Let's get over with it

Sep 18, 2015

- By Bill Bonner

Bill Bonner
Buenos Aires, Argentina

Dear Diary,

It was a rough night for Janet Yellen. She was tormented by the immensity of the responsibility she shoulders. And, this is the big day. At 2pm EST the whole world turns its eyes and ears to the Fed's Open Market Committee, Janet Yellen presiding. She can't duck. She can't go dumb. She has to take center stage and do her schtick.

Bloomberg:

    -- The FOMC will weigh the impact on the U.S. outlook from slowing growth overseas and falling stock prices, as committee members determine whether to end almost seven years of near-zero interest rates. Economists are close to evenly divided on the outcome, with 59 of 113 surveyed by Bloomberg expecting the Fed to stand pat.

    While economic data have been "pretty compelling," investors are skeptical the FOMC will want to move in the face of recent financial turbulence, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in Stamford, Connecticut.

    -- The FOMC's forecasts of the benchmark fed funds rate, revealed in dot-filled charts representing each official's projections, may suggest a more gradual pace of tightening over the next few years than was suggested in June, said Michael Hanson, senior U.S. economist for Bank of America Corp. in New York.

What will she say?

"As little as possible," is our prediction. For example, she may propose a return to 'normalcy' that is so slow we may never get there, with tiny .25% increases only two-to-four times per year.

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But what a great moment in the history! What a great opportunity - to say something provocative...something that might even be true! Poor Janet tossed and turned again last night, troubled by thoughts of what might be. The speech she might like to give:

"Hi, Janet here. And I've got an announcement to make. You know that rate hike you're waiting for? Well, I need to talk to you about that.

"The rate everyone is talking about is the interest rate at which we lend to our member banks. But where do we get any money to lend? We could only get real money from our member banks. Why would they deposit it with us and then borrow it back? They might as well just lend and borrow between themselves.

"The trick is that we can 'create' money. The more you think about it, the more absurd it is. Money is only useful when it represents purchasing power. It's a claim on goods and services that are available in the market. We can create money, but we can't create goods and services. So what we're really doing is creating claims on someone else's goods and services.

"Naturally, the people who get those claims - the big banks and their big clients - are quite happy with this. Over the last 7 years, they've enjoyed the transfer, to them, of more than $10 trillion. Savers, on the other hand, have been stiffed.

"Remind me...how is this supposed to make people better off?

"I'm sorry, but building wealth is a long, hard process. It involves learning, saving, working, risk and forgoing immediate gratification in the hope of greater gratification later on.

"As far as we know, there's no way to speed up the process or make it safer simply by creating 'money' or 'credit' out of nothing. And if there were, we would have learned from the examples in the monetary history books, created a lot more money and credit and handed it out on street corners. The trouble is, all those historical examples tell us that it doesn't work. That's why we're now talking about getting monetary policy back to 'normal.' We know that abnormal policy - in which you try to boost the quantity of money (by making it easier for people to borrow it into existence) - almost always ends in some very unpleasant way. So far, we've been spared unpleasantness. We want to keep it that way - by getting back to 'normal' before the distortions and malinvestments that come with extremely low interest rates cause us real trouble.

"Look, I'm just a girl from Brooklyn who went to Fort Hamilton High School. Do you really expect me to manage the whole world economy? My father thought I should go into medicine. And maybe he was right. Doctors have real knowledge, not just this hocus pocus of economics.

"I've already proven that I don't know any more of what is going on than you do. The biggest financial disaster of the century - the housing bubble - hit me like it hit you; it was a surprise. And remember what I said after the housing bubble blew up?

    I guess I thought that similar to the collapse of the stock market around the tech bubble, that most likely the economy could withstand [the housing collapse] and the Fed could move to support the economy the way it had after the tech bubble collapsed."
"I'm just like everybody else.... I didn't know what was going on and didn't know what to think about it...except that it would probably be all right.

"But what did you expect? You think I'm some sort of genius, or something?

"Everything has to come to an end sometime. And seven years of this silly policy seems like more than enough. Yes, we know that the stock market will crash. And yes, we know that a lot of businesses - who have come to depend on these ridiculous rates - will go broke. But there's no virtue in putting off the inevitable. When humpty dumpty is going to fall off the wall anyway, give him a push and get it over with."

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.

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