Sunday, June 9, 2019

Fed Lowering Interest Rates Will Do Little To Fix Our Ills

Years ago before the "Bernanke has all the answers" era, many of us criticized Japan for failing to own its problems. In many ways, the Fed has put America and the global economy on a path that mirrors the same unsuccessful path taken by Japan. This path avoided real reform and bailed out the very people that caused many of Japan's problems leading to "lost decades" of growth. It is difficult to reconcile the two points of view where we have people calling for more rate cuts while others claim the economy is strong and healthy. It should be noted that much of the rising GDP comes from government generated spending whether from direct purchases or fueled by money people receive from entitlement programs or government assistance. We should question how much a couple of quarter-point drops in interest rates will really make when many consumers are completely disconnected from fed rates and paying 18% APR or more on charge-cards.

When I look about my area I find a fair amount of construction but sadly it is the wrong kind. Little of it is being done by small business or independent local investors. When peeking behind the curtain we find most construction is being driven by government spending or cheap Wall Street money. The new restaurants and other commercial concerns are generally reaching into low-interest rate loans that are unavailable to the average local business. In fact, this puts small local firms at a huge disadvantage to their bigger brethren and often moves them towards closing their doors as in "going out of business." It does not help that government, by way of the United States Postal service, is busy stabbing businesses in the back by delivering Amazon packages below cost and even on Sunday as well as delivering packaged from China at a huge discount to what American companies must pay. 

This is also true in housing where few of the new apartment construction funds are generated locally and the building is no-longer based on real need but centered around the whims of huge real estate companies. Roughly 80% of new apartment construction is now for the high-end luxury market. The government holds huge responsibility for a rising share of our housing problems in low-income situations because its policies avoid dealing with the problems causing shortages such as the growing number of tenants that are irresponsible. Again the government and Wall Street money is driving this train. While retailers close and large buildings go empty across the land new buildings are being put up on speculation and bogus public-private partnerships are plowing vast sums of money into the economy on projects geared to compete with those we are already putting out of business.  

This means we are at the point where at best we should expect slow economic growth for as far as the eye can see. The mal-investment flowing from these forces tends to push out and destroy sustainable and profitable private investment. How can the independent small businessperson or concern compete against such a stacked deck? Still, this sort of false economy generally lacks staying power and dies of its own accord. Pushing on a string is a term that describes the resistance that builds up against a poorly crafted plan. The Fed simply lowering rates falls into this category and will only fuel the asset bubble we have witnessed in stocks.

It is important to remember the recent slowdown is coming at the end of a historically long bull market. The latest job numbers showed that the U.S. created 75,000 jobs in May, much weaker than estimates. In addition, the new numbers reduced some of the gains from April. To many investors, this new data confirms the economy is slowing and signals the Federal Reserve is more likely to consider reducing rates. The big question is how effective such a cut would be to the real economy which lives outside government and Wall Street.

I continue to contend that it might be wise to throw out all the current ideas on what generates inflation. A great deal is going on in the global economy and it will have a major effect on currency values going forward. The relationship of a currency's values directly tied to inflation as we know it. Years ago changes were made in the formula used to measure inflation that resulted in reducing the number. This was done in order to avoid cost-of-living adjustments for Social Security recipients and the payment of COLA adjustments in contracts. Since the measures of inflation have been skewed it is difficult to gauge just how much buying power we have lost over the years.

Those in power over the years have also tinkered with the producer price index which is used to deflate nominal GDP in order to measure real economic growth.  In order to obtain a valid estimate of how much real output has increased, it is necessary to deflate the nominal measure of GDP by removing price increases.  When inflation is underestimated, then real GDP becomes overestimated. When John Williams of Shadowstats adjusts the real GDP measure for what he calculates is a two-percentage-point understatement of annual inflation, he shows that truth that there has been very little economic growth since 2009 and the economy remains far below its pre-recession level in 2008. 

The GDP is a very poor indicator of growth. It is bloated by factors such as soaring healthcare cost, a ballooning military budget, and wasteful government spending. At some point, both investors and the public will realize that central banks can only do so much through printing money and lowering interest rates. America continues to spend nearly $3,333 more than it takes in each year per man woman and child. Such deficits were unheard of in the past and are unsustainable. Most of this money finds its way into the economy as "poorly crafted subsidies" that push data higher and create the false illusion all is well. The bottom-line is much of the world may well be looking at a version of the "Japan Syndrome" with stagflation. This translates into years of slow growth coupled with inflation or a protracted period of stagflation.


  1. Every person should start out reading G. Edward Griffin's book "The Creature from Jekyll Island" and give it to your sons and daughters to read, whatever occupation they may be in or plan for.
    People need to understand that there are two parts of the pincer that is closing upon us; one natural and one man made.

    1.)The fiat /fractional reserve, a debt based system which enables a corrupt, without rule of law, fascist (fascism is duopoly of control by government and corporations, especially the military industrial and banking) system. This is pure malinvestment and ultimately drains resources, both financially derived from whatever elements of true capitalism are left, as well as natural resources. (oil, water, topsoil, minerals). There is no money left to invest in projects that might be of help. The money will be consumed by interest payments.

    2.) The decline of the energy dependent industrialized system of formerly cheap, plentiful oil, coal, and fossil fuels (not wind, solar, shale, hydro, or nuclear) is starting to stare us squarely in the face. Yes, there is plenty of oil. The problem is it is too costly to drill for it, both thermodynamically and financially. The fraudulent debt based system has enabled the shale oil Ponzi scheme to finance (e.g.pension funds, tax breaks for solar, ethanol production) essentially a form of corrupt subsidy, which accelerates our energy depletion.

    See Gail Tverberg's blog at for a different analysis of the outdated traditional theory of economics- that if oil get's "scarce," supply of law and demand will raise the price and more will be produced. NOT! Rather, due to debt and the declining return of net energy unit per barrel, the economy can no longer grow, and can no longer service the debt. Oil price is too high for consumers, but too low for producers.
    or see Steven St Angelo's blog at ( focus on his energy analysis and how shale oil is the biggest Ponzi finance scheme going).

  2. The entire Western empire of Fractional Reserve Banking fully turned Japanese when Bear Stearns & Lehman Bros. Inc. dissolved into the ether via merger & chapter 11 bankruptcy. To assert that growth can occur within Secular Stagnation [see Summers] is to also assert that mere asset inflation & long term Quantitative Easing-QE [profligate money printing] is the only way forward for the USA given DEBT-to-GDP & deficit of tax cuts on top of that.

    War cannot stimulate the USD economy given that those dollars are far too necessary to run government. The Commercial Loans sector is flatlined because all USA corporations are to their limits & beyond on debt amassed over the last ten years. Residential sector never rebounded & believe it or not money does not grow on trees in the USA or CANADA.

    'First by inflation, and then by deflation you will wake one day to find yourselves homeless in the land that your forefathers fought & died for'. Jefferson

    USD is a Ponzi scheme that evidenced the demise of America's most historic Ponzi scheme criminal one Bernie Madoff as he was arrested by the FBI post-Lehman Bros. margin call. Bernie Madoff was the first NASDAQ chairman and while he may be the first to land in prison he is by no means the only Ponzi schemer amongst the apple barrel of rotten apples in the world of finance. JPMorgan Chase was Madoff's co-conspirator but they only had to pay the SEC parking ticket for the heist that ran 30 years. That get out of jail free card has enabled JPMorgan Chase to further profit from other felony crimes for which they paid more parking tickets.

    And the band played on.