“We want them to go back to” a normal interest rate environment.
By Wolf Richter for WOLF STREET.
Starting in 2018, President Trump harangued and hammered Fed Chair Jerome Powell to end Quantitative Tightening and to cut interest rates, and Powell buckled and did his infamous “180.” And now suddenly – unless this gets walked backed again tomorrow – we’ve got the opposite. Treasury Secretary Janet Yellen said in an interview with Bloomberg News on Sunday that higher interest rates would “actually be a plus for society’s point of view and the Fed’s point of view.”
Under Fed Chair Yellen, the Fed hiked interest rates five times, starting in December 2015. Yellen departed in February 2018 as Trump had refused to reappoint her, and instead replaced her with Powell. At the time, the sixth rate-hike was already baked in for the March 2018 meeting. She is no stranger to rate hikes.
Now Yellen – presumably with the backing of President Biden – is supporting Powell on rate hikes, which is a dramatic shift from the prior administration.
The issue in the interview was inflation and whether or not it would be fired up further by the federal government’s $4 trillion additional spending spread over 10 years, adding $400 billion per year in extra spending.
Yellen said that this would not be enough for inflation to over-run. And she said that the current “spurt” in prices powered by the stimulus would fade next year – toeing the line that the biggest burst of inflation in three decades that blew through the Fed’s target by a big margin would just be “temporary.”
But, and here it comes: If the current burst of inflation turns out to be not temporary and triggers more persistent inflation, and thereby higher interest rates, it would be a good thing.
“If we ended up with a slightly higher interest rate environment, it would actually be a plus for society’s point of view and the Fed’s point of view,” she told Bloomberg News.
“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” she said. “We want them to go back to” a normal interest rate environment, “and if this helps a little bit to alleviate things then that’s not a bad thing – that’s a good thing.”
“Alleviate things?” What things would be alleviated by higher interest rates? She didn’t say. Savers and government-bond investors earning a little bit of interest as to get some kind of cash flow going again so that they can spend a little more? People have been praying for this for years!
“I will not give up on the next [spending] packages,” Yellen said. “They’re not meant as stimulus, they’re meant as investments to address long-standing needs of our economy.”
If the temporary surge in inflation sticks and becomes persistent, monetary policy makers can handle it, she said. “I know that world – they’re very good,” she said. “I don’t believe they’re going to screw it up.”
Screw what up? Waiting too long with rate hikes and being too far behind the curve, only to have to crack down hard to get inflation back under control? She didn’t say what “screw it up” referred to. But there are endless options.
For Powell, this must surely be a breath of fresh air, to have the political backing for rate hikes and a “slightly higher interest rate environment,” as Yellen had put it.
Now the wait is on for Yellen to walk back her comments on Monday morning.
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“There Won’t Be Another Financial Crisis in Our Lifetime”
— Janet Yellen (might someday be known as Janet of Arc)
MonkeyBusiness,
We didn’t get another financial crisis — not yet at least. In March 2020, the banks were fine. We got a stock market crash and a junk bond market crash, and a run on money market funds, and problems in the Treasury market, and an unemployment crisis.
A “financial crisis” is when banks are staring to collapse. That didn’t happen in March 2020. The banks were fine. But it did happen in 2008/9.
I know that Wolf, but you seriously believe there won’t be another financial crisis in the next couple of years?
I wish I am that confident.
Too-big-to-fail banking is embedded in a set of self-reinforcing policies—consolidation, balance-sheet support through quantitative easing, favorable regulations, bank lobbying, and geo-economic and geo-political considerations—which explain why these banks have not shrunk and why they remain a threat to financial stability, well after the lessons of the crisis should have been learned.
No one learned from GFC! It is business as usual!
No one went to jail, either, an even scarier “self reinforcing policy”.
Madoff doesn’t count, he turned himself in. Hard for anyone to ignore that behavior.
I disagree. The whole system including banks were toast if they didn’t do what they did. They acted quickly to stop it from playing out.
What was toast: money market funds, parts of the bond market, and the stock market.
Obviously, after everything collapses for long enough, including housing, mortgages, and commercial real estate, etc., banks would get hit too. But that didn’t happen. Not anywhere near. This time around, they looked like the last man standing.
A future financial crisis will be triggered by something else that will come out of the “nowhere.”
I just plain disagree. In 2019 the system was fragile. And then COVID hit in 2020 and the whole system was going to collapse if the fed and fed gov did nothing. Then they acted. Why are we debating this?
Save this spot for Tuesday. I have a full day tomorrow, but I disagree.
Okays 11pm, but I’m gonna take a shot at it.
I don’t work in construction. But if the foundation of a building was buckling. And I sent in a crew to bail out and fortify the foundation, would anyone argue the building and the people on the third floor weren’t in imminent jeopardy? Would they say my team just saved the bottom bits and not the building nor the people inside?
That’s the way I interpret your position on this. With respect.
When you think how the banking losses in 2009 were more than their combined profits of the last 50 years, you know how rigged the system is.
Borrow money, pay bonuses to yourself and keep leveraging until you crash the system and get bailed out by Uncle Sam.
Rinse and repeat every 50years or so, fractional reserve banking is a slow motion Ponzi.
Wolf,
Banks have a lot of accounting and regulatory tools/tricks to delay recognition of likely/certain loan losses and, after that, to spread such losses over time.
So, I don’t know if the financial consequences of the pandemic for lenders has really been fully felt yet.
The G has indirectly taken banks’ losses for them to date (by outright grants to citizens to pay rent/mortgages, PPP grants/loans to businesses that kept employee checks flowing, various offsets for long eviction delays) but whether this de facto transfer of losses to the dollar-diluting G will fully offset all the banks’ ultimate pandemic losses is unknown right now.
cas127,
Banks securitize and sell most of their risky loans, such as leveraged loans (CLOs), mortgages (MBS), credit card loans (ABS), auto loans (ABS), CRE loans (CMBS) etc. Those risks are with investors that bought those instruments, such as bond funds and pensions funds, not banks. People keep forgetting that.
Done with my full day.
Let me analogize: Imagine a car is barreling down the highway at 60 mph and the vehicle blows a tire. The driver pulls off the freeway and fixes the flat. No realistic observer would say the motorist stopped to save the tire. Obviously that’s literally what the driver did, but it wasn’t his purpose The motorist stopped the car and fixed the tire to keep from losing control of the car and crashing, and for the safety of the occupants in the car. In this analogy the tire is the bs that was saved. The car is the system and the vehicle occupants are the players. People can say the fed didn’t act save the system if they want, but that doesn’t change the big picture IMO.
Isn’t that just semantics?
Fed created a wide array of new alphabet programs (including purchase of ETFs) to avert ‘financial crisis’. No bank failed precisely because of trillion dollar intervention and jawboning.
May be there is some hair splitting to do.
Those SPVs were designed to bail out: money market funds, parts of the bond market, and the stock market. They were designed to bail out investors, not banks.
No they were designed to bail out the system. Because the whole system was about to go into an irreversible deflationary down spin. And our gov wants no pain. I can’t believe I’m debating this with someone twice as smart as me. It’s seems so clear to me.
Res, at 11pm you should have gone to bed. You said it yourself, “why am I arguing with someone twice as smart as me?” That is a question for you to answer. Please try to think of the reason AFTER you have slept on it. My answer is that you have underestimated Wolf’s knowledge of these matters.
I concur with Wolf. There is no evidence the banks were going to fail. Banks have been dealing with pandemics for a VERY long time. They know how to deal with them. Especially when they are flush with newly printed money. Have you forgotten that QE was around LONG BEFORE the pandemic? It was still in effect from the GFC. Some people around here want it both ways. They say the economy was flying under uknowho and the reason was because uknowho reversed QT and stopped raising rates.
Unfortunately, in orthodox economics, doing both of those things is the equivalent of admitting you are the worst economic manager in the world. There would have been a greater margin for lowering rates in the face of the pandemic (the orthodox reason for lowering rates) if raising rates had continued. There would not have been as much liquidity in the system if QT had not been stopped.
This stuff is all on the public record. You don’t have to go to QAnon to find out what happened. I’m sure Wolf documented it in great detail, so if you doubt me, why not just look up the Wolf St archive for Dec 2018. I call it Wall St’s Big Christmas Tantrum.
It is noticeable as there was nothing prior that would have caused the market to crash. Hell, it was late December and everyone was getting ready for Christmas. In regards to the numbers, it was a small crash by any standard. It was big enough to be noticed, but not big enough to do any serious damage.
You know, the only reason the market crashed at that time was because Wall St’s favorite drugs, QE and low interest rates, were being taken off them. Like any good addict, they lost the plot. I expect the very same thing to happen again. The real question is: with political backing for raising rates and more repos (because QT can’t be implemented just yet), will the Fed wilt again like they did last time?
Goldman Sachs is a bank with FDIC and no depositors, (and plenty of investors). Call em investment firms. Yes Citi did get preferential treatment, while GS was allowed to shaft AIG, and BOA had to (Paulson and Bernanke) acquire Merrill shares without shareholder approval. The SPV gambit cut out the middleman (the fence) and foisted the bad paper on the taxpayer directly. Now the paper is good again. Bad paper, good paper, watch my hand.
Fat Chewer,
“Banks have been dealing with pandemics for a VERY long time. They know how to deal with them.” Only way they know how to deal with it is to run to the Fed.
US banks have more than a trillion dollars in leveraged loans in their books. Are you saying banks wouldn’t have got seriously hurt if those loans had gone bad?
“uknowwho”? You mean president Trump?
Obama had rates at .25% for most of his 8 year term and an increasing Fed balance sheet.
President uknowwho had the rates at 2.5% and decreasing Fed balance sheet. Despite this economy was roaring. It’s all public record. Don’t have to listen to NPR, read NYT or watch CNN to find out.
Nacho Libre,
“US banks have more than a trillion dollars in leveraged loans in their books.”
No they do NOT. They sold those leveraged loans to loan funds or they securitized them into CLOs and sold those to investors. Same with mortgages, credit card loans, etc. Banks offload much of their risks to investors. That’s why they’re in pretty good shape, even if investors take big losses on the crap they bought from the banks.
Wolf,
I think it is pretty much impossible to say that banks (or any lender, really) were not at least indirectly bailed out by the welter of the G’s pandemic related programs (and, especially, the Fed’s ongoing interest rate strangulation).
From an economic point of view, I don’t know if direct vs. indirect bailouts of bankers/lenders/creditors make all that much difference.
In the end, it is all being made possible by Fed money printing, which simply converts the G’s ever more monstrous debts into wealth snatching inflation for every dollar holder on the planet.
So large losses of the few (banks, etc) get converted into smaller losses of the many (every dollar holder, diluted).
This is simply a continuation of the fundamental G led economic “salvations”/corruptions of the last 20 yrs.
Banks securitize and sell most of their risky loans, such as leveraged loans (CLOs), mortgages (MBS), credit card loans (ABS), auto loans (ABS), CRE loans (CMBS) etc. Those risks are with investors, not banks. People keep forgetting that.
AB-
If you are right, it explains to me why BAC bought Merrill for such a high (considering what was going on at the time) price. Never could figure out that one.
Dimon’s move to pick up Bear S. for nothing just before Asian markets opened made sense….for Dimon.
more hair splitting…but where do the 401k’s of joe/jane public fit in with the whole offshoring of bank risk to investors? i am forced to sit through a 20 minute video every year at work to learn about “saving for retirement.”
these videos generally tell you to pick a retirement income you hope for, and then tell you how much you have to “save” to get that income in retirement, then use a slider bar on the dashboard to adjust how much “risk” you are willing to take to achieve your retirement goals.
these operations seem intended to get people to unwittingly buy at the top. especially the dividend reinvestment. i tried for years to point out to my co-workers that this will not work for them.
nowadays, i have given up. the smart ones don’t play the game. they need the money now. the ones i have given up on are believers in fairy tales like compounding 7% interest.
sadly, many of those fairy tale believers are renters with small children. good luck to them. when they become a large portion of the ultimate bagholders, they just might get angry.
more likely they will double down on btc, gme and amc. whatever their feed tells them to do. i want to say you can’t fix stupid, but this is more a case of you can’t unravel a lifetime of belief in lies to a true believer.
