Dear Friends,
It seems to me, you can push a car to start it, but if the engine is broken, it will not start no matter how far, fast or how long you push it, or how well it ran at one time… If an economy needs a zero percent interest rate, that is a symptom that the economic system is broken. That several nations in Europe have have negative interest rates is a sign those economies are broken. This week Janet Yellen said the Federal Reserve will not raise interest rates above zero, and could even go negative, if the economy falls into recession. Basically a full admission that eight years of zero interest rates has produced nothing in terms of an actual economic recovery. The helicopter drop of free money given to government and corporations has not expanded the real economy, but filled bubbles, bond bubbles, stock bubbles, and who knows what else has been bubbled up by this zero interest rate policy, (ZIRP). History is adamant about the results of bubbles however, they burst, and when they do economic catastrophes result.
Economic theory, money theory in particular, says that when the amount of money produced is at the same rate as growth in gross domestic product, (GDP) there is no inflation, but for every percentage point above GDP, it creates a percent of inflation, and for every percentage point below the rate of growth in GDP, there will be a percent of deflation. That the rate of money printing has exceeded the rate of GDP growth for so long, and by so much, yet there is actual deflation, shows, not that economic theory is wrong, but that there is a huge drag on the economies of the US and Europe. The only way to have deflation with so much money flooding the system, is that it is not reaching wage earners but instead going to cronies, stock buybacks and salted away by the rich, who have access to the free money. If that money got into the hands of the people it would generate Wiemar inflation.
The interest rate in the US and Europe has been at zero since Obama got elected, initially zero interest along with quantitative easing, (QE), or in other words, monetizing the debt, was to restart the economy after the 2008 recession. The first round failed to get the economy going so more QE was done to gin it up. That didn’t work, so the Federal Reserve did it again, to no avail, now the economy is addicted to zero interest rates and any rise at all, even a paltry .25% would cause the world’s economy to melt down. (Not my words but those of Keynesian economists like Krugman and Blanchflower). No healthy economy would putt along with zero interest rates, let alone negative rates, without skyrocketing inflation. To give you an idea of how much money was printed, QE3 could have made 85,000 random people millionaires, every month!
That is the elephant in the room, the economy still requires life support 7 years after the recession, with no end in sight. The Federal Reserve is in quite a pickle… If they raise rates, the economy will implode, if they don’t, the economy will explode. They are indebted to those who have got the benefit of all that free money, the elite, so they have to bend to their masters and keep it low. Remember, if they raise interest rates at all, even the pitiful one quarter of one percent, the global economy will implode, which would show the Obama economy to be what it is, instead of what it isn’t. They know better than to make Obama look bad.
Yet the media that calls itself unbiased touts how great the economy is. The official unemployment rate is around 5.6% which is full employment, the stock market, despite some recent setbacks, is near record highs and stock valuations against profits are at an historic high. The brainiacs who tell us what to think, cheer us to buy, buy buy, and forswear savings, they tell us the measure of an economy is how many auto sales there are, and the rise in the cost of housing. They explain that as long as auto sales are good and the price of housing is going up, all is well with the economy. These statistics are what are seen.
What is unseen is far more scary. The number that is reported as unemployment is U3 unemployment, which only counts people actively looking for work, or in other words, those on unemployment insurance. The actual number is the U6 rate, which includes people who would like to work but have given up, which is closer to 10.3%! One in ten people out of work! That represents a huge amount of slack in the labor force, and shows why there is so little wage growth, moreover, almost all the employment gains in the last 7 years has been by immigrants, the American worker is being squeezed out of work by cheaper immigrant labor. Where are the soup lines you ask? They are hidden by food stamps, ebt cards and the dole.
The stock market’s historic rise has been driven by stock buybacks, institutional investors and more importantly, Federal Reserve interventions. The Federal reserve has been buying stocks and bonds through their proxies to insure the market only goes up. This creates a false sense of reality. The illusion is bolstered by companies that by their own stocks to drive up the price. The bond market is manipulated as the Federal Reserve buys bonds, which drives up the price, and therefore the yield goes down, furthering the illusion that all is well. This staves off the market’s finding an actual price for those stocks and bonds making the economy appear to be what it isn’t.
What is the titanic drag then that is breaking our economy? To further our analogy of a broken engine, the sand of regulations creating a drag on economic investment, is in the crank case, welfare that creates a negative incentive for people to work, has drained the battery, taxes which remove much of the profit from an investment in the actual economy, has plugged the fuel filter, a voyeuristic government that demands more and more intrusive monitoring of every action of the people and businesses, has removed the tappet covers, the new class philosophy of maximizing profits for upper management at the cost to shareholders, customers and employees, is shattered the gears from the transmission, as well as zero interest rates that create pernicious incentives for capital flow, which is like using nitromethane, the wrong fuel. Since none of these drags will go away without a total reset, and the interests of those in power are intricately tied to them, the only answer is to keep interest rates at zero, or negative, to protect the mask of prosperity for as long as possible.
What it all boils down to is that our economy is about to crater. An illusion only works for so long before someone walks into it and exposes it for the illusion it is. That the economy needs to be pushed by zero interest rates for so long, is indicative of an underlying problem not addressed by interest rates, it is a structural problem instead of a cyclical one, if you will. It is like pushing a car to start it because the battery is dead, but no matter how far you push it, the engine will not start. Someone standing by the road, could look at the car and see it is moving, but that is only an illusion it is broken, and cannot move itself. At some point those pushing become too tired to continue and the car stops altogether. That is where we are now.
Sincerely,
John Pepin
