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Bill Bonner
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Bill Bonner is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and the principal author of a daily financial column, Inside Investing Daily.
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Bonner & Partners
  • The Great Fed Lie 0 comments
    Dec 14, 2012 4:12 PM

    How much of the world's woe is the fault of people who claim to know things they don't really know... and to be able to do things they can't really do?

    Investment advisors say, "Housing always holds its value." How did they know?

    Or they say, "Stocks always go up in the long run."

    Oh yeah?

    Government bosses tell us they can "improve the educational system." Or that we have to "mobilize our troops" against some foreign devils.

    Or there are experts who tell us that we use too much oil... or that we don't have enough. We eat too much fat... or too little fish. We don't drink enough water, says one. We drink too much coffee, says another.

    Practically every week brings a new alarm. A new bit of pseudo-knowledge. And a new initiative at centralized planning to fix the problem.

    The world improver knows not only what "we" should do... but also what the Israelis should do. And the Syrians. And the Chinese. And the Russians. He's got a plan for everyone!

    The Problem With Planners

    Today, we're looking at the central planners at America's central bank...

    They're sure the world would be a better place if more people had a nine-to-five job. They are not planning to do much hiring themselves. But they seem sure that they can induce other employers to increase their payrolls.

    How?

    By creating money that didn't exist before and buying bonds with it, thus suppressing interest rates.

    Hmmm...

    Yesterday, The New York Times reported that the Fed plans "to continue suppressing interest rates so long as the unemployment rate remained above 6.5%."

    Why not continue suppressing interest rates until the swallows come back to Capistrano... or until the Great Lakes dry up?

    The assumption in the Fed's plan is that there is causal connection between its monetary policy (near-zero interest rates and QE) and unemployment.

    There is also a deeper assumption: that Fed governors can understand the connection... and that they can manipulate employment by holding interest rates down.

    Is it so?

    Not likely.

    From the report in the Times:

    To help reduce unemployment, the Fed said it would also continue monthly purchases of $85 billion in Treasury securities and mortgage-backed securities until job market conditions improved, extending a policy announced in September.

    But the Fed released new economic projections showing that most of its senior officials did not expect to reach the goal of 6.5% unemployment until the end of 2015, raising questions of why it was not moving to expand its economic stimulus campaign.

    At a news conference after a two-day meeting of the bank's top policy committee, Mr. Bernanke suggested that the Fed was approaching the limits of its ability to help the unemployed.

    "If we could wave a magic wand and get unemployment down to 5% tomorrow, obviously we would do that," he said when asked if the Fed could do more.

    "But there are constraints in terms of the dynamics of the economy, in terms of the power of these tools and in terms that we do need to take into account other costs and risks that might be associated with a large expansion of our balance sheet," referring to the monthly purchases of securities.

    Well, right. Bernanke has no magic wand. All he has is monetary policy. So, he waves that around.

    But where is the evidence that it has the desired effect? Interest rates have been at zero for four years already. Unemployment is still high. John Williams at ShadowStats put the real unemployment level at 23%, not the 7.9% reported by the Labor Department.

    Unintended Consequences

    Even if you think ZIRP (zero interest rate policy) is responsible for lowering unemployment over the last four years, at the present rate it will take another five or six years before it goes down to the Fed's target.

    Let's see... What will be the unintended consequences of 10 years of ZIRP?

    If there is a connection between monetary policy and the unemployment rate, it is a slippery one. Interest rates were about 5% when the U.S. economy ran at full employment during the 1990s and 2000s. At 0% unemployment is at record highs.

    And if interest rates and unemployment are so tightly bound, what will the Fed do when unemployment sinks to the 6.5%?

    Will it then let interest rates rise? If it doesn't, surely it risks a period of "inflationary overheating"... or even hyperinflation. But if it does raise rates, won't unemployment go up again?

    So what's the point?

    Mispricing Capital

    The whole thing is so slimy and stinky we hesitate to touch it. But an economy only has so much saved money (resources) that can be borrowed and put to work. The Fed can't wave a magic wand to create more capital. All it can do is misprice it.

    The amount of savings compared to the demand for capital is what determines the real interest rate. If the Fed distorts the cost of capital... by setting an arbitrary interest rate... it also distorts the whole economy.

    We end up with zombie businesses that can only stay alive if they are pumped up with cheap money... and zombie jobs that depend on artificially low interest rates.

    We also get business activity that is fundamentally capital consuming rather than capital creating.

    Projects borrow resources without paying the real costs of them. They stay in business, consuming resources, without generating enough real wealth to pay for them. As capital disappears, we all get poorer, not richer.

    And that's just a critique of the theory. In practice, when has this policy ever worked? Not once that we've ever heard of.

    Editor's Note: You Can't Prevent Corrupt Politicians. But Here's How You Can Protect Yourself From Their Thieving Shenanigans...

    Thank goodness the silly charade of the presidential election has ended. Now we can rest until the next national charade begins...

    But did you know that the president is NOT the largest threat to you and your money? You might be surprised that the biggest villain is the U.S. Congress...

    Luckily, you can take a few easy steps to prevent it from bilking you dry. Here's the entire story -- and an action plan -- that reveals how you can combat this grasping scheme.

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    Disclaimer

    Article brought to you by Inside Investing Daily. Republish without charge. Required: Author attribution, links back to original content or www.insideinvestingdaily.com. Any investment contains risk. Please see our disclaimer.

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