Interest rate suppression policy, Federal Reservce policy

The suppression of interest rates during the Obama administration has resulted in a vast array of economic and financial distortions that will be tested as interest rates rise.

Interest rate suppression was unprecedented in both its extent and duration, but its failure is beyond doubt. Typical of inflationist policies, after an initial period of apparent success, it leaves the economy financially fragile and pervasively distorted. The suppression of interest rates during the Obama administration has resulted in a vast array of economic and financial distortions that will be tested as interest rates rise. The economy was substantially further behind its established growth trend at the end of 2016 than at the beginning of the recovery period in 2009, and Donald Trump was in the White House.
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The first indications of trouble may come from abroad.

The dollar being the world's primary reserve currency and the Keynesian propaganda myth having captured all of the world's major central banks, this testing will be worldwide. Indeed, the first indications of trouble may come from abroad.
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However, the Obama administration regulatory assault on American businesses revealingly pushed the U.S. far down in the rankings for ease of doing business. There is nothing quite like the prospect of having to deal with and risking litigation with several different regulatory agencies at several separate levels of government to throw cold water over entrepreneurial animal spirits.
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It remains to be seen, however, whether the substantial increase in economic strength and stability will be enough to withstand the stresses of the slow, timid unwinding of almost a decade of interest rate suppression policy.

Generally, the performance of the economy during the first year of a new administration is rightly charged or credited primarily to the previous administration, but the removal of the Obama regulatory juggernaut had an immediate favorable impact on economic activity and investment plans. The record for Trump administration economic policy thus begins in November, 2016, while Obama was still in office. It remains to be seen, however, whether the substantial increase in economic strength and stability will be enough to withstand the stresses of the slow, timid unwinding of almost a decade of interest rate suppression policy.
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Meanwhile, the unwinding of central bank stimulus policy may not be the only source of substantial stress to afflict the economy. The possibilities include the usual suspects: an increase in the rate of consumer price inflation; expansion of Middle East conflicts; domestic crisis in important nations; and other possibilities too numerous to mention. The current fragility of the U.S. economy and its finances leaves it distressingly vulnerable.
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There is no doubt that the U.S. economy is rapidly improving and strengthening as the Trump administration peels away the Obama permit raj, but there is no guarantee that it will be strong enough to withstand the challenges to come. The challenges are massive, and Trump provides a handy scapegoat for all that goes wrong.
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The time cost of money:

Interest rates play a vital role in market economics. Among many other things, they reveal the time cost of money throughout the economic decision making process, and impose an important degree of discipline on borrowers and lenders alike.
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For about a century, now, the U.S. - and the world - have repeatedly paid an enormous price for Federal Reserve efforts to substitute administered alternatives for market interest rates.

Yet Keynesians and monetarists think nothing of disabling the market's interest rate function. For about a century, now, the U.S. - and the world - have repeatedly paid an enormous price for Federal Reserve efforts to substitute administered alternatives based on all too fallible human judgment for market interest rates. See, Blatt, "Understanding the Great Depression & the Modern Business Cycle," Part II, "Government Monetary Policy." (Table of Contents and Introduction) See, also, eight articles on Meltzer, "The History of the Federal Reserve," beginning with Part I: "The Search for Monetary Stability (1913-1923); and Friedman & Schwartz, "Monetary History of the U.S., Part II: Roaring Twenties Boom - Great Depression Bust (1921-1933, and Part III: "The Age of Chronic Inflation (1933-1960). In the century after the Federal Reserve took responsibility for the nation's money supply, the dollar lost considerably more than 90% of its purchasing power, exactly what is expected from fiat money systems.
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By the fourth year of a low interest rate policy, the bubbles are growing exuberantly and the houses of financial cards will include great cathedrals whose collapse may threaten the entire economy.

The bubble mania that preceded the recent Credit Crunch recession afflicted real estate, securities and banking - the most heavily regulated industries in the nation.

The entire economy must eventually become increasingly distorted in the absence of market interest rates.