Big banks don’t sell all their loans.
They have loan books in the order of a few trillion dollars combined. They even carry CLOs to the order of about 100 billion dollars (drinking own kool-aid?)
Energy, consumer credit, commercial real estate – all types of them. Any one of which could drag the whole bank under.
I can dig through their annual reports and find the exact numbers when I get time.
Depends what you mean by “financial crisis.”
I consider the fact I might someday have to pay twice for a car what I paid 6 yrs ago a Financial Crisis.
Crisis for you is opportunity for me if I’m selling you the car.
Considering El Salvador is leaving the dollar for bitcoin, maybe yellen is seeing the writing on the wall
I suppose that’s snark!
LOL….yeah, the 118th biggest economy in the world.
They have NOT adopted it yet, their Congress has to approve.
But considering all the other stupid crap going down, sure makes as much sense as anything else!
I bet Yellen couldn’t find El Salvador on a map. El Salvador has a GDP less than a third the size of Rhode Island, not counting exported illegal aliens. If she’s thinking about anything, it’s not about El Salvador or bitcoin.
Oh, was it supposed to be sarcasm?? Oops. Sorry, I missed it. I thought you were just a crypto-obsessed idiot.
OMG not El Salvador! Tomorrow it will be the mayor of Fresno or Stockton!
You don’t want to live in a US. Without banks. It would mean very limited growth. A sure way to loose the race between countries.
A race between the countries towards *what*?
There was nearly one in the fake Gold/Silver paper market(March 20) where many large banks were on hock for hundreds of billions of dollars if the physical price of gold zoomed….. Apparently many still are and the potential problem has not gone away….and that is one reason why the Gold and Silver market is rigged…..
this seems like a good opportunity to ask:
what happens when the basel III rules come into effect, potentially later this month? seems like it may have the potential to, say, tip the board a little bit?
Spot on as usual W
The US government targeted financial support to ‘Incomes’, (one of their own confirmed that). They gave money to their citizens so that they could keep spending (everywhere they could) during the lock-down. Nothing to do with the banks who got ‘creamed’ and had to totally restore themselves to much higher standards after the 2008 debacle. The banks, apart from some in EU, are investable businesses again with good returns which will rocket further if interest rates do go up.(breath holding) It was the public that got bailed out this time.
The stock market crash, as always, was emotional fear about how bad the future was going to be. It bounced back very quickly when people began to understand the true future path. Crashes are usually caused by ‘unknown future prospect’ panics. eg is the planet going to suddenly get 5degrees warmer next week in newspaper headlines.
these central bankers (central planners akin to communism) are going to try to unleash a benign form of higher interest rates, but you have to wonder if they will lose control.
bonds have been in a 30 year bull market, higher prices, lower yields. the support lines for bonds are deeply entrenched. what happens when those trendlines are broken? seems to me that once higher yields are let out of the bag, there will be alot of money pushing to get out of the fixed income market.
low interest rates are the foundation that the whole bubble is built on, housing, crazy high P/E ratios, debt bubble, consumer spending bubble.
the Fed will try to let out some air, but back in late 2018, when they tried to let out some air, the markets went into a panic. maybe this time they will need to allow the markets to fully cleanse out the excesses, but that would be a massive economic dislocation.
the central bankers need to understand that they are the ones that created this problem and learn to never let this happen again. i doubt that will happen.
I take it you haven’t read about the so called “Alpha Covid” strain, yet? Appears to be a lot like the Alpha male in a wolfpack, and just as scary. (“The Grey” was a pretty good movie, I thought) Anyway, another WTF moment, possibly, but MSM driven.
I have just spent hours trying to figure out who the “sources” are.
NB
Check out ( market-ticker.org ) for the ‘gospel’ on Covid, it’s one Hell of a story.
Aud-
I don’t get Molecular Biology info from “click bait”. I go to NIH Pub Med and other sources. I understand the lingo and the limits of this science….mostly resolution and lack of molecular water level interactions understanding. But not really knowing stops nobody from getting rich selling pills and other “medical” crapp.
But don’t get me wrong, I am not someone who is laughing about a virus that has killed millions, and will gladly wear a tight fitting N95 for the next 3 years in public if I have to.
This bug is NO JOKE.
Aud-
Never been to that site..(or ever will again)…..just read enough to know the tea-party is alive and well….hardly MSM….needless to say I didn’t read any “info” on Covid.
NB
I try to look at everything I can, then decide who makes the best case. It’s called an open mind.
I used to do ‘stats’ in my youth but I’ve got a lazy life now, so I let Carl and Wolf do it for me because I know they are very good and save me a lot of work.
Sorry I didn’t manage to help you with your reply to my post.
By your definition, it is impossible to have a financial crisis, so long as the banks are bailed out by the taxpayers, which will be the case as we all know….
Wolf,
Does any of the structural problems in the global Banking system, which brought us the GFC, got addressed, in a meaningful way, not just covered with more debt?
It is business as usual, right?
Too-big-to-fail banking is embedded in a set of self-reinforcing policies—consolidation, balance-sheet support through quantitative easing, favorable regulations, bank lobbying, and geo-economic and geo-political considerations—which explain why these banks have not shrunk and why they remain a threat to financial stability, well after the lessons of the crisis should have been learned.
sunny129,
Yes, some of them got addressed in a big way, including the amount of banking capital (much bigger) and the risk left on bank balance sheets. Banks have been offloading their risky debt via securitization (MBS, CMBS, CLOs, ABS). Investors bought those instruments and they, not the banks, get hit when there are credit problems.
There are still plenty of risks in the banking system but not in areas that brought down the banks last time.
Janet is a nice lady, but I suspect she and many others will be wrong.
Two events of the last 30 years has allowed our financial system to put us in a horrible mess:
(1) Legal and accepted financial manipulation that has caused incredible increase of wealth inequality, now as bad or worse than 1929. The “insight” that if you know how to control the levers, no significant real human effort is required to obtain massive wealth.
(2) The Fed believing/pretending that money can be created with zero cost or meaning or consequence not requiring serious human effort to possess it.
We all know this will come to a bad end–but what?
The only end I can think of is that the dollar will be eventually seen as what in the last decade the Fed apparently thinks it’s worth: basically nothing to produce.
My guess: a monetary crash that will eventually convert billionaires to millionaires. And the rest of us???
The good news: If you have only $1000, you may only lose about $1000.
?NEXT –> look at this for a win, win situation.
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I’ve been banging away for 10-15 years at this & finally .. realisation.
Interpretation: Prices are going up. If they don’t go up fast enough we’ll continue to force them up. And if we’re successful in making them go up too quickly we’ll slow them down. But either way prices are going up. Oh, and: I’m a moron who sees no new crisis in our lifetime. Sry. Now i have to go sip Champaign and eat caviar on the Potomac with my friend Jean-Claude Juncker
The ultra low rates are toxic in many ways. 10 plus years and it hasn’t stimulated anything but bad investments and housing/market speculation. That is a policy failure that should have been ended after 2 years at the most.
Velocity is nil, which is why we don’t have hyperinflation. I would argue the inflation we are seeing is covid pent up demand, labor shortages and china playing games with semi conductors to “teach us a lesson”. But — we will see a year from now who is right.
bad investments, desperation “investing”, yield chasing, over borrowing…
The Fed may have saved the system with the COVID reaction, they may have saved the system with 2008 reaction….
But when they enter to save, they never EXIT! They never retrieve the saving infusions, nor do they ever retreat and let markets go back to what was normal operations. Did QE ever go away when we had RECORD EMPLOYMENT?
Now RECORD job openings, and the Fed still points to employment as a reason for ZIRP.
Mark
Pretty much agree with you–except for the time scale. I think it will be more than a year before we see the serious inflation. And that may make the “inflation temporary” people think they are right.
Yes, monetary velocity way down–but I think that’s because very few, very rich people hold it, who don’t spend much of the GDP except for assets–which will go up.
That cash will have to first somehow get into the hands of the people who spend money for most goods/services– who don’t yet have their hands on that money. Wages will have to able to go up a lot–which I suspect will take time–at LEAST a year — That’s my guess– As I always say, I could be wrong!
“That cash will have to first somehow get into the hands of the people who spend money”
A sensible approach would be to use the cash to hire people to make/build stuff that reduces the cost of living, especially housing and mass transportation.
But that would be communistic or something, so instead the cash will go to buying death machines to drop on the heads of Uncle Sam’s growing list of official enemies.
Trash-
Those “very few with the $$$$s” also need good protection here in the US and for any overseas interests they might have. It’s one of the few parts of Gov’t they aren’t completely busy trying to get people to hate….think the Patent Office and FAA are some other branches they kinda like, too.
I would like to see a rise interest rates not only for my own benefit but to take wind out of the sales of this phony Real estate market. There are so many abuses of the government loan programs that I can’t stand looking at it. Everyone is trying to be a real estate speculator. Second home rentals, accessory units, etc. I heard an ad on the local WMAL radio station advertising 2.75 interest rates on a 30 year loan. How can they do this when the rate is over 3%? Also they said to do a cash out refinance and play the Crypto market. I bet there are some suckers out there who are taking the bait.
Speaking of crypto…yes the suckers doing this are the central bank of El Salvador. Just announced on Sunday, curious timing RE Yellens comment
Their Congress still has to approve it.
So they’re NOT “doing this” yet….
2.75 fixed for 30 years is only possible because the risk is assumed by the GSEs – by the taxpayers.
Fed has been purchasing this risk off them too. Fed now owns more than one fifth of all residential mortgage.
We don’t need a Fed to artificially set interest rate levels. Markets are perfectly capable of gauging risk and charge interest appropriately.
ANY MARKET will ALWAYS be dominated by the largest players…and their backers, of course. Well over 99% of the USA are functionally non-participants in this “capable market” myth of yours…..e.g., they have no invisible hands.
Sure mate, keep pushing that fallacy. I am sure you will even come up with some skewed examples.
And enjoy pushing your myth, it’s one of the many leaps of faith I don’t care to make…..I don’t fear grey areas, I look at them as a mental challenge.
Give examples, let’s explore. Without concrete examples we are just shouting at clouds.
1. Retailers working to provide convenience, quality and low price to consumers. Have you seen government run distribution systems in socialist countries? Compare those two.
2. Rideshare companies providing service without asking for taxpayer money.
3. Let’s contrast the above with the monopolies – utility companies, school districts, pension programs.
What do you see as better run and provides better value to consumers?
You talk in absolutes – “ANY MARKET will ALWAYS be” and then say “grey areas”.
If it’s “ALWAYS”, you shouldn’t have any trouble giving some examples.
My parents live just outside small town in NC that is your typical low wealth drying up place. Their neighbor wants to get out and put house on market this week. Open house yesterday. Watched potential buyers come and go for two hours. Even before they had open house, the realtor said it will sell within one week.
Price. The owners were thinking it might list for around $100,000. Realtor listed for $169,000. When the real estate bubble comes to podunk NC you are getting close to the top.
“take the wind out of the sales.”
?
More blowing smoke by the great leaders we have in Money and Banking. LOL…. One things for sure; they will destroy everything.
What could possibly go wrong?!
Us* … that’s what!
*as in not buying into ANY official narrative EVER AGAIN.
