What will Yellen be thinking? - The Daily Reckoning

What will Yellen be thinking?

Sep 15, 2015

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Diary,

Poor Janet Yellen. Usually we reserve our pity for the poor, the downtrodden, the hopeless and the clueless. But today, we feel Janet Yellen's pain.

Markets are tense. Investors seem to be holding their breath. At least, that's what the financial press tells us. Everyone is waiting to see what the Fed will do. There must be thousands...or maybe millions of well-educated adults...sitting on the edge of their chairs, eager to hear what this rather ordinary, middle-aged functionary will say.

Will Janet Yellen proudly put the Fed on the side of the angels, announcing that they have decided to move the Fed's key rate into a more normal area...regardless of how much it costs the cronies?

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Will she admit that ZIRP and QE have been big failures, helping shift some $10 trillion in wealth towards the rich, while leaving Main Street actually poorer?

Will she beg forgiveness for such errant policy decisions over such a long time, and vow publically never to interfere with the market again?

No, she won't.

What she will say is that the outlook is favorable - generally, clearing skies and fair weather is in the forecast. But there are some clouds forming out to the East that could lead to stormy weather. So she will urge a cautious return to normalcy. She may be feeling confident and allow for a small rate increase...or feeling fearful and decide to hold off for a while. We don't know.

But we think it is very unlikely that she will stick to a plan to return to sanity.

Once you begin manipulating markets, it's a hard habit to break. First, investors come to look forward to it. Then, business becomes dependent on it. And then, you can't stop even if you wanted to. After 6 years of emergency policies, we are now in a permanent emergency. Yes, it is a phony emergency. Markets are supposed to go down as well as up. They're supposed to correct their mistakes. And they're supposed to destroy capital to make way from capital creation. It's never been a real emergency; it was just capitalism at work.

But poor Janet Yellen must not know what to think. On the one hand she is lauded as the most powerful woman in all history. Helen of Troy was a bit player compared to her. Cleopatra was merely the love interest in the battle between Julius Caesar and Mark Antony. Susan B. Anthony? No one knows what she did...if anything. But she, Janet, has the entire world economy in her hand. She can squeeze it. She can bounce in on the floor. She can do what he wants.

On the other hand, there are the dark nights...when she must realize that she is in way too deep. She is supposed to do what no mortal can do. She is in charge of fixing - at least to the extent she is able - the most important price in a market economy. It must have occurred to her that she shouldn't be fixing it at all. Only the gods know what price savings should rent for. What's going on? Has she been set up to take the fall for Greenspan and Bernanke?

But wait...these aren't even savings. These are the Fed's faux -savings..."money" created out of thin air. Surely, the head of the central bank can decide what price to rent its own capital, no?

Oh my. Oh my. The thoughts that must run through Janet's brain at 4am!

'If I raise the rate, just a little, I'll probably be hailed as a sober, responsible economist. After all, it is unnatural for the key lending rate to be so low for so long. And those charts and graphs on my dashboard...they seem to be saying that things really are returning to normal. People have jobs. The economy is growing...why worry?

'Of course, I know perfectly well that those charts are mostly meaningless. All the data is so jigged and jived by the back-office boys, who knows what is really going on? And here I've got Bill Dudley, Goldman and Larry Summers telling me that financial conditions are already tightening. They say the markets are tightening credit, without waiting for the Fed. And that if we raise rates now, we'll just be adding to already tight conditions.

'Maybe they're right. But those ZIRP rates must causing distortions that we don't know about. The junk bond market. The corporate bond market, generally...how were we to know those rascals would borrow money at our low rates just to goose up their own shares so they could earn bonuses? And now, those stock prices depend on our low rates. That's crazy. They must know we'll raise rates sooner or later...and then, the people who bought those stocks at such higher prices...like those gamblers at Goldman... they must realize that they'll lose money.

'I guess it's almost our duty to teach them a lesson...

'But what if all these dumb-heads who've been gaming the Fed...betting that we'll keep the rate for far longer than we probably should have... what if they panic? What if we get a couple days of 1,000 point drops in the Dow? Won't they all start pointing their fingers at me...claiming that I caused the panic?

'Of course, I did nothing of the sort. It's not my fault they bought stocks at such high prices. We were just increasing aggregate demand, by lowering the cost of credit. And we have to raise the interest rate at some time, or the whole system will become unmoored...drifting who-knows-where...and washing up on who-knows-what rocks.

'But what if Larry is right? What if a rate increase makes money too tight? And what if it provokes a sell-off in equities...and sets in motion a chain of events such as those that led to the Great Depression? The markets fall. The wealth effect turns negative. World trade collapses. Unemployment rises. And we end up in a new depression that lasts 10 years... What if they say it's my fault? What if they call it the Yellen Depression?

'Oh no...it's not fair...it's not fair....boo hoo...sob...sob...'

Publisher's Note: Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, just reconfirm your Free subscription to the Daily Reckoning...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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