Print this article
Yesterday, investors digested the big news from Wednesday... the Fed’s announcement that it would continue handing out money, asking nothing in return, for the next three years.
Stocks went down. Oil stayed under $100. The yield on the ten-year note fell under 2%. And gold just kept going up.
The New York Times reported:
The Fed said that it now planned to keep short-term interest rates near zero until late 2014, continuing the transformation of a policy that began as shock therapy in the winter of 2008 into a six-year campaign to increase spending by rewarding borrowers and punishing savers.
“What did we learn today? Things are bad, and they’re not improving at the rate that they want them to improve,” said Kevin Logan, chief United States economist at HSBC. “That’s what they concluded — ‘We’ve eased policy a lot, but we haven’t eased it enough.’ ”
The new forecast showed that the Fed expects to hit its inflation target over the next three years, but to fall well short of its goals for unemployment. The Fed projected that unemployment would drop no lower than 8.2 percent this year, just slightly below the current rate of 8.5 percent, and no lower than 7.4 percent by the end of next year. By the end of 2014, the Fed still expects that at least 6.7 percent of people actively interested in working would not be able to find jobs.
How do you like that, dear reader? The Fed has goals for unemployment and inflation. Targets. And it moves its policies around in order to achieve its goals.
Of course, it doesn’t necessarily hit its goals. Still, we’re supposed to believe that by trying to hit them it somehow encourages them in the right direction.
Most people believe they are successful. Which makes us wonder. Maybe the Fed should set goals for other things? Weight-loss goals, for example.
The idea is that by changing interest rate and banking policies the Fed actually influences inflation and employment. So, there’s a logic to thinking that the Fed should set targets and try to hit them. Trouble is, if it could really change things for the better, why does it put up with an 8.5% unemployment rate now – four years after the subprime crisis began? Why doesn’t it exercise its magic to bring the rate down?
Well, we all know the answer. It can’t. Once you’ve taken interest rates down to zero... and announced that you’ll leave them there for the next three years, what more can you do? Drop money from helicopters? Right!
But no point in getting ahead of ourselves. Right now, interest rate policy doesn’t work. Because the money supply is expanded by retail and commercial bank lending, not central bank lending. The Fed lends money to the money-centre banks. They’re happy to take the Fed’s money.
But that doesn’t mean they will multiply it out by risking it in the economy.
So, for the moment, they might as well set a fat goal, too.
Claim your free gold report: Why you should buy gold now
Claim your free copy right here
And more thoughts
• Excuse us as we pause in admiration and shock.
We had a sneaking suspicion that Alan Greenspan, former Fed chief, was not as dumb as he pretended to be. When he was on the job he could barely say a straight sentence. Probably because he didn’t really believe what he was saying.
Since he’s been unemployed, he’s begun to speak more clearly. In yesterday’s Financial Times he has an opinion on capitalism which is actually among the best in the series. In it, he makes a good point. Anti-capitalists are not really annoyed at capitalism. What bothers them is 'crony capitalism':
“Crony capitalism abounds when government leaders, usually in exchange for political support, routinely bestow favours on private individuals or business. That is not capitalism. It is called corruption.”
Or you could call it zombification, or geriatric capitalism, or, as Kurt Richebacher used to call it, “degenerate capitalism”. But it’s not real capitalism.
The ‘greed’ that preoccupies Occupy Wall Street demonstrators is not a feature of capitalism, Greenspan points out. It’s a feature of human nature. He might have pointed out that socialists are just as greedy as capitalists. They are just more corrupt. Rather than get their gains by honest deception, they get it by brute force – by using the police power of government to take it from others.
Greenspan provides an example of a corrupt system, designed to protect the wealthy from competition – immigration law. It keeps out qualified foreigners willing to work for less:
“The H1B programme is in effect a subsidy for the wealthy, a policy that is anathema to the supporters of capitalism.”
He goes on to suggest that 'improvements' to capitalism, such as those to be considered today at Davos, are not likely to be good ones.
Good on you, Alan.
• Don't miss Bill's next Daily Reckoning. To receive the next article straight into your inbox as soon as he's written it,
sign up to the email list here
.
Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Customer services: 020 7633 3600. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. http://www.fsa.gov.uk/register/home.do FSA number: 1152 34
Published in
Global economy
| More
articles
by
Bill Bonner
Related articles
-
By Bill Bonner, Feb 22, 2012
-
By Bill Bonner, Feb 21, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.