No Courage, Feckless Experiments and the Deep State


Hosannas and Hat-Tipping

Today’s post is about you dear reader… and the world you live in. That world got notice last week that henceforth short-term interest rates would be more than zilch. From all over the planet came hosannas and hat-tipping.

Some commentators congratulated the Yellen Fed on its careful stewardship… others applauded the strength of a U.S. economy that permitted a “return to normalcy.” But some fretted, too…


hat tippingAn overenthusiastic outbreak of hat-tipping

Photo credit: Jeremy Daniel



Perhaps it is too soon, they thought. What if the economy failed to reach “escape velocity”? And what if the Fed – like has happened to so many other central banks around the world – was forced to beat a retreat?

The first few hours of trading after the Fed’s move seemed to confirm its wisdom: U.S. stocks traded higher. But over the following two days, the Dow lost more than 600 points. Then on Monday, it found its feet with a 123-point increase.

A quarter of a percentage point rate hike is piddling. But supposedly, it signals a new regime – a recovering economy that can afford to pay rates of interest more closely connected to the real world.

At the Diary, we never claim to know what is true… what is right… or what the future will bring. The best we can do is to try to recognize error. And then, only big ones. But here we need no careful regard for the details.

Here, big as life, we see George Armstrong Custer riding to the Little Big Horn. We see the Titanic headed out of Southampton harbor. We see Lenin headed back to Russia… Napoleon back to France… and another Bush or Clinton headed back to the White House…


Spaceship-science-fiction-future-world-1920x1080Since it is supposed to achieve “escape velocity”, the USS Economy is evidently held to be a space ship.

Image credit: Games Workshop


No Courage to Act

In the first place, the Fed deserves no praise. It never had what former chairman Ben Bernanke has termed the “courage to act.” Instead, it panicked in the face of a market correction. Then it counterfeited trillions of dollars to bail out bankers from their own dumb, greedy mistakes.

In the second place, the U.S. economy is not strong and nowhere near “escape velocity.” This plane will never get off the ground. There are more people without jobs today than when the crisis began in 2008. And almost all the important indicators – transportation, manufacturing, commodity prices, profits – are flashing a “stall speed” warning.


atlantic-april-2012-cover-ben-bernankeThis git (who definitely “didn’t see it coming”) totally panicked and later apparently began to believe his press. What’s so “courageous” about conjuring trillions in dollars from thin air with a few keystrokes to bail out banksters who hopelessly overtraded their capital?


In the third place, the Fed’s “mistake” is not that it acted too soon but that it acted too late. Whoever heard of an “emergency” monetary policy that lasted seven years? An experiment with monetary policy is like an experiment with an open marriage: It is doomed to fail from the get-go.

The Fed was trying to cause people to change their behavior. And what happened? People changed their behavior – from prudent investing to irresponsible speculating. Now, the world is full of desperate, debt-funded gamblers who can’t survive a return to normal.

In the fourth place… oh yes… the Fed will not merely stop or even back up when the going gets tough. It will turn tail and run. It will panic again… and this time do even more damage.


Feckless Experiments

But why would the Fed – the stalwart guardian of America’s money, industry, and commerce – take so many chances? Why would it risk our jobs and our savings in feckless experiments? And why would it roll the dice with the entire world economy?

Because, the Fed is a major player in the little group of insiders who run the government, aka the “Deep State.” Its real aim is to keep the money flowing – to the Deep State. This includes overseas governments, foreign banks, and major global industries.


Reserve BalancesBank reserve balances with the Fed. As a result of this growth in reserves, a far larger portion of the money supply consists of covered money substitutes today than previously (this makes bank runs less likely). To be fair, there is little banks can actually do about this mountain of cash assets, including foreign ones (which operate in the US as subsidiaries with their own US bank licenses). Reserves can essentially only be used as the basis for leveraging up new credit, for interbank lending and for paying depositors who want to withdraw cash currency. Nevertheless, interest on reserves does of course represent a huge subsidy to banks, and the reason why they have been amassed in the first place was the system-wide bank bail-out known as “QE” – click to enlarge.


Next year, for example, the Fed is scheduled to pay out $11 billion in interest to foreign banks operating in the U.S. on the excess reserve they have on account with the Fed. (All banks in the Federal Reserve System have reserve accounts with the Fed. These are used to settle payments with each other. Since the money is merely an electronic notation, it exists only in fiction.)

Does it really care about “hardworking families”? Does it respond to what the voters want? Does it give a hoot about your retirement, or your buying power, or your well-being? Maybe not.


Chart by St. Louis Federal Reserve Research


Image captions by PT


The above article originally appeared as  The “Deep State” Puppet Master Behind the Fed’s Ultra-Low Rates at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.


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