Posted on 08/09/2019 5:11:55 PM PDT by amorphous
There is immense confusion surrounding July’s Federal Reserve meeting and the rather insane aftermath that has been spurred on in the trade war. The Fed’s latest rate decision of a mere .25 bps cut was seen as “disappointing”, this was then followed by Jerome Powell’s public statements making it clear that this was only a mid-year “adjustment”, and that it was not the beginning of a rate cutting cycle and certainly not the beginning of renewed QE. This shocked the investment world, which was expecting far more accommodation from the Fed after 7 months of built up expectations that the central bank was about to unleash the stimulus punch bowl again.
The question that very few people are asking, though, is why didn’t they? What is stopping them? Everyone from daytraders to the president wants them to do it, yet they continue to keep liquidity conditions tight. In fact, they even dumped another $36 billion in assets from their balance sheet in July. Why?
Keep in mind that the latest Fed decision does two things: First, it is an indirect admission that the U.S. is entering recession territory. Second, it is also an admission that the Fed doesn’t plan to do anything about it, at least, not until it’s too late. In other words, all those people who thought the central bank was about to kick the can on the current crash in economic fundamentals were mistaken. As I have been predicting for many months, the Fed has no intention of trying to delay the effects of negative conditions any longer. The crash is now a reality that the mainstream will have to accept.
In order to understand why the Fed is withholding liquidity at this time instead of opening the floodgates, it is important to understand central banker motives. First and foremost, the assumption that the Fed is always concerned with keeping the financial system afloat is incorrect. The Fed has allowed the U.S. system to crash multiple times in its 106 year history. In truth, the Fed has created bubble after massive bubble through stimulus and low interest rates, and then crashed these bubbles using liquidity tightening policies.
The latest example of this is the most egregious – The Everything Bubble conjured in the past decade is the largest and most destructive bubble ever devised. To find anything similar, we have to go all the way back to the onset of the Great Depression.
In 1922-1923, the Fed instituted what was then called the Open Market Investment Committee (later replaced by the Federal Open Market Committee); what some people today might call a “Plunge Protection Team”. The public rationale for this development was to help the Fed enact “monetary policy” which would allow them to stabilize the economy and markets after the recession/depression of 1920-1921. Using the OMIC, the Fed directly influenced the economy, stock markets and credit conditions by artificially lowering interest rates and purchasing government securities and other assets throughout the 1920s.
At first this kind of monetary interventionism in the economy seemed to be working spectacularly. From 1924 onward, the Dow Jones climbed relentlessly higher and recessionary conditions, at least on the surface, seemed to disappear. There were even assertions by economists of the day that recessions and depressions were a “thing of the past”, as were stock market crashes. Sound familiar…?
At the time, short term, long term and overnight lending rates remained relatively low in comparison to the high rates exhibited during the 1920 depression. The Fed stimulated through open market purchases all the way up to 1928. It was then that a sudden and significant shift occurred. The Fed began to deliberately tighten conditions in order to deflate the bubble they created. The Fed hiked interest rates and sold off assets from their balance sheet.
The Fed’s own historic accounts are muddy on this event, yet they do admit that the goal of the central bank was to restrict liquidity in order to disrupt credit conditions that were allowing speculation to thrive. To this day Fed officials act as though they are unaware that their efforts to stimulate actually created financial bubbles. And to this day, they still act as though they are unaware that tightening policy into economic weakness has a tendency to cause those bubbles to implode.
I say “into economic weakness” based on some of the most important underlying indicators of the day. For example, farm mortgage foreclosures increased dramatically in the mid-to-late 1920’s; farming being a huge part of the U.S. economy at that time. Also, outstanding mortgage debt grew by eight times from 1920 to 1929, and consumer debt skyrocketed. The “Roaring 20s” were very prosperous for around the top 5% of Americans, while 70% remained in financial hardship. Again, does this sound familiar?
I find it hard to believe that the Fed is oblivious to the consequences of these actions. Former Fed chairman Ben Bernanke openly admitted that the Fed caused the Great Depression through interest rate manipulation and asset purchases in an address in honor of Milton Friedman in 2002.
So, if they are aware that the actions they took in the 1920s triggered the Great Depression, why are they following nearly the exact same pattern today?
Currently, most major fundamental indicators are showing sharp declines in the U.S. economy. There is no getting around this. The Fed has ignored all of these warnings for the past two years and tightened policy despite them. Whether or not someone agrees with the Fed’s actions is not really relevant; the point remains that the Fed has done all this before, and the result has always been the same – A historic crash.
