What does Hormegeddon look like?

Sep 18, 2015

- By Bill Bonner

Bill Bonner
Buenos Aires, Argentina

Dear Diary,

Well, it's ZIRP now. ZIRP forever.

Viva ZIRP. Viva! Viva!

As we suspected, Ms. Yellen did not want to risk raising the Fed's key rate. Bloomberg reports:

    Federal Reserve officials left interest rates unchanged, opting to delay an increase amid stubbornly low inflation, an uncertain outlook for global growth and recent financial-market turmoil.

    "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the Federal Open Market Committee said in a statement Thursday in Washington.

    In holding their benchmark federal funds rate at zero to 0.25 percent, policy makers showed they are still not convinced inflation will move gradually back to their 2 percent target, despite continued gains in the labor market. Unemployment in August fell to 5.1 percent, its lowest level since April 2008.

The whole show is so preposterous...our head swims...our knees buckle. According to the above report, the Fed will not allow savers any compensation for their discipline and forbearance. Either inflation takes their capital away at a rate of at least 2% per year. Or the Fed deprives them of any income from their savings.

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You just can't make this stuff up. Presumably, the US economy cannot function with stable prices.

And the Fed seems to have a preternatural dislike for savers. They must be punished; 'if inflation won't do the job, we'll do it ourselves,' says the FOMC.

These policy decisions - and the folderold that comes with them -- are so breathtakingly absurd that there must be a deeper logic behind them. And there is.

As Janet Yellen told us yesterday (in her dreams!), ultra-low interest rates are really just a form of white collar crime. Any rate below the 'natural' rate is larceny. The cronies with access to the money use it to jack up their asset prices. Bonuses are paid...and the assets themselves can be exchanged for other peoples' goods and services. The house on Long Island, that might have been owned by a plumber who worked hard and saved his money, instead goes to a banker, who parlayed small interest rates into a big fortune. In effect, the fix was in. The house was taken from the man who earned it and given to a man who connived with the fixers.

We predicted - months ago - that the Fed would NEVER seriously tighten. They could dabble with tiny rate increases. But our hypothesis is that they can no longer tolerate a real correction. Instead, as soon as the stock market breaks...and/or the economy goes into recession...the Fed will ease credit. We will not get rate hikes. We'll get rate cuts. And since Fed's key rate is already on the floor, the FOMC will have to cut a hole through the floorboards to let the rate sink further.

We laid out the reasons for this in our last book - "Hormegeddon." The neologic title - which never caught on in the popular press -- describes a phenomenon, often observed, but never before explained, when a public policy turns into a disaster.

What happens is that as more and more resources - such as houses on Long Island - become products of the policy, rather than the output of the real Main Street economy, more and more people have an interest in seeing the policy continue. Wall Street, Big Business, Government, the Poor, the Rich, the Cronies and the Zombies - all want to see this show go on. It is only small businesses (who don't have access to the ultra-cheap money), honest middle class (who have to work in the real, Main Street economy), retirees, and savers who might like to see it stop. And even they are often caught up in it... with student debt, car loans, and over-sized mortgages. Like spectators hooked on 'Game of Thrones,' they have to see what happens to the dwarf!

The longer the policy remains in place, the more people have adapted their lives to it...and the less they are able to bear the pain of giving it up. At some point, it becomes impossible to change the policy. You just have to stick with it...even as it leads you to a disaster. That's what Hormegeddon looks like.And that's the show we are watching now.

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

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