It surely won’t make servicing the 28.4 Trillion debt harder, right?.
What would it cost at 3%? Could the US gov make that work? Problem solved. Not fixed. Just you should know it’s not going to happen. Period.
28.4 $T * 0.03 = 0.852 Terabucks or $852 billion.
Biden just proposed a $6 trillion budget, so that would require 0.852 / 6 = about 14% of the federal budget to be spent on interest. That’s bad, but it would be survivable if we weren’t borrowing trillions every year.
The real problem is that last year 48% of the money spent by the Feds was borrowed, so if the same thing happens in 2021 we’ll borrow about $3 trillion, and the debt will increase by ~10% in a year.
Multiply 1.1 by itself ten times on your calculator – it’s about 2.6. At that rate, we’ll have ~ $73 trillion in federal government debt by 2031. It’s not sustainable, things will implode first.
Soon people will steal wheelbarrows full of money and dump the worthless paper and run away with the wheelbarrow.
Let me ask you something. What is the alternative? If the market causes rates to rise, the only way to force it down is to print. And printing will weaken the dollar.
People keep making analogies to Japan, but Japan is a creditor nation. As long as you produce more than you consume, you can get away with that, because you’re still self sufficient, as a society.
We’re not. So our little game only works for so long as the rest of the world wants our dollars. That demand for dollars has already weakened substantially over the past year and a half. When it will stop working entirely, I don’t know, but I keep hearing people say that this game will go on for another 100 years, and I’m astounded at the ignorance.
Russia is getting out of dollars beginning of dollars demise
St
Raising rates could be expected to lead to a huge flow of foreign currencies into the dollar. This might lead to US being able to buy stuff cheap from China again and might therefor quash the current bout of inflation, Maybe, maybe, maybe, nobody knows anything for sure, that’s what makes Wolf’s charts and blogs essential reading that puts you ahead of the field in understanding what’s going on.
Anything government says is temporary it will become permanent.
Then, I thought Yellin was not Fed chairman anymore, what does that mean it’s good for the Fed’s point of view?
Well this is Yellen thing interesting.
1) ZH spun this as Yellen coming out in favor of inflation.
2). Bidden supports rate hikes? Who says, Woodrow Wilson’s wife? Does anyone believe Bidden knows what he supports and if he did support something would he be allowed to say so?
3). Please inform Javit Chip that taxes do not fund Federal Government spending and haven’t for a long time, so comparing taxes paid as vs govt spending is completely confusing and false by all empirical measures.
If you skip the comment section and some click bait articles ZH has some good stuff.
Weren’t they banned for suggesting that COVID was a lab leak?
They provide value for being the antipodes of mainstream media.
There are some very insightful comments at ZH. But you have to skim thru mountains of imbecile hot air.
Mm…a waist of time…
ZH is whacko central. Stay away from the bad place.
Zero hedge is msm.Abc media ltd.look at the bottom of the page.controlled opposition.
“We’ve been fighting inflation that’s too low”
a quote from Yellen.
How else can you take this quote?
And how is it that the Fed, which is INSTRUCTED and MANDATED to FIGHT inflation, promotes it?
It is a TAX on past earnings (savings) and present earnings. The Fed is an unelected body passing a tax on the American People.
Inflation 4%…..fed funds .01%….Neve ever happened before.
So you are just now figuring out the government lies?
With simple and incisive well thought out comments like that, you are definitely becoming my favorite and most consistent troll here.
There are, fortunately, a lot of other people here who are not afraid to wade into the “grey areas” in an attempt to LEARN what the larger variables involved might be, and how they are interacting and changing.
But I can completely understand your wanting to avoid mental stress and unknowns, it does sometimes strain the brain.
H
It is economic mantra everywhere that 2% demand running ahead of supply (ie inflation) provides an optimum scenario with slightly hot demand drawing out production and investment. That’s why they do it, but whether it works or not is hard to say.
When you’re a true believer ,you worship at the alter. I think she meant to say for laymen that she was fighting deflation. She thought she was explaining.
The Fed has actually been very good at keeping it under that level for an extended period, unlike yhe UK which has seen it run over on multiple occasions. What’s happening now is exceptional due to Covid.
“Inflation 4%…..fed funds .01%”
I believe the 2nd number, but not the first…14% Maybe.
T
Everywhere and always Govt (ie politician) spending is funded by one of or a combination of :-
1) Tax (honest but the people won’t elect you)
2) Borrowing (pass it to the grand kids)
3) Inflation (print the money in the basement without going to jail)
Which one would you choose if you were uncle Joe?
There is another option, you could flog some old aircraft carriers to Saudi Arabia.
I think I’ll have to copy and paste this post soon. Wolf must get tired repeating himself.
I don’t know what planet you people have been on, but inflation has been here for a very long time, like decades. For example just in the last 5 years my 12oz coffee grounds have gone from $6 to $7. It has been sneaking up for a long time. The bailout money went into REIT funds which jacked up everyone’s rent and that rent has been passed on to the consumers. Only a knuckle head government employee looking at the monitor all day would say otherwise. And I am Stupid.
I stopped at “Micky D’s” this afternoon to pick up a chocolate milkshake for my wife. I haven’t bought one of these in years. They come in three sizes now. Ordered a medium sized one and forked over $3.45. What? That’s a dollar more than I pay for a gallon of gasoline.
Yeah, we have inflation and it’s going to get worse.
Nowhere is a burger, fries and a drink less than $11 in Texas!!! LOL!!! That means four combos are almost $50!!! LOL!!!!
Come to California and go to In n Out. A combo set of burger, fries and one drink can still be had for less than 7 bucks!!!
When you adjust the milkshake for hedonic improvements of the cup and its graphics your milkshake was the same price it was in 1960. I can not believe that people do not appreciate what the Fed has done to improve our lives.
The thing is, that ain’t no ‘milk shake!
… it be psuedo food.
Bottom line is rent and prices have risen faster than wages in my state. The quality of our lives has dramatically shrunk in my lifetime. Made in America is what made America great. Maybe on the West Coast it is different. (BTW In and Out Burger is small and tasteless like McDonald’s to me. I mean who puts mayo on the burger? LOL!) Anyway, Texas has no income tax but high property taxes. Maybe that plays into it. And the West Coast is also tax and regulation heavy as seen in droves of business leaving. Have fun!
What made America great was being the last industrial giant standing after WWII. Everything after that is debatable, including how that economic boom was spent (and who benefitted most from that spending).
Thanks for the reminder DrD!
When mcD came to our the small town SWFL in late 50s,, mom took us to try it: Burgers were $0.15,,, fries the same,,, coke as a dime!!
But White Tower burgers were a nickel,,, so that was the last time at mcD for us, from mom,,, though we kids did sneak in there once in a while on our bikes to spend our paper route and baby sitting $$$s
(And, totally agree with the skunked one,,, just a bunch of synthetic chemicals now a days,,, haven’t been there in 20-25 years…)
You must hate your wife!!! McDonalds? Damn…..
I guess you never saw the ‘milkshake scene’ in the film about Ray Kroc and the McDonald’s brothers called “The Founder”.
It’s a damned good movie…
Great film. You initially side with Kroc’s gumption until he starts exerting more control and cost-cutting measures. Have to rewatch that film!
“You must hate your wife!!! McDonalds? Damn…..”
Where else would I buy a milkshake these days? All counter deli’s are out of business or not open on Sunday!
Stupid…
The “deflation fear” era….from 2009 to 2020…
CPI went from 214 to 254….that’s roughly 17%….and by Yellen’s admission
“We’ve been fighting inflation that’s too low”, that 17% is “too low”.
There is something wrong with a person who will be drawing AT LEAST two inflation protected pensions promoting inflation on the people who are providing HER with an inflation protected future.
H
17% over 11 years is approx 1.5%pa by my count, which confirms what I said above. The fact that it wasn’t deflation shows what all that deficit spending actually did. USA was in a very bad way in 2008 and they borrowed and printed to stop you getting poorer in the hope you would pick up and pay it back later. You didn’t, then covid came along so it’s even harder for them now. The way the money polarised to rich v poor is their real failure over the period.
Called it!
The vaccines and “Free government money” have ro get paid somehow.
Rax
The same way we paid for the one trillion dollar F35 debacle.
I still believe that the Fed put will be honored regardless. I need to see the Fed stand aside during a bear market before I change my mind. All those voting Fed fools bought into Bernanke’s “wealth effect” idea.
The people who can pay for The Great Society don’t really wish to pay for it. So the Fed papers over the political stalemate using this crazy wealth effect ploy.
Two things.
Supposedly Janet Yelled fancies herself as a good communicator and worked with Bernanke to improve his communication skills if my memory is correct. She is trying to manipulate you if she is talking.
I heard Janet Yelled yesterday say that she believes most countries have more ability to run up their debt to GDP. She used the fancy term fiscal space. To me it looks like their playbook is government borrowing a lot of money at negative real rates and central planning it into the economy. If you think of the real economy as a old times swiss watch with lots of tiny gears you have fat fingered politicians taking the back off messing around and are sure to break it.
“She is trying to manipulate you if she is talking.”
I’m shocked, truly shocked by that statement. I always thought she was a kind old granny that everyone wished they had.
Seriously, these elite eggheads always speak in public to further their goals and narrative (although they are not perfect so sometimes they speak out of turn or momentarily lose the thread of their narrative). It is propaganda in its purest form.
Also called gaslighting.
OS
“Fiscal Space” is economic PR speak for, the ability to tax more, hence the G7 initiative to get a minimum corporate tax level of 15% round the world. You’ll be next, believe me.
OS
Sorry, I may have slightly mislead you above.
‘Fiscal Space’ does indeed refer to the space between tax and spending, However, to a spending ‘Hawk’ like me, space would be seen as a chance to raise more taxes, but to a spending ‘Dove’, space would be seen as a chance to spend even more money.
In replying to your post I thought nobody in their right mind in the current USA could be a spending ‘Dove’.
I was totally shattered today, listening to PR briefings for the G7 meeting where uncle Joe is expected to try to persuade the G7 that there is scope for ‘MORE’ deficit spending, unbelievable, you guys are up S creek. No wonder Yellen started babbling about higher rates, it’s all a mega-joke.
Let’s assume there is another bear market. What more is the Fed going to do? It already has rates at zero. It can only, by its charter, purchase treasuries and taxpayer guaranteed MBS. It’s already committed to unlimited QE. So what more can it do? How can it print more and get it into the economy?
As I’ve said before, the Fed’s “tools” are not nearly as effective as the BELIEF people have in the Fed’s tools’ effectiveness. It’s all a confidence game, and it’s anyone’s guess as to when it falls apart.
Rn
It’s easy, they just print to buy treasuries forever. Because they are printing and not borrowing from others, the interest rate need never go up.
I’m sincerely hoping they are not that dumb, and Yellen needs everybody’s backing if she is sincere in her intention.
Our problem now is that the inflation is not just being caused by monetary effects. We are at the point in the predictions of the famous limits to growth model by Dennis and Donella Meadows where the lines for population, pollution effects, energy and resource availability cross on the graphs. We got bailed out of the inflation of the 70’s by Tall Paul but also by the North Slope and North Sea oil, the green revolution in seeds and fertilizer, and the productivity of computers. This time I think the Fed will find it is pushing on a rope. Things will just keep getting more unaffordable till most of us will be left with a shack, a rusty bike and some rice and beans.
Yes. The unraveling of the social fibers that have, up till now, held our modern civilization together, leaving all of them rather frayed and tattered.
There may however, still be enough sound rope lying around, should hemp neckties come back in serious fashion …
Predictions and $4 will get you a cup of coffee.
Remember, the future is unknown…..
