In response to an FT article by Larry Summers on 23rd August 2015, entitled 'The Fed looks set to make a dangerous mistake'
The Fed has backed itself into a corner. It took seven years to get there, but there is no way out:
If it raises rates it will accelerate the unwinding of the carry trade that has resulted in an 8 trillion dollar short position held overseas and invested in currencies which are already in various stages of collapse. It will also make government borrowing more expensive at the same time as the debt ceiling expires and the new budget comes into effect - October 1st. Great timing as usual.
If it doesn't raise rates it will exacerbate an inevitable pensions crisis, as pension funds which require 7% to stay solvent, sink deeper into the largely unreported abyss.
Which way will they jump?...off the top of the building or back down the lift shaft?
The 'don't raise rates' chorus is getting louder daily, as it inevitably will. We can expect the calls for QE4 to be not far behind. The talking heads on CNBC will get louder and viewers may even be treated to a re-run of Cramer doing his best rabid dog routine...imploring the Fed not to undo all the great work that has been done over the last seven years...just as the economy is starting to become self-sustaining. The economy is always 'just now becoming better'...figures are fiddled and fudged...and there is always the latest forecast for next year to look forward to. The problem with that, is that next year is an election year, and unless the Fed can start rigging the weather as well, it will start with winter.
A couple of days ago the NYT had an article from Professor Krugman entitled 'Debt is Good'. He really should have carried on and rewritten the rest of Gordon Gekko's speech, but we can't have everything...much to the disgust of Professor Krugman.
The position that the Fed is in is a reflection of the 'economics' that they have been pursuing since the nineties when Mr Greenspan started his easy money cult, and people like Professor Summers facilitated casino banking with short sighted policies like the abolition of Glass-Steagall.
This 'economics' consists of very clever mathematical modelling that bears little relationship to how people behave in the real world, ignores the effect of debt, and which is designed to create a 'better world' through central planning, money-printing, and political manipulation.
In this ‘better world' the failure of central planning is the justification for more central planning - we are about to get a torrent of such justification. Academics such as Professor Summers, Dr Bernanke, and Professor Krugman will never stop crying for more government intervention because their underlying mindset is based on the need for ‘control’. The intellectual credibility these academics provide to governments, suits politicians very well because it gives them the means to maintain power - i.e. the currency with which to bribe electorates with unfunded entitlements and pursue foreign interventions - or, as it was first known in the sixties, ‘guns and butter’.
When 'controllers' are overwhelmed by the failure of their attempts to subdue the world, the answer is always ‘more control’, which then produces more of the unforeseen consequences that they are trying to suppress, until the whole edifice collapses under its own weight. Even when our bloated monetary system finally drops to its knees, the penny will not drop for these academics - it will remain suspended in a cloud of hubris. The answer will always be the same - ‘we didn’t do enough’.
The problem is debt, and there are three possibilities: Inflate it away, suffer a deflationary collapse, or carry out a conscious restructuring of the global monetary system. The Fed, and all the Central Banks have been attempting to inflate. They don't have the wisdom or the courage to restructure. Thus we are in the early stages of a global sovereign debt crisis and deflationary collapse.
Raise rate or don't raise rates - we took decades to get here and the damage is done. Agonising over a possible 0.25% increase in interest rates after 7 years at zero, though it looks crucial right now, is also a symptom of how our governments and academics have utterly missed the point.