First some comments on the theoretical and practical environment in reference to the excellent article and references provided in Why the Fed Is WRONG About Interest Rates Submitted by George Washington on 12/16/2015 19:09 -0500 http://www.zerohedge.com/news/2015-12-16/why-fed-wrong-about-interest-rates (for the Werner link http://www.washingtonsblog.com/2015/03/qe-inventor-easy-create-full-blown-recovery-central-banks-chose-make-banksters-rich-instead-helping-main-street.html (see also for definition on interests on reserves https://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html )
In French on the presumed short and long term rates interactions see the excellent article and synthetic graphs : « La Fed a été moins efficace qu’on ne le croit » Par Eric Dor | 16/12/2015, 16:11 | 1927 mots http://www.latribune.fr/opinions/tribunes/la-fed-a-ete-moins-efficace-qu-on-ne-le-croit-536703.html
The conclusion will deal specifically with the last FED decision
It is true that interest rates lag the economy, but then for these economists it is only an empirical data which contradicts their own Marginalist paradigm. In effect, interest is part of profit and the reverse is not true, hence …
One then needs to understand the structure of the monetary regime and of the current Monetarist – not monetary – policy. In short, it hinges on the prudential ratio and on the functional segregation of the 4 pillars of the financial world (deposit and merchant banks, insurance, and credit unions). Both have been thrown out of the windows. This means that the weak but still existent feedback mechanisms between monetary policy – credit – and the economy do not operate any longer. It used to be that required reserves had to come from earned profit in the economy when the economy was not entirely speculative. The segregation also insured that speculation only affected the merchant banks which could go broke without bringing down the whole system just as competition demands. This then led to fusions and concentration of capital and in short a new trade cycle after the purge of the excesses had take place.
Today we no longer have any real prudential ratio – the FED and Central Banks have replaced it with QE and bailouts; I called this « credit without collateral ». Furthermore the abrogation of Glass Steagall Act in 1999 did away with what remained of the functional segregation including for small saving – part of it institutionalized by the New Deal Welfare State and now privatized i.e. see 401 K into 201 K for the result …
This means that the whole economy is speculative and turns on itself while the Roe asphyxiates the real economy – by the way, « real economy » are my termes since Marginalism cannot make the difference between speculative economy and real economy no more than between interest or, worse, speculative interest and profit. Efficient market analysts, sons of the fascist von Mises even argue that speculation accelerates the working of the market, a monumental ineptitude which does not even take into account of the erratic mass psychology of the market – it is « moutonnier » in nature.
Now you need to compute Irving Fisher’s « income stream » into the picture – it does away with the difference between fixed and circulating capital, hence real and speculative economy with the income stream concept even treating the salary as in income stream!
So what about the trap on long-term rates ? Basically this is just empirical. It says that in Fisher’s world the long-term rate impacts on the framework of anticipation and preference for investment – of any kind, including on derivatives. But the hic is that the long-term rate is moving too, so you are on moving sands.
The real trap lies in the difference between interest and profit and the real vs. the speculative economy. See my Synopsis of Marxist Political Economy for details (in the Livres-Books section of www.la-commune-paraclet.com ). Basically, once you get both the ratio and the functional segregation out, you are forcing the entreprises in the real economy – real goods and services not mere financial gimmicks – to compete directly with the financial enterprises (in a very loose, to say the least, fractional reserve system …). And you do this in a context where the trillions from the QE serve them. Their productivity is far higher – they need much less fixed capital contrary to Fisher’s simplistic falsification – but this fictitious higher productivity sets the rule against the productivity rate of the other economic sectors. You can see this immediately just by looking at the ridiculous Roe asked by equity funds etc. and by looking at the buyback strategy of firms. In short, there is no incentive to invest in the real economy – industry , infrastructures etc., simply because this kind of investment ties up lots of capital for a long time before you get a risky return. Hence, the credit crunch. Aside from the structural vulnerability of banks afraid to lend to each other and keeping trillions on reserves with the FED paying them an interest – contrary to the current negative overnight policy of the ECB, for instance.
This also explains why the bailouts and QE do not work, except making things worse just as I had explained as the crisis started in 2007 – see the section International Political Economy of my site www.la-commune-paraclet.com – The only thing that worked was the Federal government Stimulus Plan but only for public investments – bridges, roads, health, education and the like – not for the private side of the Plan . This is because the sectoral multipliers are not the same as the average overall multiplier which, for its part, is negatively distorted by speculation (for the argument and references, see in English my THE FED DILEMMA in http://rivincitasociale.altervista.org )
But then we are in mature economies, which are now in competition with new developed countries like China and emerging countries given the global free-trade regime. This regime forces the Western economy into favoring fictitious services as the industries were delocalized, an inept choice at the beginning which has now become even more inept because of the working of the productivity law which is fatally destroying the size of these artificial speculative sectors – for instance, high-frequency trading and robotisation and algorithms will soon destroy more than half if not more of employment in the sector – banks’ employees and brokers. They will be replaced by techees in bug control rooms, I guess.
The new free-trade regime is based on two big mistakes – given the somewhat pretentious and even slightly racist fallacy of « asymmetric interdependency » in a world in which China deposits more patents and China and India graduate more engineers than the US and in which China already has a greater solvent domestic market etc ..