I like Jim Rogers saying that even peasants know they better have a little silver or gold hidden in the house for when government really screws up.
Why do you think they are trying to do away with physical currency?
OS
I like Jim Rodgers investing in Russia with all that everything.
I agree that we have exhausted our natural resources and that inflation for the remaining timber, oil, fish, soil, etc will continue to rise.
The only wild card between now and the near future of settling down to our rusty bicycle and rice and beans is the dangerous militarism going on. Modern warfare will make everything worthless, everywhere.
You got it all wrong, prices of commodities aren’t rising because we have exhausted them, but because Powell injected about 5 trillions of freshly printed green bucks in the financial system.
We are nowhere near at the point of exhausting our natural resources, and until just recently, commodities were in a depressed market…
It will be the vast and currently underway advances in Quantum and theoretical physics this time around SC,,, no doubt about it,, as several of the younger generations of physicists have already begun to publish new work extending the theories of Einstein and similar giants of the past.
That there is also a vast excess of our species at the current moment will very likely be dealt with by some sort of relatively painless method such as birth control, etc. Too much to ask for common sense to prevail so far, eh?
Based on the advances of the standard of life for the vast majority of citizens of the entire globe in the last hundred years or so, there is every indication the overall increases of the well being of MOST folks,,, but clearly not every one, as ever, will continue.
Affirm.
We can do this. Pick the right targets, focus resources, use our heads, stay cool.
Do-able. Not easy, but do-able.
ain’t gonna happen. unless it makes some rich people even richer. then, maybe, but any attention paid to the last twenty or so years should lead to the conclusion that the people ahead in the game are trying to keep the same size slice of the pie they are used to getting, despite the size of the pie shrinking. it has to come from somewhere.
our betters might have a chance at such a future, but they will probably have to come up with a different scam to keep the proles feathering their nests. judging by the current batch of scapegoats, i don’t think they will be fooling everyone much longer with the same tired song and dance.
Great comment S Cliff, but I do think the last sentence was a bit overstated.
What I would respectfully add is that due to a few reasons, (reserve currency one), the US has been living in a false wealth bubble for decades. The stranglehold on manufacturing after WW2 was the 1st big grasp, dollars for oil trades 2nd, and arms deals/wars and meddling strong arm tactics against other economies worked until China got uppity. Tariffs and tariffs, zero sum threats against historical allies was like watching the big buddy take his friend’s sandwich away on the playground. And low and behold the emperor was naked and stupid with a funny haircut and big belly.
An above comment linked this event to a crumbling foundation. Resjudicata? mentioned sending in the trades to fix is metaphor to consider. Speaking as a carpenter, this is not a crumbling foundation….this is the building structure sinking into rot and carpenter ant nest damage. Termites. The paint looks good, but don’t poke around too close with anything sharp….and yes the roof has started to leak. Yellen is up on a ladder slapping on roof patch tar trying to stop it.
The jury is out on the foundation, imho. The foundation is the people. Look around your neighbourhood and ask how many folks you see have the jam to live on 1/2 of what they have right now? How many could sit politely in a local meeting and participate constructively? How many would help their neighbour, or share a meal with someone hungry? That is the foundation of a country and movement, imho.
Imagine Cuba old cars and not brand new financed EV F-150s with a Karen family. Picture home food prep and fewer restaurants. I don’t see any changes yet. After Covid all we hear about is air travel resuming and vacations, restaurants, law suits about restrictions and religious services, increasing gun sales. complaining and complaining, finger pointing. Anti vaxers, fillibusters, free everything, and on and on. That’s the rot. That’s the noise of ants chewing. OMG, gas is $3.20. It should be $5.00. What will people do at $10/gallon? (equivalent to wealth).
This inflated wealth effect and a society full of expectations hasn’t been around for all that long, what….. 50-60 years? I figured it was going to fall apart when little princesses were paying 3X for a pair of jeans with holes and rips. Then it was the skim milk lattes and frapp coffees. Meanwhile, roads and bridges are falling to pieces and people can’t afford housing. And next week is infrastructure week, at higher interest rates. :-)
Does anyone here remember when food banks first started up? It was supposed to be temporary where I live. Now, it’s multi generational.
Concur again. Like I said above, it’s do-able.
Pick the right targets, dump the fluff, and learn to work as a team.
Drama is good for entertainment, but not so much for results.
Paulo/Tom-generational drift: when curiosity about not knowing what you don’t know devolves to only wanting to know what you do…
may we all find a better day.
Paulo, are food banks evidence that “many would [not] help their neighbour, or share a meal with someone hungry” or evidence of rot in the foundation? Food banks rely on the generosity of donations, at least in the one around the corner from me which fed 250+ families during the pandemic and has been in existence for over two decades.
The logic seems contradictory.
Food banks are a scam. We had a neighbor who used to go to the neighborhood food bank, even though they were very well off. As a matter of fact, everyone in town was well off as it was a affluent area, with very high property values. I could not understand at the time why we even had a food bank.
They used to excuse it by saying that there were lots of well off people going there and the other day they met one of the local firemen there getting groceries, and he said all the public employees went…
Jdog, no, your neighbor is a scammer. The food pantry or cupboard is performing a vital service.
A vital service? Subsidizing irresponsibility is hardly a vital service. We have all seen the late model cars and SUV’s sitting in lines burning gas at $3.50 a gallon to get free food.
There used to be a time in this country when people had too much self respect to accept charity. Now the people do not respect themselves or anyone else. That is the price of liberalism.
Jdog, that’s the result of “diversity.” Distrust, lack of societal shame, racial unrest, and other social ills are baked into the diversity cake.
Interesting viewpoint.
The “limits to growth” model has continued to be wrong – only ideological reasons keep it alive.
70s inflation an outcome of exiting our own Bretton Wood standard – but inflation can’t last forever if you can turn debts (dollars held by other countries that is exchangeable for gold) into assets (dollars held by other countries that is exchangeable for nothing).
Green revolution due to Monsanto maneuvering – so it is ok? Actually at least 10%-15% of this revolution due to increasing CO2 levels…
Productivity of computers: Computers are faster and cheaper – are they actually a net benefit to the economy? As in creating jobs and increasing standards of living? The actual standards of living, state of infrastructure, etc in the US would seem to argue otherwise – the improvements have mostly been to the rest of the world…
c1ue, a Harvard study of 2019 data of 2019 data to assess the accuracy of the projections in the original Limits to Growth research confirms that so far the projections have been quite accurate. Most of the projections diverge after 2020, depending on which scenario, BAU (business as usual), BAU2, CT (comprehensive technology), and SW (stabilized world) we follow. They did not predict collapse, nor was the study intended to be ideological.
“are they [computers] actually a net benefit to the economy”
They reduce costs in the distribution industry. Modern package delivery is impossible without bar codes and automated handling.
I remember the day at the J.I. Morris Co. in late 1970s when we got the postage meter and scales to talk to the company’s minicomputer. It was high fives all around. And no, the shipping department people did *not* want to go back to pre-computer days.
“Productivity of computers: Computers are faster and cheaper – are they actually a net benefit to the economy? As in creating jobs and increasing standards of living? ”
What you are missing is that there is no such thing as something that benefits everyone. As a general rule, what is a benefit for one person is a determent to someone else. That is why government interference is usually a bad policy.
Prior to computers, it often took 4 or 5 people to do what now one can do. So it was an overall benefit to companies and corporations, but not for the people who were displaced by technology.
The problem is magnified when you consider that the majority of profits from technology go to the 1% as the labor pool compete for ever lower wages.
There is a clause in the Constitution that says the Government is obliged to provide for the “general welfare”.
Most people really do not understand what that means. General welfare is the welfare of “all citizens” and not special interests or the benefit of some, while harming others.
If a government policy helps one group, while being detrimental to another, it is not in the general welfare, and therefore not constitutional.
When the government skews the free market to benefit one group, it does so always at the determent of another.
Jdog-so what agency guarantees a ‘free market’ other than a government? Please discuss the situation of the Vanderbilt (railroads)/Carnegie (steel)/and Rockefeller (oil) monopolies (their power having become quasi-‘governmental’) vs. the imposition of (elected government) antitrust legislation. (Begs the longstanding and very tricky question of at what expansion point does a private business become vital enough to a well-functioning national citizenry that it has essentially morphed into one of a public utility?).
may we all find a better day.
“Our problem now is that the inflation is not just being caused by monetary effects.”
As someone much smarter than me famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” (Friedman)
Just as the high inflation nightmare of the 1970s-early 80s was a result of reckless .gov spending of the 60s era (Vietnam War, Great Society programs, ultra expensive space program to put man on moon, Nixon taking US off gold standard, etc) so too the fiscal, debt, and spending excesses of recent decades (especially since GFC of 2008) have come home to roost now in form of entrenched (for foreseeable future) inflationary pressures.
May we all see a lower cost of living again in our lifetimes.
You can blame it on pandemic, shortages, pent up demand, or supply shortages but it boils down to money printing and debauching the currency.
Inflation comes from borrowing, and not just government borrowing. It is consumer borrowing that fuels the lions share of inflation, as much of government borrowing gets stolen or routed into the bank accounts of the wealthy, and never makes it into the actual economy.
Whenever you buy something on credit, you create the money to buy it at the point of sale. Then you inflate the cost of the purchase by the amount of interest you pay, so you not only create the money for price of the item, but also for the interest.
The solution for inflation is simple, stop using credit.
H
QE made Friedman rotate at 3000rpm in his grave.
SC
Interesting hypothesis, must be read alongside the mega push to green energy which will increase living costs massively for ordinary peeps and may get them rapidly hunting for your shack and beans.
Shell oil was ordered by a Netherlands Judge to reduce their planned co2 emissions by 40% by 2030. It’s an unprecedented interference in the management of a private company which basically makes Shell un-investable unless they get the hell out of the EU. This is masochism on a grand scale.
Do you Know how to build a good shack and where I can find an old bike? Thanks.
Doublethink: Doublethink is a process of indoctrination whereby the subject is expected to simultaneously accept two mutually contradictory beliefs as correct, often in contravention to one’s own memories or sense of reality.
Welcome to 1984 WS readers.
ZR
I think it was late by 10yrs and started in 1994. I can prove it but you’d have to listen to me drone on for 5hrs.
What could she mean by “…slightly higher interest rate environment, it would actually be a plus for society’s point of view…”
Seems like a vague and misleading statement from the Treasury Secretary. What facet is being considered as society?
You have to remember the Fed doesn’t believe in market rates of interest. The believe in a PhD administered rate. This means they believe in their manic r* rate at which the economic bathtub is filled exactly to the rim without running over.
R* is currently around zero last time I checked and they know this is not healthy. She is saying they want to get r* up to 2% or so. In my mind they are just reaping what they showed by taking interest rates out of the markets hands. They have facilitated a debt saturated economy addicted to their heroin that is slowly getting more out of shape like all centrally planned economies.
OS
dead on.
No one hates the concept of free market forces than central bankers.
They know what rates should be, just ask them.
Phd administered rates…..as you say.
The Fed has allowed future generations to be “emptied out” with the $20 plus Trillion in debt created in just the past 11 years.
If the Fed was just held to their mandates….stable prices, moderate long rates…none of this could have happened.
30yr mortgages under inflation?
Fed Funds 4% below inflation? These things have never happened.
The Taylor Rule should be revisited….even if just for discussion purposes.
I think she means “As interest rates go up the cost of housing comes down. People will buy less debt going forward. The debt people currently have will be cheaper to pay off.”
Wolf
Apparently, you did not understand the game so let me try and explain it to you. The Fed says inflation is transitory so don’t worry about it and stocks will go higher. Yellen says inflation may go up and may not be transitory but don’t worry the Fed can raise rates and the stock market will be fine. two different speakers, two different stories but only one conclusion, stocks are headed higher no matter what happens. so get in there and buy, buy and buy some more.
