The major frustration of living in today’s world is the seeming inability or unwillingness of those in charge to learn a thing from history. It’s bizarre. One might suppose that expertise would be a requirement for holding positions of authority.
The words expert and expertise are related to experience through the same Latin root (experientia), meaning knowledge born of trial. Experience is not the same as a credential or having the right network of friends.
Experience can also be gained vicariously by reading history; that is, things that happened before have a rough approximation to events of the present. The point of doing so is to develop a better roadmap concerning what to do and what to not do.
This much we know from history or experience: This is not a good time to cut the federal funds rate. Doing so will lower the risk of credit expansion and encourage more credit, which is one way that the money stock is expanded and creates boom-like conditions. That boom, however, is artificial and distorts production structures, boosting capital investment in ways that prove ultimately unsustainable.
The problem of inflation is related. In fact, if you go back to a century ago, the very definition of inflation was an expansion of money and credit beyond which the conditions of economic growth can support. The excess in the money stocks spills over to fuel price increases. That’s why lower rates and government debt creation are associated with inflationary conditions.
One might suppose that this is not complicated, especially for people in the industry and who have studied economics. What I just said above is completely conventional thought. It is taught in every prep course for the Certified Financial Planner or Certified Financial Analyst exams. It is a mainstay of industry knowledge.
There is also the matter of history to consider. In the 1970s, there were three distinct waves of inflation; early, middle, and late in the decade. In each case, the inflation was preceded by credit expansion. In each case, the inflation died out. In each case, the Fed interpreted the lower inflation as permission to lower rates and avoid recession. In each case, the lower rates fueled a reinflation that lowered the purchasing power of money.
None of this history is in dispute.
We have just lived through a terrible inflation that has calmed down some but not enough. Sure enough, the Fed seems to have decided that rates are too high, even though they are not high by any historical standard. The absurdity was the zero and negative rates that the Fed manufactured after 2008. That created the absurd boom and industrial distortion that have bloated the media, tech sector, medical services, and government.
In light of this history and what we know, we need years and years of higher rates. That would be the wise policy. The worst possible policy would be one that recreates the exact history of the 1970s, following up a first wave of inflation with another round of the same. That is exactly what is happening.
Again, rates are simply not high in real terms right now.
This move doesn’t even make any theoretical sense. In the Keynesian framework, such rate cuts are designed as countercyclical moves, a measure to dig out of a hole. But according to all official data, which are admittedly all incorrect, there is not a recession but rather things are going along swimmingly. What possible basis for a rate cut is there if that is true? Or does the Fed know something that it is not publicly admitting?
For all the world, this Fed move seems to be entirely political, structured to put lipstick on the post-lockdown economic pig. The effect will surely be good for financial markets. But does this translate to genuine economic growth that benefits everyone else? Not at all. In fact, rising financials is often just another way in which inflation reveals itself. Sure, people like this form of inflation, but it is really no different from increased prices for bread and eggs: It’s new money added to the stock that merely waters down the value of all existing stock.
There are many features of current economic life that are simply unsustainable: the federal debt, the housing market, the medical services market, the higher education market, the bloated sectors of tech and media, the artificial propping up of industry via trade restrictions, and so on. An old-fashioned recession, one that is widely admitted and not covered up by fake agency data, is exactly what the doctor ordered. It’s no different from detoxing a drug addict: The recovery is painful but necessary.
Sadly, the Fed seems dedicated to preventing what we need the most. It’s hard not to come to any other conclusion than that this is all about the November election. That said, there is another factor. The Fed has thus far been unwilling to admit any responsibility for causing the most recent inflationary bout that has sliced off between 25 cents and 50 cents of all purchasing power from the dollar over four years.
In this sense, our times are exactly like the 1970s, when the Fed admitted no culpability for the disaster of that decade either. It finally required a new Fed chairman, Paul Volcker, to show up as the bad cop and sop up every last drop of liquidity following the inflation of 1979 and 1980. That finally killed the problem.
Sadly, we are nowhere near that, and Volcker is not around to fix the problem. As a result, it appears for all the world that the Fed is dedicated to recreating this grim history, be it because there are other priorities, the people in charge simply do not understand, or that the banking industry is putting its own interests over those of the public. In any case, it’s tragic to see it all unfold.
There is no one in this country who would cast a vote for another wave of inflation. But with these kinds of Fed policies, that is precisely what we are going to get. A bigger cut is worse than a small one, but no cut or even an increase is a much safer and sounder path. That would signal to the market that, in this country, we are going to make money the old-fashioned way: We will earn it and not create it from the printing press.