Pushing interest rates down may be alright for a few months or even for a year during some crisis period, but when interest rates are held down substantially below market rates for two or three years, the economy naturally adapts to that low interest rate environment. All manner of economic bubbles begin to expand and those prone to take great risks with borrowed money are greatly encouraged. By the fourth year of a low interest rate policy, the bubbles are growing exuberantly and the houses of financial cards will include great cathedrals whose collapse may threaten the entire economy.
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Market disciplinary mechanisms are never perfect so regulation to supplement them can be useful. However, regulation is at best a weak reed that can never substitute for market disciplinary mechanisms. Regulation is always expensive and always poses a threat to market efficiency.
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The bubble mania that preceded the 2007-2009 Credit Crunch recession afflicted real estate, securities and banking - the most heavily regulated industries in the nation. The bubble mania was caused at the most fundamental level by a series of government policies that disabled market disciplinary mechanisms and the obvious inadequacy of regulatory mechanisms in the absence of those market disciplinary mechanisms. See, "Understanding the Credit Crunch." Besides artificially low interest rates, these misguided policies included, among others, the moral hazard of widespread explicit and implicit credit market guarantees, the reduction of bank lending standards, the allocation of resources into politically favored markets like housing and agriculture, noxious tax code incentives such as those that encourage debt financing and punish equity financing, and the distorted incentives of even low levels of chronic inflation and dollar devaluation.
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Interest rates perform many essential roles, one of which is to impose the time cost of money on financial decisions. Thus the entire economy must eventually become increasingly distorted in the absence of market interest rates. When the Federal Reserve is ultimately forced to allow interest rates to rise towards market levels - as eventually it must - vast strains will test the economy. All manner of bubbles will burst and some of those houses of financial cards will crumble - and everybody will blame the markets and seek scapegoats for yet another disastrous failure of Federal Reserve monetary policy.

Two Keynesian epochs:

The draining of the vast financial strength of the U.S. after WW-II, the Great Inflation of the 1970s, and the 2007-2009 Credit Crunch recession clearly reveal the economic policy madness that periodically afflicts the government directed U.S. market system.
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The Keynesians brought in by the Kennedy administration were full of conceit and hubris, and some even claimed almost scientific certitude. They promised to accelerate economic growth and "obsolete" the business cycle.

Republican governance repeatedly favors the narrow political interests of unprincipled political hacks. Democratic governance repeatedly demonstrates not only their own vulnerability to political expediency but also a powerful susceptibility towards ideological and Keynesian madness.
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The Keynesian propaganda myth is just an adaptation of the Marx propaganda myth. See, Blatt, "Understanding the Economic Basics and Modern Capitalism," "Table of Contents and Introductions," at "Introduction: Keynesian Theory," §2) "The Influence of Karl Marx."

(i × i = i²
Intellectuality times ideology equals intentional ignorance.)

A plague of Keynesian economists transmitting the Keynesian madness periodically descends on Washington. The Keynesians brought in by the Kennedy administration were full of conceit and hubris, and some even claimed almost scientific certitude. They promised to accelerate economic growth and "obsolete" the business cycle. With such attitudes, they were capable of enormous mistakes.
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The publisher of FUTURECASTS online magazine responded to the first plague by publishing "Dollar Devaluation" (1967) accurately forecasting the devaluation of the dollar in the 1972-1974 period and the inflationary morass that would destroy 60% of the dollar's purchasing power in the decade thereafter. A financial column was provided for some business newspapers accurately explaining and forecasting the volatile twists and turns of the 1970s. At a time when establishment economists were achieving an astounding record of almost 100% failure in forecasting economic developments, the publisher's published forecasting record was almost perfect. See, Futurecasting Record 1, Futurecasting Record 2, and Futurecasting Record 3. His readers were thus forewarned in time to protect themselves - and even to profit from - that Keynesian debacle.
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The demonstrated forecasting ineptness of establishment economists is readily explained. They simply cannot forecast the failure of the policies that they are busy justifying for their politician masters and political causes. To the extent that their brains are addled by the Keynesian madness, their economic concepts are risible and the policies they support are certain to fail. Forecasting skill thus requires only a recognition of the inevitable failure of Keynesian policies and the modest talent to draw a reasonable time line to the period of failure.
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Now, a second plague of Keynesian economists has been loosed from the nation's foremost academic institutions where the virus was incubated after being eliminated from Washington in the 1980s. Why the faculties of arts and sciences in these institutions hate their country that much is a question that remains to be answered.
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FUTURECASTS in its earliest issues had foreseen and explained this re-infection. See, Economic Futurecast, at segment on "The conundrum of American monetary policy" republished from the 11/1/99 prototype issue. Indeed, FUTURECASTS online magazine was established to be ready to explain and forecast the inevitable failures of Keynesian policies for a new generation of readers so they too would be able to protect themselves - and even to profit from - this second Keynesian debacle. FUTURECASTS online magazine averaged well over 30,000 hits per month during the ten years of its publication as a regular magazine. (As FUTURECASTS JOURNAL, articles are now published only occasionally.)
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However, as one commentator aptly put it, history doesn't repeat, it rhymes. There have in fact been differences in this 21st century outbreak. Floating dollar exchange rates eliminate sudden devaluation crises, but sudden or smooth, dollar devaluation proceeds just the same. Monetarist concepts and expectations theory are among the improvements accepted for Keynesian theory, but these just improve matters at the margins and have some problems of their own. The Keynesian propaganda myth remains rotten to its Marxian core and its policies produce the same economic maladies. The burdens of entitlements that lack cost constraints have already reached massive proportions.
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The Bush (II) Republicans surrendered to political expedience and abandoned the successful policies of the 1980s and 1990s. They couldn't resist the temptation to loot the public treasury and undermine market disciplinary constraints as favors for their supporters.

