As the economy goes into recession, there will be calls for the central banks to stop the deterioration and “do something.” But that is exactly the problem.
Many ask, what should the Fed or the central banks do? Our reply: get out of the way and let economic forces readjust. It would be painful, but it would be over quickly if the central banks would stay out of the way and let all the bad investments liquidate. But they won’t.
The central bankers have been trying to control the economies at least for the last 45 years, trying to prevent recessions. But the recessions are getting increasingly worse.
For the past 20 months, the economies have been trying to rest and have a recession. But Central bankers like the Fed try to prevent it, with financial maneuvers, such as QE, negative interest rates, buying governments, and now corporate bonds from the banking system. They will do this until they can no longer stem the tide. And then it will be that much worse because there is no tool left to stop the avalanche.
According to the WSJ, Janet Yellen wrote in a letter to a Congressman:
“While I would not completely rule out the use of negative interest rates in some future very adverse scenario, policymakers would need to consider a wide range of issues before employing this tool in the United States.”
She wrote that 2% is coming “in time” and that the Fed will do what it has to in order to fulfill its mandate of full employment and “stable prices.”
We ask, what is stable about 2% inflation? It means that a household with $50,000 per year income would lose $1000 per year.
The big source of the global “no growth” problem is the type of people heading the central banks: economists! They really believe that they can repeal recessions. It’s like the weatherman claiming he will control the weather.
The fact is that everything in the universe goes in cycles. In the economy, growth begets growth until there is a big surplus, such as housing, manufacturing capacity, etc. CEO’s act on the faulty belief that they can extrapolate growth into the endless future.
The excess capacity then brings them back to reality. Bankruptcies of the most over-indebted and mismanaged firms result, and the cleansing takes place.
The shakeout results in the dumping of non-productive investments. People lose jobs and prices come down to attract business. That causes a recession.
The recession attracts new entrepreneurs who see the opportunities because of the cheap assets in various sectors. And thus a recovery is born.
But with the central banks in charge, recessions are considered “bad.” When the economy weakens, they lower interest rates. Then they start huge artificial money creation programs. Globally, that’s about $13 TRILLION now in failing efforts to stimulate growth.
However, cheap money only causes even more mal-investments, which are unproductive and later must be liquidated at rock bottom prices.
One ‘mal-investment’ is stock buybacks by companies. It adds nothing to the value of companies, only to the pocketbooks of the top executives who have stock options. Why don’t the shareholders and analysts see this?
I have had debates with analysts on national TV about buybacks of Apple. They say that the reason to buy the stock is “because the company distributes part of its cash.” So, they buy a stock to get some of their money back, less all the fees. Why not keep the money in the first place?
Cheap money produces huge mergers, which are doomed to be failures because of the excessive prices paid. We will see these failures over the next 5-10 years. It will be a bloodbath.
In other words, by not allowing normal economic cycles to occur, they worsen the eventual ‘readjustment.’ We saw that in 2008-2009, when about $64 TRILLION of wealth was wiped out, according to some estimates. The next one should be worse.
For example, let’s look at a hypothetical TV weathermen around the country trying to control the weather. They know people like sunshine and hate rain. They form an association to control the weather. They decide to produce plenty of sunshine and reduce the amount of rain. That makes them popular.
But in time, everything turns brown and withers because it is drying up. People become unhappy. So, the Weathermen Association decides to eliminate the little rain that’s left because, in the past, more sunshine has produced more satisfaction in the populace. But then nature gets even drier and browner, the economy turns into recession, and people become even more unhappy.
Skeptics about weather control warn that the weathermen are actually causing economic misery. But these people are ridiculed.
Do you think that controlling the weather is impossible? Well, it’s not. In fact, it’s called “geo-engineering.”
Congress should try one experiment: eliminate the Fed’s mission to control the economy. The result might be an economic miracle after a brief period of great pain.