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"Understanding the Great
Explaining the Great Depression, its Trade War, and failures of "New" Keynesian interest rate suppression policy without ideological clap trap, theory confirmation bias or political spin.
"Understanding the Economic Basics &
Modern Capitalism: Market Mechanisms and Administered
Wealth of Nations. Ricardo: Principles.
INTEREST RATE SUPPRESSION
The market sends a message:
The turmoil in the securities markets in February, 2018, was not a reflection of contemporary developments in the economy.
Instead, it was a market signal of difficulties to come as the Federal Reserve
timidly continues its attempts to unwind almost a decade of massive but clearly
unsuccessful interest rate suppression policy. The 2009-2016 interest rate
suppression period joins the dismal string of Keynesian-type policy failures
that includes 1932, 1933, 1937, 1968, 1972, 1973, 1979, 2000, and 2007.
The suppression of interest rates during the Obama administration has resulted in a vast array of economic and financial distortions that will be tested as interest rates rise.
Interest rate suppression was unprecedented in both its extent and
duration, but its failure is beyond doubt. Typical
of inflationist policies, after an initial period of apparent success, it leaves
the economy financially fragile and pervasively distorted. The suppression of
interest rates during the Obama administration has resulted in a vast array
of economic and financial distortions that will
be tested as interest rates rise. The economy was substantially further behind its established
growth trend at the end of 2016 than at the beginning of the recovery period in
2009, and Donald Trump was in
the White House.
The first indications of trouble may come from abroad.
The dollar being the
world's primary reserve currency and the Keynesian propaganda myth having
captured all of the world's major central banks, this testing will be worldwide.
the first indications of trouble may come from abroad.
The permit raj:
How well the U.S. economy will hold up
as interest rates rise closer to normal levels and financial dominoes begin to
fall will depend to a substantial degree on the success of Trump administration
efforts to unravel the Obama administration's smothering permit raj.
Just as the massive regulatory burdens of the "license raj"
helped keep India in poverty for over a century, the massive and increasing economic
burdens imposed by hundreds of thousands of pages of
new regulations undermined the U.S. economy and reduced its potential to levels
typical of the European economy. A variety of
unconvincing excuses were of course put forth.
However, the Obama administration
regulatory assault on American businesses revealingly pushed the U.S. far down in
the rankings for ease of doing business. There is nothing quite like the
prospect of having to deal with and risking litigation with several different
regulatory agencies at several separate levels of government to throw cold water
over entrepreneurial animal spirits.
It remains to be seen, however, whether the substantial increase in economic strength and stability will be enough to withstand the stresses of the slow, timid unwinding of almost a decade of interest rate suppression policy.
Generally, the performance of the economy during the first year of a
new administration is rightly charged or credited primarily to the previous administration, but the
removal of the Obama regulatory juggernaut had an immediate favorable impact on
economic activity and investment plans. The record for Trump administration
economic policy thus begins in November, 2016, while Obama was still in office. It remains to be seen, however, whether
the substantial increase in economic strength and stability will be enough to
withstand the stresses of the slow, timid unwinding of almost a decade of
interest rate suppression policy.
As economic growth rates rise back towards the established growth
trend, tax receipts are certain to rise far beyond those calculated by the
mathematical economists and their risible invalid mathematical models. However, the budget deal of 2018 proves
yet again that it is the inability of Congress to control its spending
proclivities and not any shortage of tax revenues that is the ultimate cause
of the nation's budget deficits and financial fragility. The budget process is so dysfunctional that neither the administration nor
the Congress can be bothered to worry about increasing interest
costs and nominal debt levels.
FUTURECASTS has been explaining the weaknesses of interest rate suppression policy since the beginning of the decade and warning that the ultimate evaluation of the policy can come only when the policy is unwound. Now that the unwinding process is underway, a reminder from a couple of those previous articles is in order.
Bernanke's Bubbles (January 2011)
The time cost of money:
Interest rates play a
vital role in market economics. Among many other things, they reveal the time cost of money
throughout the economic decision making process, and impose an important degree
of discipline on borrowers and lenders alike.
For about a century, now, the U.S. - and the world - have repeatedly paid an enormous price for Federal Reserve efforts to substitute administered alternatives for market interest rates.
Yet Keynesians and
monetarists think nothing of disabling the market's interest rate function.
about a century, now, the U.S. - and the world - have repeatedly paid an
enormous price for Federal Reserve efforts to substitute administered
alternatives based on all too fallible human judgment for market interest rates. See, Blatt, "Understanding the
Great Depression & the Modern Business Cycle," Part II,
"Government Monetary Policy." (Table
of Contents and Introduction) See, also, eight articles on Meltzer,
"The History of the Federal Reserve," beginning with
Part I: "The Search for Monetary Stability (1913-1923); and Friedman
& Schwartz, "Monetary History of the U.S., Part
II: Roaring Twenties Boom - Great Depression Bust (1921-1933, and Part
III: "The Age of Chronic Inflation (1933-1960). In the century after
the Federal Reserve took responsibility for the nation's money supply,
the dollar lost considerably more than 90% of its purchasing power,
exactly what is expected from fiat money systems.