The Bush (II) administration and its three Republican Congresses inherited an economy that had regained its position of world leadership and financial strength - much to Keynesian astonishment. There was no secret about the economic policies that had enabled the U.S. to recover from the Keynesian inflationary morass of the 1970s. There was no secret about the economic policies that maintained two decades of increasing prosperity interrupted by only two short and shallow recessions. These policies were referred to as the "golden straightjacket," since they produced prosperity broadly over time but imposed discipline on politicians that the politicians hate. The end of the Cold War and the divided government during the Clinton administration supported this restoration of prudent governance.
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However, the Bush (II) Republicans surrendered to political expedience and abandoned these successful policies. They couldn't resist the temptation to loot the public treasury and undermine market disciplinary constraints to provide favors for their supporters. They began digging the nation into an economic hole the ultimate results of which were easy to see.
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This deplorable turn of events was repeatedly covered by FUTURECASTS. See, Heedless Government, Government by Crisis and Congress: The Engine of Inflation. The Republicans did not have the excuse of Keynesian influence. This was the same old fashioned heedless irresponsibility of unprincipled political hacks that created the disastrous trade war of the 1920s.
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The electorate responded in the only way it could - by kicking the bastards out. Unfortunately, the new bastards were even worse. The Democrats have continued and intensified Republican policies and have in addition exposed Washington to a second plague of Keynesian economists. They have thus proceeded to accelerate the disease process in much the same way as during the 1930s New Deal period. See, Blatt, "Understanding the Great Depression and Failures of Modern Economic Policy," (2016), at Part II, Ch. 4, "The Heedless Young Giant," pp 310-369. Their Keynesian propaganda myth has been somewhat improved at the margins, but it remains rotten to its Marxian core.
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FUTURECASTS had provided its readers with accurate forewarning of the inevitable results of this conduct. The onset of a serious recession, now called the "Credit Crunch," probably before the 2008 election, was clearly forecast. Such factors as the Fannie Mae and Freddie Mac bubbles, the bank lending bubbles, debt leverage bubbles, the housing bubbles and the constraints in the energy markets and much more had been clearly explained as early as February, 2003. Further explanations and warnings followed. See, Eleventh Annual Review of FUTURECASTS Issues.
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By February, 2009, while the blood was flowing on Wall Street and establishment economists and talking heads were demonstrating their incompetence by speculating about a return of the Great Depression, FUTURECASTS told its readers to "buy now." FUTURECASTS correctly assured its readers that despite continuing volatility, the market would be substantially higher by the end of 2010.

"In any event, now while the blood is still running on Wall Street and idiot talking heads on television are comparing this significant recession to the Great Depression, this would definitely be the time to buy."

However, recovery was forecast to be troubled and disappointing. By trying to protect us from the impacts of bursting bubbles, the government in its usual ham handed way prevented the markets from liquidating the mess. Banks were still struggling with toxic assets and unperforming mortgages and other debts. The surplus housing inventory took years to clear. Fannie Mae and Freddie Mac, now under explicit government direction, cost the taxpayer tens of billions of dollars each quarter. They insanely loaded up on low interest mortgages that will decline in value by hundreds of billions of dollars as mortgage rates return closer to market levels. The Federal Reserve also has in excess of a trillion dollars in low value mortgages.
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However, corporations and other businesses have improved their competitiveness and their balance sheets, and a decade of high prices has restored the supply side of the energy market and removed the constraints on oil supplies. Oil now fluctuates in line with commodity inflation, albeit with an extraordinary risk of supply disruptions that is made considerably worse by artificially low interest rates. Low interest rates and oil price inflation meant that oil in the ground was worth more than oil produced (but fracking substantially modified all that).
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Government policy must restore and facilitate market mechanisms, instead of constraining markets and disabling their disciplinary mechanisms. In addition, substantial cost constraints MUST be imposed on the nation's vast entitlements.

