Central Banks Have Signed Their Death Warrants

During the past year U.S. consumption spending for health care rose by 5%. Spending at restaurants and bars were up by 9%, while spending for gasoline and other energy products was down by 22%.

This was Mr. Market at work—millions of households reallocating their spending in response to relative price changes. It had nothing to do with a macroeconomic abstraction called “weak demand”.

Actually, the medical care component of the CPI rose 3.3% last year. Housing and shelter were up by 3.2%, while gasoline prices were down by 7.3%. It all added up to a 1.34% annual change in the overall CPI index by the sheer coincidence of BLS’s arbitrary weightings of the index components.

Again, it had nothing to do with the pace of total consumption expenditures or any other measurement of “aggregate demand.”

So the MarketWatch “senior economics reporter” who filed the piece I referenced above, one Greg Robb, was writing gibberish and apparently didn’t even know it. Yet without this herd-like transmission of the narrative, the Fed’s ridiculous monthly deliberations about 25 basis points changes to the federal funds rate would be seen for the farce it actually is.

This chronic pretense of fine-tuning the money market to the second decimal point (i.e. 0.38% versus 0.12%) is supposedly all about delivering what the Fed judges to be just the right amount of “accommodation” to the macroeconomy to achieve its inflation and unemployment targets.

But the “lowflation” proposition cited by MarketWatch (“inflation has been trending below that (2%) target for the past four years”) is a modern version of counting angels on the head of a pin.

It’s a pointless exercise that has nothing to do with improving the real world. It’s only a ritual to justify the existence and power of the monetary politburo.

The price of goods like furniture and basketball shoes has everything to do with how much untapped labor remains in the Chinese rice paddies and virtually nothing to do with the monthly adjustments to the money markets at the Eccles Building.

Once upon of time in your grandfather’s economy of the 1950s, when the U.S. economy dominated the world, there may have been a loose connection between the Fed’s policy rate and the U.S. consumer inflation rate.

That’s because the policy rate could still cause incremental household and business borrowing and spending in an era before Peak Debt. Under those conditions, spending could temporarily get ahead of production and capacity, thereby enabling the general price level to accelerate owing to “excess demand”.

Those days are long gone. The U.S. economy’s leakage into the global economy is massive and the private sector is stranded at Peak Debt. The money market rates pegged and administered by the Fed therefore have virtually nothing to do with short and medium term rates of change in the consumer price indices.

So there is no reason at all for the Fed to target the inflation rate, let alone to two-decimal point variations around 2.00%. If anything, it should request that Congress repeal its so-called price stability mandate on the grounds that it no longer has any tools capable of making a difference. Here’s the fundamental reality:

Once at Peak Debt, the central bank in effect has already printed itself out of a job!

(I was actually a member of Congress when the Humphrey-Hawkins dual policy mandate of full employment with stable consumer prices was enacted. I proudly voted against it).

In an open $80 trillion global economy and era of Peak Debt, central bank interest rate repression and massive QE injections function almost entirely in the financial markets, not the real economy. Their primary impact is to falsify financial asset prices and risk/reward ratios throughout the entire financial industry.

Consumer price inflation is presently lower than might be expected because of a one-time plunge in oil and other commodity prices and their effect on goods and services down the production chain.

I should add that the great global deflation wave is due to the past money printing excess of the Fed and the other main central banks. Their massive artificial credit creation caused an unsustainable boom in energy and materials demand and capacity investment throughout the global economy. Anyway…

During the last 15 years, the annual rate of consumer price fluctuations have ranged between 1.70% and 2.15%, depending on how they’re measured.

In the scheme of things, these minor differences over time are trivial. But most importantly, virtually none of the these changes were because of the Fed’s radical repression of money market interest rates since Greenspan went all in with money printing in December 2000.

At the end of the day, 2% inflation targeting is an astoundingly transparent ruse being used to justify what amounts to an economic coup d’etat by an unelected gang of monetary central planners.

Inflation targeting has just been a giant cover story for a monumental power grab. But the academics who grabbed the power had no idea what they were doing in the financial markets that they have now saturated with financial time bombs. I believe one of those time bombs is about to explode. That’s why I rushed to organize a live event this Wednesday to prepare you for it.

When these FEDs (financial explosive devices) erupt in the months and years ahead, the central bankers will face a day of reckoning. The immense social damage from the imploding bubbles dead ahead will be squarely on them.

ZIRP, NIRP and QE have destroyed honest price discovery and the key ingredients of financial market self-discipline and stability. They’ve created financial bubbles, which sooner or later must collapse. They haven’t helped Main Street at all. Yet Simple Janet Yellen spends her time studying her labor market dashboards as if they’re related to Fed policy.

They are irrelevant!  ZIRP and QE just deform, distort, degrade and destroy free financial markets, turning them into casinos of crony capitalist corruption.

And that brings us to the latest crime of negative interest rates (NIRP). In the eurozone, Switzerland, Sweden and Japan, central banks are imposing negative rates on the excess cash reserves of commercial banks. But that maneuver is only squeezing bank interest margins and causing a run on banking sector stocks.

The central bankers of the world are driving the lemmings on one last run toward the sea. Yet this fantastically dangerous experiment is doing nothing for the real economies of a world staggering under unpayable debt and massive excesses of production capacity, infrastructure assets and working inventories. Instead, it is just feeding the mother of all bond bubbles.

Ultimately, the central bankers will go for the real thing—NIRP for real people who are trying to save a nest egg. To be sure, a pipe-smoking economist will say there’s no appreciable difference between positive 30 basis points and negative 30 basis points on a CD.

But there is. And the great political inflection point will come when policy elites try to pull that stunt on real people. NIRP will be the flashing neon lights announcing that the government is confiscating the people’s savings and wealth.

When they actually try to impose NIRP on their own people and not just the commercial banks, the central banks will be signing their political death warrants. That day can come none too soon.

Regards,

David Stockman
for The Daily Reckoning

P.S. No one sees this crash coming. It’s not an exotic hedge fund. It’s not derivatives on real estate or commodities. It’s not even speculative options… it’s worse. It’s likely buried deep in your retirement strategy. And you may not even be aware. It’s a fatal flaw in the most popular financial innovation of the 21st century — a specific type of investment that’s about collapse…

Setting ablaze more than $1 trillion of ordinary investors’ money. You’ll want to make sure you’re not one of the victims. That’s why I’m hosting a FREE live event next Wednesday at 7 p.m. EST to give you all the details.

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