The Impact of the Fed's Pro-Inflation Policy
The Fed's Inflation Target and Its Consequences
Since the Federal Reserve officially adopted its 2.00% inflation target in January 2012, there has been a 41% increase in the price level, according to the 16% trimmed mean Consumer Price Index (CPI). The CPI was still increasing at a 3.31% annual rate as of July this year. This means that a dollar earned or saved in 2012 is now worth just 70 cents. This raises the question of why the Fed is considering increasing the money supply, which would further erode the purchasing power of wage earners and savers.
Wall Street's Influence on Interest Rate Cuts
The primary reason for the impending round of interest rate cuts, which are almost certain to begin next month, is Wall Street's threats of a market tantrum if the Fed does not provide traders and speculators with more cheap credit. However, the Fed would not openly admit to this. Instead, it claims that the rate cuts are for the benefit of the average household and are necessary to prevent the economy from slipping into a recession.
The Burden of Debt and the Inappropriateness of Lower Interest Rates
With the US economy now carrying nearly $100 trillion of public and private debt, the appropriateness of lower interest rates is questionable. Central bank-induced reductions in interest rates are designed to encourage households, businesses, and the government to take on more debt. However, this could further destabilize their already precarious financial situations.
The Misallocation of Increased Business Sector Leverage
The non-financial business sector's leverage has increased significantly since 1994. Most of this additional leverage has not been used to acquire productive assets, but rather has been channeled into stock buybacks, overvalued mergers and acquisitions, and other financial engineering schemes that enrich Wall Street.
The Impact of Lower Interest Rates on the Housing Sector
Lower interest rates have not significantly benefited the housing construction sector. Instead, they have mainly driven up housing prices, demonstrating that lower interest rates tend to stimulate asset prices more than they do real output, jobs, and income.
The Transformation of Wall Street into a Gambling Casino
The combination of central bank financial repression, artificially cheap debt, and recurrent Fed bailouts in the stock market has transformed Wall Street into a gambling casino. This has led to the proliferation of false narratives about the Fed's supposed benefits to Main Street.
The Unsustainability of the Current Debt Levels
With nearly $100 trillion of total debt representing a record 360% of GDP, there should be no calls for lower interest rates and more debt. The rationale for these measures is to stimulate higher levels of investment in the residential and business sectors of the Main Street economy. However, this has not been the case.
The Ineffectiveness of Rate Cuts in Preventing Recessions
Despite Wall Street's claims, rate cuts are not effective in preventing the economy from falling into a recession. During the Great Recession, the Fed made the most radical and rapid rate cuts in its history, but these did not prevent a recessionary purge and rebalancing.
The Fed's Role as Wall Street's Best Friend
While the Fed may be Wall Street speculators' best friend, it repeatedly sets up the Main Street economy for a recessionary fall and does little to prevent the contraction. At the same time, it buries households, businesses, and governments under an ever-increasing mountain of debt.
Bottom Line
The current drive for another round of substantial interest rate cuts by Wall Street is reminiscent of the famous Saturday Night Live skit where a music producer kept demanding "more cowbell." Wall Street is now yelling for "more cuts!" However, this is likely to make the economic music even more discordant. What are your thoughts on this matter? Share this article with your friends and sign up for the Daily Briefing, which is delivered every day at 6pm.
