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No Courage to Act

Experimenting with monetary policy is like experimenting with an 'open' marriage...

The WORLD got notice this month that henceforth short-term interest rates would be more than zilch, writes Bill Bonner in his Diary of a Rogue Economist.

From all over the planet came hosannas and hat-tipping.

Some commentators congratulated the Yellen Fed on its careful stewardship. Others applauded the strength of a US economy that permitted a "return to normalcy."

But some fretted, too.

Perhaps it is too soon, they thought. What if the economy failed to reach "escape velocity"? And what if the Fed – like has happened to so many other central banks around the world – was forced to beat a retreat?

The first few hours of trading after the Fed's move seemed to confirm its wisdom: US stocks traded higher.

But over the following two days, the Dow lost more than 600 points. Then it found its feet with a 123-point increase.

A quarter of a percentage point rate hike is piddling. But supposedly, it signals a new regime – a recovering economy that can afford to pay rates of interest more closely connected to the real world.

At the Diary, we never claim to know what is true...what is right...or what the future will bring. The best we can do is to try to recognize error. And then, only big ones. But here we need no careful regard for the details.

Here, big as life, we see George Armstrong Custer riding to the Little Big Horn. We see the Titanic headed out of Southampton harbor. We see Lenin headed back to Russia...Napoleon back to France...and another Bush or Clinton headed back to the White House.

In the first place, the Fed deserves no praise.

It never had what former chairman Ben Bernanke has termed the "courage to act".

Instead, it panicked in the face of a market correction. Then it counterfeited trillions of Dollars to bail out bankers from their own dumb, greedy mistakes.

In the second place, the US economy is not strong and nowhere near "escape velocity." This plane will never get off the ground. There are more people without jobs today than when the crisis began in 2008. And almost all the important indicators – transportation, manufacturing, commodity prices, profits – are flashing a "stall speed" warning.

In the third place, the Fed's "mistake" is not that it acted too soon but that it acted too late. Whoever heard of an "emergency" monetary policy that lasted seven years?

An experiment with monetary policy is like an experiment with an open marriage: It is doomed to fail from the get-go.

The Fed was trying to cause people to change their behavior. And what happened?

People changed their behavior – from prudent investing to irresponsible speculating. Now, the world is full of desperate, debt-funded gamblers who can't survive a return to normal.

In the fourth place...oh yes...the Fed will not merely stop or even back up when the going gets tough. It will turn tail and run. It will panic again...and this time do even more damage.

But why would the Fed – the stalwart guardian of America's money, industry, and commerce – take so many chances?

Why would it risk our jobs and our savings in feckless experiments?

And why would it roll the dice with the entire world economy?

Because, the Fed is a major player in the little group of insiders who run the government, aka the "Deep State".

Its real aim is to keep the money flowing – to the Deep State. This includes overseas governments, foreign banks, and major global industries.

Next year, for example, the Fed is scheduled to pay out $11 billion in interest to foreign banks operating in the US on the excess reserve they have on account with the Fed. (All banks in the Federal Reserve System have reserve accounts with the Fed. These are used to settle payments with each other. Since the money is merely an electronic notation, it exists only in fiction.)

Does it really care about "hardworking families"? Does it respond to what the voters want? Does it give a hoot about your retirement, or your buying power, or your well-being?

Maybe not.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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