To begin with, how exactly does one define “normalize” in reference
to the Fed’s balance sheet? The Fed predictably held off raising rates
again today. However, it said that beginning in October it would no
longer re-invest proceeds from its Treasury and mortgage holdings and
let the balance sheet “run off.”
Here’s the problem with letting the Treasuries and mortgage just
mature: Treasuries never really “mature.” Rather, the maturities are
“rolled forward” by refinancing the outstanding Treasuries due to
mature. The Government also issues even more Treasurys to fund its
reckless spending habits. Unless the Fed “reverse repos” the Treasurys
right before they are refinanced by the Government, the money printed by
the Fed to buy the Treasurys will remain in the banking system. I’m
surprised no one has mentioned this minor little detail.
The Fed has also kicked the can down the road on hiking interest
rates in conjunction with shoving their phony 1.5% inflation number up
our collective ass. The Fed Funds rate has been below 1% since October
2008, or nine years. Quarter point interest rate hikes aren’t really
hikes. we’re at 1% from zero in just under two years. That’s not
“hiking” rates. Until they start doing the reverse-repos in $50-$100
billion chunks at least monthly, all this talk about “normalization” is
nothing but the babble of children in the sandbox. I think the
talk/threat of it is being used to slow down the decline in the dollar.
To justify its monetary policy, Yellen stated today that she’s, “very
pleased in progress made in the labor market.” Again, how does one
define progress? Here’s one graphic which shows that the labor market
has been and continues to be a complete abortion:
The labor force participation rate (left y-axis) has been plunging
since 2000. It’s currently below 63%. This means that over 37% of the
working age population in the United States is not considered part of
the labor force. That’s close to 100 million people between the ages of
15 and 64 who, for whatever reason, are not looking for a job or
actively employed. A record number of those employed are working more
than one part-time job in order to put food on table and a roof over the
heads of their household. Good job Janet! Bravo!.
The blue line in the graph above shows the amount of dollars spent by
the Government on welfare. Note the upward point acceleration in the
rate of welfare spending correlates with the same point in time at which
the labor force participation rate began to plunge. Again, nice work
Janet!
The labor force participation rate is much closer to the true rate of unemployment in the United States. John Williams of Shadowstats.com
has calculated the rate of unemployment using the methodology used by
the Government a couple of decades ago and has shown that a “truer” rate
of unemployment is closer to 23%.
The true level of unemployment is definitively the reason why the
rate of welfare spending increased in correlation with the decline in
those considered to be part of the labor force. It could also be shown
using the Fed’s data that another portion of the plunging labor force
participation rate is attributable to the acceleration in student loans
outstanding. I would argue that part of the splurge in student loan
funding, initiated by Obama, was used to keep potential job-seekers
being forced by economic necessity from seeking jobs and therefore
could be removed from the labor force definition, which in turn lowers
the unemployment rate.
As I write this, Yellen is asserting that “U.S. economic performance has been good.
I’d like to get my hands on some of the opioids she must be abusing.
Real retail sales have been dropping precipitously (the third largest
retail store bankruptcy in history was filed yesterday), household debt
is at an an all-time high, Government debt hits an all-time high every
minute of the day and interest rates are at 5,000 year lows (sourced
from King World News)
Note to Janet: near-zero cost of money is not in any way an
attribute of an economy that is “doing well.” In fact, record levels of
systemic debt and rising corporate and household bankruptcies are the
symptoms of failed Central Bank economic and monetary policies. This is
further reinforced by the record level of income disparity between the
1% highest income earners and the rest of the U.S. labor force.
The entire U.S. economic and financial system is collapsing. If the
Fed truly follows through on its threat to “normalize” its balance sheet
and raise rates, the U.S. will likely collapse sometime in the next
couple of years. On other hand, up to this point since Bernanke’s famous
“taper” speech in May 2013, most of the Fed’s statements with regard to
hiking rates (hiking them for real) and reducing its balance sheet has
been nothing but hot air. And in fact, unless the Fed reverse repos its
balance sheet back to the banks, it’s assertion of “balance sheet
normalization” is nothing more than another in long series of lies.
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Dave Kranzler spent many years working in various Wall Street jobs. After business school, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and Short Seller Journals. Contact Dave at dkranzler62@gmail.com.
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