Jeff Cox says what everybody’s thinking:
The Federal Reserve was never hiking rates four times this year. Investors didn’t believe it, and now Fed Chair Janet Yellen has all but explicitly acknowledged it.
Indeed, Yellen’s blockbuster speech Tuesday assuring that the central bank would go slowly on future adjustments to monetary policy only caught some of the market by surprise. Others realized there was virtually no chance of a hawkish Fed in 2016.
“Central bankers at the Fed bark but they won’t bite,” Peter Schiff, frequent Fed critic and founder of Euro Pacific Capital, told CNBC.com. “I knew all that talk was a bunch of nonsense.”
Anybody who’s been paying attention knew it was a bunch of nonsense. Between a hostile business climate, overregulation, the uncertainties of ♡bamaCare!!!, new taxes on investment returns, crushing debt, and unsustainable spending…
…well, free money has been the only thing keeping this economy afloat since 2007.
Welcome to our own Lost Decade.
How bad are things really?
A mere quarter point hike in the prime rate — that’s up 25 basis points from zero — was enough to erase billions and billions in value from Wall Street, confused panic at the Fed, GDP/jobs/spending took huge hits, and a spike in the value of the dollar (and resulting trade deficit increase) as foreign investors sought the comparatively yuge returns made possible by that stunning quarter point hike.
Then the Fed backed off its mock-hawkish (mowkish?) stance, Wall Street bounced back, the dollar is poised to re-crash, and our recovery seems to have gone back to plodding along at its anemic New Normal pace.
Because, hey, more free money.
When the next recession comes — and the signs are ominous — our central bank will likely experiment with negative interest rates.
That’s what central banks do when the free money stops working, like the longtime cocaine addict who has to do an eight ball before breakfast. The idea behind negative interest rates is to get people to spend money by creating the fear of inflation by taking money out of circulation.
“Wait… what?” you might fairly ask.
But, yes, that’s right. Negative interest rates reduce the amount of money in circulation by acting as a tax on deposits. This is supposed to get people to spend their money. Instead, negative interest rates take money out of productive investments, and steer it into “hoarding” products like gold and ammo.
And yet central bankers persist, even though no, negative rates have never worked anywhere even once. Yes, they have been tried most everywhere more than once.
The good news is American businesses are sitting on a lot of cash, which could be quickly redirected from overseas and American bank accounts, and back into making productive investments right here at home. The problem is we have a Democratic frontrunner who cut her political teeth on Saul Alinsky and radical leftist, and a Republican frontrunner who seems determined to cause a trade war with Asia and tempt Russia into a shooting war with NATO.
Which, really, neither candidate seems to offer the kind of business climate we need to cure our addiction to free money.
The New Normal just keeps getting weirder and weirder.