Fed – No Surprise – The Next Bubble

If anyone thinks that the Fed does not know in advance what is happening with the numbers, well you must be from another planet. Just hours after the Commerce Department reported that there was the first decline in quarterly GDP in 3-1/2 years, the Federal Reserve announced it was maintaining its policy of near-zero interest rates and $85 billion worth of long-term Treasury and mortgage-backed purchases per month. The Fed has no intention of change that policy even though it does not work or cause inflation. Why not? They are bailing out the banks still and the banks are not freely lending money anyhow. People who are trying to remortgage are finding the banks have adopted the attitude of TSA workers – shut up; one at a time; couples not recognized – see that yellow line?

Unemployment

The Fed said that it would keep interest rates near zero “so long as the unemployment rate remains above 6.5%.” Well, that means they will be there into 2020 at least. Remember this chart and forecast made back in 2009? The real rate of unemployment is closer to 15% than 6%. But even using the Fed’s bullshit number of 7.8%, there is no way. State and local government have to cut since they do not print money. Corporations are playing games using excuses to get rid of people close to retirement to save money.

The Fed’s easing policy is dead wrong and if following the Japanese model. This is like trying to drink your way to being sober again. The Free Markets are always right and the pain is only dragged out by trying to prevent it. The Free Market would have seen Goldman gone and a new tier or bankers would have emerged learning lessons from how the night fall. That would have made for a stronger recovery and far more innovative. The Great Depression fell to 10 cents on the dollar but it was over after the fall from September 1929 until July 1932. The Japanese succeeded in converting a 3 year depression into 23-26 years! Brilliant. We are following that same success model.

T`he Fed will simply continue to try its indirect monetize of debt and may even increase it as it realizes is is not working. This enabling the federal government to run trillion-dollar-plus deficits of course, but buying in treasuries does not inject money into the system if the sellers are foreign. Furthermore, they have to really be divorced from this type of policy entirely. The Fed was intended to be a central fund to protect banks. The elastic money supply made sense to expand until the banks could liquidate their portfolios. They were NEVER designed to run the monetary policy of the nation. That should be a separate institution altogether. Tax revenues will decline after all these tax hikes, unemployment is more likely to rise than decline sharply, and running deficits with new funding at 7% of GDP annually is just nuts!

The next bubble will eventually burst after 2015.75 and it will be centered in government debt this time. Interest rates will increase and bondholders start to realize they should diversify. Once that takes place, banks will have to bid for cash sending real rates higher. That is where the debt bubble will explode.