By the fourth year of a low interest rate policy, the bubbles are growing exuberantly and the houses of financial cards will include great cathedrals whose collapse may threaten the entire economy.
The bubble mania that preceded the recent Credit Crunch recession afflicted real estate, securities and banking - the most heavily regulated industries in the nation.
The entire economy must eventually become increasingly distorted in the absence of market interest rates.
Pushing interest rates down may be alright for a
few months or even for a year during some crisis period, but when interest rates
are held down substantially below market rates for two or three years, the
economy naturally adapts to that low interest rate environment. All manner of
economic bubbles begin to expand and those prone to take great risks with
borrowed money are greatly encouraged. By the fourth year of a low interest rate
policy, the bubbles are growing exuberantly and the houses of financial cards
will include great cathedrals whose collapse may threaten the entire economy.
Government Directed Business Cycle, (November, 2010)
Two Keynesian epochs:
The draining of the
vast financial strength of the U.S. after WW-II, the Great Inflation of the
1970s, and the 2007-2009 Credit Crunch recession clearly reveal the economic policy madness that
periodically afflicts the government directed U.S. market system.
The Keynesians brought in by the Kennedy administration were full of conceit and hubris, and some even claimed almost scientific certitude. They promised to accelerate economic growth and "obsolete" the business cycle.
Republican governance repeatedly favors the narrow political
interests of unprincipled political
hacks. Democratic governance repeatedly demonstrates not only their own
vulnerability to political expediency but also a powerful susceptibility towards
ideological and Keynesian madness.
A plague of Keynesian economists transmitting the
Keynesian madness periodically descends on Washington.
The Keynesians brought in by the Kennedy administration were full of conceit and
hubris, and some even claimed almost scientific certitude. They promised to
accelerate economic growth and "obsolete" the business cycle. With such attitudes,
they were capable of enormous mistakes.
The publisher of FUTURECASTS online magazine responded
to the first plague by publishing "Dollar Devaluation"
(1967) accurately forecasting the devaluation of the dollar in the 1972-1974
period and the inflationary morass that would destroy 60% of the dollar's
purchasing power in the decade thereafter. A financial column was provided for some business newspapers accurately explaining and
forecasting the volatile twists and turns of the 1970s. At a time when
establishment economists were achieving an astounding record of almost 100%
failure in forecasting economic developments, the publisher's published
forecasting record was almost perfect. See, Futurecasting
Record 1, Futurecasting
Record 2, and Futurecasting
Record 3. His readers were thus forewarned in time to protect themselves -
and even to profit from - that Keynesian debacle.
Now, a second plague of Keynesian economists
has been loosed from the nation's foremost academic institutions
where the virus was incubated after being eliminated from Washington in the
1980s. Why the faculties of arts and sciences in these institutions hate their
country that much is a question that remains to be answered.
The Bush (II) Republicans surrendered to political expedience and abandoned the successful policies of the 1980s and 1990s. They couldn't resist the temptation to loot the public treasury and undermine market disciplinary constraints as favors for their supporters.
The Bush (II) administration and its three Republican
Congresses inherited an economy that had regained its position of world
leadership and financial strength - much to Keynesian astonishment. There was no secret about the economic
policies that had enabled the U.S. to recover from the Keynesian inflationary morass of
the 1970s. There was no secret about the economic policies that maintained two decades of increasing prosperity interrupted by only
two short and shallow recessions. These policies were referred to as the
"golden straightjacket," since they produced prosperity broadly over
time but imposed discipline on politicians that the politicians hate. The end of
the Cold War and the divided government during the Clinton administration
supported this restoration of prudent governance.
FUTURECASTS had provided its
readers with accurate forewarning of the inevitable results of this conduct.
onset of a serious recession, now called the "Credit Crunch," probably
before the 2008 election, was clearly forecast. Such factors as the Fannie Mae
and Freddie Mac bubbles, the bank lending bubbles, debt leverage bubbles, the
housing bubbles and the constraints in the energy markets and much more had been
clearly explained as early as February, 2003. Further explanations and warnings followed.
See, Eleventh Annual
Review of FUTURECASTS Issues.
