I was excited writing this piece. Everyone and their cat has been telling me that in less than 24 hours the Federal Reserve will raise interest rates for only the second time since 2007. But that’s not why I am excited.
Will they do it? Probably. Do I care? Not really.
Should I be concerned about whether the stock market shoots through the roof or crashes through the floor? Yes, but I haven’t got a clue to be honest. Will gold head south for a long cold winter with the penguins, or will it slingshot back north and be with the polar bears by spring? I haven’t got the foggiest idea. Have I heard the rumour that the dollar has already booked a flight to Frankfurt in order to kick ten bells of cr@p out of the euro? I have, but how on earth should I know?
I'm told the rate hike is certain…but I suspect the immediate consequences are not…and I can’t be bothered to be bothered either way. So why am I excited?
Because whether Janet Yellen hikes or not, the charade of Fed control is over. Because whether the market laughs or cries, what really matters is that after 8 years of mind-numbing mediocrity, the dead hand of central planning is losing it's grip on the economy's throat. Because the mess that they have created is going to become very apparent to a much wider group of people. Because we have to tell the truth about this mess if we ever want to clean it up...and that's exciting.
The term ‘Federal Open Market Committee’ is an oxymoron. There are two mutually exclusive elements to this description – ‘open market’ and ‘federal committee’. You either have an open market or you don’t. What we’ve got is a federal committee - a monetary politburo.
An open market gears production in response to real demand, through the mechanism of price signals. In the market for ‘money’, we have a group of academics that share the same conceit; the belief that they know better than the combined wisdom of millions of savers, investors and consumers each making free choices on what they need and when. The FOMC inevitably sets an interest rate that encourages production sufficient to meet a level of demand that doesn’t exist.
This ersatz rate is almost always lower than an open market rate would be…which is very convenient for the people who appoint these bureaucrats - governments who are up to their eyeballs in balance sheet debt that they will never pay back, & off balance sheet liabilities that they will never meet. This deception keeps alive the illusion that governments are ‘solvent’ rather than merely ‘liquid’. It also enables them to engage in financial repression and to levy the hidden taxation called ‘inflation’ - which enables an invisible wealth transfer to take place…a process that even the grandee of central planners, John Maynard Keynes, warned about.
The trouble for the central planners, and sadly for us all, is that whilst their financial legerdemain has appeared to ‘work’ for decades…it ceased ‘working’ eight years ago, when the illusion was shattered by an outbreak of reality. The ‘recovery’ that has happened since 2009 has been a sickly affair, consisting mainly of pumped up asset prices…again…and part-time, low-wage jobs. None of the problems that brought down the system have been fixed – they have been papered over with the same ‘stuff’ that caused them in the first place – more leverage, more debt.
Moral hazard has not been fixed either. Bureaucrats have created thousands of pages of regulations that skirt the real issue – lack of consequences. These regulations will not have one hundredth of the impact that a picture of Jimmy the Diamond in an orange jumpsuit would have had.
Moving forward we need a clear out of the policymakers who have led us here. The economy is a complex dynamic system, and we should strive to understand it as such. ‘Equilibrium’ is bunkum; flat earth twaddle that has little utility for understanding the real world of people, resources and relationships.
So where are we right now? We have come to the end of a 35-year bull market in sovereign bonds – governments and their court academics have taken it to the limit with easy money - but the tide has turned and there is absolutely nothing that a handful of blinkered functionaries in the Eccles Building can do about that. Raise rates, don’t raise rates, it makes little difference to the reality of the situation - they’ve lost control. Just as the so-called ‘liberal elites’ (they are neither liberal nor elite) have lost control of the political narrative, the mainstream economic establishment have lost control of the economic narrative. The next crisis will finish off their reputation, and with it, hopefully the guaranteed tenure through which each new intake of young economists is brainwashed into thinking that more central planning is the answer to every question. In an increasingly complex system, increasing the degree of centralisation is crazy. E.G. When you increase the size of TBTF structures by two, you increase the systemic risk by multiples of that. That’s how complex systems work.
The FOMC will almost certainly raise rates this week because the market already has. The lodestone of the global economy, the yield on the 10-year US Treasury, bottomed in July, about 100 basis points below where it is today. So they will raise rates; and we’ll have a ‘Santa Rally’…or not. It really doesn’t matter unless you’re planning to trade stocks over the next two weeks.
Whatever, we will go into 2017 with record levels of global debt. According to the latest BIS quarterly review, 10% of dollar-denominated corporate debt in emerging markets is set to mature next year. These loans, some $120 billion, will need to be paid back or rolled over, at a time when a strong dollar makes it more expensive for emerging markets to service debt with their local currencies. But that’s just one example – the big picture is one of massive chains of leverage that act as collateral for other chains of leverage…sitting within a banking system, particularly in Europe, which is one good gust of wind away from falling flat on its face. Alongside that, in non-regulated spaces, we have a complex web of derivatives, most of which are nothing more than ‘side bets’, which are nevertheless all highly sensitive to changes in interest rates and capable of causing a contagion that would make 2008 look like the pre-shock to a major earthquake.
There are, however, things we can do differently moving forward, for example:
1. Debt restructuring
2. The creation of a new Glass-Steagall
3. Closure of the revolving doors between banks, regulators and rating agencies
4. Campaign Finance Reform – i.e. take government out of the pockets of vested interests
5. Congressional term limits – i.e. remove the ‘permanent’ spot at the public trough
6. The return of the Federal Reserve to its original mandate – lender of last resort to solvent private sector organisations, against sound collateral, with profit generating interest rates…and importantly:
7. A transformation in how we allow governments to mortgage our children’s future through the bond markets – in short, we need to control how government raises its funding. We need to control government - not the other way round
In the longer run I believe that there will be a complete overhaul of ‘money’ worldwide, including a reform of the global reserve currency framework. The scariest part about this possibility is that the organisation positioned to supervise such a reform is the IMF. Why is that scary? Because the IMF has an even worse forecasting and managerial record than the Fed. It also has unashamedly ‘globalist’ intentions i.e. they appear to love centralisation in all it’s forms…we could be out of the frying pan straight into the fire. But that is outside the scope of this piece.
Right now, at the end of 2016, the situation remains that without a serious acknowledgement from political and monetary authorities that the over-arching risk we face is a global mountain of collapsing debt, there will be no solution(s). In short - you cannot solve a problem until you are willing to speak its name.