Just remember, subprime is contained per Bernanke.
I must be missing something? Everyone on the blog has been against the fed for artificially keeping the rates low so this should be viewed as a positive development but people either missed the point or everyone agrees its a total propaganda lie without saying so. Also don’t get why Trump gets blamed for Powel lowering the rates in 2018. Anyone in that position should be independent and obviously Trump would have been blamed for anything bad to come out of it anyway for all of history based on media bias. The rate changes when laid over presidential terms after ww2 show hikes for republican terms and drops with long low periods for dems. Trump is the outlier and wasn’t afraid to say it but just not sure why 2018 rate drop is the only rate drop to be remembered as significant for the past 75 years
“Also don’t get why Trump gets blamed for Powell lowering the rates in 2018..”
If you paid ANY attention at all in 2018/19, well even if you didn’t pay attention, you must have seen the stuff Trump said on Twitter about Powell, and what was leaked about that situation. This was everywhere on the front pages. Until then, the Fed was considered off-limits for presidential tirades.
Yeah and Powell folded like a little B, guess that will do it when your job is on the line.
On the other hand, don’t expect Biden do anything remotely like that, which means Powell will get more freedom to act on his own accord and still not thinking about thinking raising rates anytime soon
A President can not remove a Fed Chair unless for cause. Disagreement is not cause.
The Fed is supposed to be independent and not influenced by politics. So, yes. Biden will not do what Trump did.
Wolf…
Yep. Powell was jawboned in December of 2018 when he took Fed Funds up to the then 2% inflation rate. The Dow shed 5K in 3 weeks.
Trump went nutz and started calling for negative rates.
Powell was never the same after that.
So, the markets cant handle 2% interest rates….back in 2018.
This begs the question, “What is the threshold now?” 1%?
The fragility of the markets is glaring, IMO.
When the Dow made its all time high in 2007, Fed Funds were circa 4%. And the market was chugging higher. Now 1 or 2% would cave in the entire affair.
The market could handle it just fine (it fell, and that’s what markets do periodically). Trump, who’d taken ownership of the DOW, couldn’t handle it.
This was not one of T’s best moments. Calling for negative interest rates, and bashing Powell for a small increase in the Fed funds rate was a big mistake.
I guess it depends on what you mean by “it can’t handle it.” It certainly can’t handle it and maintain current P/Es, that’s for sure. But it remains to be seen whether it can “handle it,” in the sense that the financial system doesn’t completely collapse.
Off limits? I guess LBJ didn’t use Twitter but supposedly he lifted Martin off the floor by his collar. Maybe that tale is apocryphal. And I recall Nixon had Artie in his back pocket. Seems to me there have been two independent chairs during the last several decades: Volcker when St Ronald took his medicine and Greenspan when he “solved” the business cycle.
I’m convinced Powell caved to the Wall Street moaners rather than Trump’s tweets.
Yes, Powell didn’t respond to Trump tweets, only journalists and Proud Boys do that, he dances to the tune of his financial overlords at Goldman et al, taper tantrums and other such are what he and his immediate predecessors fear.
I remember the Bush2/Greenspan photo op, with Bush’s arm around Greenspan’s shoulder and the look of fear on Alan’s face, while George was beaming. I didn’t hear the tirade, but I sure did see it in that photo, and still remember it too.
W
Was it Trump and not Nixon who got his Fed chairman in a choke hold against the wall for lower rates before an election?
I can never find out which one.
“Until then, the Fed was considered off-limits for presidential tirades.”
I politely beg to differ. In earlier times someone like Trump would not have had access to social media to attempt to ‘persuade’ Fed Chairs, but they had other much more effective ways of getting their way.
What about the time LBJ summoned then Fed Chair William McChesney Martin to his ranch where he proceeded to shove him up against the wall to “persuade” him to go it his way?
Or how about those infamous Nixon tapes, which showed that President Richard Nixon pressured then Fed chairman Arthur Burns to run expansionary monetary policies before 1972 election.
H
Halleluya !
I’ve had rumours of this story for years, but I could never find out which president it was.
Now I’ve got a choice of 3, LBJ, Nixon or Trump, maybe it was all 3!
Thanks for that, see my post above.
It was because the whole world (well, at least rational people) agreed and still do agree that the US raising interest rates to NORMAL LEVELS ie ~5% was/is very desirable. Trump lowered rates in the face of a rising economy. That goes against all orthodox economic realities, not just theories. He put direct pressure on Powell to do so, thus violating whatever independence the Fed had concerning monetary policy. A historical necessity that exists to stop the pollies printing money to do whatever they want with. A stock market crash does not necessarily mean the economy has crashed. They are two different things. Wall St engineered the tiny crash as a way to scream for more drugs. Those drugs are massive liquidity and ultra low interest rates.
I want you to understand this. I am not saying there is not a fundamental underlying problem long term. There is, and it’s bad. I am not saying that injecting liquidity and lowering interest rates won’t make an economy boom. It will, but for all the wrong reasons. It’s like how a crack-head is euphoric after a hit.
Real economic booms have a widespread contribution from many sectors of the economy, not just the stock market. Engineering a real boom is incredibly difficult and there are many intangible things that make it happen. It doesn’t just happen with certain economic settings. It takes planning and good will and good ideas and a general feeling of confidence in the community that it can be possible to have a booming economy that is based on real productive investment and not monetary trickery.
Trump did not lower rates. That is not something he had power to do. Rates follow the Treasury’s and Treasury auctions determine interest rates. The Fed simply follows, and takes credit for the moves.
Low interest rates reflect the glut of money being invested in Treasuries. There are several reasons for this. Mostly wealth disparity. The wealthy have huge sums of money, of which a portion goes into Treasuries.
If the public had a larger share of the pie, they would be, for the most part, spending the money instead of saving it. There would be less money available to buy Treasuries, and interest rates would go up to attract more investors.
This is not just a US phenomena, it is the case worldwide.
“The Fed simply follows, and takes credit for the moves.”
People who say that don’t understand the Fed’s most powerful tool, “forward guidance,” as it is officially called, or “jawboning.”
The Fed tells markets in myriad ways what it WILL DO in the future. This includes the endless series of Fed governors talking, the meeting minutes, press releases, Fed chairs speaking, forward projections released during meetings, etc. Markets take them in and prepare for them by adjusting their yields accordingly. Then in charts, it looks like the Fed was following, when in fact the Fed told the markets where it would be, giving markets time to adjust to it gradually. It’s as simple as that.
The theory that the Fed follows the markets is nonsense for that reason.
It is not nonsense. Jawboning is just that. It really does not matter what the Fed says, if the auctions go poorly. The rates will go up.
Sorry, but the “glut of money” is nonsense. If it was really true, central banks wouldn’t be constantly printing/creating more of it. You don’t create something there’s a glut of.
Jd
Interest rates are indeed determined by the amount of money available to buy new treasuries, but I think you might be missing the point that QE always provides enough money to ensure the rate ends up where the Fed wants it.
As Wolf says the Fed has to know in ‘advance’ otherwise the rate would go up before the Fed had pumped the money in.
Only way to win is not to play.
For the life of me I can’t figure out anyplace to put my money except into home equity. I don’t know how Millenials are expected to build wealth otherwise.
I have simplified my strategy as world gets more complicated. Invest mainly based on your time horizon and risk tolerance. You can get by with as simple as two asset classes SP500 and cash and blend them for any time horizon and risk tolerance. Adding bonds and real estate in theory helps, but not really required in my opinion.
I agree LK. I did this when I was 24 back in the late ’70s. I didn’t have any money then, lost my job, worked away from home, but made that mortgage payment every month. Never missed. The house was what people here on WS would call a crap shack. And when I lost my job I planted a 1/2 acre garden, had chickens, a rabbit hutch, and shot a deer every fall. But we never missed a mortgage payment. I really missed my family when I worked up north for 3 seasons. Then one magic day I owned a better home with no mortgage. It took about 15 years.
Most immigrants work hard. They work really really hard and are frugal. They have a plan, and usually that first step is getting into a house. It works. Don’t recognise your country anymore? It isn’t what they say? Then be an immigrant, a stranger in a strange land. You’ll be all right. RE works long term. Maybe not so great as a casino chip.
Paulo-have never gone wrong by paying off the ranch, AND NO MATTER WHAT, NEVER, EVER, betting it…(this, indeed has resulted in being ‘a stranger in a strange land).
may we all find a better day.
Freeze dried food
A paid off home is a huge asset. Not just for its value, but the phycological effect. Most people live in debt, which puts them in a weak money position. The phycological effect of that is that they must always be cautious, and usually pass when opportunity comes along because of their overhanging debt and the need to service it.
When that weight is removed, you feel empowered to take more chances with your investments, and profit is directly related to risk.
Most people do not begin to make serious money on their investments until their home is paid off..
” I don’t know how Millenials are expected to build wealth”
Building wealth is not expected. Rather, young people are expected to be debt slaves by 20 years old, and stay that way until they die, which is supposed to happen about a week after they are no longer able to work.
“For the life of me I can’t figure out anyplace to put my money except into home equity.”
Yes, you, and everyone’s uncle and dog.
Residential real estate has now emerged as a most desirable income-producing asset for big and small ‘investors’ alike.
I can’t recall a time when housing became the premier asset to pile into for a relatively ‘safe’ (not really, but they don’t realize that) cash flow income. Bonds, stonks, crypto, even precious metals pale in comparison under current conditions.
Hence, enormous dislocations and malinvestments are going on now with the small guys (homebuyers, flippers, small landlords) competing for dwindling housing inventory, and with 800 lb gorillas (big corps like Blackstone, hedge funds, pension funds, etc) muscling their way into market to buy up what’s available in low-mid price ranges.
Is Yellin telling us the Feds water Purification system is breaking down? Only for it to be a ruse to expose our crypto capabilities? reHYPOthecate has confirmed there is a new product of Interest. Shall our Wall Street aircraft carriers draw nearer now…bunch up or spread apart? Screenwriters drafting a budget y’know.
I must disagree with Wolf regarding bailing out the FED in 2020. Yes, mutual funds, bonds and bond funds were bailed out but who finances mutual funds, holds bonds and has holdings, direct and indirect interest in ETF funds? The FED’s biggest owner.
There is nothing done by the FED without running it up the flagpole to JPM, GS, BAC, WFC, Mellon, BNY, etc. It was required due to counter parties similar to 2008. What would happen to the overnight lending, 7-day, 30-day lending, commercial markets had the FED opted to not bailout mutual funds short term commercial lending markets? Lending markets for short term paper freezes up, payroll is not met, creditors are not paid, etc.
Oxygen was about to be cutoff to the short term markets. The life blood to and from private equity, hedge funds, pension funds would’ve seized up like gas pipelines in a Texas freeze.
And who is on the losing end? The banks asset side of the balance sheet, I.e., loans, commercial paper, short term financing, credit cards, car loans, IPOs in the pipeline, equity and short term maturity bond markets, weekly payrolls, re-fi, etc.
Janet Yellen is truly the Paul Volcker of our era!
Years from now we’ll remember fondly her decisiveness and courage to mumble something about maybe kinda having higher interest rates someday.
Her virtue signaling better befits our era. Maybe she thinks the PPT has been a little too effective.
Bernanke/Yellen kept rates at zero for 8 years before very timidly moving rates up just in time for a new president during a time of near record low unemployment. Super courageous. Punch bowl should have been yanked in 2010.
“Under Fed Chair Yellen, the Fed hiked interest rates five times, starting in December 2015.”
Only one time out of those 5 times was before President Trump was elected. Rest were after. No wonder she wasn’t re-appointed as the fed chair.
