in 2008 and they saved all America’s too-big-too-fail banks, and the economy, and the country from another Great Depression.

Hogwash. The Fed caused the build-up of leverage that fueled the mortgage mania that imploded the greedy banks who played along, and imploded the economy when people lost their homes, jobs, and savings.

Now, the Fed wants to stimulate the economy further by lowering rates, at the exact moment when stocks are making all-time highs, with unemployment at 3.7%, at 50-year lows, as wage growth starts to improve, as GDP growth has been well above trend, and consumers are in good shape and in a buying mood.

Why now?

Because they can. Because they’ve taken it upon themselves to command the economy as they see fit.

It’s stupid.

The Fed is stupid.

We’re stupid for not demanding Congress kill the manipulator of the economy, the killer of free markets, the harbinger of full-fledged socialism.

Lastly, as proof the Fed’s infected the whole world with mad cow disease, interest rates falling around the globe, courtesy of central banks that have to follow the Fed, and lead the Fed when they know the Fed going to cut rates, actually causes the Fed to cut rates.

In other words, the Fed’s so stupid they are actually victims of their own manipulation.

The only reason investors, meaning state-backed banks and institutions and smart big-time bond traders, buy negative yielding bonds, of which there are about $15 trillion worth worldwide (according to Deutsche Bank Securities 43% of bonds outside the U.S. now sport negative yields, that’s up from 20% in late 2018), is because they know that central banks, thanks to the Fed leading the charge, will have to cut rates more.

Negative yields don’t matter to those investors; they’re not buying all those bonds for negative yields. They’re buying them because as rates go lower, they get capital appreciation (prices jump higher) on the bonds they bought.

The problem is that to book profits they must sell those increasingly negative yielding bonds to someone.

When the game’s up, there’s only one “investor” big enough and stupid enough to buy all those bonds to save the world from them defaulting. Those investors will have to be the central banks of the world, led, of course, by the Federal Reserve.

Do you see how this is going to end?

Tell me, what do you think will ultimately happen?



3 Responses to It’s Not the Economy, Stupid… It’s the Fed

  1. Robert in Vancouver says:

    I hope someone can tell me if I’m right or wrong, but I think interest rates will go up a lot when there’s nobody left willing to buys bonds at negative or low rates. But why hasn’t that already happened?

    Since it hasn’t happened by now, maybe the whole scheme can keep going for as long as major world gov’ts play along with the Fed?

  2. Jay says:

    Knowing that fed will print $trillions in digital dollars to buy US government debt, no one will want the dollar. The dollar will lose its status as the world’s reserve currency. Some type of gold-backed currency will take its place.

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