However, recovery was forecast to be troubled and disappointing. By trying to protect us from the impacts of bursting bubbles,
the government in its usual ham handed way prevented the markets from
liquidating the mess. Banks were still struggling with toxic assets and unperforming
mortgages and other debts. The surplus housing inventory took years to clear. Fannie Mae and Freddie Mac, now under explicit government direction,
cost the taxpayer tens of billions of dollars each quarter. They insanely loaded
up on low interest mortgages that will decline in value by hundreds of
billions of dollars as mortgage rates return closer to market levels. The
Federal Reserve also has in excess of a trillion dollars in low value
Government policy must restore and facilitate market mechanisms, instead of constraining markets and disabling their disciplinary mechanisms. In addition, substantial cost constraints MUST be imposed on the nation's vast entitlements.
FUTURECASTS has thus fulfilled its primary obligation
to its readers. It is now up to the electorate to keep kicking the bastards
out - churning their elected officials - until the Keynesians are again sent
packing so some sanity can be restored in Washington
and those willing to make the hard decisions that will be needed to restore
economic and financial health, stability and strength are able to guide
government economic policy.
Confusing the credulous:
Keynesians excel at the production of excuses for policy failures.
Reality always perversely refuses to conform to Keynesian expectations.
Keynesian are heroically unconcerned about the additional trillions of dollars of sovereign debts that they now assert is necessary to make their stimulatory efforts succeed.
Keynesian policies always send the nation into financial decline. Its adversaries and potential adversaries always prosper and expand their influence during periods of Keynesian madness. The nation's problems always ultimately reach "ungovernable" levels. Gold always rises.
Suddenly there are discussions about a minimum unemployment level consistent with non-inflationary growth that has inexplicably risen above 6%. This comes straight out of the Keynesians 1970s playbook. Why does this always seem to happen when Keynesian policies are pursued?
Budgetary deficits are simply never enough to
do the job of stimulating the economy, and monetary inflation ultimately always
fails to fulfill Keynesian expectations of reduced unemployment and restored
prosperity. Current economic contractions are always different in unexpected
ways that prevents realization of the benefits expected from Keynesian policies.
policy makers are never skilled enough to properly execute Keynesian policies.
It's all the fault of evil speculators! It's all the fault of the markets! The markets inexplicably fail to respond properly to
Keynesian policies. Reality always perversely refuses to conform to Keynesian expectations.
Meanwhile, the domestic economy leaks trillions of dollars out through its balance of payments deficit. Substantial adverse impacts on the international trade and payments balances are always an unintended consequence of Keynesian policies. See, Blatt, "Dollar Devaluation" (1967).
If $2 trillion in budgetary deficits is
insufficient, there should be $4 trillion. And trillions more during the next
recession and the one after that. Nobody but a Keynesian can be stupid enough to
expect that political leaders will ever pay down any substantial amount of this
debt in between recessions. Keynesian stabilization efforts inevitably
increase economic instability as debt loads and monetary inflation increase.
The Keynesians now set the bar for success at an extraordinarily low level.
The Keynesians brag that there has not been another
Great Depression. They thus set the bar for success at an extraordinarily
To get another Great Depression, you need another WW-I
that uses up the world's wealth and disrupts established courses of commerce.
The war has to be followed by a Treaty of Versailles that imposes heavy
reparations obligations on the losers and Balkanizes nations into constituent
ethnic or sectarian parts that are not economically viable. Then the major
creditor nation must initiate a trade war that blocks entry to its markets and
prevents debtors from earning the wherewithal to service their debts and
prevents the new
little Balkanized states from accessing international markets. The major
creditor nation must adopt a
mercantilist monetary policy that it rigidly maintains as the world falls apart
Keynesians are rightly embarrassed by the undeniable failures of their policies during the 1970s and so strive to direct attention elsewhere.
Today, some pieces of the Great Depression puzzle are actually in place,
but thankfully not the primary pieces. Sovereign debt loads have increased massively, and
China pursues mercantilist policies that weaken the finances of its debtor
nations. However, there has been no great war since the 1940s, and the
"naïve" U.S. somehow managed to preside over a far more enlightened
peace process after WW-II than the more "sophisticated" European great powers at
Versailles. Most important, globalization gives debtor nations the opportunity
to earn the wherewithal to service their debts and small nations the opportunity
to flourish within the broad global market.
Ignored is the failure of Keynesian-type
policies during the New Deal. There was, after all, still almost 19%
unemployment in 1938, after six years of New Deal budget deficits, monetary
inflation and industrial policy experiments. The New Deal not only retained all the worst of the economic policies
of the previous Republican administrations, but they added new constraints on
the economy, even attempting to subject the whole economy to a system of cartels
against the public interest. They insanely adopted inflation as a "cure"
for economic problems, and in several ways massively reduced the efficiency of
the economy. Ominously, inflation as a remedy is again part of the economic
madness in Washington.
(The budget deal of 2018 proves that that has not yet occurred.)
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