The rate hikes and asset selling by the Fed in 1928 and early 1929 led directly to the “Black Monday” equities crash. Keep in mind the pattern here: The Fed stimulated through monetary intervention just after the recession/depression of 1920-1921. Around 8-9 years later the Fed tightens liquidity as the fundamentals are already faltering. A year to two years after that stocks finally realize what is happening and they crash.
Today, the Fed has stimulated a historic bubble in the decade after the recession of 2008/2009. This has mostly translated to a vast stock market bubble but very little improvement anywhere else in the economy (unless you actually believe the fraudulent numbers coming from the Bureau of Labor Statistics or the Fed’s GDP calculations). As economic fundamentals including housing sales, auto sales, manufacturing PMI etc. began to decline more aggressively, the Fed started to tighten liquidity. They also raised interest rates as corporate and consumer debt was hitting all-time highs, just as they did in the late 1920’s.
In the aftermath of the Great Depression banking conglomerates were able to buy up considerable hard assets for pennies on the dollar while at the same time consolidating political power. I suggest that the Fed and most central banks deliberately create financial bubbles and then deliberately pop them through tightening in order to engineer economic crashes. This allows them to absorb hard assets cheaply while also increasing their social influence. It is no coincidence that after every major financial crisis the top 1% increase their wealth by a wide margin while everyone else grows poorer.
That said, if we have established a pattern of behavior for the Federal Reserve, as well as a motive, then what happens next?
The Fed will continue to withhold stimulus measures until it is far too late to defuse crash conditions or to kick the can down the road. Jerome Powell told us this is exactly what they would do after July’s meeting. There are some analysts who refuse to believe that this will happen and that the Fed will be “forced” to introduce QE in the near term. This will only happen when the current crash in fundamentals hits its peak, and probably not until there is a sizable crash in stock markets (at least 20% if not more). The Fed will not be “forced” by market conditions to intervene early. They WANT a crash. This is the only explanation for the Fed’s decision and statements in July.
In the meantime, the trade war conveniently kicked into high gear only one day after the Fed broke the hearts of investors looking for an easy profit. The Fed’s minor “rate adjustment” and promise of no QE is all but forgotten as Donald Trump initiated new tariffs on China starting in September. China retaliated with a freeze on U.S. agricultural purchases, the U.S. labeled China a “currency manipulator” for the first time in 25 years, and China is now devaluing the Yuan (though not quite as much yet as many had feared they would).
As expected, the trade war circus has only escalated and there will be no end to it before the next U.S. election. It has also provided perfect cover for the actions of the Fed, and the current economic downturn is being consistently attributed to trade tension rather than the central bank’s policies.
Essentially what the Fed has done is create an economic time bomb, a sensitive explosive that could be set off by the slightest tremor. Any new geopolitical shock event could trigger this bomb. A No Deal Brexit, a shooting war in Iran, etc. The public will look to these events as the “cause” of the economic crisis, when it was actually the central bank that made it all possible.
Another interesting development has been the spike in gold and silver. As I predicted in my article ‘Gold Will Rise Even If The Fed Doesn’t Cut Interest Rates’ published in early July, the Fed has denied investors near zero interest rates and new QE in the near term, and precious metals jumped in price anyway. The dollar even bounced initially in response. Normally this would have caused a dive in metals but the dollar is not the only driver of gold. Market turmoil also causes price rallies in hedge commodities, and we have plenty of that now.
After the crash of 1929, the fed lowered rates substantially, but I would point out that this was no guarantee of stability. In fact, the Fed raised interest rates yet again only a few years later in 1932, which was a death blow to the economy. I would again assert that there are no guarantees that the Fed will not raise interest rates even in the midst of a dramatic downturn. They have done it before and they can do it again.
I would also point out that expectations of the Fed folding to White House pressure are misplaced. Powell has stated that he has no concerns of Trump attempting to fire him and would stay in his position regardless. Also, any attempt by Trump to enforce currency devaluation through a declaration of national emergency could simply be denied by the Fed. This kind of battle between the central bank and the president would lead to a collapse in faith in the U.S. ability to pay off government debt as well as the eventual loss of the dollar’s world reserve status, but that is a subject that must be examined in depth in a future article.
