Fighting to Lose
BALTIMORE – Where are we now? Dow down 296 points on Tuesday – or just under 2%. Cruz and Clinton win the Iowa caucuses. Oil is back below $30. An election has been described as two wolves and one lamb voting on what to have for dinner.
We’re going to make a difference on election day! Or maybe not…
Actually, there was never any doubt about what was on the menu. An election is really when the wolves scrap over who gets the choicest pieces. To bring new readers fully into the picture… It doesn’t matter who won in Iowa. Major policies are not determined by the voters but by the more or less permanent elite who run the government, aka the “Deep State.”
The Fed is an instrument of the Deep State, not of the people. This sounds conspiratorial. But it doesn’t require any hidden agenda or secret handshakes. Most people want power, money, and status. If you can get control over the government – the only institution that can steal and kill, legally – you’ve got it made. That’s why so much money is spent trying to get elected or to influence public policy.
The U.S. presidential campaign has seen surprisingly strong showings from two “outsiders”: Donald Trump and Bernie Sanders. Why? As former Congressional staffer turned Deep State whistleblower Mike Lofgren recently told Bonner & Partners Investor Network editor Chris Lowe, it’s because each in his own way warns voters about the wolves. The insiders, according to Trump and Sanders, are predatory and incompetent.
Bernie and the Donald – voters like them because they are seen as the anti-establishment choices. The press decries them as “populists” and “nutcases”, which means they must be doing something right. As an aside, the European press is completely apoplectic over Trump, to our unending amusement.
But the Deep State is more predatory and less incompetent than it appears. It fights wars, for example, not to win them… but to lose them. The War on Poverty has been going on for more than 50 years. Still no sign of victory. But it has financed countless careers and retirements of government operatives.
The War on Drugs has raised profit margins for the drug dealers… and for the drug fighters too. But the public has suffered higher levels of violence and billions of dollars in prisons and crime-fighting costs.
Likewise, there are more terrorists now than when the War on Terror was announced – after trillions of dollars were spent and millions of people were killed. The more the U.S. bombs, drones, and bullies… the more people join the fight against it.
George Orwell recognized the principle in 1949 already – these wars were never meant to be won. This is also why we already know that the “war on terror” will never end – and it is one of the greatest threats to individual liberty yet.
The Long Emergency
Why fight wars you intend to lose? Because it suits the Deep State. The wars are just a way of marshaling support for a transfer of wealth and power from fly-over states to the suburbs of Washington, D.C. and New York. That is to say from the public… to the elite. Which brings us back to our beat: money.
When the 2008 financial meltdown came along, the Fed announced what was effectively another war: the War on the Credit Cycle. In a fiat money world, consenting adults are no longer able to set the price of credit. So, the Fed does it for them.
And after 2008, the Fed decided to take the “emergency” measure of dropping short-term interest rates to zero to try to stimulate the economy. But like so many other government programs, it was an intentional failure.
With the labor participation rate now at its lowest level ever, the typical American man is more likely to be unemployed today than at any time in history. The rich have gotten richer; the poor have gotten poorer. (No wonder Trump and Sanders are doing so well!)
And after eight years of the most extravagant stimulus efforts in history, in the last quarter, the U.S. economy grew by just 0.7% – “stall speed” in other words. That too looks like incompetence. But it was really another predatory measure.
By evaporating interest rates, the Fed transferred trillions of dollars from savers on Main Street to the speculators on Wall Street. The bankers got their bonuses. Mission accomplished!
Not another bonus… then again …
A Miracle-Gro Economy
But now, the Fed has put its “credibility on the line,” reported the Financial Times.
That was a shocker; we didn’t think the Fed had any credibility left. But there it was, sitting on the line between higher rates and lower ones.
The PhDs running the Fed are no fools. They know they have not entirely defeated the credit cycle. They only hope to manage it. They know, too, that there are contractions as well as expansions… bear markets as well as bull markets… winter as well as summer.
The idea of raising rates was to get in position before the weather turned cold again. They would need to cut rates again to fight the next downturn. So, last December, the Fed put its credibility on the line. It announced a program of gradual increases that was supposed to bring the short-term interest rates back into their normal range by 2019.
What could possibly happen?
Last year, we argued that this was not going to come to pass as planned. The weird and wonderful plants of the Bubble Epoch had been raised in a hothouse with Miracle-Gro sprinklers on 24/7. Now, the Fed was proposing to shut off the spigots!
Surely this would trigger the very crisis the Fed hoped to avoid. That was always the problem with the “data dependent” path Ms. Yellen announced. If your course depends on numbers rather than principles, you are bound to see some numbers you don’t like. Then you have to react.
And the only possible reaction for the Fed is to reverse course. Besides, its main mission is to protect the Deep State’s finances – the flow of real wealth from you to it. And now we find the world’s elite – the Deep State financiers and economists – planning, explaining, and preparing the world for a U-turn.
An uncanny sense of timing…
Last week, for instance, the Wall Street Journal reported that the Fed was “having second thoughts about hiking rates three or four times this year.”
And yesterday, the Financial Times called Ms. Yellen’s plan to return to normal a “rate rush.”
“Few believe [the Fed] will stick to its plan for more increases this year,” it continued.
Count us among the non-believers.
Charts by: Heritage Foundation, St. Louis Federal Reserve Research
Chart and image captions by PT
The above article originally appeared 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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