FUTURECASTS has thus fulfilled its primary obligation to its readers. It is now up to the electorate to keep kicking the bastards out - churning their elected officials - until the Keynesians are again sent packing so some sanity can be restored in Washington and those willing to make the hard decisions that will be needed to restore economic and financial health, stability and strength are able to guide government economic policy.
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Government policy must restore and facilitate market mechanisms, instead of constraining markets and disabling their disciplinary mechanisms. In addition, substantial cost constraints MUST be imposed on the nation's vast entitlements.

The economic policies of the 1980s and 1990s must be restored, no matter what the short term cost. Entitlement madness must be confronted and robust cost constraints must be imposed.

Confusing the credulous:

Keynesians excel at the production of excuses for policy failures.
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Reality always perversely refuses to conform to Keynesian expectations.

Keynesian are heroically unconcerned about the additional trillions of dollars of sovereign debts that they now assert is necessary to make their stimulatory efforts succeed.

Keynesian policies always send the nation into financial decline. Its adversaries and potential adversaries always prosper and expand their influence during periods of Keynesian madness. The nation's problems always ultimately reach "ungovernable" levels. Gold always rises.

Suddenly there are discussions about a minimum unemployment level consistent with non-inflationary growth that has inexplicably risen above 6%. This comes straight out of the Keynesians 1970s playbook. Why does this always seem to happen when Keynesian policies are pursued?

Budgetary deficits are simply never enough to do the job of stimulating the economy, and monetary inflation ultimately always fails to fulfill Keynesian expectations of reduced unemployment and restored prosperity. Current economic contractions are always different in unexpected ways that prevents realization of the benefits expected from Keynesian policies. Government policy makers are never skilled enough to properly execute Keynesian policies. It's all the fault of evil speculators! It's all the fault of the markets! The markets inexplicably fail to respond properly to Keynesian policies. Reality always perversely refuses to conform to Keynesian expectations.
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In the 1970s, scapegoats were sought for Keynesian failures as the economy descended into the morass of chronic inflation and business cycle volatility. Business was blamed for abusing market power and generating "cost-push" inflation, and unions were blamed for "wage push" inflation. OPEC and the oil companies are still stupidly blamed for much of the price inflation of the 1970s.
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Somehow, in the absence of monetary inflation and artificially low interest rates, there was no OPEC oil embargo or oil price shock during the Israeli invasion of Lebanon in the early 1980s. That chronic inflation is impossible in the absence of monetary inflation, and indeed is inevitable in the presence of substantial rates of monetary inflation, was amazingly rejected until the Keynesians themselves were rejected by the electorate and kicked out of Washington.

(During the Obama administration, the Keynesians blamed insurance companies for the health care price inflation caused by government policies. They blamed "speculators" for recognizing and acting upon the inevitable failure of Keynesian policies. They blamed consumers for refusing to respond with confidence to the Keynesian stimulatory efforts that failed to stimulate the economy.
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They blamed banks for not lending and businesses for not hiring in that environment. They are heroically unconcerned about the additional trillions of dollars of sovereign debt that they asserted was necessary to make their stimulatory efforts succeed.
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Obama policies took income away from the middle class and gave it to the rich but they nevertheless responded with outrage at the widening inequality. And they thus put Donald Trump into the Presidency instead of Hillary Clinton.)

Meanwhile, the domestic economy leaks trillions of dollars out through its balance of payments deficit. Substantial adverse impacts on the international trade and payments balances are always an unintended consequence of Keynesian policies. See, Blatt, "Dollar Devaluation" (1967).

Keynesian policies always send the nation into financial decline. Its adversaries and potential adversaries always prosper and expand their influence during periods of Keynesian madness. The nation's problems always ultimately reach "ungovernable" levels. Gold always rises.

If $2 trillion in budgetary deficits is insufficient, there should be $4 trillion. And trillions more during the next recession and the one after that. Nobody but a Keynesian can be stupid enough to expect that political leaders will ever pay down any substantial amount of this debt in between recessions. Keynesian stabilization efforts inevitably increase economic instability as debt loads and monetary inflation increase.
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Keynesians refuse to even contemplate the subsequent recessions that will inevitably follow one after the other in quick succession as a result of Keynesian efforts to prevent their occurrence. They view with astonishment the troubled and unsatisfactory nature of the intervening recoveries.
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Keynesians are suddenly quiet about their 1960s claims that they can accelerate growth and "obsolete" the business cycle. Instead, they generate excuses for failure, something they now have much practice with. In the 1970s there suddenly were discussions about a minimum unemployment level consistent with non-inflationary growth that had inexplicably risen above 6%. This is still a part of the Keynesian's playbook. Why does this always seem to happen when Keynesian policies are pursued?
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The Keynesians now set the bar for success at an extraordinarily low level.