Exactly. Yellen is as partisan as they come. Her reward for those interest rate increases under Trump was being made Secretary of the Treasury by Biden. Unfortunately, that’s the way our political system works.
Republican President Bush handed Obama the Financial Crisis and the Great Recession in January 2009. Memory is short. Trump handed Biden the current crisis.
Under no president was there ever more QE in a shorter time than under Trump… over $3 trillion. This Fed is very political!!
Do you guys see how silly this whole discussion is?
Obama with near zero interest rate for 8 years had a sluggish recovery. But the economic boom we saw under Trump was due to Obama’s policies. All the trillions flowing now with no results is Trump’s fault.
Sorry Wolf, that sounds all very silly to me.
I don’t think Fed is political, it just has God complex, impossible mandates from Congress and misplaced loyalty.
Would you like to make a friendly wager that the QE under Biden will be much higher than Trump?
I’m tempted :-]
PUS boy Weimar Powell to raise interest rates? Believe it when I see it. Sure he might do it under the pressure of Yellen/Biden, couple of basis points here and there until both stock and housing market crash epically from that easy access punch bowl getting just a little bit more expensive. Market will throw the most epic tantrum and 180 the other way again and permafrost on rate hike all over. Call me negative/non-believers/jaded but seeing interest rate being hike back up to anywhere near normal is like hunting for that magic unicorn or lucky charm leprechaun.
Not to mention, Biden is no Trump, he lacks that abrasiveness and unpredictability that Trump has got over little Jerome. Likely empty threats and soft toll the line messages here and there. Biden can’t even call out the two Jacka$$ by name that are constantly throwing cold water to this own agenda…good luck with holding the FED chairman accountable especially when all his donors are counting on cheap money easy supply continue indefinitely in order to support the rotten fundamentals they benefit from while middle and lower class get royally screw day in and out.
In calendar 2020, Western countries ran deficits of c12% of GDP. Central banks funded almost all of this with monetization. Demand (wages) was supported by stimulus, but supply (production) was hit by lockdowns. When does central bank funding at these levels not amount to a crisis?
Part of the resulting inflation occured in stocks and assets, which is ignored by measures such as CPI. Retail price inflation is now described as “transitory”, just as QE and ZIRP were “temporary” back in 2008-09.
Joe B is urging the G7 not to cut back on stimulus. Janet Y thinks we can curb inflation by talking about maybe, perhaps, raising rates by a smidgen. Serious rate rises would crash asset prices, and trigger a cascade of defaults.
Where’s the reality in all of this?
It sure would be nice for retirees to have the same 5% yielding bonds that their grandparents did.
Those 5% bond yields are from another era….now ended.
Ya know….like plentiful manufacturing jobs….also now ended.
It wasn’t that long ago, just 2002.
Yeah, because the older generations decided that they “earned” their Social Security and Medicare, and come hell or high water, were going to receive it! No matter how unsustainable it was.
Nope
It’s the military that will get their budget come hell or highwater.
U.S. military power is the REALLY unsustainable program.
Cut that program deeply and all things financial immensely improve.
You could eliminate the entire military budget and you’d still be running a large deficit. The military, Social Security, Medicare, and Medicaid ALL need cuts.
What terminology would you use to label the paying into those funds for 40 years or more? Not earning it? Do you have any concept on what that money would have earned conservatively invested? Do you have any concept how many people get ripped off by the system because they die before or shortly after retirement and never collect anything to speak of?
Jdog, the fact is, the actuarial assumptions were based on people living until 68. The contributions weren’t changed appropriately once the average lifespan went to 84.
The system is not sustainable without benefits cuts or tax increases. It’s that simple.
OTB
The 2 are directly connected
Good! Interest rates are meant to encourage saving and discourage borrowing. ZIRP does the opposite.
Very possible we will be at 10 year close to zero and inflation at 5% if Fed and government can not get it right.
fair rates, rates that cover inflation were the norm in this country until the Bernanke, Yellen, Powell trifecta.
You are not old enough to remember the late 70’s early 80’s. Stocks will fall out of favor and Wall Street will push up rates. Just so they can make money on the way down. They always win!
‘A future financial crisis will be triggered by something else that will come out of the “nowhere.”’
crisis – Does it become a crisis only when the banks are affected?
“nowhere” – climate change? a war? One is natural; another is planned to a greater extent.
Climate change may be slow and easy to ignore, but can bring about quick changes to human way of life, depending on the tipping point. Water paucity in the Midwest, growing ghost forests on US coastal regions, flooding in Charleston…it’s already happening, only we chose to close our eyes to it…not really a surprise element there…
War has been always a useful distraction device. The powers that be will never allow a ‘real’ war with China…economic pain will be too real. Maybe Iran? I wonder when?
Maybe Wolf is alluding to an asteroid impact? That would definitely fit the usage of “nowhere.”
“Climate change may be slow and easy to ignore, but can bring about quick changes to human way of life …” Yes indeed, but by ice rather than fire.
Speaking of distractions, could it be the current military ‘revealed’ UAP (aka UFOs) flap is yet another psyop to distract public from current problems?
Very peculiar time, IMO
The new Space Force needs a job to do. UFO research and hunting will have the approval of the masses as they ignore the cost.
At this point savers need a bailout. How about a surprise 5% interest rate hike to make up for some of the losses of the past years?
Think about the stimulus effect. Millions of savers can suddenly start spending again ;)
I think Yellen is both naïve and right.
She is completely hoping against hope that inflation is temporary (or “transitory” as the new buzzword in FedSpeak goes). I hate to break it to her but inflation is hard to break once it takes hold.
But if it does then the Fed is going to have to use higher interest rates to check it. This isn’t 2017 to 2019 when the Fed could simply engage in QT by letting 20% of bonds and MBS “run off” its Balance Sheet. The mistake Powell’s Fed made towards the end of that was to try to raise interest rates at the same time as the balance sheet reduction was underway… in a near-zero inflation rate economy at that!
NOW the Balance Sheet has grown so big that I am not sure they could reduce it if they wanted to. Certainly not by 20% in two years… which was a glacial pace even in 2017. And certainly not in an inflationary environment when the US Government is pouring gas on the flames with deficit spending.
Yellen is correct that if inflation proves to not be “transitory” then the only tool the Fed has that will work to contain it is to jack up interest rates.
But then she goes right back to being naïve if she thinks that is a good thing for the economy (or America). I realize that she is putting a happy face on all of this… but higher interest rates because of inflation will be seen by the public as resulting from a policy failure of the highest order.
Fed needs a smaller economics department and a larger history department in my opinion. History teaches monetization doesn’t work
They should have started normalising right after the emergency was over in 2009. Then we would not have had an everything bubble, no zombies, no excessive corporate debt, no crypto bubble, etc. And enough margin to step in when real emergencies occur without bankrupting the country or setting ourselves up for an epic bust.
Yes, this is owned by Bernanke, the proof of the validity of any Fed action isn’t what happens when it is taken, but what happens when it is unwound. The fruits of 2001 were harvested in 2008. The fruits of 2008 won’t be here until the entire stimulus and ZIRP is unwound, potentially forcibly when the USD loses reserve status precisely because of ZIRP/endless stimulus. I don’t know when or how this will end, no one does, but it assuredly will.
How exactly will higher interest rates be seen as a policy failure by the public? Higher interest rates will affect the capital class the most. That’ll mean that their “wealth effect” will be gone, so the top 1% will stop rampaging through the housing market and buying up all other assets, leaving none for the little guy with a normal middle class job.
Sure, mortgage rates will go up, but housing PRICES will drop correspondingly. Oh, and credit cards? Credit card balances bear little correlation to the fed funds rate.
Go ask Jimmy Carter AND Gerald Ford… the last two Presidents who let inflation go untamed. The public was NOT amused.
I see most comments here are incredibly myopic.
If interest rates in the US rise, the real story is what happens in the rest of the world….you know, where most dollars and US debt is floating around.
It will cause unpredictable social and political upheaval, several regimes will fall, famines will occur, rebel insurgencies in hot-spots will intensify.
One must always think global. The plight of the typical American consumer complaining about the rising cost of a cup of Starbucks is not the real story.
No seriously?
I think you forgets that the problems of eliminating savings and because of the world dollar and all the capital saved and in annual devaluation while the national budgets of many countries are squandered by unable politicians because of the creation of zero interest .
The people in many countries such as in America it is becoming impoverished with the consequence that extremism is increasing in many countries and the civil war threatens , this should make you reflect on your comment.
I’m not sure it’s the FED that’s keeping interest rates low. I’ve been reading Michael Hudson’s _Killing the Host_, about the way debt is pervasive throughout the U.S. economy. Everywhere in the economy debt service is a cost of doing business. So in the end, consumer prices have to cover the cost of all the debt incurred in producing and distributing the products.
I took out a loan at 5% to buy my used car. Interest compounded year-by year over the term of the loan, of course. Interest ALSO compounded deal-by-deal as the car moved down the supply chain, as each sub-dealer covered the previous sub-dealer’s debt costs.
If there were three levels of supplier, and they each paid 5%, then the price to me was increased by 1.05**3=1.157, that is about 16%, and I paid 5% interest on that increased price.
At 6% my price would be increased by 19%.
So I think there’s a downward pressure on interest rates when people simply can’t afford the deals, and business doesn’t get done because of the compounded rates.
Michael Hudson is one of the few economists who actually observes the real world, both past and present, instead of being a High Priest for the religion of Greed Is Good.
Nicko2
If Inflation rises, and it has risen, any damage ?
I maintain that you will get “unpredictable social and political upheaval, several regimes will fall, famines will occur, rebel insurgencies in hot-spots will intensify” right here in the ole US of A.
Did you see last summer?
Inflation will anger people, for it STEALS from them. And that theft is prearranged and promoted by the Federal Reserve. Imagine that. The Fed who is supposed to tamp down inflation and promote stable prices…PROMOTES inflation, which is nothing more than a TAX.
So we have, for your political upheaval, Taxation without Representation, (sound familiar?)
For who has representation on the Fed who taxes us? And to whom are they accountable?
H
So ?
Get out there and spend all that money you have ! Now there is nothing left to steal !
Easy peasey!
What will happen if Zanet raise the narrow EFFR pipeline between 0.00/0.10 to a wider one between 0.25/ 0.5.
1) Giant Eagle supermarket party: 12 donuts in a box for $3.99, or 33 cents each. Giant Eagle bakery (in each individual store) is larger & better than DD.
2) MCD combo meal : Big Mack, mid fries, mid coke for $5.99.
The Fed manages the coin of the realm, but it lost its way in a blood transfusion IPO gone weird.
Now it manages the coin of the alm.
Fed needs to get some Salvation, merge with a hardwood, knot with a naughty pine.
I don’t see banks raising rates on savings no matter what. They didn’t last time Janet was raising rates. Saver’s money is worthless to the banks when they can get it for nothing from the gov. and will continue to do so. What money you have in the bank is being played in the markets, icing on the cake for banking.
Three year treasuries on sale paying less than .33% interest the other day. There is not much incentive to seek shelter there. I remember buying a 5% one year CD back in the day.
Will the great California drought spark a greater exodus of Californians looking for greener grass?
They don’t look for greener grass, though- they look for greener crops.
They look to escape tyranny…
Isn’t inflation with growth what society needs and wants at this point? The constraint on expansionary monetary and/or fiscal policy is actual inflation.
The question is whether we get inflation with or without growth. Inflation with growth is more or less fine, but inflation without growth is quite problematic.
Society never wants inflation. Inflation is a cancer that eats away the value of your income and labor. The only entity that benefits from inflation are the banks, as it is the product of the free money they get from interest rates on money created from thin air….
