False Premise

PARIS – The Fed did as expected. It announced it would raise its key rate by a quarter of a percentage point to 0.5% and gradually raise it up over the next three years.

Reports the Financial Times: “Historic gamble for Yellen, as Fed makes quarter-point rise.” If all goes well, we’ll be back to “normal” in 2019 – 10 years after the long emergency began!


esmeralda-candy-palace--large-msg-117815948689Esmeralda, one of the many forecasters known to be superior to the Fed (a lot cheaper too).

Photo via pinterest.com


U.S. stocks rose on the news, with the Dow up 224 points – or about 1.3%. Those who predicted panic were wrong. (Surprises rarely come when they are expected.) But wait …


Effective FF rateThe daily effective federal funds rate, a volume-weighted average of trades arranged by major brokers. It is now at its highest point since late 2008, ending seven years of “ZIRP” – click to enlarge.


How does the Fed know what a normal rate will be in 2019? Won’t conditions change? Besides, there are sidewalk astrologers and mall palm readers with a better record of market forecasting than the Fed.

To borrow a phrase from George Soros, our mission at the Diary is to “find the trend whose premise is false and bet against it.” Is it true that the Fed is really going to follow through with its promise to return interest rates back to normal?

Is it true that terrorists are out to get us? Is it true that Donald Trump is a fool? Of course, we are all fools… but some more than others. The wise man is the one who knows he is a fool. For our part, we deny it. And we resent readers who remind us.

But we admit to being wrong, from time to time. (Any man who has been married for as long as we have must be accustomed to this kind of admission.) And since investors so heartily endorsed the Fed’s move, we will reexamine our position.

The premises of the rate increase are several:


…that the Fed knows best what interest rate is good for the economy…

…that a recovery is sufficiently established to permit an end to the emergency micro rates of the last seven years…

…and that otherwise everything is more or less hunky-dory.


The “Dollar Recession”

And they are all false? We dismiss the first one as poppycock. No serious economist – if there are any left – would believe that the Fed can do a better job of setting the price of credit than willing buyers and sellers.

As to the second premise – that the recovery is solid – we present evidence to the contrary practically every day. Today, we submit to the jury some additional facts:


  • Last month, U.S. industrial production fell more than any time in the last three and a half years. This marks the eighth monthly decline in 10 months. This slowdown is shadowed overseas by what Deutsche Bank describes as “a huge global dollar nominal GDP recession – the worst since the 1960s.”
  • According to the Fed, there are now 61 million people of working age in the U.S. who don’t have jobs. That’s out of 204 million people between 15 and 64 years old. So, if you pass five people on the street, the odds are that one and a half of them is jobless.
  • The “labor participation rate” – the amount of people in the working-age population either employed or looking for work – is at its lowest level since 1977. For men, it has never been lower.


If it were true that the economy was in good health, how is it possible that men would have a harder time finding a job than ever before?


yellen_cartoon_ben_garrisonEverything is awesome, unless it isn’t. In terms of a lagging indicator the construction of which obfuscates more than it reveals, everything is fine. Most other indicators (especially the leading kind) say it just isn’t so.

Cartoon by Ben Garrison


When the Going Gets Tough

Now, we turn to the third premise – that everything else is more or less hunky-dory. Supposedly, in this wide world of everything that is not directly under the Fed’s control, or included in its inventory of conceits and fantasies, there is nothing that poses a serious obstacle on the road to normalcy.

If this were true, we are wrong. Because our guess is that the Fed is trapped and that it cannot continue down this road for long. It is only a matter of time until it runs into trouble. What kind of trouble?

You can get any kind of “facts” you want. But on the road to normalcy, the Fed is bound to encounter a normal stock market sell-off or a normal recession. Ms. Yellen has dismissed worries of a recession. But unless the Fed has triumphed over the business cycle – which we doubt – a recession will appear sooner or later.


