Thursday, December 17, 2015

Late to the Party

In a widely anticipated move yesterday the U.S. Federal Reserve Board raised the target range for the Federal Funds Rate to .25-.50%. This comes after many months of jawboning the markets with promises to act when the time is just right. In the meanwhile the U.S. Dollar has appreciated massively against other main world currencies, in the process dragging the profits of multi-national corporations down and further depressing the prices of real commodities. Iron, gold, silver, wheat, corn, and of course oil depressed by a world that produces too much for demand as it is. China is wrestling with a slowdown in their economy, emerging markets that have overbuilt in the China trade over the years having debt problems of their own, and high yield/junk bond markets worldwide in a swoon. The junk debt of U.S. oil producers is in jeopardy resulting in concern over banks that may hold the debt. It is true that employment in the U.S. has rebounded and from ground level it appears the U.S. economy is firing on most cylinders. This is as auto loan debt is at historic levels along with student debt at similar heights, leading to the conclusion that these debts will be a drag on new spending and debt creation for some time. Surely the cycle is near a peak.

The Fed Fund rate increase in and of itself is probably of little consequence since it has been so low for so long. But the Fed also raised the rate that it pays to member banks on the reserves held at the Federal Reserve. There have been complaints of the banks not lending as they should with the easy money made available to them by the central bank for years. Now they will have increased incentive to leave money in the Fed. This seems a puzzle. Why increase the incentive for reserves to be held out of the economy? This is surely a tightening of economic policy in the real sense of the word. At a time when the rest of the world is still in an increasingly accommodative stance such policies will further strengthen the U.S. dollar and further constrain manufacturing in this country and further stimulate the imports of goods. How can this be good for the long term health of the U.S. economy? Debts remain high, manufacturing is declining. Eventually the strength of the U.S. dollar will correct and perhaps catastrophically so.

From the latest Fed statement:

"Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down. "

"The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015."

Full Fed statement here

I think the Fed has inadvertently raised rates too early in an effort to avoid being early. They have missed the timing of the cycle by 180 degrees.

I am not a fan of debt creation but I am a proponent of defending the country against the predatory currency devaluations of the rest of the world. And the fact is that the world has indulged in the greatest debt creation in world history over the last couple of decades and the only way out is debt forgiveness in the form of devaluations of currency. The U.S. Federal reserve has made the same mistake that they did in the 1930's with the former Great Depression, only with great deliberation and hindsight.

I will add this:

Auto loans outstanding

Hyperbolically yours,


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