Debtors also benefit, they are a built in inflation cheerleader constituency. Inflation is a destructive tax on savers, particularly the elderly.
I’m shocked there is not a grey haired pitchfork crowd at the Eccles building.
Most really don’t.
As a general rule, the leveraged money made during boom cycles is usually lost when the bubble pops. Being heavily in debt insures most debtors will not survive the recessions.
The truth is most people in the US die with little in the way of wealth. They work most of their lives, and someone else ends up with the benefits of their labor.
“I’m shocked there is not a grey haired pitchfork crowd at the Eccles building.”
Their get up and go got up and went already.
Even elderly’s lobbying arm, AARP, is a dog that won’t hunt when it comes to confronting inflationary policies on behalf of seniors.
If it weren’t for .gov transfer payments like SS, Medicare, etc we would only have mostly well-off seniors in their cushy resort homes– poor and struggling seniors would no longer be with us.
To just say inflation is always bad is too simplistic of a view. Financial repression on savers still occurred since 2008 even with “low inflation.” What matters more is the level of real interest rates and growth. If inflation is at 3% and interest rates were at 5%, savers in this scenario would not be hurt by the “higher inflation.” Real rates would be 2% and would be significantly better for them than negative real rates that prevailed since 2008.
The dynamics of inflation will always benefit one group over another i.e. savers v debtors, but this again goes back to real interest rates. Debtors want negative real rates, while savers want positive rates.
Having negative real rates for so long creates massive distortions throughout the economy and financial system. If we had higher real rates, there would be no way Uber and WeWork would be allowed to burn through billions of dollars on a yearly.
You’re right, that debtors “want” negative real rates, while savers don’t, but negative real rates are a perversion of nature.
Regarding Uber and WeWork, is that really so bad? It’s true that startups often burn money at the beginning, but at some point, they should become profitable. In fact, low rates and investors chasing yield has made things WORSE, as competitors to Uber and WeWork can’t easily open up with a better business model, as the “model” doesn’t matter at this point. It’s all about who can raise more investor capital.
Do you think your pay is related to “growth” in any way?
Inflation steals the value of your labor. In addition, it facilitates the government raising taxes to higher levels despite the loss of value of the money.
How stupid is it to pay capital gains on an investment, and not have it indexed for inflation? Let’s say, you doubled your money over 10 years, but the money is only worth half as much… guess what? You owe tax on that money you actually did not make……
Even if we assume growth doesn’t affect wages, growth still affects the interest paid by banks for savings deposits and Treasury bond yields. Again, financial repression occurs in “low inflation” environments as well. Banks have more or less offered 0% on savings deposits over the past 12 years, but in a higher growth environment they would not be able to do so. Also, the Fed would not be able to hold rates at zero. Savers benefit from positive real rates and that has not occurred much since 2008.
RightNYer
I think we more or less agree. Low rates and cheap capital for a small period of time is good for innovation, but the persistence of such environments can distort the economy and society. The question I have is: if we had higher rates, would investors tolerate such destruction of capital by these companies? If the low rate environment goes away, would investors be more selective in capital allocation to companies that had better business models than say WeWork?
In case you didn’t learn from the last 2 bubble/bust cycles it goes like this. Run up assets, convince retail it won’t stop, sell to them at the top, raise rates to pull the rug out, acquire those assets, whittle away at people’s wealth. They don’t want you at the country club.
It is difficult to time the market. Warren Buffett is not a market timer. People are more likely to sell in a downturn because they do not want an investment that always goes down. Country club is merely a restaurant with a golf course view. The country club waitresses walked off the job because so few people went there, the waitresses were not getting decent tips. They wanted customers, but did not get them.
Great article, Wolf!
Everyone debating in the comment as if they’ve experienced a $7 trillion dollar hot beef injection into an economy. This is history in the making, guys. None of you have EVER experienced this amount of stimulus nor have ever experienced low/negative interest rates. I find it fascinating how many fear mongers are out there more than ever when in reality…you honestly don’t know and neither do I.
A broken clock is right twice a day.
Tony …to notice there are things happening that have NEVER happened before…and they are happening via committee decisions of the unelected…is not fear mongering…
and there is stimulus being administered to the already stimulated….
and one person decides to expand M2 by 27%……what is that??
The entity that is allowed to exist, allowed to operate with the understanding, the instructions, the agreed mandates to
“promote stable prices” fully and openly promotes JUST THE OPPOSITE, inflation. Inflation is a tax and it is theft…and in this case it is premeditated theft….ala a bank robbery…..by the Fed.
Free market force used to be allowed, but the Fed suspends the supply/demand price discovery in the federal debt market.
Yes, this is history in the making……it’s a takeover of markets by the central bankers.
They exist and operate way outside the scope and purviews, increasingly so, with each “emergency”.
The sad truth is that the market isn’t technically free. It’s very regulated and always has been.
Our job as the public is to adapt and adjust. When everyone saw that $7 trillion stimulus….the public knew inflation was going to happen and believe you me…a lot of people capitalized while a lot of other people got scared and took out their retirements early, etc. What I’m saying is the fear of the unknown actually hinders you from making logical decisions and also clouds your judgement….now I’m not saying “put all your eggs in one basket” but if you don’t have any exposure at all, you really do miss out on return on capital.
How can you have a free market, when the corporate structure is basically a fascist construct to begin with. Corporations are given special privilege’s by the government, so they can crush the competition from sole proprietorship’s. Then they are given a free pass to bribe government to pass laws and legislation to benefit them at the expense of small business and consumers.
Corporations are detrimental to the general welfare, and were actually illegal in early America…. except in the case of temporary public works projects.
“What I’m saying is the fear of the unknown actually hinders you from making logical decisions and also clouds your judgement”
What I’m saying is that eventually economic forces do come to play, and the Fed cant hold the “beach ball” under water for much longer. The markets have been an “arrangement” since 2009 and the Fed doing things they had never done before to save the day.
You can have free markets and still be regulated (rules).
If nobody knows what is going to happen, why is Powell doing it?
‘Starting in 2018, President Trump harangued and hammered Fed Chair Jerome Powell to end Quantitative Tightening and to cut interest rates, and Powell buckled and did his infamous “180.”’
Sums up the CORE of the problem: the politicizing of every aspect of America life, including the Fed. Would a Brit PM lean on the Chancellor of the Exchequer to ease up? Sure, but he wouldn’t do it publicly.
Lyndon Johnson privately leaned on Greenspan, in a kind of maudlin ‘bedside’ appeal. Johnson, who was in hospital having his gall bladder removed, summoned Greenspan and said: ‘You wouldn’t raise rates on a fella in hospital would you?’ Greenspan pointed out he had also had his gall bladder removed, but he didn’t raise rates.
As for arguably the most successful economy, Germany’s, which pre-C19 was running a 2 % budget surplus, the leadership wouldn’t dare lean on the Bundesbank, publicly or privately. Germany’s Central Bank is constitutionally independent, a politician is not supposed to even phone it.
A quick survey of the comments over time shows relentless Fed bashing, accusing it at best of incompetence, at worst of ‘evil’, a tool of the world elite. But check the quote again: who was Powell responding to when he buckled? A politician, but who are politicians responding to? The public, i.e., voters.
Recessions used be part of the normal economic cycle, but no President wanted one on his watch, so it got handed off.
The person, or entity ‘taking away the punch bowl’ as the party gets rolling should be ‘de jure’ and de facto immune from the party animals. Or you could just skip all the whole thing and let the public vote directly on interest rates. Like Democracy Airlines, where the Captain goes on the PA and asks how much flap you’d like for the approach.
“Lyndon Johnson privately leaned on Greenspan…”
Wrong name, I would assume. Greenspan became Fed chairman in 1987, appointed by Reagan to replace Volcker. Johnson was Prez over two decades earlier.
Woops. Must have been McChesney Martin. Apparently Johnson a big man also grabbed Martin at one meeting at the ranch. Martin stood his ground, saying he and the Pres headed different branches.
William McChesney Martin was the author of the ‘punch bowl’ metaphor. Of that I’m sure!
“Germany’s, which pre-C19 was running a 2 % budget surplus, the leadership wouldn’t dare lean on the Bundesbank, publicly or privately. Germany’s Central Bank is constitutionally independent, a politician is not supposed to even phone it.”
That was a very good idea. However, the problem these days is that have turned 180 degrees. The central bank was supposed to keep the government in check. But now, the Bundesbank follows the ECB and the ECB is staffed with irresponsible people who pursue political goals rather than monetary. And now they cannot be criticised because of central bank independence.
In theory, their ONLY mandate is “price stability”. But after the GFC they have made keeping the euro together their main goal. So countries like Italy rakes up massive debt while Germany has bubbles and high inflation.
Recently they have added climate change to their “mandate”, although no democratic process has ever changed their “price stability only” mandate or added stuff like climate change and bailing out member states to their mandate.
YS
Climate change mandate and how!
A Netherlands judge has ordered Shell Oil to reduce their projected 2030 co2 emissions by 40%. Life time investors are dumping the stock big time and wondering where to go that won’t be hit next. I bet Shell bails to Asia to keep some investors.
What Yellen is saying is that we are emerging from our demographic storm that lasted from 2008 to 2021.
Until the 2050’s there is not another storm comparable in size or length for the US. If our immigration continues we should have a somewhat normal economy for the next 30 years. When she says lifetime she is referring to her lifetime not someone in their 30’s. She is also not ruling out serious recessions along the way.
Rates are headed up…….but not aggressively…….which means that borrowers will no longer receive a large inflationary bonus.
What if they’re serious about raising rates, while at the same time increasing SPV’s and other interventions? Isn’t this a creative way to increase (illegal) influence over free markets?
23 Trillion dollars of US government debt held by the public says to me that interest rates rising simply won’t be tolerated by the US government itself, even if inflation is tolerated. Yellen is blowing smoke out of her ass.
Yancey Ward,
As long as there is demand for Treasury securities — and there is huge demand, hence the low yields — the government will simply issue more debt to pay interest. Higher interest rates and higher interest payments are part of Biden’s budget. They already baked them in into the cake.
There is a limit, Wolf- we don’t know exactly where this limit is, but it does exist.
The axiom is that you outgrow deficits by investing in growth assets. The limit is the ratio of revenue to expenditures. You put more in, get less out, and the limit is also growth in the monetary base. The system cannot tolerate a slower rate of growth, much less a decline in the size of the money supply. They also cannot tolerate zero money velocity or money “leaving the economy..” Which is why they hate gold, or crypto. Crypto is okay as long as people use it. The last forty years have been a concerted policy to free up money trapped in asset collateral, in short you leverage up your home equity, your stock portfolio, your kids future. Now that the equity is all tapped out (one-off benefits are no way to build for the future) they have to print money to keep the squirrel cage moving (increasing economic activity). Now the Fed has to buy assets (Yellen wants to buy stocks) and RRPO is a real shot of cold water. Of course those treasuries are only on loan to provide some benefit to the MM cash depositors, the result of QE. All that money has to be serviced. Seigniorage is the fee earned for providing the currency, in this case the limit is when that asset becomes a liability.
What you fail to address is why there is such huge demand for Treasuries. Because of the inflated value of assets.
What happens to that demand when the asset bubble pops and asset values revert to more historical values?
And that 23 trillion will be 50 trillion in another 15 years, and like more.
1) JP raised interest rates until Oct 2018, to save the world from NR,
but Germany didn’t care.
2) UST10Y – DET10Y reached 2.85% in Oct 22 2018. That forced JP to
changed his plans.
3) Down to 0.95% in June 2020. // Up in Mar 29 2021, – a month ago, – US10Y – DET10Y reached a lower high @2.06%
4) Gravity with Germany will constrict JP + Zanet.