The Keynesians brag that there has not been another Great Depression. They thus set the bar for success at an extraordinarily low level.
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Like fundamentalist clerics warning of brimstone and damnation, Keynesians use threats of a return of the Great Depression to frighten people into acceptance of their concepts and policies regardless of disappointing results. That a return of the Great Depression is impossible without the government policies that caused the Great Depression is something they don't even want to think about. See, Blatt, "Understanding the Great Depression and the Modern Business Cycle," (2009) See, also, Summaries of Great Depression Controversies and Facts and seven Great Depression Chronology articles beginning with "The Crash of '29."

(The Great Depression was an artifact of an autarkic trade war world. There are many economic troubles that may afflict a globalized world, but those of the Great Depression are impossible. The Great Depression is the "phantom menace" invoked by cynical political leaders to frighten people into accepting their policies.)

To get another Great Depression, you need another WW-I that uses up the world's wealth and disrupts established courses of commerce. The war has to be followed by a Treaty of Versailles that imposes heavy reparations obligations on the losers and Balkanizes nations into constituent ethnic or sectarian parts that are not economically viable. Then the major creditor nation must initiate a trade war that blocks entry to its markets and prevents debtors from earning the wherewithal to service their debts and prevents the new little Balkanized states from accessing international markets. The major creditor nation must adopt a mercantilist monetary policy that it rigidly maintains as the world falls apart around it.
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NOTE: All these factors are aspects of WW-I and post WW-I government policy. None are natural features of market mechanisms. Indeed, they all are constraints on markets. They are each immensely burdensome and stupid, but no single one of them would suffice to cause a Great Depression. The Great Depression was the result of a whole series of immensely burdensome government activities and constraints on the markets.

Keynesians are rightly embarrassed by the undeniable failures of their policies during the 1970s and so strive to direct attention elsewhere.

Today, some pieces of the Great Depression puzzle are actually in place, but thankfully not the primary pieces. Sovereign debt loads have increased massively, and China pursues mercantilist policies that weaken the finances of its debtor nations. However, there has been no great war since the 1940s, and the "naïve" U.S. somehow managed to preside over a far more enlightened peace process after WW-II than the more "sophisticated" European great powers at Versailles. Most important, globalization gives debtor nations the opportunity to earn the wherewithal to service their debts and small nations the opportunity to flourish within the broad global market.
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Although the analogy is far from perfect, the dangers of the modern business cycle are more in line with the Great Inflation of the 1970s than the Great Depression of the 1930s. However, Keynesians are rightly embarrassed by the undeniable failures of their policies during the 1970s and so strive to direct attention elsewhere.
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Ignored is the failure of Keynesian-type policies during the New Deal. There was, after all, still almost 19% unemployment in 1938, after six years of New Deal budget deficits, monetary inflation and industrial policy experiments. The New Deal not only retained all the worst of the economic policies of the previous Republican administrations, but they added new constraints on the economy, even attempting to subject the whole economy to a system of cartels against the public interest. They insanely adopted inflation as a "cure" for economic problems, and in several ways massively reduced the efficiency of the economy. Ominously, inflation as a remedy is again part of the economic madness in Washington.
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The Keynesian response, as usual, is that the budgetary deficits and monetary inflation were simply not big enough to get the job done, They never are!
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This is not rocket science. The bottom line is obvious.

Not until some principled adult supervision is provided for the Republican party and the Keynesians are kicked out of Washington will the United States restore financial and economic stability and strength.

(The budget deal of 2018 proves that that has not yet occurred.)

The market sends a message:	The turmoil in the securities markets in February, 2018, was not a reflection of contemporary developments in the economy. ?
	Instead, it was a market signal of difficulties to come as the Federal Reserve timidly continues its attempts to unwind almost a decade of massive but clearly unsuccessful interest rate suppression policy. The 2009-2016 interest rate suppression period joins the dismal string of Keynesian-type policy failures that includes 1932, 1933, 1937, 1968, 1972, 1973, 1979, 2000, and 2007. ?