Gold News

America's Immature Recovery

Can the Yellen Fed dare take away the QE allowance just yet...?
The PRICE of OIL is dropping – even with the problems in Russia and Iraq, notes Bill Bonner in his Diary of a Rogue Economist.
This suggests the global economy is slowing. And in the US, the homebuilders are crashing...probably in anticipation of higher mortgage rates.
Janet Yellen is being pushed into a corner by the Fed's own pronunciamientos. It has been threatening to raise interest rates when its inflation and employment targets are hit. And hit they have been. So what's she gonna do?
Our guess is she means what she says. She is a smart woman. But she is not smart enough to see that she has been talking claptrap...and not courageous enough to admit that her career is built on it.
"People come to think what they must think when they must think it," is one of our signature dicta.
To become a major establishment economist Janet Yellen had to think that well-meaning, well-educated officials could improve the performance of a market system.
She could be a monetarist...or a Keynesian. Different strains of thought were acceptable. But she had to be some type of activist. She had to be a True Believer in the power of intervention.
And as numero uno at the Fed, she must believe, too, that its policies have prevented a depression and have helped the economy recover.
As lunatic as it sounds, she now believes she guides the US economy, and indirectly, the entire economy of planet Earth, to a stability and growth that it could not achieve on its own.
A heavy responsibility, no doubt. She probably hedges it with the further belief that an economy – like a surly teenager – does not always cooperate. It doesn't always do what it ought to do when it ought to do it.
Sometimes it even sulks...and often, it fails to get out of bed in the morning. So, if it doesn't meet expectations, it's not her fault!
Now, she must think she's got things headed in the right direction. Her role is to make sure it doesn't get off track.
If she sees any sign the "recovery" has been put in danger by her attempts to normalize interest rates...she will back up. That is the history of the last seven years of Fed policy...and it is probably the best guide to the months ahead.
Almost surely, the withdrawal of QE will be accompanied by anxiety and volatility. As economist Richard Duncan points out, the net liquidity that has been driving up asset prices, month after month, is now drying up. The financial world is used to getting a big allowance, with no strings attached. Take it away and there are bound to be tantrums.
Yellen will not panic at end-July's 500-point drop in the Dow. But if the drops continue...and if new data show the recovery is not as mature as she had thought...she will back off. She will give in. The allowance will be reinstated.

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

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