5) The best they can do is to carefully widen EFFR pipeline for more o/n traffic, along with higher taxes on the FANG, to cool the stock market.
6) The growing global overcapacity will prevent inflation.
Just stay stocked up on the popcorn…Trader Joe’s now has a pickle flavored popcorn…need variety here and I like it as this “show” is going to go on for a while.
She lost me at “actually”.
“I know that world – they’re very good,” she said. “I don’t believe they’re going to screw it up.”
Intepretation: 17% on CD’s in 2024.
Reminds me of “stocks have reached a permanently high plateau” comment from 1929
7) When the pressure was max, in 2008, EFFR was narrowed to almost zero, in stepping stones, causing rates to explode beyond the boundaries, because Bernanski was a lousy engineer.
8) Paulson “abused” BAC and other banks.
9) Paulson & Bernanski leadership was the cause of 2008/09 financial crisis.
1) Warren Buffett “saved” BAC in 2008 and became it’s largest share holder.
2) AAPL is greatest co in the world. AAPL is 30% of BRK stock portfolio.
3) Xi can bend the hand of the 91 old king.
Secretary Janet Yellen reminds me of the Scarecrow in the Wizard of Oz movie, released back in still depression-era America, that skipped down the Yellow Brick Road (got Gold?) singing, “IF I ONLY HAD A BRAIN”. Unfortunately, us moviegoers, aka Taxpayers and Consumers, in this current horror film produced and directed by Powell and Yellen will not have a sanguine ending like the July Garland movie did.
Results speak much louder than any Fed- or Treasury-Speak, and the Inflation Genie is so far out of the bottle in America and around the world today, that the fabled character needs oxygen!! Now thinking we are running at 5% to 6% annual inflation stateside, just paid $85 with tax for a single BC 4×8 sheet of sanded plywood to take with me on vacation to counter the uber-soft mattresses of cabin landlords, similar to the consistency of Ms. Yellen’s brain.
Higher rates will definitely kill the ability of the U.S. to service no-shortage of new debt being planned in The Swamp, but the Fed has proven to be a very adroit buyer of Uncle Sam Funny Money and buyer of first resort. This shell game is going to draw to a very nasty conclusion as the Dollar Reserve Currency gets progressively thrown to the Trash Heap of Failed Currencies and Sec. Yellen gets more inflation in a nation addicted to imported goods than she can safely expound about (or proclaim/label as TRANSITORY).
For us savers, with American Express SuperSavings rate at 0.40% on my last statement (have $200 in account at this rate), we will begin to get restitution for the TRAIN ROBBERY SINCE 2008 ON OUR CASH DEPOSITS APPROACHING $18 Trillion and counting. Who would hold cash in such accounts at these rates. And the banks are only as solvent today as the fudged Mark to Cost holdings of some of the Trillions of Dollars of obscure and soon-to-default derivatives, some likely to hedge Bitcoin and other Crypto-Vapor positions, would not at all be surprised.
Have absolutely no faith in the U.S. banking system, partially because Sec. Yellen and most Fed members were born out of it. No transparency to speak of, and really no one knows where all the bodies lie in the sea of derivatives being held in some fashion or subsidiary in the $100’s of Trillions. The black swan also goes by the name: CREDIT DEFAULT.
Good comment. Filled with passion and fury. ;)
4) It wouldn’t be a surprise if WB sell AAPL, sending NDX down.
The US has already become a tyranny. The way you can tell is that the public opinion no longer effects the actions of the people in power. In the past, public opinion dictated the boundaries of what was and was not acceptable. Today public opinion is ignored. The powers that be, feel emboldened to do whatever they want without fear of the public. That is the definition of tyranny..
It is unnerving how bold their moves are. But it’s “our” fault those people who appoint these people are there to begin with. “We” don’t seem too eager to replace them different material (and when that does happen, the material almost always gets stained). Well, it was a good experiment. The best.
Pretty much. Mass immigration of peasants from the third world is the best example of this. It was nearly universally opposed by America, but foisted on us anyway.
what a Xenophobe. I guess you must be the O.G American. You know, you were here even before the Native Americans
zr, name a single example of a successful AND free “diverse” society and come back to me.
RNY
That would be the grand ole USA !!!
Also the mindset you have described is the very definition of bigotry.
Higher yields for savers will be eaten up inflation, but it will imperil consumers to try and stay ahead of the curve, and keep the economy moving. If you thought stocks would double in the next five years you would be buying with both hands. Business needs pricing power which is why we get stories about labor shortages. If government didn’t provide payments to workers the labor market would be uber tight, and we would right back to the precovid prerecessionary economy we had. Yields will be higher, and inflation will be higher marginally. If USG supplies workers with healthcare, housing and transportation subsidies, then all their income is discretionary. Alas half of America has a Dickensian view of the economy.
As a guy who’s been waiting for a good time to buy a home for years now, I’m SO tired of reading article upping article for years and years about how perpetual low interest rates have continued to raise prices to repeated all time highs. 20% of X, where X gets larger at a faster pace than my savings. All while rent goes up, and wages stay the same. Damnit. Raise the rates and maybe 5-10 years I can afford a house.
The old advice still stands; Buy the cheapest house on the best street.
My generation was young in the 1970’s during massive inflation was driving home prices much the same as today, only then no one had ever seen it before. The common school of thought was we were never going to be able to afford a home until we were middle aged.
Of course we had a few severe recessions in the early 80’s and 90’s and 2000. Property prices dropped giving opportunities to buy, for those who had been preparing. I had a friend who was certain he would never afford a home, but was diligent about saving. In the early 90’s he was able to buy a VA repo for 40K in So. Cal. It was a fixer, but he was happy just to get something. He fixed it all up and a few years later sold it for 400K during the next boom.
Yes, but back then, you didn’t have this deranged idea of “needing to keep people in their homes” which really just means bailing out people who were irresponsible and hurting the people that weren’t.
That’s true, the insanity of what is going on today is astounding…
Morton Shulman always said never pay more than 3 times the husband’s annual income for a house. This advice was given during the early to mid 1970’s and he also stated buy as much house as you can at the time. Back in the 1970’s you didn’t even need a high school diploma to get a job that would pay for an average sized house.
You can still get a good deal on a renovated townhouse here in Swampland if you are willing to go into a high crime neighborhood. There a bargains galore at thee low interest rates.
You may have to “Lock & load” when you get there.
What a bunch of talkers. She is just trying to get her jawboning ahead of what she think is going to happen. Then when it does happen its a combo, “no problem….because we thought this might happen…and we are right again”. Trust in the Fed. The Oracle of Delphi with a megaphone. No doubt, she’s got an early read on the numbers
After the Fed drove the M2 yearly growth to an all time high (even higher than during WWI & II), inflation is finally peaking its head. With the latest CPI print, inflation rose to 4.16%. With the interest rate for the 1-year US Treasury bond resting at 0.06% the real interest rate fell to -4.10%, which marks the lowest print since 1980.
Some experts such as Ray Dailo point out an analogue of our current times with the 1930s. Following this period inflation exploded while nominal interest rates were being supressed, leading to a real interest rate of -18.86%. Naturally, this was desasturous for holders of cash and bonds. Over the following 30 years, accounting for dividens, stocks outperformed (corporate-)bonds over 10 times.
I would like to believe her but I can’t quite yet.
Am I thinking like the markets I wonder.
If she actually does something I’ll be busy as Hell adjusting all my investments. Markets the same maybe?
BS, Yellen is not really telling the real whole story here on interest rates. The Fed does not want higher interest rates. In 2018, my aunt finally listened to me and I told her to lock in some 10 year 3.25% to 3.50% CD rates as I told her interest rates will be going lower. Look at them now, so low a 1.57% 10 year and 2.25% 30 year US treasury rate and CD’s 1.3% maybe 1.35%. these are not even the basement low interest rates just 6 months ago.
I told her don’t believe the Federal Reserve, the media, banks, analysts on higher interest rates. It is not true. This helped her retire earlier than expected by 3 years, 63 years old. She took her social security early, gets her husband’s military pension which he is deceased in 2017 at 61. I also told her and my uncle many years ago to buy over many weeks as money was maturing back in 2010, 30 year US treasury bonds at 4.66%, 4.72%, 4.55%, 4.43%, 4.29%, 4.44%, 4.39%, 4.33%, 4.68% at multiple auctions.
This added at least $1,500 a month in interest with these US treasury bonds in her IRA, other accounts compared to the low rates today. I bet her interest income would be at least 50% less than today’s. Guess what, most widows don’t have an extra, financial cushion after all living expenses, taxes etc. every month of at least $1,800 to $2,100. This helps her keep her savings intact and actually grow them by $70,000 since by 2018.
If we do see higher interest rates, the most will be 2.75% to 3.0% 10 year and 3.25% to 3.30% 30 year US treasury bond rates. Always lower than last rise in bond rates, yields.
DM
re BS, The Fed gets relentlessly hammered on this site.
The Fed doesn’t “want” anything other than a prosperous country, they are professional officials with a job to do. The job is defined by your politicians who you are responsible for electing. The country was bombed out in 2008 and the Fed has been trying to keep a lid on things ever since. Low interest rates and massive deficit spending have led to an inflation rate of approx 1.6-ish over the 12 years. I ask you to imagine what would have happened without any support, the deflation could have been massive with poverty much worse than it is. Of course the Fed knows that proper interest rates are the proper way to run the economy but they can’t get there until the economy is off life support. If rates do go up it could mean the Fed thinks we’ve turned the corner, a good thing surely.
Nobody is perfect but they’ve tried. Blame the politicians if you don’t like the way things are.
Auldyin,
“The Fed doesn’t “want” anything other than a prosperous country,…”
They seem to define “prosperous country” as the top 10% or so that they have decided to make super wealthy — the “wealth effect” — at the expense of everyone else who simply have to pay more to get less.
But I agree with you: it’s Congress who set up the Fed and encourages the Fed. They could easily curtail what the Fed can do, they could shut it down, or replace it. All it takes is an act of Congress. That is where the blame lies.
Thanks Wolf
I did agree in another recent post somewhere that the Fed’s failing was the gulf between rich and poor. ( IRS-Congress-taxes on the rich? ) I’m only arguing ‘intent’ because I was in it in the 70’s and we tried damn hard. Yellen PR speaks what her nerds have spend weeks briefing her on, she doesn’t sit at a desk doing calcs or much else for that matter. It’s the way with all these talking figureheads.
Wolf,
I don’t disagree that a lot of bank originated loans are sold off to be securitized but,
1) Banks do still hold trillions in originated loans on their own books (a major fraction of their assets) and
2) Banks are big, big buyers of those securitized loans (MBS and CMBS especially)…so while they have diversified away origination risks, they still have systemic, national risk exposure.
And, while banks have sold off a lot more credit risk than anyone could have conceived of 35 years ago…they are still far away from being pure intermediaries/loan risk brokering bookies…they are still among the most major creditor classes that exist.
High interest rates mean the rich get much, much richer and the poor stay poor forever. This is the way its supposed to be. The poor deserve nothing. I’ve been praying for higher interest rates since the end of 1982 but I do have some 50 year strip bonds from 1981 and 1982.
I’m here in Canada and last year 2020 I got some 2.70% 10 year GIC’s which are your US bank equivalent CD’s. I purchased some more just last week June-4-2019 2.40% 10 year GIC’s. They are 11.11% lower GIC rates than last years but the highest GIC rates out there right now.
Back in 2019, I got shorter term 5 and 7 year GIC rates of 3.5% and 3.6% which I doubt we will see any time soon.
Eva, I got a 10 year GIC with my RRSP here with a Manitoba credit union. Since it is compound a 38.3576% total interest return maturing by 2029.
I needed to make my $266,000 interest return by the time I retire at age 60.