GDPA long term chart of “real GDP growth” – as useless a statistic as GDP is, this chart does reveal two important facts: 1. the Fed has no control over the business cycle, and 2. its influence on the economy is thoroughly negative, as even in terms of this massaged and in many ways phony aggregate (inter alia it is designed to make things look better than they actually are), growth is in a persistent downtrend – click to enlarge.


In the face of such adversity, how likely is it that the Fed will persevere? The Fed’s future actions are “data dependent,” says Yellen. But imagine if Christopher Columbus had taken a “fact-dependent” voyage across the Atlantic.


Fact No.1: He ran out of food.

Fact No.2: His men were sick and dying of scurvy, malnutrition, and other diseases.

Fact No.3: India was not where he thought it was.


Any one of these facts, presented to him forcefully by his crew, would have been enough to cause him to turn around. When the going gets tough, “fact-dependent” travelers go home.


ChristopherColumbus1492: Christopher Columbus and what’s left of his malnourished and scurvy-mangled crew arrives in “India”

Painting by John Vanderlyn


Charts by: St. Louis Federal Reserve Research


Image captions by PT


The above article originally appeared as “The Three Biggest Myths About the Fed’s Rate Hike… at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.



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3 Responses to “False Premises: The Biggest Myths About the Fed’s Rate Hike”

  • Kafka:

    In the dark past, monetary policy relied heavily on what happened at the margin. The telegraphing of raising or lowering the Fed rate helped decision makers at the micro level to invest/not-invest, purchase a home, not purchase a home.

    It is the Fed’s misguided coddling of the TBTF and all of it’s sucklings that has choked the real economy.

    If the dark past is any guide, a gradual raising of rates will entice home buyers back into the market.

    • therooster:

      Kafka … It’s not the Fed’s misguided coddling of the TBTF and all of it’s sucklings that has choked the real economy, IMO. That’s a highly noticeable symptom, however. It’s the market’s failure to recognize a USD price measure role from a USD medium of exchange and the use of the dollar in the correct way. Some of this can reside on the axiom of incapability too. That practical ability is emerging now , thank God.

      The development of the floating dollar created a price standard ( a price measure) but is also created the current debt based medium of exchange which was part of that “apprenticeship” . This was as unavoidable as creating a segment of rope that only has one end, however. Fortunately , in the aftermath of this development and market orientation, another segment of rope could be tied on so that the price measure (of value) can be linked to a direct debt-free payment of the market’s choice. This allows two debt-free widgets (with dollar pricing) to trade for each other, directly, without the use of any debt.

      The dollar’s role as a medium of exchange can now become diminished as the dollar can now play a strong role in the support of debt-free transactions that are fee based where 100% of the capital for the service fee has already been created and is already in circulation. Remuneration for the dollar’s support is directly tied to an economic event and is not interest (time based). It’s part of a distribution concept like paying a fee for hopping on a bus or a subway.

      Review this again and simply insert gold or silver as being one of the two debt-free widgets in the debt-free trade. (eg: bullion for a new suit) It’s the price scale that is commonly relative to both of the two widgets and the ability to settle payment with debt-free gold/silver mass (weight)

      The market has full control of the closing acts to this book. We accept it or we drown in debt due to inaction…… or the elite comes with “plan B” on the basis that Plan A does not gain market traction. It’s quite simple. Just add assets and stir ….

      The great news is that we ach get to choose.


  • therooster:

    In Canada, we refer to this kind of stunt by the FED as “stickhandling”, which is also known as buying time.

    Now that the FED has created a real-time price measure (known as the floating USD) in support of DEBT-FREE trades, they don’t know what to do with themselves while they patiently wait for the market to finish the job.

    Did y’all think the FED’s mission statement was to create a debt based currency ? Guess again. The dollar’s job goes a great deal further than that. It’s a comparative measuring mechanism in the support of debt-free gold payments, by measuring out mass based settlement, which has been the whole key to developing debt-free gold currency with FULLY unrestricted liquidity.

    Never forget the gifts of the Magi. You’ll get totally lost at the end if you do. Merry Christmas !!!


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