A) the current anti-dumping definition does not allow any reference to labor rights – not even minimal ILO tripartite rights. This pushes salaries to the global physiological level – potentially in competition with half a billion of Dalits whose longevity is around 40 years – at least tendencially; and it leads to the destruction of social programs – Lord Beveridge said theses were fundamental rights and even great countercyclical tools. i.e. the non salary part of the necessary « global net revenue » of households. Individual salary alone will not do because the worker needs to reproduce him/herself inside an household, something the New Dealers had understood but which was totally forgotten by the inept and fascistic von Mises, von Hayek, Friedman and all this sorry brainless and over-represented crews in the « dismal science ».
B) The current anti-dumping definition did away with any reference to econological criteria, even minimum criteria. Larry Summers was on record saying that it costed less to produce in a polluting way abroad – just look a Bhopal …
In short, one needs to restore the distinction between interest and profit and hence come up with some kind of functional financial segregation, at least some rigorous internal « ring fencing » more stringent than the Dodd-Frank loose framework, especially for household saving – this now amounts to some 20 to 30 % of household average revenue; hence bail-ins would automatically destroy this – while big shareholder would have time to shift their own assets in fiscal paradises before restructuring is publicly announced, it amounts to a fool game and an expropriation of the people by sorry parasites – and send the economy into a recession in the recession – negative spiral.
In short, the structure of the « global net revenue » of the household needs to reflect the structure of the overall economy – taking into account the external balances – or else there will be no dynamic reproduction – you still get a general equilibrium, by definition you always do, but lower and always post hoc, and even a « cemetery equilibrium » after the speculative bubbles burst. Check for instance the GDP in Italy; now it is still 10 % lower than it was before the crisis unfolded. Marginalist general equilibrium – through the blind invisible hand – is not the kind of dynamic reproduction that can bring the whole society at a higher qualitative level.
And you need to restore the anti-dumping definition necessary to protect the global net revenue. In fact, salary deflation destroys the general Fordist aspect of the economy. This is because it is not true that there will be an supply whenever there is a need This is only true when the need in question is solvent. Just look at all the unsatisfied needs of the 3 lower deciles in the US or in the EU … not to say in Africa or in India etc..
Conclusion : As for the FED decision to raise slightly the main interest rate, I believe it is coherent with what I expected in my analysis exposed in «THE FED DILEMMA » available in this same site. These are the main sentences : « Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. (…)The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen. (…) In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. » see http://www.federalreserve.gov/newsevents/press/monetary/20151216a.htm . It seems to me that the prudent gradual approach hinges on the strategic decision on oil pricing.
As you can see the expected inflation trend hinges on energy prices and also on commodity prices still denominated mostly in US dollars. This sends us back to the strategic decision on oil price at a time when Saudi Arabia and its US-Israeli masters still want to use lower oil prices to brake economic rivals, though the strategy does not really work for the greater economic rivals.
Another point to note is the differential in overnight deposit rates. The ECB has chosen negative rates while the FED is still in positive territory. Mind you, Draghi’s negative rate does not in the least contribute in braking the credit crunch – banks are too vulnerable and will not even be able to reimburse most of the LTRO and TLTRO loans … The increasingly louder chats on so-called « helicopter money » – as if it had worked in GB … – will not help much either. If you create inflation artificially – « monetary rain » as Hume said, see my book Tous ensemble … – this will not transform automatically into real, job creating economic growth …
Yet, the differential is important to understand the trends unleashed by the FED recent decision. In brief, most of the effects of the reverse carry-trade have been anticipated through this differential at least as far as big countries are concerned. It is only sad to see that the FED and the US – idem for the EU- are still wedded to their Monetarist policies. You cannot run a economy on Monetarist tools alone. Fiscal policies should have priority over monetary tools, and these should not be confused with Monetarist tools.
A word about the oil pricing strategy. When the media started talking about the US shale oil and gas, I wrote that this presented the United States with a great opportunity, at least for the next 15 years or so – leaving aside new findings, say in the Arctic or North of the 49 Parallel – to restructure its economy, particularly the real economy base, which had been greatly outsourced and delocalised. This was because of the comparative gain in production cost compared to other competing nations like Germany, Japan etc. Structurally lowering production cost is a winning strategy, lowering labor cost other than through real productivity increases amounts to a devaluation and simultaneously destroys productivity and internal demand. This would remain true even if the domestic oil and gas prices reflect world prices, if only because of transportation costs. Especially as the US is now almost independent in this crucial sector.
Unfortunately, the US current international policy does not serve the best interests of the Nation, but rather those of a small over-represented crew who have managed to force the US into the ruinous Middle-East philo-Semite Nietzschean quagmire.(1) I will not belabor the point and just remind readers about the explosion of the public debt after the Mid-East costly adventures waged in the name of otherwise illegal « preventive wars » and « regime change », together with their fostering of blowbacks and other supported terrorist groups.
Hence, the present oil pricing strategy is ill-considered at best.
Paul De Marco, December 17, 2015
1) On this concept see my « Nietzsche as an awakened nightmare » in the Livres-Books section of the site www.la-commune-paraclet.com