"Ugly Outcomes" Loom As Fed Suppression Forces Long Term Economic Repression
By Tyler Durden
Submitted by Eugen von Bohm-Bawerk via Bawerk.net,
The Federal Reserve really wants to raise rates, but they do not dare as the consequence of interrupting an unprecedented level of capital misallocation is too grave to face head on. So our money masters continue their low interest rate policy; pulling society further and further into a capital structure that cannot be sustained long term. In other words, scare capital is consumed in order to feed the present structure of production. Low rates thus cement what cannot be upheld and the suppression of volatility entailed by such policies simply mean internal inconsistencies accumulate without any functioning correction mechanism. Think of it as two continental plates pushing against each other; it is obviously better with thousands unremarkable earthquakes spread over time than a sudden burst of centuries with built up tension. Soviet Union did not have any functioning price system and they manage to run their economy for decades without recessions, until 1989 that is…
Our economic system should optimally experience a recession daily so unremarkable that no one even notice as these tiny corrections will help keep the system sustainable and balanced. Weeding out imbalances before they can do harm. World central bankers on the other hand suppress these corrections and consequently create conditions for massive disruptions. Controlling short term volatility inevitably leads financial dislocations large enough to bring down the whole system.
Today we will show how this may manifest itself for the US federal government as the Federal Reserve is eventually forced to raise rates, possible faster than anyone today imagine possible. In one scenario it is entirely possible that central bank credibility falls among the general public, leading to lower demand for cash and inversely increases demand for goods. In this particular scenario, prices, measured in currency units, spirals out of control and the only thing the central bank can do at this stage is to create the gut wrenching recession needed to tame price inflation. Volcker was forced to do it in the early 1980s from a far better starting point than todays. The latest consumer price inflation report issued by the Bureau of Labor Statistics does indeed show some price pressure in the dollar system with the “core” rate running ahead of target for the fifth month in a row as of April.
For now, assume the FOMC will follow its latest dot-plot, lifting rates to 0.875 per cent by year-end 2016, 1.875 by December 2017, 3.00 in 2018 and 3.25 from there on. Further assume a stable yield curve with longer dated rates following the Fed funds rate smoothly upwards. Needless to say, if the FOMC does lift rates it is highly likely the yield curve will invert as the US economy, on the brink of recession, cannot cope with higher interest rates. However, for the sake of argument assume the future will look like the chart below
The Fed Funds rate is at 3.25 per cent by 2019 while the 10-year is assumed to be a mere …read more
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