Fed Breaks The Bank
Macro, Long/Short Equity
Seeking Alpha Analyst Since 2016
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Summary
- Fed Chairman marks disaster for US economy.
- Equity markets catapult into higher risk bucket.
- ICO market will dominate with US debt-structured coins.
As the market grinds on the speculation of the trade war on China, the real impact on the economy is coming from the Fed. In the latest statement from the St. Louis Fed, and the Fed Chairman hawking another round of interest rate hikes, and posturing we are in a “neutral” position or a rising inflation market, parroted statements could not be farther from the truth. There are no neutral positions, and inflation is not trending upward, as the markets are fluid. The economy is either growing or declining. Neutral is only a momentary phase between growing and declining, and the Fed has taken us to a declining state.
With inflation tracking at 1.6%, and the Fed rate at between 1.5% and 1.75%, with promised increases on the way, assuredly the market has begun free fall. The decline was initiated on the basis that the Fed incorrectly believes in the policy, that managing rates control inflation, and the Fed does not manage inflation, only to increase or lower risk. Therefore, prices will rise as a result of the increase in rates, at much higher risk. The Fed will see this as another opportunity to believe the economy is gaining strength, and raise rates again, choking off any possibility of the continued growth phase we have been in for the past decade, albeit slowly, but growing.
As the Fed continues to raise rates, based on an artificial rise in inflation, risk takers move front and center, since the hurdle rate to produce returns above the Fed rate will require much more risk, and be assured, the boom / bust is coming. For whatever reason, the Fed has not learned to avoid this policy. Not even in the extraordinary circumstances of an entirely systemic crash to the economy, it would seem to have made sense that after numerous efforts to super charge, medium charge, and little charge the economy, nothing was actually broken. It should have been obvious at this point, that the amount of capital and liquidity that had been sucked out of the economy, by the mistaken Fed policy previously, would have educated those looking at the relationship between the Fed rate and inflation.
Learn from lessons past: There must be a spread between the Fed rate and the rate of inflation, and the Fed rate must always be below the inflation rate of the economy, so the economy has the inefficiency to move in an upward trajectory. (ie. If inflation is running at 1.6% the Fed rate should not exceed 1%.) As long as the risk free rate remains below the rate of inflation, the economic gains are a result of increases in productivity and efficiency. With increases in productivity and efficiency, prices will be lower, not higher. Inflation is not an example of an expanding economy; it is a symptom of constrained supply, or massive inefficiency in the market.
The Fed action to raise rates, even if they are held for the moment, have already given rise to bust this economy, and will give more credence to the emergence of the ICO market, as disobedience to the Fed’s control over capital. With the advent of raising rates, the Fed entered into the resurgence of the ICO market, as the market will no longer tolerate limited supply of capital.
Managing growth of the economy through inflation is the folly of the Fed, as the Fed can only attempt to manage the supply of capital. Inventors, entrepreneurs, and corporate mangers manage the growth of the economy; in the ability to mange and deploy assets. If they are doing it effectively and efficiently, inflation will run at the rate of the inefficiency. If the Fed removes the spread for the inefficiency, the economy is in decline, not anywhere near neutral or expanding.
Therefore, the surge in the ICO market will not be in the form of speculative supply and demand based coins, but rather in a bond measured currency that will be defined as bond interest rate adjusted currency (“BONDI”). The BONDI will be based on the currency equivalent to equal monetization of the amount of debt issued by a government at any moment of time, and in the US the example can be to any duration of Treasuries. The benefit of the BONDI currency is the technology to measure an exact issuance date, and linkage to the Bond / Treasury return. In this instance, $100 dollars is measured / converted as the discounted value at all times through the life of the coin. The coin can be broken into interval units from $.01 to millions of dollars, with a known cash value, effectively decoupling Fed policy to the coin, with the same backing of the US government, breaking the bank.
The idea that coin currency values move based on available supply and demand, is ineffective. The currency that will survive will replace exiting reliance on paper dollars or credit dollars that have effective rates of return, backed by a government sovereign instrument, without fiscal and monetary control. The Fed continued flawed interest rate policy brought the market to this point; we just have to wait to see who will issue the first one.
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