Not sure it's what's going to happen now, but pretty sure it contributed to the Great Depression. Many people lost their land and assets to the rich during that period in our history.
The Fed is just another typical government agency. Staffed with people creating the very problems they're supposed to prevent and arrogant enough to not realize it.
Federal Reserve is as much "government" as Federal Express is. Federal Reserve is a private bank.
this article is complete bullshit if they think a minor adjustment by the Fed is going to cause a “Great Depression” ...
To be fair, many rich went broke, too. Some jumped out of indows.
The trade war is BS. A $30B annual tariff is hardy much of an escalation in the ‘war’. What is dangerous is all the misplaced hype about it.
Lefties and coastal import interests are making a mountain out of a molehill to drive down markets and get a Democrat elected in 2020. They’re also going to hurt the economy with the crazy talk for gun control by spurring too many people to divert personal money to firearms again.
We need more production on U.S. soil of basic tools necessities for everyday living, so we should take whatever pain and corrections along the way to get there. We won’t be buying imported items, when we’re personally out of money. And because of the pinch for private sector workers, austerity is coming. And government jobs will be cut. That’s an eventual certainty.
So people politically aligning too much with unneeded import interests had best go with the flow. Big government needs revenues from big production on U.S. soil. Can’t get blood out of balance of payments deficits caused by trade imbalances.
Ever hear of THE DUST BOWL?
Do you know how much the rules have changed regarding how people and/or companies and traders buy & sell stocks came into existence and are still there today, since the CRASH OF '29 and what was done and by whom, to make sure that the crash's aftermath didn't rebound until well after WW II ?
Is the rest of the world in the depths of a GREAT DEPRESSION, as it was in almost all of Europe, after WW I, right now?
Factual history is extremely important to know and obvious, cherry-picking one tiny part ( which in fact had far less to do with the GREAT DEPRESSION than you or the author of this stupid piece appear to know )and then extrapolating it to current times and events just does NOT wash!
And FWIW...the VERY "rich" did NOT escape the Great Depression unscathed nor did they "steal" land and assets from the "poor"!
And Trump and his team are about THE farthest thing to the RIGHT when compared to FDR and his COMMIE advisors and cabinet!
Is the Fed trying to subvert the Trump economy?
Might have contributed but was not central. What locked in the prolonged depression was the French hoarding gold. The lack of availability of gold to back up currencies in the world as the French were hoarding it was what completely froze up any possibility of avoiding the crash and recovering from it. Only after WWII when the French and British sold their gold to the US to finance the war was America able to rule over gold in ways that were fair and not destructive as a tool against other nations as the French had done it perfidiously
China and anti Trump globalists will do everything to sink the economy before election. China dumping the trillion in treasuries seems a likely prospect.
Oh...and worse than the CRASH OF ‘29, was THE CRASH OF ‘87, when the market lost 22.6% of it’s value! And NOTHING compared to ‘29, nor ‘87, nor even the insane one in 2008, has or is happening now and shan’t!
You’re 1/2 right; the “jumping out of windows” is a canard.
Pearl clutching?
Looking for your fainting couch?
Jeez, not this $hit again..
The time when a pig was worth more than cash, since nobody had any cash.
Country Doctors often got paid by barter.
The Creature from Jekyl Island is going to do what Creatures do, Wreak havoc and take over. That is the History of Central Banking.
Maybe it is a bit hyperbolic.
s It's 100%, unalloyd, unadulterated BOVINE EXCREMENT! The entire concept is built on one teensy tiny, almost inconsequential bit...sans any actual, factual, historical knowledge of any kind at all!
No mention of what the Treaty of Versailles did to 1/2 of the European nations, the decimation of the populations of Europe, due to WW I and what THAT did to factories, the leftward movements in thinking in many of those nations, the strikes, and war reparations, and that's just what was going on on the other side of the Atlantic!
And thanks to J.P. Morgan and his compatriots, they could have save the market...but that POS Joe Kennedy and his consortium did corrupt, kind of illegal stuff to keep depressing the markets! And one thing led to another, which kept making things here worse after the Crash!
Then there were the weather conditions!
These historical facts are out there for everyone to know!
I mentioned that some people jumped out of windows. You took it a lot further.
Don’t disagree with your historical facts. But, that wasn’t the main point of my comment. It was that the merely rich suffered in the Great Depression and became poor. Some of those you are talking about .. Morgan and Kennedy... were not the merely rich, but the super-super-rich, who could mold events and benefit from them.
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